China Automotive Systems Q4 2025 Earnings Call - High Margin Mix and Global Expansion Drive Record Results

Operator: 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 phone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Kevin Theis, Investor Relations. You may begin.

Kevin Theis, Investor Relations, China Automotive Systems: 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. 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 throughout this call, we may make statements that may contain forward-looking statements within the mean 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 heading Risk Factors and Results of Operations in the company’s Form 20-F annual report for the year ended December 31, 2025, as filed with the Securities and Exchange Commission, and in 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 impact in the regions where we conduct business, cause our business to suffer in ways that we cannot predict, and materially adversely impact our business, financial condition, and results of operations.

A prolonged disruption or any unforeseen delay in our operations of the manufacturing, delivery, and assembly processes with any of our production facilities could result in delay in the shipment of products to our customers, increase costs, and reduce revenue. The company expressly disclaims any duty to provide updates to any forward-looking statements made in this call as a 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 31, 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 purpose 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 and automobile industry, and our market position. China’s automotive industry in 2025 set another new record, with vehicle production reaching 34.5 million units and sales totaling 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. Commercial vehicle production and sales reached 4.3 million units and 4.3 million 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 vehicles 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. Additional local government and private incentives may also have aided buyers. Chinese-branded vehicle OEMs introduced a significant number of new models to attract consumers. 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 due to 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 million, compared with $7.8 million in the fourth quarter of 2024. 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. Net income attributable to the parent company’s common shareholders increased by 103.2% to $18.4 million. Diluted earnings per share of $0.61 in the fourth quarter of 2025 compared to $0.30 in the fourth quarter of 2024. 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. EPS sales represented 41.5% of total revenue in 2025, compared to 38.9% in 2024. Our Henglong subsidiary sales of passenger vehicle steering systems rose by 12.1% year-over-year to $365.3 million in 2025. Jiulong sales of commercial vehicle steering systems increased by 28.9% year-over-year to $92.3 million. Brazil Henglong’s net sales grew by 34.7% year-over-year to $68.7 million. Net sales to North American customers rose by 15.3% year-over-year to $121.6 million in 2025. Sales to Stellantis’ worldwide network help propel our steering product sales growth in North and South American markets, as well as Europe. 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 increased mainly 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 company’s common 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 increased by 63% year-over-year to $45.1 million in 2020. We had a number of product and technology innovations in 2025. Our second generation iRCB, intelligent electro-hydraulic circulating ball power steering, began production for use in heavy-duty vehicles that use both hydraulic power and electric controls. As China’s first iRCB compatible with L2+ assisted driving, this system utilizes cutting-edge electro-hydraulic control technology to achieve remarkable steering accuracy and response. Through higher efficiencies, operating costs will be significantly reduced.

Our Jingzhou Henglong subsidiary launched its active rear-wheel steering in 2025. Once reserved only for luxury cars, CAAS’s active rear-wheel steering provides superior steering characteristics and is now entering into the upper mass market pools in China. Our REPS steering product developed for Nanjing Iveco entered production in 2025, providing advancements in performing autonomous driving functions such as automatic parking, lane keep assist, and lane follow assist. Our REPS 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, Hyoseong (Wuhan), began to ship its new 115-platform steering motor production line at the end of 2025. This high-torque 115-platform electric motor supports our eRCB commercial vehicle program. eRCB is an advanced electric recirculating ball steering system.

This is a significant innovation in our advanced intelligent steering strategy. We also made strategic moves to expand our geographic expansion. Our Hubei Henglong subsidiary entered into a strategic cooperation agreement with KYB-UMW in Malaysia. Through this cooperation, a new regional manufacturing and supply system is being entered in Malaysia. This joint venture is 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 Perodua, Malaysia’s largest car manufacturer. UMW also has a joint venture with Toyota in Malaysia. Per our agreement with KYB-UMW, our products will be initially supplied to Perodua in Malaysia. In the future, additional opportunities in the OEM and aftermarkets will be explored in the broader Asian region. To support strategic partnership, KYB-UMW’s new advanced manufacturing plant became operational in 2026.

