Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2024
Or
☐
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-33123
China Automotive Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware
33-0885775
(State or other jurisdiction of incorporation or
(I.R.S. Employer Identification No.)
organization)
No. 1 Henglong Road, Yu Qiao Development Zone, Shashi District
Jing Zhou City, Hubei Province, the People’s Republic of China
(Address of principal executive offices)
(86) 716- 412- 7901
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of each exchange on whichregistered
Common Stock, $0.0001 par value
CAAS
The Nasdaq Capital Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Name of each exchange on which registered
As of May 14, 2024, the Company had 30,185,702 shares of common stock issued and outstanding.
CHINA AUTOMOTIVE SYSTEMS, INC.
INDEX
Page
Part I — Financial Information
4
Item 1.
Unaudited Financial Statements.
Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2024 and 2023
Condensed Unaudited Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023
5
Condensed Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2024 and 2023
6
Notes to Condensed Unaudited Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
20
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
32
Item 4.
Controls and Procedures.
Part II — Other Information
33
Legal Proceedings.
Item 1A.
Risk Factors.
Unregistered Sales of Equity Securities and Use of Proceeds.
Defaults Upon Senior Securities.
Mine Safety Disclosures.
Item 5.
Other Information.
Item 6.
Exhibits.
34
Signatures
35
2
Cautionary Statement
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or the Company’s future financial performance. The Company has attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. Such statements are subject to certain risks and uncertainties, including the matters set forth in this Quarterly Report or other reports or documents the Company files with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date hereof. The Company’s expectations are as of the date this Form 10-Q is filed, and the Company does not intend to update any of the forward-looking statements after the date this Quarterly Report on Form 10-Q is filed to conform these statements to actual results, unless required by law. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the Securities and Exchange Commission.
3
PART I — FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
China Automotive Systems, Inc. and Subsidiaries
Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income
(In thousands of USD, except share and per share amounts)
Three Months Ended March 31,
2024
2023
Net product sales ($11,360 and $13,576 sold to related parties for the three months ended March 31, 2024 and 2023)
$
139,394
142,243
Cost of products sold ($6,968 and $7,015 purchased from related parties for the three months ended March 31, 2024 and 2023)
115,325
120,625
Gross profit
24,069
21,618
Gain on other sales
514
653
Less: Operating expenses
Selling expenses
4,073
3,384
General and administrative expenses
5,547
4,753
Research and development expenses
5,312
6,390
Total operating expenses
14,932
14,527
Income from operations
9,651
7,744
Other income, net
2,403
1,502
Interest expense
(258)
(249)
Financial expense, net
(12)
(422)
Income before income tax expenses and equity in earnings of affiliated companies
11,784
8,575
Less: Income taxes
1,743
829
Add: Equity in (losses)/earnings of affiliated companies
(777)
137
Net income
9,264
7,883
Less: Net income attributable to non-controlling interests
989
1,055
Accretion to redemption value of redeemable non-controlling interests
(8)
Net income attributable to parent company’s common shareholders
8,267
6,820
Comprehensive income:
Other comprehensive income:
Foreign currency translation (loss)/income, net of tax
(348)
4,554
Comprehensive income
8,916
12,437
Less: Comprehensive income attributable to non-controlling interests
941
1,321
Comprehensive income attributable to parent company
7,967
11,108
Net income attributable to parent company’s common shareholders per share -
Basic
0.27
0.23
Diluted
Weighted average number of common shares outstanding -
30,185,702
30,193,082
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
Condensed Unaudited Consolidated Balance Sheets
(In thousands of USD unless otherwise indicated)
March 31, 2024
December 31, 2023
ASSETS
Current assets:
Cash and cash equivalents
112,557
114,660
Pledged cash
44,028
40,534
Accounts and notes receivable, net - unrelated parties
255,119
261,237
Accounts and notes receivable, net - related parties
11,599
8,169
Inventories
109,082
112,392
Other current assets
38,047
27,083
Total current assets
570,432
564,075
Non-current assets:
Property, plant and equipment, net
99,395
101,359
Land use rights, net
9,151
9,233
Long-term investments
59,278
60,173
Other non-current assets
32,416
31,600
Total assets
770,672
766,440
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term loans
40,471
48,005
Accounts and notes payable-unrelated parties
228,705
240,739
Accounts and notes payable-related parties
14,265
12,839
Accrued expenses and other payables
44,839
44,771
Other current liabilities
35,409
37,385
Total current liabilities
363,689
383,739
Long-term liabilities:
Long-term tax payable
8,781
Other non-current liabilities
5,360
5,498
Total liabilities
377,830
398,018
Commitments and Contingencies (See Note 21)
Mezzanine equity:
Redeemable non-controlling interests
621
613
Stockholders’ equity:
Common stock, $0.0001 par value - Authorized - 80,000,000 shares; Issued – 32,338,302 and 32,338,302 shares as of March 31, 2024 and December 31, 2023, respectively
Additional paid-in capital
69,722
63,731
Retained earnings-
Appropriated
12,174
11,851
Unappropriated
292,776
284,832
Accumulated other comprehensive income
(8,558)
(8,258)
Treasury stock – 2,152,600 and 2,152,600 shares as of March 31, 2024 and December 31, 2023, respectively
(7,695)
Total parent company stockholders’ equity
358,422
344,464
Non-controlling interests
33,799
23,345
Total stockholders’ equity
392,221
367,809
Total liabilities, mezzanine equity and stockholders’ equity
Condensed Unaudited Consolidated Statements of Cash Flows
Cash flows from operating activities:
Adjustments to reconcile net income from operations to net cash provided by operating activities:
Depreciation and amortization
5,114
4,856
Reversal of credit losses
(114)
(217)
Deferred income taxes
136
1,019
Equity in losses/(earnings) of affiliated companies
777
(137)
Loss on disposal of property, plant and equipment
670
15
(Increase)/decrease in:
Accounts and notes receivable
2,335
(17,383)
3,109
8,285
1,091
(1,206)
Increase/(decrease) in:
Accounts and notes payable
(10,157)
1,360
96
(2,868)
(1,870)
(3,023)
Net cash provided by/(used in) operating activities
10,451
(1,416)
Cash flows from investing activities:
Increase in demand loans included in other non-current assets
—
(14)
Cash received from disposal of property, plant and equipment sales
108
31
Payments to acquire property, plant and equipment (including $1,615 and $2,376 paid to related parties for the three months ended March 31, 2024 and 2023, respectively)
(4,493)
(3,160)
Payments to acquire intangible assets
(18)
Investments under the equity method
(5,841)
Purchase of short-term investments
(14,534)
(34,795)
Proceeds from maturities of short-term investments
2,370
26,541
Cash received from long-term investments
84
557
Net cash used in investing activities
(16,483)
(16,681)
Cash flows from financing activities:
Proceeds from bank loans
34,347
20,135
Repayments of bank loans
(41,866)
(20,534)
Cash received from capital contributions of a non-controlling interest
15,504
Net cash provided by/(used in) financing activities
7,985
(399)
Effects of exchange rate on cash, cash equivalents and pledged cash
(562)
2,428
Net increase/(decrease) in cash, cash equivalents and pledged cash
1,391
(16,068)
Cash, cash equivalents and pledged cash at beginning of the period
155,194
158,951
Cash, cash equivalents and pledged cash at end of the period
156,585
142,883
Three Months Ended March 31, 2024 and 2023
1. Organization and business
China Automotive Systems, Inc., “China Automotive,” was incorporated in the State of Delaware on June 29, 1999 under the name Visions-In-Glass, Inc. China Automotive, including, when the context so requires, its subsidiaries, is referred to herein as the “Company.” The Company is primarily engaged in the manufacture and sale of automotive systems and components, as described below.
