Kevin Theiss - Investor Relations, Grayling Hanlin Chen - Chairman Qizhou Wu - Chief Executive Officer Jie Li - Chief Financial Officer Daming Hu - Chief Accounting Officer

Jeff Linroth - Leaving It Better

Greetings, and welcome to the China Automotive Systems third quarter 2013 conference call. (Operator Instructions) It is now my pleasure to introduce your host, Kevin Theiss of Grayling. Thank you, Mr. Theiss, you may begin.

Thank you for joining us today and welcome to China Automotive Systems 2013 third quarter and nine months conference call. My name is Kevin Theiss, and I am with Grayling, China Automotive's U.S. Investor Relations Advisor. Joining us today are Mr. Hanlin Chen, Chairman; Mr. Qizhou Wu, Chief Executive Officer; and Mr. Jie Li, Chief Financial Officer; and Mr. Daming Hu, Chief Accounting Officer of China Automotive Systems. They will be available to answer questions later in the conference call and we will help with translation. Before we begin, I would remind all listeners that throughout this call, we may make statements that may contain forward-looking statements. Forward-looking statements represent estimate 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 in the company's Form 10-K Annual Report for the year-end December 31, 2012, and under the heading Risk Factors in the company's Form 10-Q for the three months ended September 30, 2013, filed with the Securities and Exchange Commission on November 13, 2013, respectively; and the documents filed by the company from time-to-time with the Securities and Exchange Commission. The company expressly disclaims any duty to provide any forward-looking statements in this call whether as a result of new information, future events or otherwise. I will provide a brief overview and summary of the 2013 third quarter and nine months results, and then I will turn to the management to conduct the question-and-answer session. The 2013 third quarter and nine months results are unaudited numbers under U.S. GAAP. For our call today, I will review the financial results in U.S. dollars. Industry comment. We achieved record high sales for any third quarter in our history, as our sales accelerated to 24.2% year-over-year in the third quarter of 2013 from a 21.8% year-over-year increase in the second quarter of 2013. We have reported the highest sales for any first, second and third quarters in 2013, resulting in a 22% year-over-year increase to a record high sales of $286 million for the first nine months of 2013. We continue to capture market share, as our 24.2% growth far exceeded the 13.6% year-over-year growth of China's total automotive vehicle market for the third quarter of 2013, according to the China Association of Automobile Manufacturers, CAAM. The net sales increase was mainly due to continued significant sales to SAIC-GM-Wuling Automobile and a number of OEM customers, who reported strong growth during the third quarter such as, Great Wall with a 42% increase in its SUV sales, Brilliance sales rose 29% and Dongfeng Peugeot Citroen Automobile sales climbed by 18%. In July, Dongfeng Peugeot Citroen, one of our top 10 customers, increased its production capacity to 750,000 vehicle, as its new assembly plant began operation. We continue to strengthen our product portfolio and long-term relationships with our over 60 OEM customers in China to maintain our leading market position. The passenger vehicle market in China increased by 14.5% for the third quarter of 2013, but increased by 21% in September of 2013, as dealer inventories remain stable and demand for new cars increased before a reduced fuel efficiency incentive program takes effect. However, passenger vehicle demand is expected to continue to grow, as the new fuel efficiency incentive program began on October 1, 2013, and targets small vehicles using technologies for saving fuel and environmental protection. We continue to believe the five-year vehicle replacement cycle is beginning and it will keep retail sales growing. Our sales in the commercial vehicle steering market continue to benefit from the regained growth in the Chinese truck market in 2013. Higher third quarter commercial vehicle sales reflected increased demand from the continuing pre-buy of lower cost national three emission standard compliant vehicles, as the enforcement of the national four emission standards began on July 1, 2013, is providing a temporary opportunity as enforcement eventually become country-wide. For the future, the new central government is changing its policy to give priority to generate higher internal consumption over infrastructure projects and exports as the key driver of the economy for the future. Our growth trend and exports to North America continued in the third quarter of 2013, as our top customer Chrysler extended their winning streak for 42 consecutive months of sales increases in North America. During 2013, Chrysler has honored China Automotive System, as its 2012 Chrysler China Regional Excellent Supplier, and the 2012 second place award for Global Metal Product Supplier and Chrysler's 2013 Supplier of the Year Metallic. We are pleased to have earned these honors two years in a row, in the judgment of a global vehicle manufacturer with stringent supplier requirements. Innovation is a key to growth in our industry and we have developed over 300 steering products to meet the needs of a large number of passenger and commercial OEMs. The large portfolio of advanced steering products has made us the preferred lender to many leading Chinese OEMs to a growing number of [indiscernible] investors in China and led to our growing sales in North and South America. For the third quarter of 2013, we have used our strong financial position to temporarily increase our investment in R&D by 88.1% to $5.3 million, to accelerate the advancements to our electric power steering, EPS products, and other new products. EPS has greater market penetration outside the China, but is gaining share inside China, as the product increases fuel efficiency, and China is a major oil importer. We designed and produced the first domestically designed EPS system and we are committed to build new generations of EPS with even higher performance and quality. We have an increasing number of Chinese OEMs purchasing our EPS units and we believe it will be a sales driver over the next several years. Our market penetration in China is twofold, replacing higher priced imported EPS systems and selling to first users in China. By using our Nationally Accredited Laboratory, CAS' Jingzhou Henglong Automotive Technology Test Centre Laboratory, the only Nationally Accredited Laboratory among the Chinese steering companies, we expect our R&D to enhance our leadership position in steering technology. As we continue to build our R&D capabilities, we will more quickly develop and produce superior EPS and other steering products to meet or seek the requirements of our many OEM customers. Through our R&D, we enhance our relationships with our current customers and acquired new ones domestically and in international markets. In the second quarter of 2013, our gross profit increased by 32.2% to $16.5 million in the third quarter of 2013 with a growing margin to 18.2% versus 17.1% in the third quarter of 2012. Gross profit