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China Automotive Systems, Inc. (NASDAQ:CAAS)

Roth Capital Conference

February 21, 2007 1:00 pm ET

Executives

Robert Tung - Director

Presentation

Moderator

Ladies and gentlemen, our next presenter here in the China Track today is China Automotive Systems. We are very pleased to have Mr. Robert Tung here. Mr. Robert is a Director with the firm and also takes his stance here as the Investor Relations' representative. So Robert, please go ahead, thanks.

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Robert Tung

Hi, everybody. Because of the Chinese New Year celebration, our Chairman could not be here. But he did like me to convey some metrics to all of you here.

Happy Chinese New Year and make a great fortune in the year after 2006.

This is the Safe Harbor statement.

So, who are we? China Automotive Systems is the largest independent supplier of power steering components and systems in China. Its subsidiaries offer a full range of auto parts and incorporate into steering systems for both passenger vehicles and commercial vehicles.

We are the number one market share in commercial vehicle and the number two in passenger vehicle. We are also key suppliers to Chery, Geely and Brilliance, three domestic homegrown automakers.

We have a very strong R&D team and with high-quality and low-cost. We have a very strong relationship with large local OEMs. As of 2006, 100% of our sales are through China's domestic market.

The company actually started in 1993. In '93, we had Jiulong established, '97 Henglong, and in 2002, we have Zhejiang, VIE Pump and Shengyang to support Brilliance.

And also in 2006, last year, we had two more joint ventures. One with the Chery Auto in Anhui, Wuhu and another is EPS, the next-generation power steering systems also established in 2006. And during the year, we strengthened our R&D capabilities and the manufacturing capabilities.

We are licensing with Australian's Bishop Steering and with South Korea's Nam Yang and we also did a joint venture with Korean Delphi.

The company did a reverse merger in 2003 and listed in NASDAQ Small Cap in 2004.

And also in 2006, we received Volkswagen supplier code and we already started a road test. Volkswagen is the largest China automobile maker. In 2006, they produced around 700,000 cars, and we are working with them right now.

And also in 2007, we just issued a news release. We are opening an office in Troy, Michigan and we will talk about it later.

Those are the main subsidiaries under China Auto. We have Henglong and Jiulong. They are both located in JingZhou. Our headquarter is in Wuhan, Hubei Province. Both facilities are around 200 kilometers from Wuhan. Its location gives us a very good labor and the labor rate there is much lower than our competitors in the coastal city. That certainly gives us a good edge on it.

In addition, Dongfeng is also located in Wuhan. They give us the flexibility to support one of our major clients.

Then, in the middle, is the Chery joint venture that we were talking about. The capacity will be around 300,000 units. It's a supplement to our Henglong facility, which right now has the capacity only of about 120K. That's pretty much Wuhu's overall capacity from 800,000 units to more than 1.1 million units.

So, these are the major products. The power steering system is including the steering pump, steering column, rack and pinion power steering gears and steering hoses. These are produced by different subsidiaries.

Now, we are talking about the fast-growing Chinese auto market. The domestic auto market from 2001 to 2010, the CAGR is around 17% and in 2007, it's estimated to be 7.36 million parts.

China right now remained the world's second largest auto market and auto penetration is still only 2%. So, we have a big room for growth. Of course, the comparison with USA in automobile market. For example, a lot of the smallest cars, like [mid-sized] Chery QQ, is RMB 30,000 or around US $4,000, is very cost effective and is affordable by lot of the middle-class family.

The domestic auto parts are expected to grow around 15% annually in the next 5 years. China also exports parts to US, and also the growth rate will be around 20% annually.

There are three pillars that are really supporting the strong demand for our Chinese auto parts. The first one is the growth of the China domestic auto industry. It has 15% annual growth for OEMs and 18% growth for the aftermarket and also for the exporting.

The exporting is in fact projected to be 20% annual growth in the next 5 years, and we also know that each one of the top three are ordering more than 1 billion auto parts from China.

And the government policy. The Chinese government requires the automaker in China to have minimum 40% local content and 60% in the following year. They really boost the sales for China auto part makers.

We are talking about our competitors and ourselves. CAAS right now take about 17% of the power steering market. The largest one is ZF. ZF is the joint venture of Shanghai Auto with ZF of Germany. They are primarily providing their products to GM and Volkswagen. And the third one is FKS. It's a Japanese joint venture. They are providing primarily to the Japanese cars. So, that's why we said, we are the largest independent power steering suppliers.

Those are the competitive strength of China Auto. We have more than 200 engineers and three R&D centers. We have 12 Chinese patents and two trademarks. A large percentage of our sales is through R&D development. We partner with Bishop, Namyang, Korea Delphi and Tsinghua University.

None of our clients really take up more than 20% of our total sales. So, we are not really depending on anyone of the fixed OEM clients.

One of the other advantages is our R&D. We normally take about three months to turn over a new design from our R&D team. In comparison with our competitors, that takes six to nine months, expect Japanese, for overall competitors.

Generally, we have a four series of our products and more than 300 models.

Now talking about our primary customers. Our number one customer is Chery, then Brilliance, then it is Foton, then it is Geely. So [there is these four that] takes up about 55%, and then the [lower half] is more than 20%. Also you can see that the 75% of our product is in the passenger cars. You also know that, Chery, Brilliance and Geely, they are all exporting their automobiles overseas.

