FY 2013 ANNUAL REPORT
Based in Hubei Province, People’s Republic of China, CHINA AUTOMOTIVE SYSTEMS, INC. is a leading
supplier of power steering components and systems to the Chinese automotive industry and is exporting
into the North American market.
The company operates through three wholly-owned subsidiaries in China and America and ten Sino-foreign
joint ventures in China.
o Henglong USA Corporation
Great Genesis Holdings Limited
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd.
Hubei Henglong Automotive System Group Co., Ltd.
Shashi Jiulong Power Steering Co.
o
o Wuhu Henglong Electric Power Steering Co., Ltd.
o Wuhan Jielong Steering System Co., Ltd.
o
Universal Sensor Application, Inc.
Beijing Henglong Automotive System Co., Ltd.
o
o Chongqing Henglong Hongyan Automotive System Co., Ltd.
o CAAS Brazil’s Imports And Trade In Automotive Parts Ltd.
Jingzhou Henglong Automotive Parts Co.
.
Jingzhou Henglong Automotive Technology (Testing) Centre
DEAR SHAREHOLDERS,
We are pleased to report record sales for the 2013 year
as we gained market share in both the passenger and
commercial vehicle markets in China. Our overall market
share grew in 2013 as our total annual sales growth of 23.6%
year-over-year surpassed the 14.0% industry vehicle growth
as reported by the China Association of Automobile
Manufacturers (“CAAM”).
Our record annual sales of $415.2 million resulted from
higher unit sales in the Chinese and foreign markets in 2013.
Export sales to Chrysler in North America continued strong
and our new electric power steering ("EPS") products
experienced robust domestic sales. Greater economies-of-
scale and strict cost controls improved our profit margins.
Diluted earnings per share were $0.95 in 2013 compared with
$0.70 in 2012. Net cash flow from operating activities was
$12.8 million for the 2013 year. At December 31, 2013,
working capital increased by 29.2% to $179.3 million. Cash,
cash equivalents and short-term investments totaled $89.5
million and with no long-term debt.
Subsequent to the 2013 year, we used our improved
financial strength to declare our first ever cash dividend and
make our first acquisition. After reviewing the Company's
financial performance, financial condition, cash requirements
and cash flows, a special cash dividend of $0.18 per common
share was paid in late July 2014 as a non-taxable return of
capital. This dividend
to our
shareholders and demonstrated our confidence in the future.
We also acquired a 51.0% equity control position in Fujian
Qiaolong Special Purpose Vehicle Co., Ltd., which produces
special emergency vehicles. Both transactions were designed
to increase value to shareholders.
the return
increased
A number of factors helped vehicle sales rebound in
2013 after two years of lackluster market growth. Chinese
government incentives stimulated the purchase of low-
emission and fuel-efficient cars to help reduce air pollution.
To further reduce air pollution, the Chinese government
began implementing the more stringent National IV emission
standard in mid-2013 to reduce engine emissions from
commercial vehicles. Strict nationwide enforcement of the
National IV emission standard is scheduled to begin in
January 2015. Before then, the pre-buy of National III
commercial vehicles continues, and demand for more-
expensive, heavy-duty trucks has been strong.
Also, we
believe a new 5-year replacement cycle is beginning for the
many commercial vehicles sold in the 2009~2010 period.
We achieved record sales as our broad line of high-
quality steering products continued to strengthen our close
relationships with our many OEM customers. Our domestic
OEM customer base is over 60 companies including many
leading Chinese brands such as Chery Auto, Brilliance, Geely,
Great Wall and more. Investments in new product research
and advanced manufacturing to meet global standards have
been rewarded. We have achieved growing sales to Chrysler
in North America as well as the Chinese joint venture
operations of General Motors, Volkswagen and Peugeot. Sales
growth to Chrysler in North America increased by 17.4% in
2013, and we were named Chrysler 2013 Supplier of the Year
Metallic. A key focus is to expand our North American market
share with steering products for potential new vehicle models
and new customers.
investment
The high quality and performance demanded by these
leading companies required significant
in
production equipment, quality systems and new product
development over the years. We have built
low-cost
manufacturing operations
in China using advanced
production equipment, including proprietary machinery. Our
research and development has introduced high-quality, high-
reliability steering products that enhanced our brand name.
Investment in research and development has grown to 5.0%
of revenues as innovation will drive our growth and market
share gains.
In China, we have introduced updated hydraulic
steering products and proprietary EPS products to provide
more value to customers and enhance our leading market
position. EPS systems are relatively new to the Chinese
automotive markets. As the first domestically designed and
produced EPS system in China, our products are in high
demand as they contribute to improved fuel economy. We are
building a suite of EPS products to expand our customer base,
increase our market penetration, and capture market share
from more expensive imported EPS systems. Our innovative
steering technologies are solidifying our current customer
relationships and opening opportunities with new customers
as well.
Opportunities in other foreign markets continue to help
us achieve our goal of becoming a tier-1 global steering
supplier. Our Brazilian operations are positioned to expand as
our Chinese customer, Chery Auto, is constructing a new plant
to build vehicles there. We remain optimistic on the outlook
for the South American automotive markets. We are also
exploring other sizeable markets where our products' cost-
value proposition will allow us to flourish.
increase our
We are very encouraged about our growth prospects.
We are well positioned with low-cost, high-quality products
to
leading domestic market share. The
replacement cycle for older commercial vehicles is just
beginning. Further, the Chinese government's plan to force
replacement of high-polluting, older passenger vehicles is
expected to generate millions of additional car purchases over
the next several years. Our sales to Chrysler in North America
have increased each year and we are attracting new potential
foreign customers.
We continue to focus on building our operations to
generate free cash flow and increase shareholder value.
Sincerely,
/s/Qizhou Wu
CEO & Director
July 26, 2014
CHINHA AUTOMOTIVE SYSTEMS, INC.
INDEX
PART I ....................................................................................................................................................................................................................................................... 1
ITEM 1.
BUSINESS .......................................................................................................................................................................................................... 1
ITEM 1A.
RISK FACTORS ................................................................................................................................................................................................ 6
ITEM 1B.
UNRESOLVED STAFF COMMENTS ...................................................................................................................................................... 15
ITEM 2.
ITEM 3.
ITEM 4.
PROPERTIES ................................................................................................................................................................................................. 15
LEGAL PROCEEDINGS .............................................................................................................................................................................. 15
MINE SAFETY DISCLOURES .................................................................................................................................................................. 16
PART II .................................................................................................................................................................................................................................................. 16
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES. .......................................................................................................................................................................... 16
ITEM 6.
ITEM 7.
SELECTED FINANCIAL DATA ................................................................................................................................................................ 17
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.17
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ....................................................................... 30
ITEM 8.
ITEM 9.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ........................................................................................................ 30
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
31
ITEM 9A.
CONTROLS AND PROCEDURES ............................................................................................................................................................ 31
ITEM 9B.
OTHER INFORMATION ............................................................................................................................................................................ 33
PART III ................................................................................................................................................................................................................................................. 34
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE .......................................................................... 34
ITEM 11.
