Greetings. Welcome to China Automotive Systems' Second Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. At this time, I'll turn the conference over to Kevin Theiss. Kevin, you may begin.

Thank you everyone for joining us today. Welcome to China Automotive Systems' 2020 Second Quarter 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 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 in the company's Form 10-K annual report for the year ended December 31, 2019 as filed with the Securities and Exchange Commission on May 14, 2020 and in other documents filed by the company from time to time with the Securities and Exchange Commission. If the outbreak of COVID-19 is not effectively and timely controlled, our business operations and financial condition may be materially adversely affected as a result of the deteriorating market outlook for automobile sales, the slowdown in regional and national economic growth, weakened liquidity and financial condition of our customers and other factors that we cannot foresee. Any of these factors and other factors beyond our control could have an adverse effect on the overall business environment, as well as 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. The prolonged disruption or any further unforeseen delay in our operations of the manufacturing, delivery and assembly process with any of our…

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] Thank you. Our first question is coming from the line of William Gregozeski with Greenridge Global. Please proceed with your question.

Hi guys. Can you talk a little bit more about, how sales are looking for the second half of the year, to the U.S.? And also, how the gross margins are looking? It seems like, that was quite a bit lower than I was looking for even with the product mix you guys had, in the second quarter?

In the second half, you mean, right?

Yeah. How sales are looking for international, in the second half? And then also, the gross margin was down pretty substantially, in the second quarter itself from product mix. Can you just talk a little bit more about that, since it seemed more than just the mix was the reason for the decline?

Okay. [Foreign Language] So for your first question, second half, we are anticipating that everything will going back to normal. So we see, the -- with the North America, our customers returned to production. And our business export -- international business will return to normalcy. And also we are seeing -- as a matter of fact, we believe second half our sales is going to be higher than last year same period. On the second question the gross margin, in the second quarter. Our gross margin, during the second quarter was heavily affected, by North America business also. To give you some color, our revenue, last -- same period last year was $27 million. But this quarter, it's only $11 million. So that was a significant loss of revenue because our North America customers their factory were closed 1.5 months, almost two months. As you know, we have a fixed cost. And our facility supplied to the North America customers are heavily affected and negatively affected. Our gross profit alone, for the North America business was a loss of -- I mean, was down US$7 million. That triggered a negative gross margin, for the second quarter, our international business. Now if you look at the domestic China business, our gross margin actually are equivalent to the same period last year. So with the return of the North America business, we think second half of the year, we should stage a comeback.

Okay. So your question. Foreign Language]

Yeah. [Indiscernible]. Go ahead. [Foreign Language]

Okay. Also in the second quarter there was a one-time event related to the custom charge. Our – also that's related to North America. Typically our – I mean, our quote to the North America customer use a DDP deliver duty paid. There are some calculation changes during the second quarter – adjustment during the second quarter, which cause us a charge of US$2 million and that's also affected our gross margin in the second quarter.

Okay. And that will be just a onetime event then, or is that something that's going to impact you guys going forward?

This is the one-time event. It will not happen again.

Okay. Okay. And then just to clarify, you said second half sales will be higher than last year. Is that just for North America, or is that for the whole business?

Okay. Yes. The answer is yes, the second quarter – second half of the year what we're referring is the North America part of business is going to be higher this year than same period last year because we have a pre – we have some business that we won for the some models, new models and hasn't been put into production. Yes. So it's going to be second half of the year the order book is higher than the same period last year from the North America customers.

Okay. All right. Great. Thank you.

Thank you.

[Operator Instructions] Thank you. Our next question is from the line of Robert Polvich [ph], a private investor. Please proceed with your question.

Good morning. I had a question on Hyoseong brushless motors, the joint venture. I believe that's up and running at this point. And I'm just wondering what the status is as far as – I would say it's more of a cost savings by making the motors in the joint venture versus acquiring them on the outside. What kind of volume are you doing there? And what kind of growth prospects? And what kind of cost savings might we see from this as we move into the second half and as we move into 2021? Thank you.