Great Genesis Holdings Limited, a company incorporated in Hong Kong on January 3, 2003 under the Companies Ordinance of Hong Kong as a limited liability company, “Genesis,” is a wholly-owned subsidiary of the Company.
Henglong USA Corporation, “HLUSA,” which was incorporated on January 8, 2007 in Troy, Michigan, is a wholly-owned subsidiary of the Company, and mainly engages in marketing of automotive parts in North America, and provides after-sales service and research and development, “R&D”, support.
The Company owns interests in the following subsidiaries incorporated in the People’s Republic of China, the “PRC,” and Brazil as of March 31, 2024 and December 31, 2023.
Percentage Interest
March 31,
December 31,
Name of Entity
Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong” 1
100.00
%
Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong” 2
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “Shenyang” 3
70.00
Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong” 4
85.00
Wuhu Henglong Automotive Steering System Co., Ltd., “Wuhu” 5
Hubei Henglong Automotive System Group Co., Ltd., “Hubei Henglong” 6
Jingzhou Henglong Automotive Technology (Testing) Center, “Testing Center” 7
Chongqing Henglong Hongyan Automotive System Co., Ltd., “Chongqing Henglong” 8
CAAS Brazil’s Imports and Trade In Automotive Parts Ltd., “Brazil Henglong” 9
95.84
Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie” 10
Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong” 11
Hubei Henglong & KYB Automobile Electric Steering System Co., Ltd., “Henglong KYB” 12
60.00
66.60
Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd., “Wuhan Hyoseong” 13
51.00
Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun” 14
62.00
Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong” 15
Hubei Zhirong Automobile Technology Co., Ltd., “Zhirong” 16
The Company has business relationships with more than sixty vehicle manufacturers, including BYD Auto Co., Ltd., Zhejiang Geely Automobile Co., Ltd., and Chery Automobile Co., Ltd., three of the largest privately owned car manufacturers in China, Chongqing Changan Automobile Co., Ltd., the largest state-owned car manufacturers in China, SAIC Motor Co., Ltd., FAW Group and others. All of them are our key customers. For overseas customers, the Company has supplied power steering gear to Stellantis N.V. since 2009 and to Ford Motor Company since 2016.
8
2. Basis of presentation and significant accounting policies
(a)
Basis of Presentation
Basis of Presentation – The accompanying condensed unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. The details of subsidiaries are disclosed in Note 1. Significant inter-company balances and transactions have been eliminated upon consolidation. The condensed unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions in Regulation S-X. Accordingly they do not include all of the information and footnotes required by such accounting principles for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
The accompanying interim condensed consolidated financial statements are unaudited, but in the opinion of the Company’s management, contain all necessary adjustments, which include normal recurring adjustments, for a fair statement of the results of operations, financial position and cash flows for the interim periods presented.
The condensed consolidated balance sheet as of December 31, 2023 is derived from the Company’s audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2024.
Estimation - The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Foreign Currencies - China Automotive and HLUSA maintain their books and records in United States Dollars, “USD,” their functional currency. The Company’s subsidiaries based in the PRC and Genesis maintain their books and records in Renminbi, “RMB,” their functional currency. The Company’s subsidiary based in Brazil maintains its books and records in Brazilian real, “BRL,” its functional currency. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 830, foreign currency transactions denominated in currencies other than the functional currency are remeasured into the functional currency at the rate of exchange prevailing at the balance sheet date for monetary items. Nonmonetary items are remeasured at historical rates. Income and expenses are remeasured at the rate in effect on the transaction dates. Transaction gains and losses, if any, are included in the determination of net income for the period.
(b)
Recent Accounting Pronouncements
No accounting standards newly issued during the three months ended March 31, 2024 had a material impact on the Company’s financial statements or disclosures.
(c)
Significant Accounting Policies
There have been no updates to the significant accounting policies set forth in the notes to the consolidated financial statements for the year ended December 31, 2023.
9
3. Accounts and notes receivable, net
The Company’s accounts and notes receivable, net as of March 31, 2024 and December 31, 2023 are summarized as follows (figures are in thousands of USD):
Accounts receivable - unrelated parties
146,898
164,231
Notes receivable - unrelated parties (1)
123,629
112,605
Total accounts and notes receivable - unrelated parties
270,527
276,836
Less: allowance for credit losses - unrelated parties
(15,408)
(15,599)
Accounts and notes receivable - related parties
13,048
9,573
Less: allowance for credit losses - related parties
(1,449)
(1,404)
Accounts and notes receivable, net
266,718
269,406
(1)
Notes receivable represent accounts receivable in the form of bills of exchange for which acceptances are guaranteed and settlements are handled by banks.
As of March 31, 2024 and December 31, 2023, the Company pledged its notes receivable with amounts of $8.3 million and $11.5 million, respectively, as collateral for banks to endorse the payment of the Company’s notes payable to the noteholders upon maturity (See Note 8).
As of March 31, 2024 and December 31, 2023, the Company pledged its accounts receivable with amounts of $0.5 million and $0.5 million, respectively, as collateral for banks to obtain the long-term loans.
Provision for doubtful accounts and notes receivable, as reversed in the unaudited consolidated statements of operations, amounted to $0.1 million and $0.3 million for the three months ended March 31, 2024 and 2023, respectively.
During the three months ended March 31, 2024, the Company’s five largest customers accounted for 48.7% of its consolidated net product sales, with one customer individually accounting for more than 10% of consolidated net product sales, i.e., 18.8%. As of March 31, 2024, approximately 9.9% of accounts receivable were from trade transactions with the aforementioned customer.
During the three months ended March 31, 2023, the Company’s five largest customers accounted for 45.2% of its consolidated net product sales, with one customer individually accounting for more than 10% of consolidated net sales, i.e., 22.1%. As of March 31, 2023, approximately 7.0% of accounts receivable were from trade transactions with the aforementioned customer.
4. Inventories
The Company’s inventories as of March 31, 2024 and December 31, 2023 consisted of the following (figures are in thousands of USD):
Raw materials
24,886
28,505
Work in progress
18,142
17,123
Finished goods
59,551
62,760
Cost of R&D service
6,503
4,004
Total
The Company recorded $1.8 million and $1.2 million of inventory write-down to cost of products sold for the three months ended March 31, 2024 and 2023, respectively.