EXECUTIVE COMPENSATION ............................................................................................................................................................. 36
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS. ................................................................................................................................................................................................ 38
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE ........................ 39
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES ........................................................................................................................ 39
PART IV ................................................................................................................................................................................................................................................. 40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM...................................................................................................... 40
CONSOLIDATED BALANCE SHEETS .............................................................................................................................................................................. 41
CONSOLIDATED STATEMENTS OF INCOME .............................................................................................................................................................. 42
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ....................................................................................................................... 42
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY .............................................................................................. 43
CONSOLIDATED STATEMENTS OF CASH FLOWS .................................................................................................................................................... 43
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)..................................................................................................................... 44
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION ...................................................................................................................... 44
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES ................................................................................................................................ 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ........................................................................................................................................ 45
CAUTIONARY STATEMENT
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933, and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or the Company’s future
financial performance. The Company has attempted to identify forward-looking statements by terminology including “anticipates,”
“believes,” “expects,” “can,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should”
or “will” or the negative of these terms or other comparable terminology. Such statements are subject to certain risks and uncertainties,
including the matters set forth in this Annual Report or other reports or documents the Company files with the Securities and Exchange
Commission, the “SEC,” from time to time, which could cause actual results or outcomes to differ materially from those projected.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot
guarantee future results, levels of activity, performance or achievements. Undue reliance should not be placed on these forward-looking
statements which speak only as of the date hereof. The Company’s expectations are as of the date this Form 10-K is filed, and the
Company does not intend to update any of the forward-looking statements after the date this Annual Report on Form 10-K is filed to
confirm these statements to actual results, unless required by law.
ITEM 1. BUSINESS
COMPANY HISTORY
PART I
China Automotive Systems, Inc., “China Automotive” or the “Company,” was incorporated in the State of Delaware on June 29,
1999 under the name Visions-In-Glass, Inc. On or around March 5, 2003, the Company acquired all of the issued and outstanding equity
interests of Great Genesis Holdings Limited, “Genesis,” a corporation organized under the laws of the Hong Kong Special
Administrative Region, China, by issuance of 20,914,250 shares of common stock to certain sellers. After the acquisition, the Company
continued the operations of Genesis. On May 19, 2003, the Company changed its name from Visions-In-Glass, Inc. to China Automotive
Systems, Inc. Currently, Genesis directly and indirectly owns interests in nine Sino-joint ventures and a wholly owned subsidiary in the
People’s Republic of China, “China” or the “PRC,” which manufacture power steering systems and/or related products for different
segments of the automobile industry. Genesis also owns interests in a Brazil-based trading company, which engages mainly in the import
and sales of automotive parts in Brazil. Unless the context indicates otherwise, the Company uses the terms “the Company,” “we,” “our”
and “us” to refer to Genesis and China Automotive collectively on a consolidated basis.
BUSINESS OVERVIEW
The Company is a holding company and has no significant business operations or assets other than its interest in Genesis. Genesis
mainly engages in the manufacture and sale of automotive systems and components through its controlled subsidiaries and the joint
ventures, as described below. Set forth below is an organizational chart as at December 31, 2013.
CHINA AUTOMOTIVE SYSTEMS, INC. [NASDAQ:CAAS]
100%
Great Genesis Holdings Limited
↓
100.00%
Hubei Henglong Automotive System
Group Co., Ltd.
“Hubei Henglong” 1
↓
80%
Jingzhou Henglong
Automotive Parts
Co., Ltd.
81%
Shashi Jiulong
Power Steering
Gears Co., Ltd.
83.34%
Universal Sensor
Application, Inc.
77.33%
Wuhu Henglong
Automotive
Steering System
Co., Ltd.
85%
Wuhan Jielong
Electric Power
Steering Co., Ltd.
“Jiulong”4
“USAI”5
“Wuhu”6
“Jielong”7
“Henglong”3
↓
80.00%
Jingzhou Henglong
Automotive
Technology
(Testing) Center
“Testing Center” 11
100%
Henglong USA Corporation
70%
Shenyang Jinbei Henglong
Automotive Steering System Co.,
Ltd.
“Shenyang”2
50.00%
Beijing
Henglong
Automotive
System
Co., Ltd.
“Beijing
Henglong”8
70%
Chongqing
Henglong
Hongyan
Automotive
System Co., Ltd.
“Chongqing
Henglong” 9
80.00%
CAAS Brazil’s
Imports And Trade
In Automotive
Parts Ltd.
“Brazil Henglong”
10
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
1. On March 7, 2007, Genesis established Hubei Henglong (formerly known as Jingzhou Hengsheng Automotive System Co.,
Ltd.), its wholly-owned subsidiary, to engage in the production and sales of automotive steering systems. The registered capital
of Hubei Henglong at the time of establishment was $10 million. On February 10, 2010, the registered capital of Hubei
Henglong was increased to $16 million. On October 12, 2011, the board of directors of the Company approved a reorganization
of the Company’s subsidiaries operating in China. As a result of the reorganization, all of Genesis’s equity interests of its
subsidiaries operating in China, except for Shenyang, were transferred to Hubei Henglong, the Company’s new China-based
holding company. The reorganization was completed on January 19, 2012, subsequent to which the registered capital of Hubei
Henglong was increased to $39.0 million. As the reorganized entities were under common control of the Company, the
reorganization did not have any impact on the Company’s consolidated financial position or results of operations and should
not impact the tax treatment of the Company or its subsidiaries in any material respect. On July 8, 2012, Hubei Henglong
changed its name to Hubei Henglong Automotive System Group Co., Ltd.
2. Shenyang was established in 2002 and focuses on power steering parts for light duty vehicles.
3. Henglong was established in 1997 and mainly engages in the production of rack and pinion power steering gear for cars and
light-duty vehicles.
4. Jiulong was established in 1993 and mainly engages in the production of integral power steering gear for heavy-duty vehicles.
5. USAI was established in 2005 and mainly engages in the production and sales of sensor modules.
6. Wuhu was established in 2006 and mainly engages in the production and sales of automobile steering systems.
7. Jielong was established in 2006 and mainly engages in the production and sales of electric power steering, “EPS.”
8. Beijing Henglong was established in 2010 and mainly engages in the design, development and manufacture of both hydraulic
and electric power steering systems and parts. According to the joint venture agreement, the Company does not have voting
control of Beijing Henglong. Therefore, the Company’s consolidated financial statements do not include Beijing Henglong,
and such investment is accounted for by the equity accounting method.
9. On February 21, 2012, Hubei Henglong and SAIC-IVECO Hongyan Company, “SAIC-IVECO,” established a Sino-foreign
joint venture company, Chongqing Henglong, to design, develop and manufacture both hydraulic and electric power steering
systems and parts. The new joint venture is located in Chongqing City and has a registered capital of RMB60 million, of which
RMB42 million, or 70%, is held by Hubei Henglong. The registered capital of Chongqing Henglong was fully contributed by
Hubei Henglong in cash of $6.7 million (equivalent to RMB42 million) in January and February 2012 and by SAIC-IVECO in
property, plant and equipment with a fair value of $2.8 million (equivalent to RMB18.0 million) in April 2012.
10. On August 21, 2012, Hubei Henglong established a Sino-foreign joint venture company with two Brazilian citizens, Ozias Gaia
Da Silva and Ademir Dal’ Evedove. The joint-venture company is called CAAS Brazil’s Imports And Trade In Automotive
Parts Ltd., “Brazil Henglong”. Brazil Henglong engages mainly in the import and sales of automotive parts in Brazil. The new
joint venture is located in Brazil and has a registered capital of $1.0 million (equivalent to BRL1.6 million), of which $0.8
million (equivalent to BRL1.3 million), or 80%, is held by Hubei Henglong, and of which $0.2 million (equivalent to BRL0.3
million), or 20%, is held by Mr. Ozias Gaia Da Silva and Mr. Ademir Dal’ Evedove. As of December 31, 2012, Hubei
Henglong and Mr. Ozias Gaia Da Silva and Mr. Ademir Dal’ Evedove have completed their capital contributions.
11. Testing Center was established in 2009 and mainly engages in the research and development of new products.
The Company has business relationships with more than sixty vehicle manufacturers, including FAW Group and Dongfeng Auto
Group Co., Ltd, two of the five largest automobile manufacturers in China; Shenyang Brilliance Jinbei Co., Ltd., the largest light vehicle
manufacturer in China; Chery Automobile Co., Ltd, the largest state owned car manufacturer in China, and BYD Auto Co., Ltd and
Zhejiang Geely Automobile Co., Ltd., the largest privately owned car manufacturers in China. The PRC-based joint ventures of General
Motors (GM), Volkswagen, Citroen and Chrysler North America are all key customers of the Company. Starting in 2008, the Company
has supplied power steering pumps and power steering gear to the Sino-foreign joint ventures established by GM, Citroen and
Volkswagen in China. The Company has supplied power steering gear to Chrysler North America since 2009.
