Greetings. Welcome to China Automotive Systems' Fourth Quarter 2018 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I would now turn the conference over to Kevin Theiss. Mr. Theiss, you may now begin.

Thank you, everyone, for joining us today. Welcome to China Automotive Systems' 2018 Fourth Quarter and Fiscal Year Conference Call. Joining us today are Mr. Qizhou Wu, Chief Executive Officer; and Mr. Jie Li, Chief Financial Officer of China Automotive Systems. They 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. Forward-looking statements represents 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 in the company's Form 10-K annual report for the year ended December 31, 2018, as filed with the Securities and Exchange Commission on March 28, 2019 and in other documents filed by the company from time to time with the Securities and Exchange Commission. 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 financial results for the 2018 fourth quarter and 12 months. Management will then conduct a question-and-answer session. The following 2018 fourth quarter financial results are unaudited and the fiscal year results are audited. These results are reported under U.S. GAAP for the purposes of our call today, I'll review the financial results in U.S. dollars. We will begin with a review of the recent dynamics of the automotive industry and China Automotive's market position. China's GDP growth in the fourth quarter 2018 slowed to 6.4% from 6.5% in the…

Thank you. [Operator Instructions] Thank you. First question is from the line of William Gregozeski with Greenridge Global. Please proceed with your questions.

Hi. I have a few questions. Looks like your domestic sales fell 7.5% on 2018, which was below the - or more than the industry decline. Can you talk about how your market share is looking with the domestic OEMs?

[Foreign Language]

[Foreign Language]

[Foreign Language]

[Foreign Language]

Okay. So first is on EPS side. There are a lot of old model, we have about - over 1 million old models - vehicles used our EPS products. Those are - these old models are not - no longer in production. However, the new models, they have not started their new model here, so there was a gap between this product transition, so causing our EPS sales decline during 2018. So that's been driving now the overall sales volume. On the other hand, on the mechanic steering, those are - sectors are going to some price - intensify price competition. So there are some companies are desperately fighting for survival. So we have been affected due to this competition.

[Foreign Language]

Okay. So on the other hand, our others areas business have been stable and had a pretty solid performance in 2018. For instance, our export business, it's been doing very well. Other steering products that serve into the commercial vehicle has been doing very well as well. So just - that's a mixed result that are largely due to EPS and to a certain degree the price competition in the mechanic hydraulic - mechanic steering system.

Okay. With regard to your guidance, can you talk about what the split would be then between domestic revenue and international revenue?

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[Foreign Language]

In terms of breakdown of the guidance, the international sales is probably flat year-over-year, the remaining are domestic. So let me give you some color why is international side of business is flat. I mean, as you know that we're still in the midst of U.S. and China trade dispute. And so we're still closely following decisions and being very optimistically cautious. On the other hand, our customers are - in terms of their product launch, there are a of product - talking about customers in North America, there are a number of products, their launch is going to be in 2000 - new models 2020. So we already got those contracts. But due to - 2020 is a high product launch year, 2019 in comparison are lighter - going to be lighter. So only Chrysler has a new model working on for 2019. So we expect '19 international sales will be flat for that reason.

Okay. With regards to gross margins, was down quite a bit in the fourth quarter from the year ago period, and the year ago period's had a pretty big warranty charge. Can you talk about where are these big declines in margin are coming from? And what your outlook on margins is for the next 2 years?

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Okay. So there are four reasons negatively affect the gross margin, four factors in 2018 fourth quarter. First is the pricing. We have a price decline, ASP drop in the fourth quarter. Secondly, the costs have gone up, that's also affecting the margin. Thirdly, the warranty has gone up. The last one is the - [Foreign Language]

Foreign exchange.

ForEx has impact for the - for our gross margin as well, foreign exchange. So combining those four, we're having an exceptionally weak gross margin in the fourth quarter. Going forward, we're going to adjust our pricing, and also, we're going to reduce cost. So we believe we're going to be able to turn a positive side to grow back the gross margin.

Okay. And my last question is just on the operating expenses. G&A and R&D were up quite a bit in the fourth quarter. Is that - are those figures are a percentage of sales that are going to be something we can look forward going forward? Or were they just abnormally high for some reason?

[Foreign Language]

[Foreign Language]

So in the G&A category, we were experiencing some higher expenses, mainly due to the legal expenses associated with go-private proposal. So that's a sort of onetime event, now it's behind us. And so we'll see the G&A expenses will recover. In total percentage of revenue, G&A as a percentage of revenue will start to improve. And we're also proactively rolling our programs to streamline our cost management and cut down basically - we're cutting down a lot of different expenses. So you should expect G&A expenses category will improve going forward in 2019. On R&D side, we are also closely - we have reviewed projects and looking at their performance, and we're going to cut back on a few projects or number of projects which are not giving a proper satisfactory return for us. So we're going to reduce some of the projects. So you should see R&D as a percentage of revenue will start to reduce as well - go down as well. So we should have improvement there in 2019.

Okay. Thank you, guys.

Thank you.

The next question comes from the line of Ed Sollbach with Spartan. Please proceed with your question.

Hello?

Yes, go ahead. You're on the line.

