China Automotive Systems (NASDAQ:CAAS) Q4 2025 Earnings Call

0:01 Greetings. Welcome to the China Automotive Systems fourth quarter and fiscal year 2025 conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Kevin Theiss, Investor Relations. You may begin. Thank you everyone for joining us today. Welcome to China Automotive Systems 2025 fourth quarter and 2025 annual results conference call. Joining us today are Mr. Jie Li, Chief Financial Officer of China Automotive Systems.

0:49 He will be available to answer questions later in the conference call with the assistance of translation. Before we begin, I will remind all listeners that the RAPIS call We may make statements that may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements represent the company's estimates and assumptions only as of the date of this call. As a result, the company's actual results could differ materially from those contained in these forward-looking statements due to a number of factors, including those described under the adding risk factors and the results of operations in the company's Form 20F Annual Report for the year ended December 31, 2025, and it's filed with the Securities and Exchange Commission. And then other documents filed by the company from time to time with the Securities and Exchange Commission. Any of these factors and other factors beyond our control could have an adverse effect on the overall business environment and cause uncertainties in the regions where we conduct business.

1:56 Thank you for joining us. The company expressly disclaims any duty to provide updates to any forward-looking statements made in this call with the result of new information, future events, or otherwise. On this call, I will provide a brief overview and summary of the fourth quarter 2025 unaudited results and the 2025 annual audited results for the period ended December 31st.

2:49 2025. The 2025 fourth quarter results and the 2025 annual results are reported using U.S. GAAP accounting. Management will conduct a question and answer session for the purposes of the call today. I'll review the financial results in U.S. dollars. We will begin with a review of some of the quarterly business highlights, recent dynamics of the Chinese economy, automobile industry, and our market positions. China's automotive industry in 2025 set another new record with vehicle production reaching 34.5 million units and sales doubling 34.4 million units. These numbers reflect growth of 10.4% and 9.4% year-over-year, according to data from the China Association of Automobile Manufacturers, CAAM.

3:44 Commercial vehicle production and sales reached 4.3 million units and 4.3 vehicles sales respectively. China's domestic auto market rose by approximately 6.7% with total vehicle sales reaching 27.3 million vehicles. Among the industry trends were greater sales of new energy vehicles and Chinese-branded vehicle capturing a larger portion of the total vehicle sales. Auto-related exports were another strong sales growth avenue for Chinese vehicle manufacturers. In 2025, government incentives for the automobile industry included tax incentives, subsidies for scrapping older vehicles, and lower interest financing.

4:35 Additionally, local government and private incentives may also have aided buyers. Chinese-branded vehicle OEMs introduced a significant number of new models Our sales increased by 21.4% year-over-year to $229.2 million in the fourth quarter of 2025, compared to $188.7 million in the fourth quarter of 2024 and $193.2 million in the third quarter of 2025. Net sales increased to a higher demand for passenger and commercial vehicles in China, as well as increased export sales in the quarter. Gross margin in the fourth quarter of 2025 rose to 23.1% compared to 15.6% in the fourth quarter of 2024. Research and development expenses, R&D expenses, rose to $17.8 billion compared with $7.8 billion in the fourth quarter of 2024.

5:39 Technology is playing an increasing role with steering performance and quality, and customers are buying more advanced products. Operating income grew to $18.1 million in the fourth quarter of 2025, primarily due to higher gross profit. Net income attributable to parent companies' common shareholders increased by 103.2% to $18.4 million, with diluted income per share of 61 cents. For the 2025 year, record net sales increased by 17.6% to $765.7 million. Total sales of the company's EPS systems increased by 25.5% year-over-year, and sales of the traditional steering products increased by 12.6% year-over-year. EPF sales represented 41.5% of total revenue in 2025 compared to 38.9% in 2024. Our headlong subsidiary sales of passenger vehicle steering systems rose by 12.1% year over year to $365.3 million in 2025.