INTELLECTUAL PROPERTY RIGHTS
Intellectual Property rights, “IP,” are important in helping the Company maintain its competitive position. Currently, the Company
owns IP rights, including two trademarks covering automobile parts, “HL” and “JL,” and more than eighty-five patents registered in
China covering power steering technology. The Company is in the process of integrating new advanced technologies such as electronic
chips in power steering systems into its current production line and is pursuing aggressive strategies in technology to maintain a
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
competitive edge within the automobile industry. In December 2009, the Company, through Henglong, formed Testing Center to engage
in the research and development of new products, such as EPS, integral rack and pinion power steering and high pressure power steering,
to optimize current products design and to develop new, cost-saving manufacturing processes.
STRATEGIC PLAN
The Company’s short to medium term strategic plan is to focus on both domestic and international market expansion. To achieve
this goal and higher profitability, the Company focuses on brand recognition, quality control, decreasing costs, research and development
and strategic acquisitions. Set forth below are the Company’s programs:
─ Brand Recognition. Under the brands of Henglong and Jiulong, the Company offers four separate series of power steering sets
and 310 models of power steering sets, steering columns and steering hoses.
─ Quality Control. The Henglong and Jiulong manufacturing facilities obtained the ISO/TS 16949 System Certification in January
2004, a well-recognized quality control system in the auto industry developed by TUVRheindland of Germany.
─ Decreasing Cost. By improving the Company’s production ability and enhancing equipment management, optimizing the
process and products structure, perfecting the supplier system and cutting production cost, the Company’s goal is to achieve a
more competitive profit margin.
─ Research and Development. The Company established Testing Center for the research and development of products and, by
partnering with Nanyang Ind. Co. Ltd. and Tsinghua University for the development of advanced steering systems, the
Company’s objective is to gain increased market share in China.
International Expansion. The Company has entered into agreements with several international vehicle manufacturers and auto
parts modules suppliers and carried on preliminary negotiations regarding future development projects.
─
─ Acquisitions. The Company is exploring opportunities to create long-term growth through new ventures or acquisitions of other
auto component manufacturers. The Company will seek acquisition targets that meet the following criteria:
.
.
.
companies that can be easily integrated into product manufacturing and corporate management;
companies that have strong joint venture partners that would become major customers; and
companies involved with power steering systems.
CUSTOMERS
The Company’s ten largest customers represented 71.9% of the Company’s total sales for the year ended December 31, 2013. The
following table sets forth information regarding the Company’s ten largest customers.
Name of Major Customers
Chrysler North America
SAIC GM Wuling Automobile Co.
Zhejiang Geely Holding Group
Baoding Great Wall Automobile Holding Co., Ltd.
Shenyang Brilliance Jinbei Automobile Co., Ltd.
BYD Auto Co., Ltd
Beiqi Foton
Dongfeng Auto Group Co., Ltd.
China FAW Group Corporation
Chery Automobile Co., Ltd.
Total
Percentage of Total
Revenue in 2013
11.1 %
8.9 %
7.8 %
7.7 %
7.3 %
6.8 %
6.5 %
6.3 %
4.8 %
4.7 %
71.9 %
The Company primarily sells its products to the above-mentioned original equipment manufacturing, “OEM,” customers; it also
has excellent relationships with them, including serving as their first-rank supplier and developer for product development for new
models. While the Company intends to continue to focus on retaining and winning this business, it cannot ensure that it will succeed in
doing so. It is difficult to keep doing business with the above-mentioned OEM customers as a result of severe price competition and
customers’ diversification of their supply base. The Company’s business would be materially and adversely affected if it loses one or
more of these major customers.
SALES AND MARKETING
The Company’s sales and marketing team has 106 sales persons, which are divided into an OEM team, a sales service team and a
working group dedicated to international business. These sales and marketing teams provide a constant interface with the Company’s
key customers. They are located in all major vehicle producing regions to represent more effectively the Company’s customers’ interests
within the Company’s organization, to promote their programs and to coordinate their strategies with the goal of enhancing overall
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
service and satisfaction. The Company’s ability to support its customers is further enhanced by its broad presence in terms of sales
offices, manufacturing facilities, engineering technology centers and joint ventures.
The Company’s sales and marketing organization and activities are designed to create overall awareness and consideration of, and
therefore to increase sales of, the Company’s modular systems and components. To achieve that objective, the Company organized
delegations to visit the United States, Korea, India and Japan and has supplied power steering gear to Chrysler North America. Through
these activities, the Company has generated potential business interest as a strong base for future development.
DISTRIBUTION
The Company’s distribution system covers all of China. The Company has established sales and service offices with certain
significant customers to deal with matters related to such customers in a timely fashion. The Company also established distribution
warehouses close to major customers to ensure timely deliveries. The Company maintains strict control over inventories. Each of these
sales and service offices sends back to the Company through e-mail or fax information related to the inventory and customers’ needs.
The Company guarantees product delivery in 8 hours for those customers who are located within 200 km from the Company’s
distribution warehouses, and 24 hours for customers who are located outside of 200 km from the Company’s distribution warehouses.
Delivery time is a very important competitive factor in terms of customer decision making, together with quality, pricing and long-term
relationships.
EMPLOYEES AND FACILITIES
As of December 31, 2013, the Company employed approximately 3,835 persons, including approximately:
. 2,566 by Henglong (including Testing Center formed by Henglong) and Jiulong;
. 306 by Shenyang;
. 28 by USAI;
. 143 by Wuhu;
. 238 by Jielong;
. 412 by Hubei Henglong;
. 12 by HLUSA;
. 125 by Chongqing Henglong; and
. 5 by Brazil Henglong.
As of December 31, 2013, each of Henglong and Jiulong (as a whole), Shenyang, Wuhu, Jielong and Hubei Henglong (as a whole),
and Chongqing Henglong had a manufacturing and administration area of 150,689 square meters, 35,354 square meters, 83,750 square
meters, 170,520 square meters and 17,188 square meters, respectively. The area of manufacturing facilities of Henglong was reduced
due to the sale of the land use right of Henglong in the third quarter of 2013 (see Notes 9 and 20 to the consolidated financial statements
in this Report).
Hubei Province, which is home to Dongfeng, one of the largest automakers in China, provides an ample supply of inexpensive
but skilled labor to automotive-related industries. The annual production of one of the Company’s main products, power steering gear,
was approximately 4.3 million units and 3.5 million units in 2013 and 2012, respectively. Although the production process continues to
rely heavily on manual labor, the Company has invested substantially in high-level production machinery to improve capacity and
production quality. Approximately $48.6 million was spent over the last three years to purchase professional-grade equipment and
extend workshops, approximately 77.9% of which has been used in the production process as of December 31, 2013.
RAW MATERIALS
The Company purchases various manufactured components and raw materials for use in its manufacturing processes. The
principal components and raw materials the Company purchases include castings, finished sub-components, aluminum, steel, fabricated
metal electronic parts and molded plastic parts. The most important raw material is steel. The Company enters into purchase agreements
with local suppliers. The annual purchase plans are determined at the beginning of the calendar year but are subject to revision every
three months as a result of customers’ orders. A purchase order is made according to monthly production plans. This protects the
Company from building up inventory when the orders from customers change.
The Company’s purchases from its ten largest suppliers represented in the aggregate 24.0% of all components and raw materials
it purchased for the year ended December 31, 2013, and none of them provided more than 10% of total purchases.
