China Automotive Systems, Inc. Aktie

Good day, everyone. Welcome to the China Automotive Systems Conference Call.

[Operator Instructions]

It is now my pleasure to turn the floor over to your host, Kevin Theiss, Investor Relations. The floor is yours.

Thank you, everyone, for joining us today. Welcome to China Automotive Systems 2026 First Half Results Conference Call.

Joining us today is 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 meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements represent the company's estimates and assumptions only as of the date of this call.

As a result, the company's actual results could differ materially from those contained in these forward-looking statements due to a number of factors, including those described under the heading Risk Factors, 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 on the overall business environment, cause uncertainties in the regions where we conduct business, cause our business to suffer in ways that we cannot predict and materially and 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 within any of our production facilities could result in delays in the shipment of those products to our customers, increased costs and reduced revenue.

The company expressly disclaims any duty to provide updates to any forward-looking statements made in this call, whether as a result of new information, future events or otherwise.

On this call, I will provide a brief overview and summary of the first half of 2023 unaudited results, which are reported using U.S. GAAP accounting.

Management will then conduct a question-and-answer session. For the purposes of today's call, I will review the financial results in U.S. dollars.

We will begin with a brief overview of our financial performance in the first half of 2026 and recent dynamics of the Chinese economy and automobile industry and our market position.

For the 6 months ended June 30, 2026, we had growth across the board in our major operating units, with 3 operating units achieving net sales growth exceeding 40% in the first 6 months of 2026.

These results offset the 5.1% decline in our Brazilian subsidiary. Net sales increased by 20.1% to a 6-month record of $412.5 million, with 6-month records in gross profits, which increased by 49.7% year-over-year; income from operations growth of 100.4% year-over-year, and diluted earnings per share growth by 98% year-over-year.

Our growth contrasts with China's automotive industry performance, as data from the China Association of Automobile Manufacturers (CAAM) disclosed that vehicle production and sales fell 4% and 4.1% year-over-year, respectively, in the first half of 2024.

Passenger vehicle sales fell by approximately 6% in the first half of 2026 as retail sales of ICE vehicles declined. The sales of NEV vehicles increased by 7.3% year-over-year and reached 49.6% of all new vehicle sales, and battery EV sales represented approximately 67% of total NEV sales.

Rising fuel prices and a reduction in government EV subsidies and subsidies in China impacted vehicle demand.

The Chinese economy was also a factor in lower vehicle growth, as China's gross domestic product grew by a sluggish 4.7% year-over-year in the first half of 2026.

The growth slowed to 4.3% in the second quarter. The Chinese economy witnessed weak household consumption, an 18% year-over-year contraction in property investment, and weak wage growth.

However, total exports remained strong with a 17.6% advance in the first half of 2026, including strong growth of NEV vehicles. Nevertheless, China is facing increasing uncertainty in foreign markets for the future.

In 2025, we introduced a number of innovations, including our second-generation IRCB, an intelligent electrohydraulic circulating ball power steering for use in heavy-duty vehicles.

The launch of our active rear wheel steering, produced our RPS steering system for Magic convento, and developed a high-torque 115-watt platform electric motor.

These advancements help build our sales and marketing in specific markets in 2026. In the first 6 months of 2026, the first batch of our EPS steering was shipped to a global automaker's European division and is featured in 2 new European vehicle models.

Other vehicle models are targeted to adopt this advanced steering. Annual sales volume is expected to reach 300,000 units.

In addition to improving our sales and market presence in South America and Europe, we continue to build our strategic cooperation agreement with KYBUMW for a new regional manufacturing and supply system focused in Malaysia.

With our financial strength, we were able to invest $20.8 million in research and development as well as $30.4 million in property, plant and equipment in the first half of 2026.

Net cash provided by operating activities was $47.8 million in the first half of 2026. Cash, cash equivalents, and pledged totaled $155.6 million, and working capital was nearly $249.8 million.

Despite these investments, our free cash flow was $14.3 million in the first 6 months of 2026.

Our new 2026-2030 strategic plan is focused on deepening local presence in global markets, developing additional cutting-edge steering technologies, penetrating new product markets, and 0 defect quality with platform-based lean automated manufacturing systems.

These strategies will lead to higher sales and greater market share in the global automotive marketplace. With these changes, we will grow our market position as a Tier 1 supplier to large global OEM customers in North America, Europe, Asia, and South America.