6:51 Yiu Wong sales of commercial vehicle steering systems increased by 28.9% year over year to $92.3 million. Brazil headlongs net sales grew by 34.7% year-over-year to $68.7 million. And net sales to North American customers rose by 15.3% year-over-year to $121.6 million in 2025. Sales to this worldwide network helped propel our steering product sales growth in North and South American markets as well as Europe.

7:39 Gross profit in 2025 increased by 33.2% year-over-year to $145.5 million, with the gross margin increasing to 19%. The gross margin increase may be due to a change in the product mix and lower material costs compared with last year. Operating income increased by 33.2% year-over-year to $53.6 million in 2025. Net income, attributable to parent companies, families, shareholders, was a record $42.8 million in 2025 with diluted net income per share 43.4% higher to a record $1.42 per share. R&D expenses increased by 63% year-over-year to $45.1 million in 2025.

8:30 We had a number of product and technology innovations in 2025. Our second generation IRCB, Intelligent Electro-Hide Thank you very much. Operating costs will be significantly reduced. Our Jinzhou Headlong subsidiary launched its active rear-wheel steering in 2025. Once reserved only for electric cars, CAAS's active rear-wheel steering provides superior steering characteristics and is now entering into the upper mass market for new energy vehicles in China.

9:38 EPS Steering Project for Engaging EVECO Interproduction in 2025, providing advancements in performing autonomous driving functions such as automatic parking, lane keep assist, and lane follow assist. Our EPS uses our proprietary ball screw assembly, which has become an essential steering configuration for mid- to high-end vehicle models. Demanding high reliability and efficiency and quick responsiveness. Another subsidiary, Hyzone One, began production of its new 115-platform steering motor production line at the end of 2025.

10:24 This high-torque 115-platform electric motor supports our ERCV commercial vehicle program. ERCB, the Advanced Electronically Circulating Ball Steering Systems. This new motor is a significant innovation in our advanced intelligence steering strategy. We also made strategic moves to expand our geographic expansion. Our Hulu headlong subsidiary entered into a strategic cooperation agreement with KYB In Malaysia. Through this cooperation, a new regional manufacturing and supply system is being entered in Malaysia.

11:09 This joins ventures between KYB, a globally renowned automotive component company, and UMW, a Malaysian industrial conglomerate with core businesses covering automobiles and other equipment. UMW holds a 38% stake in Pardua, Malaysia's largest car manufacturer, and UMW also has a joint venture with Toyota in Malaysia. For our agreement with KYB slash UMW, our products will be initially supplied to Pardua in Malaysia. In the future, additional opportunities in the OEM and aftermarkets will be explored in the broader AGM region.

11:56 To support this strategic partnership, KYB UMW's new advanced manufacturing plant became operational in 2026. Our Jinzhou Henlong subsidiary also won its first R-EPS product order from a large, well-known European automobile producer. This order, with annual sales expectations exceeding $100 million, covers multiple vehicle models and mesh production, is expected to begin by 2027. Also, our affiliated company in Sweden, Sentient AB, achieved considerable sales to a major European OEM 2025 for its leading steering technology integrating hardware and software.

12:44 As of December 31, 2025, total cash, cash equivalents, pledge cash, and short-term investments on long-term time deposits were $256.7 million. Net cash flow for operating activities increased to $111.3 million in 2025 compared to $9.8 million in 2024. Free cash flow exceeded $74 million in 2025. Our net cash position reached $169.7 million at year end. With our increasing global presence, the Board of Directors decided to change our corporate registration to the Cayman Islands. This change will save significant administrative costs and pave the way for us to become a true multinational supplier to global OEMs.