All components and raw materials are available from numerous sources. The Company has not, in recent years, experienced any
significant shortages of manufactured components or raw materials and normally does not carry inventories of these items in excess of
what is reasonably required to meet its production and shipping schedules.
RESEARCH AND DEVELOPMENT
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
The Company owns the Testing Center, a Hubei Provincial-Level technical center, which has been approved by the Hubei
Economic Commission. The center has a staff of about 306, including 35 senior engineers, 6 foreign experts and 195 engineers, primarily
focusing on steering system R&D, tests, production process improvement and new material and production methodology application.
In addition, the Company has partnered with Tsinghua University to establish a steering system research center, called Tsinghua
Henglong Automobile Steering Research Institute, for the purposes of R&D and experimentation for EPS.
The Company believes that its engineering and technical expertise, together with its emphasis on continuing research and
development, allow it to use the latest technologies, materials and processes to solve problems for its customers and to bring new,
innovative products to market. The Company believes that continued research and development activities, including engineering, are
critical to maintaining its pipeline of technologically advanced products. The Company has aggressively managed costs in other portions
of its business in order to increase its total expenditures for research and development activities, including engineering, at approximately
$20.9 million, $14.9 million for the years ended December 31, 2013 and 2012, respectively. The significant increase in 2013 is mainly
due to the large expenditure in EPS R&D, because the Company believes demands for new EPS products will increase significantly in
the future. In 2012 and 2013, the sales of such newly developed products accounted for about 13.4% and 9.3%, respectively, of total
sales.
COMPETITION
The automotive components industry is extremely competitive. The Company’s customers consider criteria including quality,
price/cost competitiveness, system and product performance, reliability and timeliness of delivery, new product and technology
development capability, excellence and flexibility in operations, degree of global and local presence, effectiveness of customer service
and overall management capability. The power steering system market is fragmented in China, and the Company has seven major
competitors. Of these competitors, two are Sino-foreign joint ventures while the other five are state-owned. Like many competitive
industries, there is pressure on downward selling prices.
The Company’s major competitors, including Shanghai ZF and First Auto FKS, “FKS,” are component suppliers to specific
automobile manufacturers. Shanghai ZF is the joint venture of SAIC and ZF Germany, which is an exclusive supplier to SAIC-
Volkswagen and SAIC-GM. FKS is a joint venture between First Auto Group and Japan’s Koyo Company and its main customer is
FAW-Volkswagen Company.
While the Chinese government limits foreign ownership of auto assemblers to 50%, there is no analogous limitation in the
automotive components industry. Thus, opportunities exist for foreign component suppliers to set up factories in China. These overseas
competitors employ technology that may be more advanced and may have existing relationships with global automobile assemblers, but
they are generally not as competitive as the Company in China in terms of production cost and flexibility in meeting client requirements.
CHINESE AUTOMOBILE INDUSTRY
The Company is a supplier of automotive parts and most of its operations are located in China. An increase or decrease in the
output and sales of Chinese vehicles could result in an increase or decrease of the Company’s results of operations. According to the
latest statistics from the China Association of Automobile Manufacturers, “CAAM,” in 2013, the output and sales volume of vehicles
in China have reached 22.12 million and 21.98 million units, respectively, an increase of 14.8% and 13.9% compared to 2012. The
output and sales volume of passenger vehicles in 2013 was 18.09 million and 17.93 million units respectively, an increase of 16.5% and
15.7% compared to 2012. The output and sales volume of commercial vehicles in 2013 was 4.03 million and 4.06 million units,
respectively, an increase of 7.6% and 6.4% compared to 2012. Accordingly, in 2013, the Company’s sales of steering gear for passenger
vehicles and commercial vehicles increased by 23.9% and 11.0%, respectively, compared to 2012.
With the recovery of the overall economy of China and the continued increase in the income of China’s urban and rural residents,
the automobile industry had double-digit growth in 2013. Industry analysts expect that market growth will continue in 2014 at an annual
rate of about 8% to 10%.
Management believes that the continuing development of the highway system will have a significant positive long-term impact on
the manufacture and sale of private automobiles in the PRC. Statistics from the Ministry of Transport show that 100,000 kilometers of
highway and 8,000 kilometers of expressway were built in 2013. Total highways and expressways in the PRC now amount to 4,242,000
kilometers and 104,000 kilometers, respectively.
ENVIRONMENTAL COMPLIANCE
The Company is subject to the requirements of U.S. federal, state, local and non-U.S., including China’s, environmental and
occupational safety and health laws and regulations. These include laws regulating air emissions, water discharge and waste management.
The Company has an environmental management structure designed to facilitate and support its compliance with these requirements
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
globally. Although the Company intends to comply with all such requirements and regulations, it cannot provide assurance that it is at
all times in compliance. The Company has made and will continue to make capital and other expenditures to comply with environmental
requirements, although such expenditures were not material during the past two years. Environmental requirements are complex, change
frequently and have tended to become more stringent over time. Accordingly, the Company cannot assure that environmental
requirements will not change or become more stringent over time or that its eventual environmental cleanup costs and liabilities will not
be material.
During 2013, the Company did not make any material capital expenditures relating to environmental compliance.
FINANCIAL INFORMATION AND GEOGRAPHIC AREAS
Financial information about sales and long-term assets by major geographic region can be found in Note 32, “Segment Reporting”
to the consolidated financial statements in this report. The following table summarizes the percentage of sales and total assets by major
geographic regions:
Geographic region:
United States
China
Other foreign countries
Total consolidated
WEBSITE ACCESS TO SEC FILINGS
Net Sales
Year Ended December 31,
Long-term assets
As of December 31
2013
2012
2013
2012
12.11 %
87.65
12.94 %
86.57
0.93 %
99.06
0.24
0.49
0.01
100.00 %
100.00 %
100.00 %
0.81 %
99.17
0.02
100.00 %
The Company files electronically with (or furnishes to) the Securities and Exchange Commission, the “SEC,” its annual reports
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports pursuant to Section 13(a)
of the Securities Exchange Act of 1934. The Company makes available free of charge on its web site (www.caasauto.com) all such
reports as soon as reasonably practicable after they are filed.
The SEC maintains an Internet site that contains reports, proxy information and information statements, and other information
regarding issuers that file electronically with the SEC. The address of that website is http://www.sec.gov. The materials are also available
at the SEC’s Public Reference Room, located at 100 F Street N.E., Washington, D.C. 20549. The public may obtain information through
the public reference room by calling the SEC at 1-800-SEC-0330.
ITEM 1A.
RISK FACTORS
Any investment in the Company’s securities involves a high degree of risk. You should carefully consider the risks described below,
together with the information contained elsewhere in this Annual Report, before you make a decision to invest in the Company. The
Company’s business, financial conditions and results of operations could be materially and adversely affected by many risk factors.
Because of these risk factors, actual results might differ significantly from those projected in any forward-looking statements. Factors
that might cause such differences include, among others, the following:
RISKS RELATED TO THE COMPANY’S BUSINESS AND INDUSTRY
The cyclical nature of automotive production and sales could result in a reduction in automotive sales, which could adversely
affect the Company’s business and results of operations.
The Company’s business relies on automotive vehicle production and sales by its customers, which are highly cyclical and depend
on general economic conditions and other factors, including consumer spending and preferences and the price and availability of gasoline.
They also can be affected by labor relations issues, regulatory requirements and other factors. In the last two years, the price of
automobiles in China has generally declined. Additionally, the volume of automotive production in China has fluctuated from year to
year, which gives rise to fluctuations in the demand for the Company’s products. Therefore, any significant economic decline could
result in a reduction in automotive production and sales by the Company’s customers and could have a material adverse effect on the
Company’s results of operations. Moreover, if the prices of automobiles keep declining, the selling price of automotive parts also would
decrease, which would result in lower revenues and profitability.