Now let me review the financial results in the first 6 months of 2026. Net sales increased by 20.1% year-over-year to $412.5 million compared to $343.3 million in the first half of 2025.

The net sales increase is mainly due to higher sales of electric power steering and the appreciation of the RMB against the U.S. dollar.

Net sales of traditional steering products and parts increased 11.2% year-over-year to $219.6 million in the first half of 2026.

Net sales of EPS products rose 32.2% year-over-year to $192.3 million from $145.9 million for the same period in 2025.

EPS product sales grew to 46.8% of the total net sales for the first half of 2026 compared to 42.5% for the same period in 2025. Net sales in our Henglong subsidiary, the largest contributor to sales, rose by 25.3% to $205.7 million compared with $164.2 million for the first half of 2025.

Sales to North American customers increased by 3.5% to $59.2 million compared to $57.2 million in the first half of 2025, primarily due to higher demand for passenger vehicle products by one customer.

Sales in Brazil declined by 5.1% in the first half of 2026 to $32.6 million from $34.4 million in the first half of 2025.

Julong's net sales to the Chinese commercial vehicle market increased 42.9% year-over-year to $61.7 million, and our Wuhu subsidiary's net sales to Cherry Automotive Company Limited rose by 40.3% year-over-year to $22.7 million in the first half of 2026.

Gross profit grew by 49.7% year-over-year to $88.5 million from $59.1 million in the first half of 2025.

Gross profit margin increased to 21.5% in the first half of 2026 from 17.2% in the first half of 2025. The increase in gross profit was mainly due to product volume gains and greater sales of relatively higher-margin products.

Net gain on other sales increased to $2.1 million in the first half of 2026 compared to $1.6 million in the first half of 2025. Selling expenses grew by 28% to $11.9 million in the first 6 months of 2026 compared with $9.3 million in the same period last year.

Higher selling expenses were a result of sales and volume gains; selling expenses represented 2.9% of net sales in the first half of 2026 compared with 2.7% in the first half of 2025.

Administrative expenses increased 12.6% to $14.6 million compared to $13 million, primarily due to higher office expenses.

G&A expenses represented 3.5% of net sales in the first 6 months of 2025 compared to 3.8% of net sales in the same period in 2025. Research and development expenses, R&D, increased by 23.6% to $20.8 million in the first 6 months of 2026 compared with $16.8 million in the first half of 2025.

R&D expenses represented 5% of net sales compared to 4.9% in the first 6 months of 2025. Research and development programs include upgrading performance and quality of current products, customizing products for specific customers as well as further developing EPS and hydraulic steering systems, automotive intelligence and software technologies, automotive electronics, high polymer materials and manufacturing technologies.

Other income net was $6.9 million in the first 26 weeks compared to the same period last year. This increase is mainly due to the decrease in the loss on disposal of property, plant and equipment.

Income from operations climbed 100.4% to $43.3 million in the first 6 months of 2026 from $21.6 million in the first half of 2025. This gain reflected greater sales, higher gross profit margins, and effective cost controls.

Interest expense was stable at $0.8 million in the first half of 2026 and 2024.

Net financial expense was $2.9 million in the first half of 2026 compared to net financial income of $3.3 million in the first half of 2025. This change in net financial income was primarily due to foreign exchange volatility.

Income before income tax expenses and equity and earnings of affiliated companies increased by 71.3% to $5 million in the first half of 2026 compared to $47.2 million in the same period in 2025.

The change in income before income tax expenses and equity earnings of affiliated companies was mainly due to higher income from operations and higher net other income in the first half of 2026.

Income tax expense was $9.9 million in the first half of 2026 compared to $7 million in the first half of 2025. The increase in income tax expense was primarily due to higher income before income tax expenses in the first half of 2026.

The effective tax rate was 21.3% in the first 6 months of 2026 compared with 25.7% in the same period.

Net income attributable to the parent company's common shareholders increased by 98.8% to $29.3 million in the first 6 months of 2026 compared to net income attributable to the parent company's common shareholders of $14.7 million in the first half of 2025.

Diluted earnings per share were $0.97 in the first half of 2026 compared to $0.49 in the same period in 2025. The weighted average number of diluted common shares outstanding was 30,170,702 in each of the 2026 and 2025 6-month periods.