13:37 Management is refocusing some of those resources to improve operations, sales, and to increase penetration of our growing international markets. Beginning in 2026, we will report our financial results on a six-month basis, so our next report will be for the six months ending June 30, 2026. Also in 2025, we changed our independent registered public accounting firm to Grant Thornton Zhantong Certified Public Accountants, LLP, with headquarters in Beijing. With the organizational changes and introduction of more advanced steering projects, we are now better positioned to pursue steering sales opportunities on a global basis. We look forward to our R&D providing Upgrades to further advance current product portfolios and introduce new technologies and products in the future.

14:30 Now, let me review the financial results in the fourth quarter of 2025. Our net sales increased by 21.4% to $229.2 million compared to $188.7 million in the same quarter of 2024. The net sales increase was mainly due to a change in the product mix and higher demand for passenger automobiles and Commercial Vehicles in the fourth quarter of 2025 compared to the fourth quarter of 2024. Additionally, export sales increased during the 2025 quarter. Our gross profit increased by 79.8% to $53 million from $29.5 million in the fourth quarter of 2024. Gross margin in the fourth quarter of 2025 was at 23.1% compared to 15.6% in the fourth quarter of 2024.

15:22 primarily due to a change in product mix. Selling expenses were $5 million in the fourth quarter of 2025 compared with $4.8 million in the fourth quarter of 2024. Selling expenses represented 2.2 of net sales in the fourth quarter of 2025 compared to 2.5% in the fourth quarter of 2024. General administrative expenses were $12.2 million in the fourth quarter of 2025 compared to $9.7 million in the same period in 2024. G&A expenses represented 5.3 of net sales in the fourth quarter of 2025 compared to 5.1% for net sales in the fourth quarter of 2024. Research and development expenses were $17.8 million compared with $7.8 million in the fourth quarter of 2024. R&D expenses represented 7.8% of net sales in the fourth quarter of 2025 compared to 4.1% in the fourth quarter of 2024.

16:27 Operating expenses was $18.1 million, I'm sorry, operating income was $18.1 million in the fourth quarter of 2025 compared to $8.7 million in the fourth quarter of 2024. Higher gross profit compared with the same period last year was the main driver. Interest expense was $.5 million The fourth quarter of 2025 compared to $1.1 million in the fourth quarter of 2024. Financial expense was $1.1 million in the fourth quarter of 2025 compared with financial income of $0.8 million in the fourth quarter of 2024. Income before income tax expenses and equity in areas of affiliated companies increased by 121%.

17:15 19.4 million dollars in the fourth quarter of 2025 compared to 8.8 million dollars in the fourth quarter of 2024. Income tax expense is 1.4 million dollars in the fourth quarter of 2025 compared to income tax benefit of 2 million dollars in the fourth quarter of 2024. Net income attributable to parent companies common shareholders increased by 103.2 percent to 18.4 million dollars in the fourth quarter of 2025 compared to net income attributable to parent companies, common shareholders of $9.1 million in the fourth quarter of 2024. Diluted income per share was 61 cents in the fourth quarter of 2025 compared to diluted income per share of 30 cents in the fourth quarter of 2024.

18:04 The weighted average number of diluted shares last year was 30,170,702. compared to 30,180,947 in the fourth quarter of 2024. For the 2025 year, net sales increased by 17.6% to an annual record $765.7 million in 2025 compared to $650.9 million in 2024. This increase is mainly due to higher sales and production of passenger vehicles in China, Inc. Inc. Inc. Steering systems rose by 12.1% year-over-year to $365.3 million in 2025. Yiu Wong sales of commercial vehicle steering systems increased by 28.9% year-over-year to $92.3 million.

19:17 Brazil headlongs net sales grew by 34.7% year-over-year to $68.7 million in 2025. Net sales of North American customers rose by 15.3% year-over-year in 2025 to $121.6 million. EPS sales represented 41.5% of total revenue in 2025 compared to 38.9% in 2024. Gross profit in 2025 increased by 33.2% year-over-year to $145.5 million compared to $109.2 million in 2024. The gross margin was 19%. compared with 16.8% in 2024 mainly due to a change in product mix.