Increasing costs for manufactured components and raw materials may adversely affect the Company’s profitability.
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
The Company uses a broad range of manufactured components and raw materials in its products, including castings, electronic
components, finished sub-components, molded plastic parts, fabricated metal, aluminum and steel and resins. Because it may be difficult
to pass increased prices for these items on to the Company’s customers, a significant increase in the prices of the Company’s components
and materials could materially increase the Company’s operating costs and adversely affect its profit margins and profitability.
Because the Company is a holding company with substantially all of its operations conducted through its subsidiaries, its
performance will be affected by the performance of its subsidiaries.
The Company almost has no operations independent of those of Genesis and its subsidiaries, and the Company’s principal assets
are its investments in Genesis and its subsidiaries and affiliates. As a result, the Company is dependent upon the performance of Genesis
and its subsidiaries and will be subject to the financial, business and other factors affecting Genesis as well as general economic and
financial conditions. As substantially all of the Company’s operations are and will be conducted through its subsidiaries, the Company
will be dependent on the cash flow of its subsidiaries to meet its obligations.
Because virtually all of the Company’s assets are and will be held by operating subsidiaries, the claims of the Company’s
stockholders will be structurally subordinate to all existing and future liabilities and obligations, and trade payables of such subsidiaries.
In the event of the Company’s bankruptcy, liquidation or reorganization, its assets and those of its subsidiaries will be available to satisfy
the claims of the Company’s stockholders only after all of its and its subsidiaries’ liabilities and obligations have been paid in full.
With the automobile parts markets being highly competitive and many of the Company’s competitors having greater resources
than it does, the Company may not be able to compete successfully.
system and product performance;
reliability and timeliness of delivery;
The automobile parts industry is a highly competitive business. The Company’s customers consider criteria including:
. quality;
. price/cost competitiveness;
.
.
. new product and technology development capability;
.
. degree of global and local presence;
.
. overall management capability.
excellence and flexibility in operations;
effectiveness of customer service; and
The Company’s competitors include independent suppliers of parts, as well as suppliers formed by spin-offs from the Company’s
customers, who are becoming more aggressive in selling parts to other vehicle manufacturers. Depending on the particular product, the
number of the Company’s competitors varies significantly. Many of the Company’s competitors have substantially greater revenues and
financial resources than it does, as well as stronger brand names, consumer recognition, business relationships with vehicle
manufacturers, and geographic presence than it has. The Company may not be able to compete favorably and increased competition
may substantially harm its business, business prospects and results of operations.
Internationally, the Company faces different market dynamics and competition. The Company may not be as successful as its
competitors in generating revenues in international markets due to the lack of recognition of its products or other factors. Developing
product recognition overseas is expensive and time-consuming and the Company’s international expansion efforts may be more costly
and less profitable than it expects. If the Company is not successful in its target markets, its sales could decline, its margins could be
negatively impacted and it could lose market share, any of which could materially harm the Company’s business, results of operations
and profitability.
Pricing pressure by automobile manufacturers on their suppliers may adversely affect the Company’s business and results of
operations.
Recently, pricing pressure from automobile manufacturers has been prevalent in the automotive parts industry in China. Virtually
all vehicle manufacturers seek price reductions each year. Although the Company has tried to reduce costs and resist price reductions,
these reductions have impacted the Company’s sales and profit margins. If the Company cannot offset continued price reductions through
improved operating efficiencies and reduced expenditures, price reductions will have a material adverse effect on the Company's results
of operations.
The Company’s business, revenues and profitability would be materially and adversely affected if it loses any of its large
customers.
For the year ended December 31, 2013, approximately 11.1%, 8.9%, 7.8% and 7.7% of the Company’s sales were to Chrysler
North America, SAIC GM Wuling Automobile Co., Zhejiang Geely Holding Co., Ltd. and Baoding Great Wall Automobile Holding
Co., Ltd., the Company’s four largest customers in 2013, respectively. In total, these four largest customers accounted for 35.5% of total
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
sales in 2013. For the year ended December 31, 2012, approximately 11.7%, 9.4%, 9.0% and 7.9% of the Company’s sales were to
Chrysler North America, Zhejiang Geely Holding Co., Ltd., Chery Automobile Co., Ltd. and Dongfeng Auto Group Co., Ltd., the
Company’s four largest customers in 2012, respectively. In total, these four largest customers accounted for 38.0% of the total sales in
2012. The loss of, or significant reduction in purchases by, one or more of these major customers could adversely affect the Company’s
business.
The Company may not be able to collect receivables incurred by customers.
Although the Company currently sells its products on credit, the Company’s ability to receive payment for its products depends
on the continued creditworthiness of its customers. The Company’s customer base may change if its sales increase because of the
Company’s expanded capacity. If the Company is not able to collect its receivables, its profitability will be adversely affected.
The Company may be subject to product liability and warranty and recall claims, which may increase the costs of doing business
and adversely affect the Company’s financial condition and liquidity.
The Company may be exposed to product liability and warranty claims if its products actually or allegedly fail to perform as
expected or the use of its products results, or is alleged to result, in bodily injury and/or property damage. The Company started to pay
some of its customers’ increased after-sales service expenses due to consumer rights protection policies of “recall” issued by the Chinese
government in 2004, such as the recalling flawed vehicles policy. Beginning in 2004, automobile manufacturers unilaterally required
their suppliers to pay a “3-R Guarantees” service charge for repair, replacement and refund in an amount of about 2%~6% of the total
amount of parts supplied. Accordingly, the Company has experienced and will continue to experience higher after sales service expenses.
Product liability, warranty and recall costs may have a material adverse effect on the Company’s financial condition.
The Company is subject to environmental and safety regulations, which may increase the Company’s compliance costs and may
adversely affect its results of operations.
The Company is subject to the requirements of environmental and occupational safety and health laws and regulations in China.
The Company cannot provide assurance that it has been or will be at all times in full compliance with all of these requirements, or that
it will not incur material costs or liabilities in connection with these requirements. Additionally, these regulations may change in a
manner that could have a material adverse effect on the Company’s business, results of operations and financial condition. The capital
requirements and other expenditures that may be necessary to comply with environmental requirements could increase and become a
material expense of doing business.
Non-performance by the Company’s suppliers may adversely affect its operations by delaying delivery or causing delivery failures,
which may negatively affect demand, sales and profitability.
The Company purchases various types of equipment, raw materials and manufactured component parts from its suppliers. The
Company would be materially and adversely affected by the failure of its suppliers to perform as expected. The Company could
experience delivery delays or failures caused by production issues or delivery of non-conforming products if its suppliers fail to perform,
and it also faces these risks in the event any of its suppliers becomes insolvent or bankrupt.
The Company’s business and growth may suffer if it fails to attract and retain key personnel.
The Company’s ability to operate its business and implement its strategies effectively depends on the efforts of its executive
officers and other key employees. The Company depends on the continued contributions of its senior management and other key
personnel. The Company’s future success also depends on its ability to identify, attract and retain highly skilled technical staff,
particularly engineers and other employees with mechanics and electronics expertise, and managerial, finance and marketing personnel.
The Company does not maintain a key person life insurance policy on Mr. Hanlin Chen or Mr. Qizhou Wu. The loss of the services of
any of the Company’s key employees or the failure to attract or retain other qualified personnel could substantially harm the Company’s
business.
The Company’s management controls approximately 72.01% of its outstanding common stock and may have conflicts of interest
with the Company’s minority stockholders.