Now, I'll provide some balance sheet and other financial highlights. Cash and cash equivalents and pledged cash were $155.6 million, or approximately $5.16 per share, as of June 30, 2026.

Net working capital was $249.8 million. Total accounts receivable, including notes receivable, were $362.4 million. Accounts payable, including notes payable, were $361.5 million, and short-term loans were $75 million.

Total parent company stockholders' equity was $443.8 million as of June 30, 2026, compared to $401.3 million as of December 31, 2025. Net cash provided by operating activities was $47.8 million, with payments to acquire property, plant and equipment of $30.4 million.

Business outlook. Management has increased its revenue guidance for the fiscal year 2026 to $850 million from $810 million. This target is based on the company's current views on operating and market conditions, which are subject to change.

With that, operator, we're ready to go to the Q&A.

[Operator Instructions]

First question is coming from Jonathan [indiscernible]

My question is, with the company's electric power steering now entering the South American market, how will it impact the company's operations in South America?

[Foreign Language]

[interpreted] Yes. So for your question, the EPS product, electric power steering product, is now in South America.

We are very excited about the prospect in that market. Our plan is about 300,000 units for the market for that particular line for building. Our engineers are working closely on the ground to get things ready.

We are foreseeing that the production or the batch production will start in 2028.

That being said, the general assembly line for the EPS product is on track, going there now being set up. Once it's up and running, we are seeing about a $40 million revenue impact. That will be roughly a 50% increase from the current run rate for the revenue in the South America market.

Your next question is coming from Michael Fiedler.

With the current financial resources, what are management's thoughts on cash dividends and buybacks in the near future?

[Foreign Language]

[Interpreted] In terms of the shareholder return program, we are currently in discussion at a very high level at the Board level.

But in the meantime, I just want you to be mindful that as we're expanding our global footprint, growing rapidly from top and bottom, we also are increasing CapEx.

We have been increasing CapEx in the last year, and we're seeing higher CapEx this year and next year as well. So we just want you to be aware that the cash is being put back into the operation and to generate further return for shareholders.

But that being said, we are at the Board level considering options to enhance shareholder value.

Okay. I have 2 questions that have been e-mailed to me. So the first one is, with the $30 million in CapEx in the first half of 2026, where will the greatest impact be? And what's the outlook for CapEx in the future?

[Interpreted] So yes, we do have a pretty sizable CapEx in the first half of 2026. The main part of it is our Mexico project.

We're building up our Mexico presence. For land and facilities, we have injected about USD 15.8 million. Then the remaining roughly $15 million in the first half of 2026 was all various product-related project CapEx.

So these are EPS, ECUs, ERCB, for example, those types of product development. On a full-year basis, we're seeing about USD 50 million. But if you exclude the Mexico project, the CapEx is roughly on par with 2025 CapEx.

These are for new product capacity expansion, as we just mentioned, the example of new product. And we're foreseeing about 1 million units of incremental capacity coming online.

Okay. I have a second question, which is regarding mergers and acquisitions. Is the company more focused on trying to expand the current product line through mergers and acquisitions or becoming more vertically integrated or adding other auto-related products into their network?

[Interpreted] Yes, it's a good question on M&A. We actually are looking at different areas to enhance our product offering more on the new product side, which will be complementary to our product offerings.

As well as, in particular, the chassis-related product, whether it's suspension or other types of things, such as braking systems, that will further enhance our offering for the autonomous driving offerings.

So that said, we remain open-minded. We are looking at all kinds of options to see if we can further enhance our competitiveness by bringing on new products.

[Operator Instructions]

There appear to be no further questions in the queue at this time. I would now like to turn the floor back over to Kevin Thiess for closing remarks.

Well, we thank you for your participation in today's conference call. Please be safe, and we look forward to speaking with you in the future.

Thank you, everyone. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.

Greetings. Welcome to the China Automotive Systems Fourth Quarter and Fiscal Year 2025 Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Kevin Theiss, Investor Relations. You may begin.

Thank you, everyone, for joining us today. Welcome to China Automotive Systems 2025 Fourth Quarter and 2025 Annual Results Conference Call. Joining us today are Mr. Jie Li, Chief Financial Officer of China Automotive Systems. 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 meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements represent the company's estimates and assumptions only as of the date of this call.