10
5. Long-term investments
The Company’s long-term investments as of March 31, 2024 and December 31, 2023, are summarized as follows (figures are in thousands of USD):
Chongqing Venture Fund
13,006
13,158
Hubei Venture Fund
12,128
12,217
Suzhou Qingshan
8,378
8,409
Suzhou Venture Fund
3,269
3,387
Suzhou Mingzhi (1)
1,259
1,261
Sentient AB
19,981
20,417
Henglong Tianyu
766
793
Jiangsu Intelligent
491
531
The condensed financial information of the Company’s significant equity investee for the three months ended March 31, 2024 and 2023, Chongqing Venture Fund and Suzhou Venture Fund, is summarized as follows (figures are in thousands of USD):
Revenue
Gain from continuing operations
(1,824)
3,957
Net gain
6. Property, plant and equipment, net
The Company’s property, plant and equipment, net as of March 31, 2024 and December 31, 2023 are summarized as follows (figures are in thousands of USD):
Costs:
Machinery and equipment
241,842
241,761
Buildings
63,526
64,390
Electronic equipment
5,820
5,804
Motor vehicles
4,705
4,587
Construction in progress
12,945
11,821
Total amount of property, plant and equipment
328,838
328,363
Less: Accumulated depreciation (1)
(228,875)
(226,436)
Less: Impairment
(568)
Total amount of property, plant and equipment, net (2)
11
7. Bank Loans
Loans consist of the following as of March 31, 2024 and December 31, 2023 (figures are in thousands of USD):
Short-term bank loans
Long-term bank loans
1,142
1,221
41,613
49,226
The Company entered into credit facility agreements with various banks, which were secured by property, plant and equipment and land use rights of the Company. The total credit facility amount was $165.6 million and $195.8 million, respectively, as of March 31, 2024 and December 31, 2023. As of March 31, 2024 and December 31, 2023, the Company has drawn down loans under these facilities with an aggregate amount of $41.6 million and $49.2 million, respectively. The weighted average interest rate was 2.7% and 2.6% per annum, for the three months ending March 31, 2024 and the year ended December 31, 2023, respectively.
The Company must use the loans for the purpose as prescribed in the loan contracts. If the Company fails to do so, it will be charged penalty interest and/or trigger early repayment. The Company complied with such financial covenants during the three months ended March 31, 2024.
8. Accounts and notes payable
The Company’s accounts and notes payable as of March 31, 2024 and December 31, 2023 are summarized as follows (figures are in thousands of USD):
Accounts payable - unrelated parties
131,236
147,712
Notes payable - unrelated parties (1)
97,469
93,027
Accounts and notes payable - unrelated parties
Accounts and notes payable - related parties
242,970
253,578
9. Accrued expenses and other payables
The Company’s accrued expenses and other payables as of March 31, 2024 and December 31, 2023 are summarized as follows (figures are in thousands of USD):
Accrued expenses
10,684
10,464
Warranty reserves (1)
31,665
30,440
Payables for overseas transportation and custom clearance
400
Dividends payable to holders of non-controlling interests
423
424
Other payables
2,067
3,043
Balance at end of year/period
12
For the three months ended March 31, 2024 and 2023, the warranties activities were as follows (figures are in thousands of USD):
Balance at beginning of the period
32,435
Additions during the period
3,863
4,611
Settlement within the period
(2,587)
(3,448)
Foreign currency translation gain
(51)
434
Balance at end of the period
34,032
10. Redeemable non-controlling interests
In September 2020, one of the Company’s subsidiaries issued shares to Hubei Venture Fund amounting to RMB 5.0 million, equivalent to approximately $0.7 million translated at spot rate of transaction date. The shares will be transferred to the Company and the other shareholder of the subsidiary on a pro rata basis at the holder’s option if the subsidiary fails to complete a qualified IPO in a pre-agreed period of time after their issuance with a transfer price of par plus 6.0% per year. As of March 31, 2024, $0.6 million of the shares are subject to purchase by the Company and are therefore accounted for as redeemable non-controlling interests in mezzanine equity.
For the three months ended March 31, 2024 and 2023, the Company recognized accretion of $0.008 million and $0.008 million, respectively, to the redemption value of the shares over the period starting from the issuance date with a corresponding reduction to retained earnings.
11. Additional paid-in capital
The Company’s positions in respect of the amounts of additional paid-in capital for the three months ended March 31, 2024 and 2023, are summarized as follows (figures are in thousands of USD):
Contribution by the non-controlling interest of Henglong KYB
5,991
12. Retained earnings
Pursuant to the relevant PRC laws, the profits distribution of the Company’s subsidiaries, which are based on their PRC statutory financial statements, are available for distribution in the form of cash dividends after these subsidiaries have paid all relevant PRC tax liabilities, provided for losses in previous years, and made appropriations to statutory surplus at 10% of their respective after-tax profits each year. When the statutory surplus reserve reaches 50% of the registered capital of a company, no additional reserve is required. For the three months ended March 31, 2024 and 2023, the subsidiary in China appropriated statutory reserve of $0.3 million and nil, respectively.
The Company’s activities in respect of the amounts of appropriated retained earnings for the three months ended March 31, 2024 and 2023, are summarized as follows (figures are in thousands of USD):
Appropriation of retained earnings
323
13
The Company’s activities in respect of the amounts of the unappropriated retained earnings for the three months ended March 31, 2024 and 2023, are summarized as follows (figures are in thousands of USD):
247,174
Net income attributable to parent company
8,275
6,828
(323)
253,994
13. Accumulated other comprehensive income
The Company’s activities in respect of the amounts of accumulated other comprehensive income for the three months ended March 31, 2024 and 2023, are summarized as follows (figures are in thousands of USD):
(3,413)
Foreign currency translation adjustment attributable to parent company
(300)
4,288
875
14. Treasury stock
Treasury stock represents shares repurchased by the Company that are no longer outstanding and are held by the Company. Treasury stock is accounted for under the cost method. On March 29, 2022, the Board of Directors of the Company approved a share repurchase program under which the Company was permitted to repurchase up to $5.0 million of its common stock from time to time in the open market at prevailing market prices not to exceed $4.00 per share through March 30, 2023. As of March 31, 2024 and December 31, 2023, the Company had repurchased 666,074 shares of the Company’s common stock under the program and the total number of shares held in treasury was 2,152,600. The repurchased shares are presented as “treasury stock” on the balance sheet.
15. Non-controlling interests
The Company’s activities in respect of the amounts of the non-controlling interests’ equity for the three months ended March 31, 2024 and 2023, are summarized as follows (figures are in thousands of USD):
15,182
Net income attributable to non-controlling interests
Foreign currency translation adjustment attributable to non-controlling interests
(48)
266
9,513
16,503
16. Net product sales
Revenue Disaggregation
Management has concluded that the disaggregation level is the same under both the revenue standard and the segment reporting standard. Please refer to Note 23.