As of December 31, 2013, members of the Company’s management beneficially own approximately 72.01% of the outstanding
shares of the Company’s common stock. As a result, except for the related party transactions that require approval of the audit committee
of the board of directors of the Company, these majority stockholders have control over decisions to enter into any corporate transaction,
which could result in the approval of transactions that might not maximize overall stockholders’ value. Additionally, these stockholders
control the election of members of the Company’s board, have the ability to appoint new members to the Company’s management team
and control the outcome of matters submitted to a vote of the holders of the Company’s common stock. The interests of these majority
stockholders may at times conflict with the interests of the Company’s other stockholders. The Company regularly engages in
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
transactions with entities controlled by one or more of its officers and directors, including those controlled by Mr. Hanlin Chen, the
chairman of the board of directors of the Company and its controlling stockholder.
There is a limited public float of the Company’s common stock, which can result in the Company’s stock price being volatile and
prevent the realization of a profit on resale of the Company’s common stock or derivative securities.
There is a limited public float of the Company’s common stock. As of December 31, 2013, approximately 27.99% of the
Company’s outstanding common stock is considered part of the public float. The term “public float” refers to shares freely and actively
tradable on the NASDAQ Capital Market and not owned by officers, directors or affiliates, as such term is defined under the Securities
Act. As a result of the limited public float and the limited trading volume on some days, the market price of the Company’s common
stock can be volatile, and relatively small changes in the demand for or supply of the Company’s common stock can have a
disproportionate effect on the market price for its common stock. This stock price volatility could prevent a security holder seeking to
sell the Company’s common stock or derivative securities from being able to sell them at or above the price at which the stock or
derivative securities were bought, or at a price which a fully liquid market would report.
The Company is subject to penny stock regulations and restrictions.
The SEC has adopted regulations which generally define so-called “penny stock” as an equity security that has a market price less
than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. As of December 31, 2013, the
closing price for the Company’s common stock was $7.93. If the Company’s stock is a “penny stock”, it may become subject to Rule
15g-9 under the Securities Exchange Act of 1934, the “Penny Stock Rule”. This rule imposes additional sales practice requirements on
broker-dealers that sell such securities to persons other than established customers and “accredited investors,” generally, individuals
with a net worth in excess of $1.0 million or annual incomes exceeding $0.2 million, or $0.3 million together with their spouses. For
transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received
the purchaser’s written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell the
Company’s securities and may affect the ability of purchasers to sell any of the Company’s securities in the secondary market.
For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock,
of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure also is required to be made about sales
commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally,
monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information
on the limited market in penny stock.
There can be no assurance that the Company’s common stock will qualify for exemption from the Penny Stock Rule. In any event,
even if the Company’s common stock were exempt from the Penny Stock Rule, the Company would remain subject to Section 15(b)(6)
of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock if the
SEC finds that such a restriction would be in the public interest.
Provisions in the Company’s certificate of incorporation and bylaws and the General Corporation Law of Delaware may
discourage a takeover attempt.
Provisions in the Company’s certificate of incorporation and bylaws and the General Corporation Law of Delaware, the state in
which it is organized, could make it difficult for a third party to acquire the Company, even if doing so might be beneficial to the
Company’s stockholders. Provisions of the Company’s certificate of incorporation and bylaws impose various procedural and other
requirements, which could make it difficult for stockholders to effect certain corporate actions and possibly prevent transactions that
would maximize stockholders’ value.
Litigation arising from the need to restate certain previously issued historical financial statements of the Company could have a
material adverse effect on the Company’s business, financial condition, results of operations or liquidity.
On March 17, 2011, the Company announced that it had identified historical accounting errors relating to the accounting treatment
of the Company’s convertible notes issued on February 15, 2008. The accounting errors resulted in the misstatement of certain charges
since the first quarter of 2009. The Company undertook a review to determine the total amount of the errors and the accounting periods
in which the errors occurred. The Company’s review was overseen by the audit committee of the board of directors of the Company,
the “Audit Committee”, with the assistance of management and accounting consultants engaged by management. The Audit Committee
concluded on March 12, 2011 that the Company’s previously issued audited consolidated financial statements as of and for the year
ended December 31, 2009, and related auditors’ report, and unaudited interim consolidated financial statements as of and for the
quarterly periods ended March 31, June 30 and September 30, 2010 should no longer be relied upon because of these errors in the
financial statements. The Company’s board of directors agreed with the Audit Committee’s conclusions. After analyzing the size and
timing of the errors, the Company determined that, in the aggregate, the errors were material. The Company restated its previously
issued financial statements for the years ended December 31, 2009 and 2008 on June 28, 2011.
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
Securities Action - Southern District of New York. On October 25, 2011, a purported securities class action, the “Securities Action,”
was filed in the United States District Court for the Southern District of New York on behalf of all purchasers of the Company’s securities
between March 25, 2010 and March 17, 2011. On February 24, 2012, the plaintiffs filed an amended complaint, changing the purported
class period to between May 12, 2009 and March 17, 2011. The amended complaint alleges that the Company, certain of its present
officers and directors, and the Company’s former independent accounting firm violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, and the rules promulgated thereunder, and seeks unspecified damages. The Company filed a motion to dismiss
the amended complaint, which was fully briefed on April 18, 2012. On August 8, 2012, the court denied the Company’s motion to
dismiss the amended complaint. On September 4, 2012, the Company filed an answer to the amended complaint. On January 15, 2013,
plaintiffs filed a motion to certify the purported class, which was fully briefed on April 8, 2013. On May 31, 2013, the court denied
plaintiffs’ motion to certify the purported class, and, on July 3, 2013, the court issued its order and opinion. On July 17, 2013, plaintiffs
filed a petition for permission to appeal the order denying class certification, and, on August 1, 2013, the Company filed an answer in
opposition to the petition. On October 23, 2013, the Court of Appeals for the Second Circuit denied plaintiffs’ petition for permission
to appeal. On December 6, 2013, plaintiffs filed a motion for preliminary approval of a settlement with the Company’s former
independent accounting firm and certification of a proposed settlement class. On January 7, 2014, the district court held a status
conference. On January 15, 2014, the district court denied plaintiffs’ motion for preliminary approval of settlement and certification of
a proposed settlement class. On February 20, 2014, the district court held a telephonic status conference regarding plaintiffs’ remaining
individual claims and issued a scheduling order setting deadlines for fact and expert discovery (May 30, 2014 and June 30, 2014,
respectively), motions for summary judgment (August 1, 2014), and pretrial materials (September 25, 2014). The Company and
plaintiffs have reached a settlement in principle and, on March 28, 2014, entered into a settlement agreement, which includes a dismissal
of all claims by plaintiffs against the Company and its current and former officers and directors, with no admission of any wrongdoing
or liability. The settlement is not material to the consolidated financial statements for the year ended December 31, 2013.
Derivative Action - Delaware Chancery Court. On December 23, 2011, a purported shareholder derivative action was filed in the
Court of Chancery of the State of Delaware, the “Court of Chancery,” on behalf of the Company. The complaint alleged that certain of
the Company’s current officers and directors breached their fiduciary duties to the Company in relation to the Company’s accounting
of convertible notes issued in February 2008. On January 25, 2012, a second purported shareholder derivative action was filed in the
Court of Chancery on behalf of the Company. On February 3, 2012, the Court of Chancery consolidated the two cases, which were
stayed pending the outcome of the motion to dismiss in the Securities Action. On October 23, 2012, the derivative plaintiffs filed a
consolidated amended complaint on behalf of the Company, the “Derivative Action.” The consolidated complaint alleged that certain
of the Company’s current officers and directors breached their fiduciary duties to the Company in relation to the Company’s accounting
of the convertible notes issued in February 2008. The consolidated complaint set forth three causes of action for breach of fiduciary
duties, unjust enrichment and insider trading. On January 7, 2013, the Company filed a motion to dismiss the Derivative Action. That
motion was fully briefed on February 28, 2013, and oral argument was held before the Court of Chancery on May 6, 2013. On August
30, 2013, the Court of Chancery dismissed all of the derivative plaintiffs’ claims with prejudice. The time for the derivative plaintiffs to
appeal the Court of Chancery’s decision expired on September 30, 2013 and, accordingly, the Derivative Action has terminated.