primarily increased due to higher sales volume and the gross margin rose because of enhanced production efficiency and lower raw material cost in the third quarter of 2013. Net income attributable to parent company's common shareholders increased by 153.5% to $8.6 million in the third quarter of 2013 compared to net income attributable to parent company's common shareholders of $3.4 million in the corresponding quarter of 2012. Diluted earnings per share were $0.31 in the third quarter of 2013 compared to diluted earnings per share of $0.12. As of September 30, 2013, our cash and equivalents of $87 million remain near our historical high to slight increased operating expenses to support our growth and increased R&D, and we have maintained zero long-term debt. Our ability to continuously produce positive cash flow from operations, provide the resources to expand our profitable operations, increase research and development for wide advanced products, to increase our market share and build our customer relationships and improve shareholder value. Now, let me walk you through our third quarter and nine month 2013 financial results. In the third quarter of 2013, net sales increased by 24.2% to a record third quarter high of $90.9 million compared to $73.2 million in the same quarter of 2012. The net sales increase was mainly due to significant sales growth to SAIC-GM-Wuling Automobile, Brilliance Auto and other customers such as Dongfeng Peugeot Citroen, BYD and Great Wall, which experienced rapid growth. Our sales to the North American market continued to grow, as shipments to Chrysler remain strong. Gross profit increased by 32% to $16.5 million in the third quarter of 2013 compared to $12.5 million in the third quarter of 2012. The gross margin was 18.2% in the third quarter of 2013 versus 17.1% in the third quarter of 2012. The increase in gross profit was primarily due to greater sales volume. The increase in gross margin was mainly because of lower raw material cost and the enhancement in production efficiency in the third quarter of 2013. Gain on other sales of $5 million was income from the sale of partial idle land use rights, which represented a pre-tax gain of $4.1 million, is the calculated difference between the land's selling price and the net book value of the related land use rights. Selling expenses rose by 8.3% to $2.6 million in the third quarter of 2013 compared to $2.4 million in the third quarter of 2012. Selling expenses represented 2.9% of net sales in the third quarter of 2013 compared to 3.3% in the third quarter of 2012. The increased selling expenses were primarily due to increases in compensation to salesmen, warehouse rental fee and transportation expenses resulting from higher sales volume. General and administrative expenses, G&A expenses, increased by 12% to $2.8 million in the third quarter of 2013 compared to $2.5 million in the same quarter of 2012. The increase in G&A expenses was primarily due to higher property taxes in the third quarter of 2013. G&A expenses represented 3.1% of net sales in the third quarter of 2013 and 3.4% in the third quarter of 2012. Research and development expenses increased by 82.1% to $5.1 million in the third quarter of 2013 compared to $2.8 million in the third quarter of 2012. The increase in R&D expenses is mainly due to development and trial production of the company's EPS and other new products, as well as improvement in production mold, higher external technical support fees and increased wages. R&D expenses represented 5.6% of net sales in the third quarter of 2013 compared with 3.8% in the third quarter of 2012. Income from operations increased by $5.5 million or 100% to $11 million in the third quarter of 2013 compared to $5.5 million in the same quarter of 2012. As a percentage of net sales, the operating margin was 12.1% in the third quarter of 2013 compared to 7.5% in the third quarter of 2012. The increase was mainly due to higher gross profit and the increase in gain on other sales in the third quarter of 2013 compared to the third quarter of 2012. Net financial income was $0.7 million in the third quarter of 2013 compared to net financial expenses of $0.4 million in the third quarter of 2012. The company's increased time deposits generated more interest, while a decrease in bank loans reduced interest expense during the third quarter of 2013. Income before income tax expenses and equity and earnings of affiliated companies was $12.2 million in the third quarter of 2013 compared to $5.3 million in the third quarter of 2012. The increase in income before income tax expenses and equity and earnings of affiliated companies in the third quarter of 2013 was mainly due to increased operating income of $11 million and a $1.1 million reduction in financial expenses. Net income attributable to parent company's common shareholders was $8.6 million in the third quarter of 2013 compared to net income attributable to parent company's common shareholders of $3.4 million in the corresponding quarter of 2012. Diluted earnings per share were $0.31 in the third quarter of 2013 compared to diluted earnings per share of $0.12 in the third quarter of 2012. The weighted average number of diluted common shares outstanding was 28,062,297 in the third quarter of 2013 compared to 28,260,880 in the third quarter of 2012. First nine months of 2013 results. Net sales increased by 22% to a nine month record high of $286 million compared to $234.5 million in the first nine months of 2012. Nine month gross profit was $54.3 million compared to $43.5 million in the corresponding period last year. Nine month gross margin was 19% compared to 18.6% for the corresponding period in 2012. Gain on other sales of $6.8 million was income from the sale of idle land, which represented a pre-tax gain of $4.1 million calculated by the difference between the selling price and net book value of related land use rights. Income from operations was $28.1 million compared to $20.4 million in the first nine months of 2012. Operating margin was 9.8% compared to 8.7% for the corresponding period of 2012. Income from continuing operations was $24.2 million in the first nine months of 2013 compared to $16.3 million in the nine month period in 2012. Diluted earnings per share were $0.70 in the first nine months of 2013 compared to diluted earnings per share of $0.52, including $0.08 of diluted earnings per share from discontinued operations for the corresponding period in 2012. As of September 30, 2013, total cash and equivalents and short-term investments were $87 million compared to $87.6 million as of December 31, 2012. Working capital was $164.4 million as of September 30, 2013, compared to $138.7 million as of December 31, 2012. Total parent company stockholders' equity was $217.7 million as of September 30, 2013, compared to $193.6 million as of December 31, 2012. Business outlook. Management has raised its revenue guidance from 15% to 20% year-over-year growth in the full year 2013, as the company is determined to increase its market share and further expand its leading market position. This target is based on the company's current views on operating and market conditions, which are subject to change. With that operator, we are ready to begin the Q&A session. Operator?