14
Payment to Customer
The Company accounts for consideration payable to a customer as a reduction of revenue at the later of revenue recognition and the Company’s promise to pay the consideration.
Contract Liabilities
Contract liabilities are mainly customer deposits. As of March 31, 2024 and December 31, 2023, the Company has customer deposits of $8.8 million and $8.6 million, respectively, which were included in other current liabilities on the consolidated balance sheets. During the three months ended March 31, 2024, $2.1 million was received and $1.9 million (including $1.9 million from the beginning balance of customer deposits) was recognized as net product sales revenue. During the three months ended March 31, 2023, $2.3 million was received and $1.3 million (including $1.2 million from the beginning balance of customer deposits) was recognized as net product sales revenue. Customer deposits represent non-refundable cash deposits for customers to secure rights to an amount of products produced by the Company under supply agreements. When the products are shipped to customers, the Company will recognize revenue and bill the customers to reduce the amount of the customer deposit liability.
17. Financial expense, net
During the three months ended March 31, 2024 and 2023, the Company recorded financial expense, net which is summarized as follows (figures are in thousands of USD):
Interest income
444
219
Foreign exchange loss, net
(359)
(565)
Bank charges
(97)
(76)
Total financial expense, net
18. Income per share
Basic income per share is computed using the weighted average number of ordinary shares outstanding during the period. Diluted income per share is computed using the weighted average number of ordinary shares and dilutive ordinary share equivalents outstanding during the period. The dilutive effect of outstanding stock options is determined based on the treasury stock method.
The calculations of basic and diluted income per share attributable to the parent company for the three months ended March 31, 2024 and 2023, were as follows (figures are in thousands of USD, except share and per share amounts):
Numerator:
Net income attributable to the parent company’s common shareholders - Basic and Diluted
Denominator:
Weighted average shares outstanding
Dilutive effects of stock options
7,380
Denominator for dilutive income per share - Diluted
Net income per share attributable to parent company’s common shareholders – Basic
Net income per share attributable to parent company’s common shareholders - Diluted
As of March 31, 2024, the exercise prices for all outstanding stock options exceeded the weighted average market price of the Company’s common stock during the three months ended March 31, 2024. Therefore, these stock options were excluded from the calculation of the diluted income per share for the corresponding periods presented.
As of March 31, 2023, the exercise prices for all outstanding stock options were below the weighted average market price of the Company’s common stock during the three months ended March 31, 2023. These stock options were included in the calculation of the diluted income per share for the corresponding periods presented.
19. Significant concentrations
A significant portion of the Company’s business is conducted in the PRC where the currency is the RMB. Regulations in China permit foreign owned entities to freely convert the RMB into foreign currency for transactions that fall under the “current account”, which includes trade related receipts and payments, interest and dividends. Accordingly, the Company’s China subsidiaries may use RMB to purchase foreign currency for settlement of such “current account” transactions without pre-approval.
China Automotive, the parent company, may depend on dividend payments from Genesis and HLUSA, which are generated from their subsidiaries in China, “China-based Subsidiaries,” after they receive payments from the China-based Subsidiaries. Regulations in the PRC currently permit payment of dividends of a PRC company only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Under PRC law China-based Subsidiaries are required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year to their general reserves until the cumulative amount reaches 50% of their paid-in capital. These reserves are not distributable as cash dividends, or as loans or advances. These foreign-invested enterprises may also allocate a portion of their after-tax profits, at the discretion of their boards of directors, to their staff welfare and bonus funds. Any amounts so allocated may not be distributed and, accordingly, would not be available for distribution to Genesis and HLUSA.
The PRC government also imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currencies out of China. The China-based Subsidiaries may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currencies. If China Automotive is unable to receive dividend payments from its subsidiaries, including the China-based subsidiaries, China Automotive may be unable to effectively finance its operations or pay dividends on its shares.
Transactions other than those that fall under the “current account” and that involve conversion of RMB into foreign currency are classified as “capital account” transactions; examples of “capital account” transactions include repatriations of investment by or loans to foreign owners, or direct equity investments in a foreign entity by a China domiciled entity. “Capital account” transactions require prior approval from China’s State Administration of Foreign Exchange, or SAFE, or its provincial branch to convert a remittance into a foreign currency, such as U.S. Dollars, and transmit the foreign currency outside of China.
This system could be changed at any time and any such change may affect the ability of the Company or its subsidiaries in China to repatriate capital or profits, if any, outside China. Furthermore, SAFE has a significant degree of administrative discretion in implementing the laws and has used this discretion to limit convertibility of current account payments out of China. Whether as a result of a deterioration in the Chinese balance of payments, a shift in the Chinese macroeconomic prospects or any number of other reasons, China could impose additional restrictions on capital remittances abroad. As a result of these and other restrictions under the laws and regulations of the People’s Republic of China, or the PRC, the Company’s China subsidiaries are restricted in their ability to transfer a portion of their net assets to the parent. The Company has no assurance that the relevant Chinese governmental authorities in the future will not limit further or eliminate the ability of the Company’s China-based subsidiaries to purchase foreign currencies and transfer such funds to the Company to meet its liquidity or other business needs. Any inability to access funds in China, if and when needed for use by the Company outside of China, could have a material and adverse effect on the Company’s liquidity and its business.
16
20. Related party transactions and balances
Related party transactions are as follows (figures are in thousands of USD):
Related party sales
Merchandise sold to related parties
11,360
13,576
Materials and others sold to related parties
472
592
Rental income obtained from related parties
97
63
11,929
14,231
Related party purchases
Materials purchased from related parties
6,968
7,015
Equipment purchased from related parties
243
Others purchased from related parties
106
21
7,279
Related party receivables
Accounts and notes receivable, net from related parties
Related party advance payments
Advance payments for property, plant and equipment to related parties
6,694
5,759
Advance payments and others to related parties
1,936
1,991
8,630
7,750
Related party payables
These transactions were consummated under similar terms as those with the Company’s third-party customers and suppliers.
As of March 31, 2024, Hanlin Chen, the chairman of the board of directors of the Company, owns 57.39% of the common stock of the Company and has the effective power to control the vote on substantially all significant matters without the approval of other stockholders.
21. Commitments and contingencies
Legal proceedings
The Company is not a party to any pending or, to the best of the Company’s knowledge, any threatened legal proceedings and no director, officer or affiliate of the Company, or owner of record of more than five percent of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation.
17
Other commitments and contingencies
In addition to the bank loans, notes payables and the related interest and other payables, the following table summarizes the Company’s major commitments and contingencies as of March 31, 2024 (figures are in thousands of USD):
Payment obligations by period
2025
2026
Thereafter
Obligations for investment contracts
2,960
Obligations for purchasing and service agreements
18,485
3,362
21,847
6,322
24,807
22. Off-balance sheet arrangements
As of March 31, 2024 and December 31, 2023, the Company did not have any significant transactions, obligations or relationships that could be considered off-balance sheet arrangements.