Failure to maintain effective internal control over financial reporting could have a material adverse effect on the Company’s
business, results of operations and the trading price of its shares.
The Company is subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, the
“SEC,” as required by Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring public companies to include a report
of management in its annual report that contains an assessment by management of the effectiveness of such company’s internal control
over financial reporting.
The Company’s management has conducted an evaluation of the effectiveness of its internal control over financial reporting and
concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2013. Our management
has identified control deficiencies as of December 31, 2013 that constituted a material weakness and resulted in the failure to properly
identify and timely disclose certain related party transactions. Although we have implemented measures to address the material
weakness, the material weakness identified by management is not fully remediated as of the date of the filing of this Annual Report on
Form 10-K. We cannot assure you that we will not identify additional control deficiencies that may constitute significant deficiencies
or material weaknesses in our internal controls in the future. As a result, we may be required to implement further remedial measures
and to design enhanced processes and controls to address issues identified through future reviews.
If we do not fully remediate the material weakness identified by management or fail to maintain the adequacy of our internal
controls in the future, we will not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over
financial reporting in accordance with the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for us to produce
reliable financial reports and are important to help prevent fraud. Any failure to maintain effective internal control over financial
reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our
business and negatively impact the trading price of our common stock. Furthermore, the Company may need to incur additional costs
and use additional management and other resources in an effort to comply with Section 404 of the Sarbanes-Oxley Act and other
requirements going forward.
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
The Company does not pay cash dividends on its common stock.
The Company has never declared or paid any cash dividends on its common stock and it does not anticipate paying any cash
dividends in the foreseeable future. The Company currently intends to retain future earnings, if any, to finance operations and the
expansion of its business. Any future determination to pay cash dividends will be at the discretion of the Company’s board of directors
and will be based upon the Company’s financial condition, operating results, capital requirements, plans for expansion, restrictions
imposed by any financing arrangements and any other factors that the Company’s board of directors deems relevant.
Techniques employed by short sellers may drive down the market price of the Company’s common stock.
Short selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the
intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the
value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects
to pay less in that purchase than it received in the sale. As it is in the short seller’s best interests for the price of the stock to decline,
many short sellers publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects
in order to create negative market momentum and generate profits for themselves after selling a stock short. These short attacks have,
in the past, led to selling of shares in the market.
In the recent past, public companies that have substantially all of their operations in China have been the subject of short selling.
Much of the scrutiny and negative publicity has centered around allegations of a lack of effective internal control over financial reporting
resulting in financial and accounting irregularities and mistakes, inadequate corporate governance policies or a lack of adherence thereto
and, in many cases, allegations of fraud. As a result, many of these companies are now conducting internal and external investigations
into the allegations and, in the interim, are subject to shareholder lawsuits and/or SEC enforcement actions.
It is not clear what effect such negative publicity would have on the Company, if any. If the Company were to become the subject
of any unfavorable allegations, whether such allegations are proven to be true or untrue, the Company could have to expend a significant
amount of resources to investigate such allegations and/or defend itself. While the Company would strongly defend against any such
short seller attacks, the Company may be constrained in the manner in which it can proceed against the relevant short seller by principles
of freedom of speech, applicable state law or issues of commercial confidentiality. Such a situation could be costly and time-consuming,
and could distract the Company’s management from growing the Company. Even if such allegations are ultimately proven to be
groundless, allegations against the Company could severely impact its business operations and stockholders equity, and any investment
in the Company’s stock could be greatly reduced or rendered worthless.
The Company’s secured credit facilities contain certain financial covenants that it may not satisfy, which, if not satisfied, could
result in the acceleration of the amounts due under the Company’s secured credit facilities and the limitation of the Company’s ability
to borrow additional funds in the future.
The agreements governing the Company’s secured credit facilities subject it to various financial and other restrictive covenants
with which the Company must comply on an ongoing or periodic basis. These covenants include, but are not limited to, restrictions on
the utilization of the funds and the maintenance of certain financial ratios. If the Company violate any of these covenants, the Company’s
outstanding debt under the Company’s secured credit facilities could become immediately due and payable, the Company’s lenders
could proceed against any collateral securing such indebtedness and the Company’s ability to borrow additional funds in the future may
be limited. Alternatively, the Company could be forced to refinance or renegotiate the terms and conditions of the Company’s secured
credit facilities, including the interest rates, financial and restrictive covenants and security requirements of the secured credit facilities,
on terms that may be significantly less favorable to the Company.
RISKS RELATED TO DOING BUSINESS IN CHINA AND OTHER COUNTRIES BESIDES THE UNITED STATES
The Company may face a severe operating environment during times of economic recession.
The sales volume of the Company’s core products is largely influenced by the demand for its customers’ end products which are
mostly sold in the Chinese markets. Future economic crises, either within China or without, may lead to a drastic drop in demand for
the Company’s products.
Inflation in China could negatively affect the Company’s profitability and growth.
China’s economy has experienced rapid growth, much of it due to the issuance of debt over the last few years. This debt-fueled
economic growth has led to growth in the money supply, causing rising inflation. If prices for the Company’s products rise at a rate that
is insufficient to compensate for the rise in the cost of production, it may harm the Company’s profitability. In order to control inflation,
the Chinese government has imposed controls on bank credit, limits on loans and other restrictions on economic activities. Such policies
have led to a slowing of economic growth. Additional measures could further slow economic activity in China, which could, in turn,
materially increase the Company’s costs while also reducing demand for the Company’s products.
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
The Chinese government’s macroeconomic policies could have a negative effect on the Company’s business and results of
operations.
The Chinese government has implemented various measures from time to time to control the rate of economic growth in the PRC.
Some of these measures may have a negative effect on the Company over the short or long term. Recently, to cope with high inflation
and economic imbalances, the Chinese government has tightened monetary policy and implemented floating exchange rate policy. In
addition, in order to alleviate some of the effects of unbalanced growth and social discontent, the Chinese government has enacted a
series of social programs and anti-inflationary measures. These, in turn, have increased the costs on the financial and manufacturing
sectors, without having alleviated the effects of high inflation and economic imbalances. The Chinese government’s macroeconomic
policies, even if effected properly, may significantly slow down China’s economy or cause great social unrest, all of which would have
a negative effect on the Company’s business and results of operations.
The economic, political and social conditions in China could affect the Company’s business.
Most of the Company’s business, assets and operations are located in China. The economy of China differs from the economies
of most developed countries in many respects, including government involvement, level of development, growth rate, control of foreign
exchange and allocation of resources. The economy of China has been transitioning from a planned economy to a more market-oriented
economy. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic
reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises,
a substantial portion of productive assets in China is still owned by the Chinese government.
In addition, the Chinese government continues to play a significant role in regulating industry by imposing industrial policies. It
also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
Therefore, the Chinese government’s involvement in the economy could adversely affect the Company’s business operations, results of
operations and/or financial condition.
Because the Company’s operations are mostly located outside of the United States and are subject to Chinese laws, any change
of Chinese laws may adversely affect its business.
Most of the Company’s operations are in the PRC, which exposes it to risks, such as exchange controls and currency restrictions,
currency fluctuations and devaluations, changes in local economic conditions, changes in Chinese laws and regulations, exposure to
possible expropriation or other PRC government actions, and unsettled political conditions. These factors may have a material adverse
effect on the Company’s operations or on its business, results of operations and financial condition.
The Company’s international expansion plans subject it to risks inherent in doing business internationally.