Our Jingzhou Henglong subsidiary also won its first REPS product order from a large, well-known European automobile producer. This order, with annual sales expectations exceeding $100 million, covers multiple vehicle models, and mass production is expected to begin by 2027. Also, our affiliated company in Sweden, Sentient AB, achieved considerable sales to a major European OEM in 2025 for its leading steering technology integrating hardware and software. As of December 31, cash equivalents, pledged cash, and short-term investments and long-term time deposits were $256.7 million. Net cash flow from 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 paves the way for us to become a true multinational supplier to global OEMs. Management is refocusing some of those resources to improve operational sales and to increase penetration in 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 ended June 30, 2026. Also, in 2025, we changed our independent registered public accounting firm to Grant Thornton Jian Tong Certified Public Accountants LLP with headquarters in Beijing. With the organizational changes and introduction of more advanced steering products, 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 portfolio and introduce new technologies and products in the future.

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. 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, 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 and 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% of 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. 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 $0.5 million in 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 earnings of affiliated companies increased by 121% to $19.4 million in the fourth quarter of 2025 compared to $8.8 million in the fourth quarter of 2024. Income tax expense was $1.4 million in the fourth quarter of 2025 compared to income tax benefit of $2 million in the fourth quarter of 2024. Net income attributable to parent company’s common shareholders increased by 103.2% to $18.4 million in the fourth quarter of 2025 compared to net income attributable to parent company’s common shareholders of $9.1 million in the fourth quarter of 2024.

Diluted income per share was $0.61 in the fourth quarter of 2025 compared to diluted income per share of $0.30 in the fourth quarter of 2024. The weighted average number of diluted shares outstanding was 30,170,702 compared to 30,180,947 in the fourth quarter of 2024. For the 2025 year, net sales increased by 76% to an annual record $765.7 million in 2025 compared to $650.9 million in 2024. This increase was mainly due to higher sales and production of passenger vehicles in China, increased vehicle export sales, and commercial vehicle sales in China increasing by approximately 10.9% year-over-year in 2025. Total sales of the company’s EPS systems increased by 25.5% year-over-year, and sales of the traditional products increased by 12.6% year-over-year. Henglong sales of passenger vehicle steering systems rose by 12.1% year-over-year to $365.3 million in 2025.

Jiulong sales of commercial vehicle steering systems increased by 28.9% year-over-year to $92.3 million. Brazil Henglong’s net sales grew by 34.7% year-over-year to $68.7 million in 2025. Net sales to North American customers rose by 15.3% year-over-year in 2025 to $120.6 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. 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, offsetting lower other expenses.

Selling expenses continued 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 was mainly due to higher personnel and other expenses. R&D expenses increased by 63% to $45 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% compared to $40.3 million in 2023 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 net financial expense of $0.09 million in 2024. This increase in financial income of $2.4 million was primarily due to an increase in foreign exchange gains due to the foreign exchange volatility. Income before income tax expenses and equity and 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 was primarily due to higher operating income in 2025. Interest 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 and earnings of affiliated companies, and the effective tax rate in 2025.

Net income attributable to parent company’s 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. Now we provide some balance sheet and other financial highlights. As of December 31, 2025, total cash equivalents, pledged cash, short-term investments, and long-term time deposits were $256.7 million. 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 lease rights was $37.2 million in 2025, compared to $43.7 million in 2024. The business outlook. Management expects revenue for the full fiscal year 2026 to be 108.

Jie Li, Chief Financial Officer, China Automotive Systems: I’m sorry, $810. This target is based on the company’s current view on operating and market conditions, which are subject to change. With that, operator, we are about to begin the Q&A session.

Operator: Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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 Esousa Holdings.

Jim Fallon, Investor, Esousa Holdings: Hi, can you hear me?

Kevin Theis, Investor Relations, China Automotive Systems: Yes. Thank you.

Jie Li, Chief Financial Officer, China Automotive Systems: Yeah。

Jim Fallon, Investor, Esousa Holdings: Jim Fallon from Esousa Holdings. I was just wondering, how will the U.S. Supreme Court tariff decision affect the company’s exports into the United States? Thank you.