23. Segment reporting
The accounting policies of the product sectors (each entity manufactures and sells different products and represents a different product sector) are the same as those described in the summary of significant accounting policies disclosed in the Company’s 2023 Annual Report on Form 10-K except that the disaggregated financial results for the product sectors have been prepared using a management approach, which is consistent with the basis and manner in which management internally disaggregates financial information for the purposes of assisting them in making internal operating decisions. Generally, the Company evaluates performance based on stand-alone product sector operating income and accounts for inter-segment sales and transfers as if the sales or transfers were to third parties, at current market prices. Each product sector is considered a reporting segment.
As of March 31, 2024, in addition to the holding company (Genesis), the Company had 15 product sectors, six of which were principal profit makers and were reported as separate sectors and engaged in the production and sales of power steering, Henglong, Jiulong, Wuhu, Henglong KYB, Hubei Henglong and Brazil Henglong. The other nine sectors were engaged in the development, manufacturing and sale of high polymer materials (Wuhu Hongrun), power steering parts (Shenyang), R&D services (Changchun Hualong), automobile steering columns (Jielong), provision of after-sales and R&D services (HLUSA), production and sale of power steering (Chongqing Henglong), manufacture and sales of automobile electronic systems and parts (Wuhan Chuguanjie), manufacture and sales of automotive motors and electromechanical integrated systems (Wuhan Hyoseong) and inspection and testing of automotive products (Zhirong).
As of March 31, 2023, in addition to the holding company (Genesis), the Company had 15 product sectors, six of which were principal profit makers and were reported as separate sectors and engaged in the production and sales of power steering, Henglong, Jiulong, Wuhu, Henglong KYB, Hubei Henglong and Brazil Henglong. The other nine sectors were engaged in the development, manufacturing and sale of high polymer materials (Wuhu Hongrun), power steering parts (Shenyang), R&D services (Changchun Hualong), automobile steering columns (Jielong), provision of after-sales and R&D services (HLUSA), production and sale of power steering (Chongqing Henglong), manufacture and sales of automobile electronic systems and parts (Wuhan Chuguanjie), research and development of intelligent automotive technology (Jingzhou Qingyan) and manufacture and sales of automotive motors and electromechanical integrated systems (Wuhan Hyoseong).
18
The Company’s product sector information for the three months ended March 31, 2024 and 2023, is as follows (figures are in thousands of USD):
Net Product Sales
Net Income/(Loss)
Three Months Ended
Henglong
58,716
61,631
2,454
1,609
Jiulong
16,752
16,820
779
(369)
Wuhu
8,860
7,899
(535)
452
Hubei Henglong
30,383
34,657
1,305
774
Henglong KYB
34,997
37,196
2,697
2,778
Brazil Henglong
12,701
10,762
1,623
1,370
Other Entities
29,000
22,115
250
1,177
Total Segments
191,409
191,080
8,573
7,791
Corporate
(145)
(150)
Eliminations
(52,015)
(48,837)
836
242
19
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the Company’s condensed unaudited consolidated financial statements and the related notes thereto and the other financial information contained elsewhere in this Report.
General Overview
China Automotive Systems, Inc. is a leading power steering systems supplier for the China automobile industry. The Company has business relationships with more than sixty vehicle manufacturers, including BYD Auto Co., Ltd., Zhejiang Geely Automobile Co., Ltd., and Chery Automobile Co., Ltd., three of the largest privately owned car manufacturers in China, Chongqing Changan Automobile Co., Ltd., the largest state-owned car manufacturers in China, SAIC Motor Co., Ltd., FAW Group and others. All of them are our key customers. For overseas customers, the Company has supplied power steering gear to Stellantis N.V. since 2009 and to Ford Motor Company since 2016.
Most of the Company’s production and research and development institutes are located in China. As of March 31, 2024, the Company has approximately 4,102 employees dedicated to design, development, manufacture and sales of its products. By leveraging its extensive experience, innovative technology and geographic strengths, the Company aims to grow leading positions in automotive power steering systems and to further improve overall margins, long-term operating profitability and cash flows. To achieve these goals and to respond to industry factors and trends, the Company is continuing its work to improve its operations and business structure and achieve profitable growth.
In addition, as a result of COVID-19, the Company’s businesses, results of operations, financial position and cash flows had been affected and may continue to be affected. However, because of the significant uncertainties surrounding COVID-19, which are still evolving, the extent of the business disruption, including the duration and the related financial impact on subsequent periods cannot be reasonably estimated at this time. See “Item 1A. Risk Factors—Our business operations have been and may continue to be materially and adversely affected by the outbreak of the coronavirus disease (COVID-19)” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.
Corporate Structure
The Company, through its subsidiaries, engages in the manufacture and sales of automotive systems and components. Great Genesis Holdings Limited, a company incorporated in Hong Kong on January 3, 2003 under the Companies Ordinance of Hong Kong as a limited liability company, “Genesis,” is a wholly-owned subsidiary of the Company and the holding company of the Company’s joint ventures in the PRC. Henglong USA Corporation, “HLUSA,” incorporated on January 8, 2007 in Troy, Michigan, is a wholly-owned subsidiary of the Company, and mainly engages in marketing of automotive parts in North America, and provides after-sales service and research and development support. CAAS Brazil’s Imports And Trade In Automotive Parts Ltd., “Brazil Henglong,” was established by Hubei Henglong Automotive System Group Co., Ltd., formerly known as Jingzhou Hengsheng Automotive System Co., Ltd., “Hubei Henglong,” as a Sino-foreign joint venture company with two Brazilian citizens in Brazil in August 2012. In May 2017, the Company obtained an additional 15.84% equity interest in Brazil Henglong for nil consideration. The Company retained its controlling interest in Brazil Henglong and the acquisition of the non-controlling interest was accounted for as an equity transaction. Fujian Qiaolong was acquired by the Company in the second quarter of 2014, as a joint venture company that mainly manufactures and distributes drainage and rescue vehicles with mass flow, drainage vehicles with vertical downhole operation, crawler-type mobile pump stations, high-altitude water supply and discharge drainage vehicles, long-range control crawler-type mobile pump stations and other vehicles, which was disposed of by the Company in the second quarter of 2016. USAI was established in 2005, and the Company and Hubei Wanlong owned 83.34% and 16.66%, respectively. In May 2020, USAI merged with and into Wuhan Chuguanjie, a wholly-owned subsidiary of Wuhan Jielong, and it deregistered from the local business administration on April 28, 2020. Following the merger, 85.0% of Wuhan Chuguanjie was owned by the Company and 15.0% was owned by Hubei Wanlong. In April 2020, Hubei Henglong acquired 100.00% of the shares of Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong”, for total consideration of RMB 1.20 million, equivalent to approximately $0.2 million. Changchun Hualong mainly engages in design and R&D of automotive parts. Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun” was formed in December 2019, which mainly engages in the development, manufacturing and sale of high polymer materials. In April 2021, the Company obtained an additional 22.67% equity interest in Wuhu, for total consideration of RMB 6.9 million, equivalent to approximately $1.1 million, from the other shareholder. Following the acquisition, the Company owned 100% of the equity interests of Wuhu Henglong. Jingzhou Qingyan deregistered from the local business administration on June 22, 2022. In June 2023, Hubei Henglong contributed certain equipment and intangible assets to Hubei Zhirong Automobile Technology Co., Ltd., “Zhirong”, representing 100% of Zhirong’s paid-up capital. Zhirong mainly engages in inspection and testing of automotive products. In March, 2024, KYB obtained an additional 6.6% equity interest in Henglong KYB for total consideration of RMB 110.0 million, equivalent to approximately $15.5 million, after that, Henglong owns 60.0% and KYB owns 40.0% of the shares of Henglong KYB. The Company retained its controlling interest in Henglong KYB.