20:09 Net sales on other sales in 2025 was $3.6 million compared to $4.3 million in 2024. Selling expenses rose by 15.9% year-over-year to $20.7 million in 2025 from $17.9 million in 2024 mainly due to an increase in marketing and office expenses Offsetty, Lower, Other Expenses. Selling expenses continue to represent 2.7% of net sales in 2025 as well as 2024. G&A expenses increased by 7% year-over-year to $29.7 million in 2025 compared to $27.7 million in 2024. G&A expenses represented 3.9% of net sales in 2025 compared to 4.3% of net sales in 2024. This expense was mainly due to higher personnel and other expenses.

21:08 R&D expenses increased by 63% yearly to $45.1 million in 2025 compared to $27.6 million in 2024. Higher R&D expenses reflected increased personnel expenses due to acceleration in R&D activities, including more investment in traditional product upgrades, advancing EPS technologies, and Miscellaneous Research Expenses. R&D expenses were 5.9% of net sales in 2025 compared to 4.2% of net sales in 2024. Operating income increased by 33.2% year-over-year to $53.6 million in 2025 compared to $40.3 million in 2024. The increase in operating income was mainly due to higher sales and gross profit. Interest expense was $1.7 million in 2025 compared to $1.8 million in 2024. Financial income was $2.4 million in 2025 compared to that financial expense of $0.09 million in 2024.

22:19 This increase in financial income of $2.4 million was primarily due to an increase in foreign exchange gains due to the foreign exchange volatilities. Income before income tax expenses and equity in earnings of affiliated companies increased by 39.1% year-over-year to $61.4 million in 2025, compared with $44.1 million in 2024. The change is primarily due to higher operating income in 2025. Income tax expense was $11.6 million in 2025, compared to $5.9 million in 2024. This increase was primarily due to higher income before income tax expenses and equity in earnings of affiliated companies and the effective tax rate in 2025.

23:08 Net income attributable to parent companies' common shareholders was a record $42.8 million in 2025 compared to $30 million in 2024. Diluted net income per share increased by 43.4% to $1.42. in 2025 compared to $0.99 in 2024. The weighted average number of diluted common shares outstanding was $30,170,702 in 2025 compared with $30,184,513 in 2024. That will provide some balance sheet and other financial highlights. As of December 31, 2025, total cash, cash equivalents, pledge cash, Short-term investments and long-term time deposits were $256.7 million.

24:00 Total accounts receivable, including notes receivable, were $361.8 million. Accounts payable, including notes payable, were $350.3 million. Short-term bank loans were $81.3 million, and long-term loans were $5.7 million. Total parent company stockholders' equity was $401.3 million, as of December 31, 2025 compared to $349.6 million as of December 31, 2024. Net cash flow from operating activities was $111.3 million in 2025 compared to $9.8 million in 2024. Cash paid to acquire property plant equipment and land use rights was $37.2 million in 2025 compared to $43.7 million The Business Outlook Management expects revenue for the full fiscal year 2026 to be $810 million. This target is based on the company's current view on operating the market conditions which are subject to change. With that operator, we are about to begin the Q&A session.

25:18 Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Your first question for today is from Jim Fallon with Asusa Holdings.

26:12 Hi, can you hear me? Yes. Thank you. Yeah. Jim Fallon from Asusa. I was just wondering, how will the U.S. Supreme Court chair decision affect the company's exports into the United States? Thank you. Okay, thank you. Okay, thank you. Okay, thank you. Okay, thank you. So far, we have received 301,232, and 122 terms. Compared to before the enrollment, we have almost reduced the level of tariffs by 10%.

27:10 It used to be 70%, but now it is 60%. Now the tariffs are still 60%. Yes, this one, this one, because of the whole cancellation, that is, IPA, this one, this one, this one, this one, this one, was cancelled. The previous effect of this 301 or 232, this one is still effective. Then, the Trump administration, then, then, then, then, then, then, then, then, So thank you for the question.