[Foreign Language] Okay. The brushless motor production is in -- it started the batch production in or mass production in the month of June. We anticipate the second half of 2020, we will produce around 30,000 units. Going into 2021, we expect to -- the production will continue to ramp up to 200,000 units. The -- we will start with C-EPS product and then move to -- increase the product offering to PEPS and REPS. And the total -- speaking of cost savings, we had -- our calculation is by doing in-sourcing, we will save between 12% to 15% on the cost. And most important thing by doing this, producing a design or producing brushless motor internally is to secure supply chain. As you know these products are -- has higher technology content and we are seeing a domestic shortage of such product. And so there are -- there have been a bottleneck on the supply of brushless motor. And a lot of those companies or our peers have to either deal with the domestic shortage or they have to import from another country. And that being said, our goal is to first to make sure our -- we can have enough capacity to meet our internal demand for our all lines of EPS product. And when we get to that stage whatever we have in addition, we can supply and sell to the open market to other customers.

Okay. That's good to know. Another question. I was wondering within five years, what kind of percentage are we looking at as far as EPS versus traditional power steering systems? How do you see the mix changing? And I know the other question I had was, during the call I did hear something about competitive pressures from your competition. How are you dealing with that? And what's your view over the next year or two? Do we see that kind of abating, or is that going to be something that is going to make things difficult for China Automotive as we move over the next several years?

[Foreign Language] Okay. The first -- to your first question five-year time, we see the EPS product will account for 60% the market share in the passenger vehicle sector. And as you know the passenger vehicle market in China is very large and the -- that's the trend heading. And on the commercial vehicle, the hydraulic will continue to play a major role. And however, I would -- when I say hydraulic, hydraulic power steering. However, with our new product we introduced such as IRCB and ERCB product, we are actively adding electric control components and units and that will help with the performance and also increase our technology competitiveness in the market. So, that being said, as we say in five-year time, combining passenger and commercial vehicle, we see the overall electric power steering ,the sales will exceed 50% -- at least 50% in China. On the competitive landscape, at the current stage, there are some -- the competition is intense in China. And as we mentioned in the past, the international brand on the EPS side are pretty aggressive in -- coming into China. They are led by JPAC, Bosch and next year those are Japanese, German, American, respectively. And that being said is our main business is mostly in the domestic bet. We're talking about BYDs and GWs, Great Wall those are household names. However, their sales has been -- their sales expansion has been fluctuating quite a lot in the last few quarters due to the economic change environment and also the pandemic impact. But our goal is on one fact to continue to maintain our strong ties and relationship and sales with the domestic brand on the other side we want to expand into the international brand those two I mentioned in China global names. With our technology resource now we are able to produce very high quality PEPS product and REPS product. And also our joint venture with our Japanese partner we think our product will be very competitive in terms of cost and quality and also pricing. So, with that -- that will be our goal to continue to strengthen our domestic brands presence and also expand it to international brands joint ventures.

Okay. One last question, as it relates to KYB, do you see a lot of growth potential? I mean KYB has ties with all the Japanese automakers. And outside of Japan, potentially in the U.S., are those areas where you can do more business with the relationship with KYB having been supplying, I guess the Japanese brands for a long time? [Foreign Language]

Okay. Our main goal at the time of forming joint venture with KYB is continue to strengthen our technology competitive -- technological competitiveness for the domestic China market. And so that's number one priority is we want to be able to not only continue to compete and maintain and strengthen our presence in domestic brand, but also expanding to the Japanese joint ventures in China. So that will be a huge lift in terms of market and opportunities, because the Japanese joint venture in China are very well-established in terms of both branding and the volume. And the secondary goal is to look beyond China. There are many markets, internationally, where we can potentially get into. However, due to the joint venture arrangement at the time of signing, we're not able to go into Japan, because that's the KYB's main market. So, outside of Japan, still a very large market. The world is a large place. So, we see a great potential there. But the step one is we want to be able to connect through our -- those product and KYB relationship to connect with the Japanese joint ventures in China.

It's an interesting situation. The KYB I assume at some point your relationship with KYB may be renegotiated for some additional potential and that would be a good thing but -- okay. That's all I have, and I appreciate your responses. [Foreign Language]

Great. Thank you, Robert.

Thank you.

[Operator Instructions] Thank you. At this time, we've reached the end of our additional time for question-and-answers. And I would like to turn the floor back to management for any final and closing remarks.

Well, we thank you for your participation in today's conference call. We wish you to be safe and well, and look forward to speaking with you again. Thank you.

Thank you.

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