This is our customer profile. Chery and Geely, they are the number one and number two homegrown domestic car makers. For Chery, we are providing 70% of our power steering systems. For Brilliance, we are providing about 80% to their passenger cars.

This is our passenger car vehicle summary of 2006. I mentioned before, Volkswagen is within the top-six. They made around 700,000 cars. And also from the pie chart, we can see that the local brands are taking up the market share at this point, and we are primary suppliers to Chery, Geely and Brilliance. And Chery, their annual growth range of last year was 48%, Geely 36% and Brilliance is 80%. So, they are the number three automakers.

This is our growth strategy. From domestic market standpoint, we are partnering with the fast growing OEMs in China. We are also penetrating existing clients with the different lines of products. We are carrying the widest product models in the market.

We also approach the low-margin foreign brands who import parts and this is one of our other focus. And the other is EPS, Electric Power Steering Systems, we are licensing a technology from Tsinghua University for the next generation of automobiles.

For the international market, we accelerate international expansion through direct sales and partnerships. I did mention that we are opening an office in Troy, Michigan and are continuing talks with the top-three and the tier-1 suppliers. And we think that the timing is right, that we get a closer relationship and give a closer support to them.

We know the certification process takes a long time, but it's time that we open our office to get closer to them, to get a better testing and quicker results with a turnaround.

This is our quick commercial vehicle summary. So, overall demand is 15% year-over-year growth. The truck-auto momentum is very high and it's important to see that local brands remain dominant with 90% share in China (inaudible) commercial vehicle. And at starting 2006, China become a major exporter in truck industry.

That's the little Chery QQ model. That's around $4,000. It's very affordable for the Chinese middle-class family.

So for 2007 outlook, the passenger vehicle will remain healthy and strong. The commercial vehicle will accelerate its momentum.

This is China Auto's revenue growth. The CAGR is around 25% from 2001 to 2005. We were talking about net sales. In 2005, it was around $64 million, but in the first three quarters of 2006, it's already $70 million. So, we estimate that 2006 sales will be over $90 million.

Here is the high profit margins. We compare those with China and Hong Kong listed auto parts company and also the US listed auto parts company. The gross margin is a little bit over 35% and operating margin is a little bit over 14%. Compared with our peers, I think we have performed well.

The balance sheet. As you can see from comparing 2005 end of the year and September 30, 2006, we have a very good tax position and our inventories remained healthy and we have increased about 30% through shareholders equity.

Investment highlights. China is the world's second largest car market. We will continue being so and a fast growing China auto parts industry and a leading market share. We are the number one independent power steering supplier. And the product [Petco] from Volkswagen might be leading to -- we become their back up supplier some time hopefully.

We have diversified our customer base. Our customers primarily are Chinese homegrown auto makers and they are taking up the market share quickly in the near future. With our R&D team and high quality products, we are well positioned for export opportunities. As you'll see the first step that we've opened the office in Troy, Michigan.

That concludes my presentation.

Question-and-Answer Session

Moderator

Do we have any questions from the audience? You can speak in from the microphone.

Unidentified Audience Member

[Question Inaudible]

Robert Tung

The current passes?. This is simpler. It's more environmental friendly. It will save power and it will save the fuel by around, comparing with the traditional one, at least 5% to 10%. So the EPS is being used in high-end European model and on a lot of the US model already, but in China it has just started. There are already a few company having EPS model or EPS power steering systems available, and we started it in 2006. We think it's always a more premium for larger customers.

Moderator

Any other questions?

Unidentified Audience Member

[Question Inaudible]

Robert Tung

One of our subsidiary has a minority interest ratio. We understand that's hindering us with the growth of our bottom line. However, we are working on a solution to improve our bottom line. We expect sometime this year, the growth of revenue will also be reflected in the bottom line.

Unidentified Audience Member

[Question Inaudible]

Robert Tung

Well, actually the Henglong subsidiary, which are producing power steering systems for the passenger cars, you can see our ownership is at 44.5% and also the passenger car industry is I think about 75% of China Auto's overall sales. So, most of the profits is coming from there. Okay, so we are taking measures to correct that.

Moderator

Just time for one more question.

Unidentified Audience Member

I am sorry, your answer to the last question has actually got me more confused than we started. Here's what I think you said, I just want to confirm. Most of your profit is coming from the Henglong subsidiary where you own 44% and can't consolidate, correct?

Robert Tung

We are in the process of consolidation.

Unidentified Audience Member

You will take steps this year to bring you over 51% of that business by buying and something like that, correct?

Robert Tung

Yes.

Unidentified Audience Member

Okay. And the other businesses are they profitable or not profitable?

Robert Tung

They are profitable, but the most profits right now is coming from passenger.

Unidentified Audience Member

I know all of your profits are coming from that.

Robert Tung

Not all, but, yeah, majority of it.

Unidentified Audience Member

90%.

Robert Tung

Majority of that.

Unidentified Audience Member

Okay.

Moderator

That's all the time we have for questions.

Robert Tung

Alright. Bye.

TRANSCRIPT SPONSOR

China Direct Logo

China Direct (ticker: CHND.OB) is a diversified management and consulting company. Our mission is to create a platform to empower medium sized Chinese entities to effectively compete in the global economy. As your direct link to China, our organization serves as a vehicle to allow investors to participate directly in the rapid growth of the Chinese economy.

Read all investor conference presentation transcripts here.

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