(Operator Instructions) Our first question comes from the line of Jeff Linroth with Leaving It Better. Jeff Linroth - Leaving It Better: Last year you had mentioned that you expected to see gross margins about 20% this year. What's been the biggest challenge in getting gross margin to 20% and should we anticipate getting their any time soon?

First nine months of our gross margin averaged about 19%. On annual basis we're looking at around 19% as well. The reason our gross margin is relatively weak this year is due to the product mix. This year we expanded some new contracts with some customers in the low-end steering system products. So because of the sales growth in that category, it changed our product mix and affected our overall gross margin, blended gross margin. To counter that going forward in 2014, we're going to -- first, we're trying to improve our component procurement that will help us with the gross margin and on the other side, we are increasing EPS sales, electric power steering product sales. That's a high-end product, so in balance that will overall lift the gross margin. So in short, 2014 will be a better year.

Just one more question. It's really good to see the continued growth at Chrysler. Please talk just a little bit about GM and Ford, whether you've had conversations with them or bid on programs to supply product to them? Leaving It Better: Just one more question. It's really good to see the continued growth at Chrysler. Please talk just a little bit about GM and Ford, whether you've had conversations with them or bid on programs to supply product to them?

Couple of updates. Let's start from Chrysler. Starting from month of September, we started to increase our daily production for Chrysler line from 700 units a day to 800 units a day. We are in the second project with Chrysler mainly in the Dodge RAM pickup trucks 350 model. So that's progressing well. We have another project in talk, we'll make announcement when that project start moving. Regarding Ford, we are on a trial run with Ford. It's a relatively smaller volume project of 30,000 units. It's our first project, but we are looking to expand it through their pickup trucks as well. On GM, currently GM is still supplied by [indiscernible]. We're still waiting for opportunities to get into the GM product line.

In terms of other emerging markets, we are looking at the Western Africa country. The first one we are going to make some breakthrough is Brazil. So please expect something coming out first half of 2014. We're going to make announcement in Brazil, regarding our Brazil business.

Thank you. It seems there are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

Thank you for attending China Automotive Systems' 2013 third quarter earnings conference call. We look forward to speaking with you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.