28:06 So the short answer is the Supreme Court ruling does have a positive impact to our export-related business to the U.S. market. Specifically, the tariff of Section 301 Section 232 and Section 122, those three areas, the ruling by the Supreme Court enabled the total tariff reduced from 70% to now 60%. Okay, thank you. Thank you.

28:52 Thank you. Your next question for today is from Gary Nash, a private investor. Good day, everyone. Mr. Lee, why did Q4 gross margin spike, and is Q4 gross margin sustainable for 2026? Okay. This is another problem. Why has the profit of the fourth quarter increased significantly? He wants to know if this profit can continue in the same level as it did in 2026. In 2025, the profit of the fourth quarter reached 23%, which is indeed a relatively high level.

29:37 There are several factors in this. The first one is that This product, this product combination, from the original low horsepower, now to the higher-end horsepower, this piece is increasing. For example, some of our current R-EPS, including this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, this, There are also some comprehensive, multi-levels, such as Warranty, Recovery, etc. If it is integrated, it will definitely be better than before, but it may not be as good as the level of 23, because there is a conscious impact.

30:34 Okay. Yes, you're right. We did experience a significant improvement in the gross margin category in the Q4 2025. The gross margin reached 23% in Q4. Manly attributable to a couple factors. Our product mix has dramatically improved. We have increased our higher margin product. such as our EPS product and brushless powered electric power steering we would call EPS product.

31:22 And we also have some one time also took place in the Q4. They are the tariff-related refunds as well as depreciation policy change. And so, combining these two factors, those three factors, we believe The gross margin in 2026 is going to be at a very healthy level, but it's not going to be as high as Q4 2025. Thank you. Thank you.

32:24 Your next question is from Jonathan Neves, a private investor. Hello, everybody. My question is, on a valid basis, how much does China Automotive suspect to save on an annual basis by changing the company registration to the Cayman Islands? Oh, okay. This is another investment issue. I just want to know, after we moved to Cayman Islands, from the cost to the cost, how much did we save? How much do you think it will cost if you calculate it with money?

33:18 Currently, it looks like the entire operating cost, the entire maintenance, the listing, this piece, just this piece of cost, should be able to reduce more than $500,000. This is the direct profit of this piece, and then the indirect part, Okay, so from immediate impact by Lee Damasek signing to We immediately save about 500,000 US dollars.

34:15 That's the listing related expenses. Then in terms of international business expansion, we'll see more benefit coming, even though it's still A little bit early to give the detailed number. And also in terms of taxes, we're also seeing it will be a very notable saving as well. So combining all these, we believe it's going to be a very meaningful saving for our shareholders. Thank you.

35:03 Thank you. Okay. I have a question that's been emailed to me by one of the shareholders who could not be on. And the question is, with the current cash position, what's the outlook for either a stock buyback or cash dividends in 2026? Okay. This question is also related to the cash issue. The current cash flow is very high. Have we considered doing some repurchase or doing some bonus? Repurchase is definitely under consideration. Because we used to have a buyback plan. Due to the whole process of signing, In terms of share buyback, we definitely are considering previously we do have a buyback plan in place due to the new domicile to the Cayman Islands process

36:33 we had to meet a lot of compliance so we put that buyback plan on hold now with you know with that procedure completed Me and the CFO will definitely recommend to the board and to re-initiate share buyback program. We'll make a due announcement when that's in progress. What about Phoenix? Phoenix has not yet made a clear plan. I can recommend it to the director. As far as dividends, we don't have a plan at the moment, but we're going to also make a suggestion to the board of directors.

37:36 Once again, if you would like to ask a question, please press star 1. We have reached the end of the question and answer session and I will now turn the call over to Kevin Theiss for closing remarks. We thank you all for joining us today in the conference call. We wish you to be safe and we look forward to speaking with you in the future. After we report the six-month results. Thank you.

38:25 This concludes today's conference. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.