As a result, the company's actual results could differ materially from those contained in these forward-looking statements due to a number of factors, including those described under the heading of 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 effect on the overall business environment and cause uncertainties 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, increased costs and reduce revenue. The company expressly disclaims any duty to provide updates to any forward-looking statements made in this call with 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 purposes of the call today, I'll review the financial results in U.S. dollars.

We will begin with a review of some of the quarterly business highlights, recent dynamics of the Chinese economy, automobile industry and our market 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 vehicles sales, respectively. China's domestic auto market rose by approximately 6.7% with total vehicle sales reaching 27.3 million vehicles. Among the industry trends were greater sales of new energy vehicles and Chinese branded vehicle capturing a larger portion of the total vehicle sales.

Auto-related exports were another strong sales growth avenue for Chinese vehicle manufacturers. In 2025, government incentives for the automobile industry included tax incentives, subsidies for scrapping older vehicles and lower interest financing. Additionally, 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, primarily due to higher gross profit. Net income attributable to parent company's common shareholders increased by 103.2% to $18.4 million with diluted income 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 to 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 $65.3 million in 2025. Jiulong sales of commercial vehicle steering systems increased by 28.9% year-over-year to $92.3 million. Brazil Henglong net sales grew by 34.7% year-over-year to $68.7 million, and net sales to North American customers rose by 15.3% year-over-year to $121.6 million in 2025.

Sales to Stellantis worldwide network helped 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 expenses increased by 63% year-over-year to $45.1 million in 2025. 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. And through higher efficiency, 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' Active Rear-Wheel Steering provides superior steering characteristics and is now entering into the upper mass market for new energy vehicles in China.

Our R-EPS 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 R-EPS uses our proprietary ball screw assembly, which has become an essential steering configuration for mid- to high-end vehicle models, demanding high reliability and efficiency and quick responsiveness. Another subsidiary, Hyoseong (Wuhan) began production of 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 advanced electronic recirculating ball steering systems. This new motor is a significant innovation in our advanced intelligence steering strategy. We also made strategic moves to expand our geographic expansion.

Our 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 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 and UMW also has a joint venture with Toyota in Malaysia. For 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 this strategic partnership, KYB/UMW's new advanced manufacturing plant became operational in 2026.

Our Jingzhou Henglong subsidiary also won its first R-EPS product order from a large well-known European automobile producer. This order with annual sales expectations exceeding $100 million covers multiple vehicle models and mass production is expected to begin by 2027. Also, our affiliated company in Sweden, Sentient AB, achieved considerable sales to a major European OEM 2025 for its leading steering technology integrating hardware and software. As of December 31, 2025, total cash, 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 pave the way for us to become a true multinational supplier to global OEMs. Management is refocusing some of those resources to improve operations, sales and to increase penetration of our growing international markets. Beginning in 2026, we will report our financial results on a 6-month basis. So our next report will be for the 6 months ended June 30, 2026. Also in 2025, we changed our independent registered public accounting firm to Grant Thornton Zhitong 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. Our gross profit increased by 79.8% to $53 million from $29.5 million in the fourth quarter of 2024. Gross margin in the fourth quarter of 2025 was 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 expenses was $18.1 million -- I'm sorry, operating income was $18.1 million in the fourth quarter of 2025 compared to $8.7 million in the fourth quarter of 2024. Higher gross profit compared with the same period last year was the main driver.

Interest expense was $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 and 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 17.6% 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 systems 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 of North American customers rose by 15.3% year-over-year in 2025 to $121.6 million. EPS sales represented 41.5% of total revenue in 2025 compared to 38.9% in 2024. Gross profit in 2025 increased by 33.2% year-over-year to $145.5 million compared to $109.2 million in 2024.

The gross margin was 19% compared with 16.8% in 2024, mainly due to a change in product mix. Net sales on other sales in 2025 was $3.6 million compared to $4.3 million in 2024. Selling expenses rose by 15.9% year-over-year to $20.7 million in 2025 from $17.9 million in 2024, mainly due to an increase in marketing and office expenses, offsetting lower other expenses. Selling expenses continue to represent 2.7% of net sales in 2025 as well as 2024. G&A expenses increased by 7% year-over-year to $29.7 million in 2025 compared to $27.7 million in 2024. G&A expenses represented 3.9% of net sales in 2025 compared to 4.3% of net sales in 2024. This expense was mainly due to higher personnel and other expenses.