Critical Accounting Estimates
The Company prepares its condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amount of revenues and expenses during the reporting periods. Management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions. The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s condensed consolidated financial statements.
The Company considers an accounting estimate to be critical if:
The table below presents information about the nature and rationale for the Company’s critical accounting estimates:
Balance SheetCaption
CriticalEstimateItem
Nature of EstimatesRequired
Assumptions/ApproachesUsed
Key Factors
Accrued liabilities and other long-term liabilities
Warranty obligations
Estimating warranty requires the Company to forecast the resolution of existing claims and expected future claims on products sold. OEMs are increasingly seeking to hold suppliers responsible for product warranties, which may impact the Company’s exposure to these costs.
The Company bases its estimate on historical trends of units sold and payment amounts, combined with its current understanding of the status of existing claims and discussions with its customers.
Valuation of investment in venture funds
The Company is required, from time-to-time, to review the fair value of thes investments.
The Company determines the fair value of these investments using market approach or income approach with unoberservable inputs.
Allowance for credit losses
The Company is required, from time to time, to review the credit of customers and make timely provision of allowance for credit losses.
The Company estimates the collectability of the receivables based on the future cash flows using historical experiences and forward looking factors.
Provision for inventory impairment
The Company is required, from time to time, to review the turnover of inventory, including provision of inventory impairment for over market price and undesirable inventories.
The Company estimates net realisable value using internal budgets based on the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs necessary to make the sale and related taxes.
Recoverability of deferred tax assets
The Company is required to estimate whether recoverability of its deferred tax assets is more likely than not based on forecasts of taxable earnings in the related tax jurisdiction.
The Company uses historical and projected future operating results, based upon approved business plans, including a review of the eligible carry-forward period, tax planning opportunities and other relevant considerations.
Please see Note 2 to the consolidated financial statements under Item 1 of Part I of this report.
Results of Operations - Three Months Ended March 31, 2024 and 2023
Selected highlights from our results of operations are as follows (in thousands of U.S. dollars):
Change
Change%
Net product sales
(2,849)
(2.0)
Cost of products sold
(5,300)
(4.4)
(139)
(21.3)
689
20.4
794
16.7
(1,078)
(16.9)
Other income
901
60.0
258
249
3.6
422
(410)
(97.2)
Income taxes
914
110.3
1,381
17.5
(66)
(6.3)
1,447
21.2
22
Net Product Sales and Cost of Products Sold
Cost of Products Sold
(in thousands of USD,
except percentages)
(2,915)
(4.7)
52,838
57,151
(4,313)
(7.5)
(68)
(0.4)
14,337
15,531
(1,194)
(7.7)
961
12.2
8,959
7,134
1,825
25.6
(4,274)
(12.3)
25,115
30,073
(4,958)
(16.5)
(2,199)
(5.9)
31,175
32,456
(1,281)
(3.9)
1,939
18.0
9,363
8,926
437
4.9
6,885
31.1
24,415
17,984
6,431
35.8
329
0.2
166,202
169,255
(3,053)
(1.8)
Elimination
(3,178)
6.5
(50,877)
(48,630)
(2,247)
4.6
Net product sales were $139.4 million for the three months ended March 31, 2024, compared to $142.2 million for the same period in 2023, representing a decrease of $2.8 million, or 2.0%, mainly due to the decrease in average selling price due to a change in product mix and partially offset by the increase in sales volume of products.
Net sales of traditional steering products and parts were $92.0 million for the three months ended March 31, 2024, compared to $94.4 million for the same period in 2023, representing a decrease of $2.4 million, or 2.5%. Net sales of EPS systems and parts were $ 47.4 million for the three months ended March 31, 2024 and $47.8 million for the same period in 2023, representing a decrease of $0.4 million, or 0.8%. As a percentage of net sales, sales of EPS were 34.0% for the three months ended March 31, 2024, compared with 33.6% for the same period in 2023.
Further analysis by segment (before elimination) is as follows:
23
For the three months ended March 31, 2024, the cost of products sold was $115.3 million, compared to $120.6 million for the same period of 2023, representing a decrease of $5.3 million, or 4.4%. The decrease in cost of sales was mainly due to the decrease in sales unit cost as a result of reduced raw material costs. Further analysis is as follows:
Gross margin was 17.3% for the three months ended March 31, 2024, compared to 15.2% for the same period of 2023, representing an increase of 2.1%. The increase was mainly due to the change in product mix and the decrease in sales unit cost for the three months ended March 31, 2024.
Selling Expenses
Selling expenses were $4.1 million for the three months ended March 31, 2024, as compared to $3.4 million for the same period of 2023, representing an increase of $0.7 million, or 20.6%, which was primarily due to higher office expenses.
General and Administrative Expenses
General and administrative expenses were $5.5 million for the three months ended March 31, 2024, as compared to $4.8 million for the same period of 2023, representing an increase of $0.7 million, or 14.6%, which was primarily due to higher payroll related expenses and maintenance expenses.
24
Research and Development Expenses
Research and development expenses were $5.3 million for the three months ended March 31, 2024, as compared to $6.4 million for the same period of 2023, representing a decrease of $1.1 million, or 17.2%, which was mainly due to decreased R&D activities for new projects of the traditional products.
Other Income, net
Other income, net was $2.4 million for the three months ended March 31, 2024, as compared to $1.5 million for the three months ended March 31, 2023, representing an increase of $0.9 million, which was mainly due to higher government subsidies received for the three months ended March 31, 2024 compared to the amount received for the three months ended March 31, 2023.
Interest Expense
Interest expense was $0.3 million for the three months ended March 31, 2024, which is stable compared to $0.2 million for the same period of 2023.
Financial expense, net was $0.01 million for the three months ended March 31, 2024, as compared to $0.4 million for the three months ended March 31, 2023, representing a decrease in financial expense of $0.4 million, which was primarily due to a decrease in the foreign exchange loss due to foreign exchange volatility.
Income Taxes
Income tax expense was $1.7 million for the three months ended March 31, 2024, as compared to $0.8 million for the three months ended March 31, 2023, representing an increase of $0.9 million, which was primarily due to the increase in the Global Intangible Low-Taxed Income (“GILTI”) tax expense.