Jie Li, Chief Financial Officer, China Automotive Systems: 好的，谢谢。这个投资人的问题是想要知道美国最高法院对关税的政策变化判决以后，对我们出口到美国的业务有什么影响？

这个对我们还是有一些有利的影响，就是可能会帮助我们出口更多一些。整个关税情况是这样的，我们目前整个受到的关税有301、232以及122这几个条款，相对于在这个ruling之前的话，差不多降低了一个10%这样一个关税水平，原来是70%多，现在60%多。好吧。

现在关税还有60%多，OK。

对，这块它因为整个取消的就是IEEPA这块的tariff，这个reciprocal的这一块给取消掉了。以前生效的301、232这块还是有效的。那么特朗普这个administration后面又追加了一个Section 122的这样一个10%的，所以加起来还是有比较高的关税水平，但是比原来还是减少了一些。

Thank you for your question. 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, the 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%.

Jim Fallon, Investor, Esousa Holdings: Okay. Thank you.

Jie Li, Chief Financial Officer, China Automotive Systems: Thank you.

Thank you.

Operator: Your next question for today is from Gary Nash, a Private Investor.

Gary Nash, Private Investor: Good day, everyone. Mr. Li, why did Q4 gross margin spike? Is Q4 gross margin sustainable for 2026?

Jie Li, Chief Financial Officer, China Automotive Systems: 好，这是另外一个投资人问题，为什么我们第四季度的毛利大幅增加了？他想知道一下，是不是这个毛利可以维持在2026年持续这样的水平。

2025年第四季度的毛利率达到了23%，确实是一个比较高的水平。这里面有以下几个因素：第一个，首先是我们产品这一块的产品组合，从原来低毛利的，现在向更加高端的毛利这一块在增加。比方说我们现在的一些REPS，包括brushless的EPS，这个比重越来越多，所以说对我们的毛利率有改进。另外一块也是有一些一次性的因素，比方说关税的返还，还有一些前期的一些多计提的折旧、warranty这块的recovery。综合下来的话，肯定会比以前要好一些，但是可能到不了23%这个水平，因为有一个一次性的影响。

Okay. Yes, you are right. We did experience a significant improvement in the gross margin category in Q4 2025. Gross margin reached 23% in Q4, mainly attributable to a couple of factors. One is our product mix has dramatically improved. We have increased our higher margin products such as our EPS product and brushless electric power steering, we would call EPS product. We also had some one-time event also took place in the Q4. They are the tariff-related refunds as well as depreciation policy change. Combining those three factors, we believe the gross margin in 2026 is going to be at the very healthy level, but it’s not going to be as high as Q4 2025.

Kevin Theis, Investor Relations, China Automotive Systems: Thank you.

Jie Li, Chief Financial Officer, China Automotive Systems: Thank you.

Operator: Your next question is from Jonathan Neaves, a private investor.

Jonathan Neaves, Private Investor: Hello, everybody. My question is on a dollar basis, how much does China Automotive expect to save on an annual basis by changing the company registration to the Cayman Islands?

Jie Li, Chief Financial Officer, China Automotive Systems: Oh, okay. From the immediate impact by redomiciling to Cayman Islands, we immediately save about $500,000. That’s the listing-related expenses. In terms of international business expansion, we’ll see more benefit coming, even if it’s still a little bit early to give the detailed number. Also in terms of taxes, we’re also seeing it will be a very notable saving as well. Combining all these, we believe it’s going to be a very meaningful saving for our shareholders.

Jonathan Neaves, Private Investor: Thank you.

Jie Li, Chief Financial Officer, China Automotive Systems: Thank you.

Kevin Theis, Investor Relations, China Automotive Systems: Okay. I have a question that’s been emailed to me by one of the shareholders who could not be on. The question is: With the current cash position, what’s the outlook for either a stock buyback or cash dividends in 2026?

Jie Li, Chief Financial Officer, China Automotive Systems: Okay. In terms of share buyback, we definitely are considering. Previously, we do have a buyback plan in place. Due to the redomicile to the Cayman Islands process, we had to meet a lot of compliance, so we put that buyback plan on hold. Now with that procedure completed, me as a CFO definitely will recommend to the board and to reinitiate a share buyback program. We’ll make an announcement when that’s in progress. Okay. 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.

Operator: Once again, if you would like to ask a question, please press star one. 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.

Kevin Theis, Investor Relations, China Automotive Systems: 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.

Operator: This concludes today’s conference.

Jie Li, Chief Financial Officer, China Automotive Systems: Thank you.

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