R&D expenses increased by 63% year-over-year to $45.1 million in 2025 compared to $27.6 million in 2024. Higher R&D expenses reflected increased personnel expenses due to acceleration in R&D activities, including more investment in traditional product upgrades, advancing EPS technologies and miscellaneous research expenses. R&D expenses were 5.9% of net sales in 2025 compared to 4.2% of net sales in 2024. Operating income increased by 33.2% year-over-year to $53.6 million in 2025 compared to $40.3 million in 2024. The increase in operating income was mainly due to higher sales and gross profit.

Interest expense was $1.7 million in 2025 compared to $1.8 million in 2024. Financial income was $2.4 million in 2025 compared to 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 is primarily due to higher operating income in 2025.

Income tax expense was $11.6 million in 2025 compared to $5.9 million in '24. 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 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'll provide some balance sheet and other financial highlights. As of December 31, 2025, total cash, 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 and equipment and land use 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 -- I'm sorry, $810 million. 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 Instructions] Your first question for today is from [ Jim Fallon with Esousa Holdings. ]

[ Jim Fallon from Esousa ]. I was just wondering how will the U.S. Supreme Court tariff decision affect the company's exports into the United States?

[Foreign Language]

[Interpreted] Thank you for the question. So the short answer is the Supreme Court ruling does have a positive impact to our export-related business to the U.S. market. Specifically, the tariff the Section 301, Section 232 and Section 122, those 3 areas, the ruling by the Supreme Court enabled the total tariff reduced from 70% to now 60%.

Your next question for today is from [ Gary Nash ] a private investor.

Mr. LI, why did Q4 gross margin spike? And is Q4 gross margin sustainable for 2026?

[Foreign Language]

[Interpreted] Yes, you are right. We did experience a significant improvement in the gross margin category in the Q4 2025. The gross margin reached 23% in Q4, mainly attributable to a couple of factors. One is our product mix has dramatically improved. We have -- we have increased our higher-margin products such as our EPS product and brushless powered electric power steering, we would call EPS product. And we also had some onetime event also took place in Q4. They are the tariff-related refunds as well as depreciation policy change. And so combining these 2 factors -- those 3 factors, we believe the gross margin in 2025 -- 2026 is we're going to be continued -- going to be at a very healthy level, but it's not going to be as high as Q4 2025.

Your next question is from [ Jonathan Nieves, ] a private investor.

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?

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[Interpreted] So immediate impact [indiscernible] to Cayman Island. We immediately save about USD 500,000. That's the listing-related expenses. Then we are -- in terms of international business expansion, we will see more benefit coming even it's still a little bit early to give the detailed number. And also in terms of taxes, we're also seeing -- it will be a very notable saving as well. So combining all these, we believe it's going to be a very meaningful saving for our shareholders.

Okay. I have a question that's been e-mailed to me by one of the shareholders who could not be on. And the question is, with the current cash position, what's the outlook for either a stock buyback or cash dividends in 2026?

[Foreign Language]

[Interpreted] 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 Island process, we have to meet a lot of compliance. So we put that buyback plan on hold. Now with that procedure completed, me and the CFO definitely will recommend to the Board and to reinitiate share buyback program. We'll make a -- do announcement when that's in progress.

[Foreign Language] [Interpreted] As far as dividend, we don't have a plan at the moment, but we're going to make -- also make a suggestion to the Board of Directors.

[Operator Instructions] we have reached the end of the question-and-answer session, and I will now turn the call over to Kevin Theiss for closing remarks.

We thank you all for joining us today in the conference call. We wish you to be safe, and we look forward to speaking with you in the future after we report the 6-month results. Thank you.

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

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]

Welcome to the 2025 Special Stockholders Meeting. I am Chen Hanlin, Chairman of the Board of Directors. I will be presiding over this meeting. It is now 9:00 a.m., and the meeting will begin.

I would like to introduce our other directors who are present or have joined via telephone conference today: Director and CEO, Wu Qizhou; Independent Directors, Xu Guangxun, Robert Wei Cheng Tung and Tong Teo.

Also present or joined via telephone conference are the management members, legal adviser, independent auditor, IR adviser, shareholders and guests of the company. Chief Financial Officer, Li Jie; Vice President, Andy Tse, Hanlin Chen and Dr. Cai Hai Mian, Secretary of the Board of Directors, Wei Na; the company's Legal Counsel, Simon Luk of Sichenzia Ross; the company's independent auditor, Tina Liu of PwC; the company's IR representative, Dixon Chen and Kevin Theiss of Awaken Advisors.