Net Income Attributable to Non-controlling Interests
Net income attributable to non-controlling interests amounted to $1.0 million for the three months ended March 31, 2024, compared to $1.1 million for the three months ended March 31, 2023, representing a decrease of $0.1 million.
Net Income Attributable to Parent Company’s Common Shareholders
Net income attributable to parent company’s common shareholders was $8.3 million for the three months ended March 31, 2024, compared to net income attributable to parent company’s common shareholders of $6.8 million for the three months ended March 31, 2023, representing an increase of $1.5 million.
Liquidity and Capital Resources
Capital Resources and Use of Cash
The Company has historically financed its liquidity requirements from a variety of sources, including short-term borrowings under bank credit agreements, bankers’ acceptances, issuances of capital stock and notes and internally generated cash. As of March 31, 2024, the Company had cash and cash equivalents and short-term investments of $135.8 million, compared to $125.7 million as of December 31, 2023, representing an increase of $10.1 million, or 8.0%.
The Company had working capital (total current assets less total current liabilities) of $206.7 million as of March 31, 2024, compared to $180.3 million as of December 31, 2023, representing an increase of $26.4 million, or 14.6%.
Except for the expected distribution of dividends from the Company’s PRC subsidiaries to the Company in order to fund the payment of the one-time transition tax due to the U.S. Tax Reform, the Company intends to indefinitely reinvest the funds in subsidiaries established in the PRC.
25
Based on our liquidity assessment, we believe that our cash flow from operations and proceeds from our financing activities will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures, for the foreseeable future and for at least twelve months subsequent to the filing of this report.
Capital Source
The Company’s capital source is multifaceted, such as bank loans and banks’ acceptance facilities. In financing activities and operating activities, the Company’s banks require the Company to sign line of credit agreements and repay such facilities within one to two years. On the condition that the Company can provide adequate mortgage security and has not violated the terms of the line of credit agreement, such facilities can be extended for another one to two years.
The Company had short-term loans of $40.5 million, long-term loans of $1.1 million (See Note 7) and bankers’ acceptances of $109.0 million as of March 31, 2024.
The Company currently expects to be able to obtain similar bank loans, i.e., RMB loans, and bankers’ acceptance facilities in the future if it can provide adequate mortgage security following the termination of the above-mentioned agreements, see the table under “Bank Arrangements” below for more information. If the Company is not able to do so, it will have to refinance such debt as it becomes due or repay that debt to the extent it has cash available from operations or from the proceeds of additional issuances of capital stock. Due to a depreciation of assets, the value of the mortgages securing the above-mentioned bank loans and banker’s acceptances is expected to be reduced by approximately $2.2 million over the next 12 months. If the Company wishes to maintain the same amount of bank loans and banker’s acceptances in the future, it may be required by the banks to provide additional mortgages of $2.2 million as of the maturity date of such line of credit agreements, see the table under “Bank Arrangements” below for more information. The Company can still obtain a reduced line of credit with a reduction of $1.8 million, which is 82.7%, the mortgage ratio, of $2.2 million, if it cannot provide additional mortgages. The Company expects that the reduction in bank loans will not have a material adverse effect on its liquidity.
26
Bank Arrangements
As of March 31, 2024, the outstanding principal under the Company’s credit facilities and lines of credit was as follows (figures are in thousands of USD):
Assessed
Due
Amount
Mortgage
Bank
Date
Available(2)
Used(3)
Value(4)
1. Comprehensive credit facilities
China CITIC Bank (1)
Sep-2024
82,452
40,695
23,145
2. Comprehensive credit facilities
Chongqing Bank
Apr-2025
987
776
3. Comprehensive credit facilities
China Constitution Bank
Sep-2025
2,819
2,239
4. Comprehensive credit facilities
China Merchants Bank (1)
Jun-2024
14,095
5. Comprehensive credit facilities
4,228
6. Comprehensive credit facilities
Bank of China (1)
14,094
5,638
7. Comprehensive credit facilities
Bank of China
705
8. Comprehensive credit facilities
Nov-2024
7,047
9. Comprehensive credit facilities
China Everbright Bank (1)
Dec-2025
1,598
10. Comprehensive credit facilities
Shanghai Pudong Development Bank (1)
28,189
13,872
20,121
11. Comprehensive credit facilities
Huishang Bank (1)
Oct-2024
1,720
12. Comprehensive credit facilities
Industrial and Commercial Bank of China
3,947
3,946
165,610
76,087
52,146
The Company may request the banks to issue notes payable or bank loans within its credit line using a 365-day revolving line.
27
The Company’s bank loan terms range from 1 months to 36 months. Pursuant to the comprehensive credit line arrangement, the Company pledged and guaranteed:
1. Land use rights and buildings with an assessed value of approximately $26.9 million as security for its comprehensive credit facility with China CITIC Bank Wuhan Branch.
2. Buildings with an assessed value of approximately $1.8 million as security for its comprehensive credit facility with Chongqing Bank.
3. Land use rights and buildings with an assessed value of approximately $6.4 million as security for its revolving comprehensive credit facility with China Constitution Bank.
4. Land use rights and buildings with an assessed value of approximately $8.9 million as security for its revolving comprehensive credit facility with China Everbright Bank.
5. Buildings with an assessed value of approximately $3.6 million as security for its revolving comprehensive credit facility with Bank of China.
6. Land use rights and buildings with an assessed value of approximately $15.5 million as security for its revolving comprehensive credit facility with Shanghai Pudong Development Bank.
28
Short-term and Long-term Loans
The following table summarizes the contract information of short-term borrowings between the banks and the Company as of March 31, 2024 (figures are in thousands of USD).
Borrowing
Annual
Date of
Term
Interest
Government
Purpose
(Months)
Principal
Rate
Payment
Due Date
Working Capital
Mar 31, 2024
2.58
Pay monthly
Mar 30, 2025
Feb 22, 2024
2.60
Feb 21, 2025
Oct 30, 2023
1,409
2.78
Oct 29, 2024
China CITIC Bank
Mar 21, 2024
2.80
Pay quarterly
Mar 20, 2025
China Construction Bank
Jan 4, 2024
3.50
Jan 3, 2025
Jun 15, 2023
381
Jun 4, 2024
324
Chongqing Bank (1)
Apr 14, 2022
3.60
Pay semiannually
Apr 13, 2024
30
Oct 13, 2024
36
Apr 13, 2025
Apr 27, 2022
118
May 12, 2022
73
May 24, 2022
54
Jun 16, 2022
42
Jun 29, 2022
114
Jul 28, 2022
79
Jan 16, 2023
159
Feb 20, 2023
Mar 21, 2023
Jul 18, 2023
Feb 7, 2024
6,765
2.20
Pay in arrear
Feb 6, 2025
Mar 29, 2024
2.24
Mar 14, 2025
Nov 10, 2023
70
0.90
Apr 11, 2024
281
295
Apr 7, 2024
345
Apr 9, 2024
Apr 10, 2024
122
Apr 1, 2024
337
Apr 16, 2024
188
Apr 3, 2024
Feb 29, 2024
4.20
May 26, 2024
Rural commercial bank
1,263
1.05
Aug 29, 2024
702
701
Sep 20, 2024
Dec 7, 2023
143
1.28
May 10, 2024
140
May 21, 2024
Apr 23, 2024
280
May 22, 2024
Dec 20, 2023
596
1.38
May 28, 2024
109
Feb 28, 2024
2.05
Apr 30, 2024
Mar 8, 2024
1
737
2.50
Apr 19, 2024
Banco Safra S/A (1)
Jul 6, 2023
7.31
Apr 8, 2024
29
May 6, 2024
Banco Safra S/A
Jun 6, 2024
Jul 8, 2024
Aug 6, 2024
Sep 6, 2024
Oct 6, 2024
Nov 6, 2024
Dec 8, 2024
Jan 6, 2025
Mar 6, 2025
Jun 29, 2023
7.44
Apr 29, 2024
May 29, 2024
Jun 30, 2024
Jul 29, 2024
Sep 30, 2024
Nov 29, 2024
Dec 30, 2024
Jan 29, 2025
Feb 28, 2025
Mar 31, 2025
279
Jul 6, 2026
157
Jun 29, 2026
The Company must use the loans for the purpose described and repay the principal outstanding on the specified date in the table. If it fails to do so, it will be charged a penalty interest payment of 30% to 100%. The Company had complied with such financial covenants as of March 31, 2024.