Yes. I'm just wondering if you can give us some color on what cars you're in globally? And what systems and cars both in China and Europe, North America, so we get an idea of what's driving the sales? Yes, that's it.

Your question is what kind of vehicles are - is brought in?

Yes, make and model.

Make and model. You mean in North America or in China?

In both.

Okay. This is a big question. [Foreign Language]

[Foreign Language]

So on the North America side, we have Chrysler. We supply to Chrysler's Jeep Wrangler vehicles and believe we are exclusive on the Jeep Wrangler steering systems. Also, we're exclusive on the Dodge RAM models - all different models on the Dodge RAM. And on the Ford side, we supply to the pickup trucks. And also, domestically in China, we supply to just about all major automakers, which include Dongfeng Auto, JAC, Changhe, which is - those are the large - those three are large commercial vehicles supplier - commercial vehicle producers. Also, FAW, that's the largest truck maker in China. On the passenger side, in China, we supply to Chery Auto, we have a joint venture with them. We supply to Brilliance Auto, we have a joint venture with them. We also supply the bestseller in the last couple of years to Geely. We supply to Great Wall, the largest SUV producer in China, and more. So we have about 60 - 50 to 60 customers in China, those are OEM customers.

[Foreign Language]

Yes. Anything else?

That's good color. So is - can you maybe talk briefly about the opportunities you have in North America? And I guess, there's nothing in Europe, is that correct?

[Foreign Language]

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Okay. We are continuing to pursue opportunities in the North America. We see the opportunity lies in AI, artificial intelligence-driven product and anything with autonomous driving, the quality steering mechanic system to support that. We are working on that as well. So we think it's a - that's the new growth area for us to target.

[Foreign Language]

Okay. Also with Ford Motor, we are - we have a pretty good track record than we have now. We won the quality award recently. We've done a number of model development and we secure - meanwhile, the quality has been top-notch. They have been very pleased with the progress. And so we expect, on Ford side, we should see some more purchase order coming in. So some new purchase order come in, yes.

[Foreign Language]

Okay. In Europe, we are - we have a project number 206. We're working with Fiat. This is a 2020 model for Fiat vehicle. We are doing some testing right now. I think the mass production will begin in the first quarter 2020.

[Foreign Language]

Okay. There is another angle we can play for the European vehicles. We are -- we grew there in the European headquarter, we are now discussing with some of this European automakers, Asia branch. So we hope we can open up another channel for our growth in the local markets. [Foreign Language]

[Foreign Language]

Okay. So that should answer your question, right?

Yes. Just - yes, that's really good. And are you part of any electric vehicle programs that are going on globally? That's the last question.

Electric vehicles, okay. You want to know in terms of electric vehicle, right?

Yes.

Okay. [Foreign Language]

[Foreign Language]

On the EV side, mostly our product will be electric power steering, what we call EPS. And EPS, of course, has both installment - I mean, installation in old - in the traditional combustion engine-powered vehicle as well as electric vehicle. So for electric vehicle we see the future growth opportunity even more. And so also on mechanic, the power steering systems were now using this product to partner with some of the software and the other technology company to integrate our mechanic steering systems. So we are in different channels working with electric vehicle producers.

Okay.

Thank you very much.

Thank you. Our next question comes from the line of Tracy Li with HSBC.

Hello? Hello? Can you hear me?

Tracy, your are on the line.

Hi. This is Tracy from HSBC. Thank you for taking my question. So my first question is that, can you get me a quick breakdown for the margin by products and also by region?

By region, right, China and Europe and the U.S.?

Yes, regions and also by products.

Okay. [Foreign Language]

[Foreign Language]

Okay. So the margin - gross margin for the international market is about 20%, domestic market is about 13% to 15%. On the products breakdown, the HPS, RCB product, the margins are higher and EPS margin is lower. So it's - EPS is about 10% and HPS is over 20%.

Okay. Thank you. So a follow-up question on the margin. So why our EPS margin is lower than the traditional products? Is it because we see more competition in the EPS space because we are actually seeing a lot of, like, international steering leaders are taking orders from the domestic OEMs in China? So can you also talk like the EPS competitive landscape in China now?

Okay. [Foreign Language]

[Foreign Language]

Okay. Really for EPS having lower margins in traditional products is partly due to the price competition. The other thing is mostly due to the fulfillment in the -- because we are still procure a lot of components from the other suppliers, outside of this system - ecosystem. So that's why we are - for years, we have formed a joint ventures with our Asian partners to tackle this problem. So going forward, I believe our margin will improve on the EPS side as well.

Okay. Thanks. And last question is related to the -- our privatization proposal. Management just mentioned our G&A costs has increased a lot in first quarter last year largely due to the privatization plan. So can you give us more color on the plan, like the time line and also at what price?

[Foreign Language]

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Okay. So on the privatization proposal, the buying party led by a largest shareholder has withdrawn the proposal. So it's off the table, so that we should not expect the higher legal costs going forward any longer. So this is sort of a onetime event, it's not occurring anymore. As a result, G&A expense should come down going forward.

Okay. Thank you.

Thank you.

Thank you. There are no additional questions at this time. I will turn the floor back to management for closing remarks.

We want to thank you, everyone, for joining us today, and we look forward to speaking with you after the next quarter. Thank you. Have a good day.

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