This morning, our program will proceed as follows: First, I will conduct the official business portion of the meeting. Please limit any questions you may have to those which relate to the formal business at hand. Following that, we will move along to the question-and-answer session.

Before starting, I would ask all those in attendance here today to ensure that you have registered. If you have not registered, please do so now. During this meeting, we ask that shareholders not address the meeting unless recognized, and all questions should be directed to me as Chairman.

If you have been recognized, please identify yourself and your status, whether as a shareholder or a representative of a shareholder. Questions and comments will be permitted during the question-and-answer session after the business portion of the meeting. We will now proceed to the business portion of the meeting.

The following have been delivered to the company prior to the meeting. An affidavit signed by Joanne Vogel from Broadridge Financial Solutions, Inc., certifying that the official notice of this meeting has been given as contained in a notice of Internet availability mailed on or about August 5, 2025, and a certified list of the holders of common stock of the company as of the close of business on July 30, 2025, being the record date for determining shareholders who are entitled to notice of and to vote at this meeting.

In addition, the proxy statement, the proxy and other materials necessary for shareholders voting at this meeting have been available on the website specified in the notice of Internet availability on or before August 5, 2025. The instructions to execute proxy are also available on the website specified in such notice.

A copy of the aforementioned will be incorporated into the minutes of the meeting. A copy of the list of stockholders as at the record date is available for inspection by shareholders. The Board of Directors has appointed Ms. Wei Na to serve as the Inspector of Election. Ms. Wei has delivered to me the signed oath of the Inspector of Election. Such an oath will also be incorporated into the minutes of the meeting. Ms. Wei will tabulate the results of the voting at the appointed time.

Many stockholders have already submitted their proxies. All proxies will be voted as marked by the stockholders who signed them. The holders of any undelivered proxies may present the proxies at this to Ms. Wei.

[Audio Gap]

The first matter, the merger proposal, to be voted upon is the approval of the merger of the company [Audio Gap] and China Automotive Systems Holdings Inc., an exempted company incorporated under the laws of the Cayman Islands and a wholly owned subsidiary of the company, CAAS Cayman, which includes a plan of merger required to be filed with the register of companies of the Cayman Islands, pursuant to which the company will merge with and into CAAS Cayman, with CAAS Cayman as the surviving company upon the merger becoming effective, and whereby, each issued and outstanding share of the common stock of the company will be converted into the right to receive 1 ordinary share of CAAS Cayman credited as fully paid the redomicile merger.

The second order of business, the adjournment proposal concerns the consideration and vote on the proposal to adjourn the special meeting from time to time, to a later date or dates, if necessary or appropriate, to solicit additional proxies if there are insufficient votes to adopt the Merger Agreement and the Redomicile Merger contemplated by the merger agreement at this special meeting. Are there any questions?

The company has not received any notice from its shareholders as required under its bylaws or pursuant to Rule 14a-8 under the Securities Exchange Act of 1934 of any other matter to be considered at this special meeting. Therefore, no other proposals may be properly introduced by shareholders at this meeting.

We will now proceed to balloting on the previously discussed motions. It is now 9:11 a.m. The polls for voting on all matters are hereby open. Stockholders who are voting by proxy need not cast ballots in the voting today unless they wish to change their votes. Those stockholders who wish to vote by ballot should have received a ballot at the door.

If you would like to vote by ballot and did not receive any ballot at the door, please raise your hand and a ballot will be provided to you. Let's take a few moments to complete and return these ballots to the Inspector of Election.

[Voting]

Wait a few minutes. It is now 9:14 a.m. The polls for voting on all matters are hereby closed.

According to the preliminary report of the Inspector of Election, the proposal to approve and adopt the merger agreement by and between the company and China Automotive Systems Holdings, Inc., including a plan of merger required to be filed with the registrar of companies of the Cayman Islands and the subsequent redomicile merger has been approved, and the adjournment proposal has become irrelevant and not voted upon. That concludes the business portion of the meeting. Are there any questions?

As there are no questions, this meeting is adjourned. Now we would like to receive questions and comments from our shareholders. We would appreciate your first identifying yourself by name, organization and as a shareholder or representative of a shareholder. Please feel free to address your questions specifically to any of the members of the Board of Directors or management. And please limit your questions or comment. Thank you.

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