Notes Payable
The following table summarizes the contract information of issuing notes payable between the banks and the Company as of March 31, 2024 (figures are in thousands of USD):
Payable on
Term (Months)
Working Capital(1)
Apr. 2024
18,702
May. 2024
17,822
Jun. 2024
22,345
Jul. 2024
15,100
Aug. 2024
18,395
Sep. 2024
16,677
Total (See Note 8)
109,041
The notes payable were repaid in full on their respective due dates.
The Company must use notes payable for the purpose described in the table. If it fails to do so, the banks will no longer issue the notes payable, and it may have an adverse effect on the Company’s liquidity and capital resources. The Company has to deposit a sufficient amount of cash on the due date of notes payable for payment to the suppliers. If the bank has advanced payment for the Company, it will be charged an additional 50% penalty interest. The Company complied with such financial covenants as of March 31, 2024.
Cash Flows
Net cash provided by operating activities for the three months ended March 31, 2024 was $10.5 million, compared to net cash used in operating activities of $1.4 million for the same period of 2023, representing an increase in net cash inflows by $11.9 million, which was mainly due to (1) the increase in net income excluding non-cash items by $2.4 million, (2) the decrease in the cash inflows from movements of inventory by $5.2 million, (3) the increase in the cash outflows from movements of accounts and notes receivable by $19.7 million, (4) the increase in the cash outflows from movements of accounts and notes payable by $11.5 million, and (5) a combination of other factors contributing a decrease of cash outflows by $6.5 million.
Net cash used in investing activities for the three months ended March 31, 2024 was $16.5 million, as compared to net cash used in investing activities of $16.7 million for the same period of 2023, representing a decrease in net cash outflows by $0.2 million, which was mainly due to the net effect of (1) a decrease in purchase of short-term investments of $20.3 million, (2) a decrease in proceeds from maturities of short-term investments by $24.2 million, (3) a decrease in payments to acquire investments under the equity method by $5.8 million, and (4) a combination of other factors contributing a decrease of cash outflows by $1.9 million, primarily including a decrease in cash received from long-term investment by $0.5 million.
Net cash provided by financing activities for the three months March 31, 2024 was $8.0 million, compared to net cash used in financing activities of $0.4 million for the same period of 2023, representing an increase in net cash inflows by $8.4 million, which was mainly due to the net effect of (1) an increase in repayment of bank loan by $21.3 million, (2) an increase in proceeds from bank loan by $14.2 million, and (3) an increase in cash received from capital contributions by $15.5 million.
Off-Balance Sheet Arrangements
Cybersecurity
Risk Management and Strategy
We recognize the critical importance of developing, implementing, and maintaining robust cybersecurity measures to safeguard our information systems and protect the confidentiality, integrity, and availability of our data.
Managing Material Risks & Integrated Overall Risk Management
We have strategically integrated cybersecurity risk management into our broader risk management framework to promote a company-wide culture of cybersecurity risk management. This integration ensures that cybersecurity considerations are an integral part of our decision-making processes at every level. Our management team continuously evaluates and addresses cybersecurity risks in alignment with our business objectives and operational needs.
Oversee Third-party Risk
Because we are aware of the risks associated with third-party service providers, we have implemented stringent processes to oversee and manage these risks. We conduct thorough security assessments of all third-party providers before engagement and maintain ongoing monitoring to ensure compliance with our cybersecurity standards. The monitoring includes annual assessments of the SOC reports of
our providers and implementing complementary controls. This approach is designed to mitigate risks related to data breaches or other security incidents originating from third-parties.
Risks from Cybersecurity Threats
We have not encountered cybersecurity challenges that have materially impaired our operations or financial standing.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There were no material changes to the disclosure made in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 regarding this matter.
ITEM 4. CONTROLS AND PROCEDURES.
The Company’s management, under the supervision and with the participation of its chief executive officer and chief financial officer, Messrs. Wu Qizhou and Li Jie, respectively, evaluated the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2024, the end of the period covered by this Report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this Form 10-Q, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, Messrs. Wu and Li concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2024.
The Company’s disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of its disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.
There have been no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
ITEM 1A. RISK FACTORS.
There have been no material changes from the risk factors previously disclosed in Item 1A of the Company’s 2023 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS.
INDEX TO EXHIBITS
ExhibitNumber
Description
3.1(i)
Certificate of Incorporation (incorporated by reference from the filing on Form 10SB12G File No. 000-33123).
3.1(ii)
Bylaws (incorporated by reference from the Form 10SB12G File No. 000-33123).
10.1
Joint-venture Agreement, dated March 31, 2006, as amended on May 2, 2006, between Great Genesis Holdings Limited and Wuhu Chery Technology Co., Ltd. (incorporated by reference to Exhibit 10.8 to the Company’s Form 10-Q Quarterly Report on May 10, 2006).
10.2
Stock Exchange Agreement dated August 11, 2014 by and among Jingzhou City Jiulong Machinery Electricity Manufacturing Co., Ltd., China Automotive Systems, Inc. and Hubei Henglong Automotive System Group Co., Ltd. (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q Quarterly Report on August 13, 2014).
10.3
English translation of Joint Venture Contract, dated as of April 27, 2018, by and between Hubei Henglong Automotive System Group Co., Ltd. and KYB (China) Investment Co., Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 27, 2018).
Compensation Recovery Policy
Rule 13a-14(a) Certification*
31.2
32.1
Section 1350 Certification*
32.2
101.INS*
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 104*
Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
*filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant)
Date: May 14, 2024
By:
/s/ Qizhou Wu
Qizhou Wu
President and Chief Executive Officer
/s/ Jie Li
Jie Li
Chief Financial Officer