The Company’s long-term business strategy relies on the expansion of its international sales outside China by targeting markets,
such as the United States and Brazil. Risks affecting the Company’s international expansion include challenges caused by distance,
language and cultural differences, conflicting and changing laws and regulations, foreign laws, international import and export
legislation, trading and investment policies, foreign currency fluctuations, the burdens of complying with a wide variety of laws and
regulations, protectionist laws and business practices that favor local businesses in some countries, foreign tax consequences, higher
costs associated with doing business internationally, restrictions on the export or import of technology, difficulties in staffing and
managing international operations, trade and tariff restrictions, and variations in tariffs, quotas, taxes and other market barriers. These
risks could harm the Company’s international expansion efforts, which could in turn materially and adversely affect its business,
operating results and financial condition.
On September 17, 2012, the United States filed a trade case with the World Trade Organization, “WTO,” against the PRC with
respect to the PRC government’s purported provision of subsidies to the automobile and automobile-parts enterprises in the PRC. If the
WTO rules against China in this trade case, the cost of sales of the Company could increase due to the imposition of any tariff and/or
the Company’s ability to export products to the United States could be limited, which could affect the Company’s business and operating
results.
In addition, under Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC has adopted
additional disclosure requirements related to the source of certain “conflict minerals” for issuers for which such “conflict minerals” are
necessary to the functionality or production of a product manufactured, or contracted to be manufactured, by that issuer. The metals
covered by the rules include tin, tantalum, tungsten and gold, commonly referred to as “3TG.” If these materials are necessary to the
functionality or production of a product manufactured, or contracted to be manufactured, the rules require a reasonable country of origin
inquiry be conducted to determine if an issuer knows, or has reason to believe, that any of the minerals used in the production process
may have originated from the Democratic Republic of the Congo or an adjoining country. In such a case, if an issuer were not able to
determine that the minerals did not originate from a covered country or conclude that there is no reason to believe that the minerals used
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
in the production process may have originated in a covered country, that issuer could be required to perform supply chain due diligence
on members of its supply chain. Global supply chains can have multiple layers, thus the costs of complying with these new requirements
could be substantial. These new requirements may also reduce the number of suppliers that provide conflict-free metals, and may affect
a company’s ability to obtain products in sufficient quantities or at competitive prices. If the Company was to source such 3TG minerals
that are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, compliance costs with
these rules and/or the unavailability of raw materials could have a material adverse effect on the Company’s results of operations.
The Company faces risks associated with currency exchange rate fluctuations; any adverse fluctuation may adversely affect its
operating margins.
Although the Company is incorporated in the State of Delaware, in the United States, the majority of its current revenues are in
Chinese currency. Conducting business in currencies other than U.S. dollars subjects the Company to fluctuations in currency exchange
rates that could have a negative impact on its reported operating results. Fluctuations in the value of the U.S. dollar relative to other
currencies impact the Company’s revenues, cost of revenues and operating margins and result in foreign currency translation gains and
losses. Historically, the Company has not engaged in exchange rate hedging activities. Although the Company may implement hedging
strategies to mitigate this risk, these strategies may not eliminate its exposure to foreign exchange rate fluctuations and involve costs
and risks of their own, such as ongoing management time and expertise requirements, external costs to implement the strategy and
potential accounting implications.
If relations between the United States and China worsen, the Company’s stock price may decrease and the Company may have
difficulty accessing the U.S. capital markets.
At various times during recent years, the United States and China have had disagreements over political and economic issues.
Controversies may arise in the future between these two countries. Any political or trade controversies between the United States and
China could adversely affect the market price of the Company’s common stock and its ability to access U.S. capital markets.
The Chinese government could change its policies toward private enterprise, which could adversely affect the Company’s business.
The Company’s business is subject to political and economic uncertainties in China and may be adversely affected by China’s
political, economic and social developments. Over the past several years, the Chinese government has pursued economic reform policies
including the encouragement of private economic activity and greater economic decentralization. The Chinese government may not
continue to pursue these policies or may alter them to the Company’s detriment from time to time. Changes in policies, laws and
regulations, or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions or
prohibitions on dividend payments to stockholders, devaluations of currency or the nationalization or other expropriation of private
enterprises could have a material adverse effect on the Company’s business. Nationalization or expropriation could result in the total
loss of the Company’s investment in China.
Government control of currency conversion and future movements in exchange rates may adversely affect the Company’s
operations and financial results.
The Company receives most of its revenues in Chinese Renminbi (RMB). A portion of such revenues will be converted into other
currencies to meet the Company’s foreign currency obligations. Foreign exchange transactions under the Company’s capital account,
including principal payments in respect of foreign currency-denominated obligations, continue to be subject to significant foreign
exchange controls and require the approval of the State Administration of Foreign Exchange in China. These limitations could affect
the Company’s ability to obtain foreign exchange through debt or equity financing, or to obtain foreign exchange for capital expenditures.
The Chinese government controls its foreign currency reserves through restrictions on imports and conversion of RMB into foreign
currency. In July 2005, the Chinese government has adjusted its exchange rate policy from “Fixed Rate” to “Floating Rate.” From July
2005 to December 2013, the exchange rate between the RMB and the U.S. dollar appreciated from RMB1.00 to US$0.1205 to RMB
1.00 to US$0.1640. The Company believes that this significant appreciation will continue for the near future. Significant appreciation
of the RMB is likely to decrease the income of export products and decrease the Company’s cash flow.
Because the Chinese legal system is not fully developed, the Company and its security holders’ legal protections may be limited.
The Chinese legal system is based on written statutes and their interpretation by the Supreme People’s Court. Although the Chinese
government introduced new laws and regulations to modernize its business, securities and tax systems on January 1, 1994, China does
not yet possess a comprehensive body of business law. Because Chinese laws and regulations are relatively new, interpretation,
implementation and enforcement of these laws and regulations involve uncertainties and inconsistencies and it may be difficult to enforce
contracts. In addition, as the Chinese legal system develops, changes in such laws and regulations, their interpretation or their
enforcement may have a material adverse effect on the Company’s business operations. Moreover, interpretative case law does not have
the same precedential value in China as in the United States, so legal compliance in China may be more difficult or expensive.
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
It may be difficult to serve the Company with legal process or enforce judgments against its management or the Company.
Most of the Company’s assets are located in China and twelve of its directors and officers are non-residents of the United States,
and all or substantial portions of the assets of such non-residents are located outside the United States. As a result, it may not be possible
to effect service of process within the United States upon such persons to originate an action in the United States. Moreover, there is
uncertainty that the courts of China would enforce judgments of U.S. courts against the Company, its directors or officers based on the
civil liability provisions of the securities laws of the United States or any state, or an original action brought in China based upon the
securities laws of the United States or any state.
The Company may be subject to fines and legal sanctions imposed by State Administration of Foreign Exchange (SAFE) or other
Chinese government authorities if it or its Chinese directors or employees fail to comply with recent Chinese regulations relating to
employee share options or shares granted by offshore listed companies to Chinese domestic individuals.
On December 25, 2006, the People’s Bank of China, or PBOC, issued the Administration Measures on Individual Foreign
Exchange Control, and the corresponding Implementation Rules were issued by SAFE on January 5, 2007. Both of these regulations
became effective on February 1, 2007. According to these regulations, all foreign exchange matters relating to employee stock holding
plans, share option plans or similar plans with Chinese domestic individuals’ participation require approval from the SAFE or its
authorized branch. On March 28, 2007, the SAFE issued the Application Procedure of Foreign Exchange Administration for Domestic
Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed Company, or the Stock Option Rule.
Under the Stock Option Rule, Chinese domestic individuals who are granted share options or shares by an offshore listed company are
required, through a Chinese agent or Chinese subsidiary of the offshore listed company, to register with the SAFE and complete certain
other procedures. As the Company is an offshore listed company, its Chinese domestic directors and employees who may be granted
share options or shares shall become subject to the Stock Option Rule. Under the Stock Option Rule, employees stock holding plans,
share option plans or similar plans of offshore listed companies with Chinese domestic individuals’ participation must be filed with the
SAFE. After the Chinese domestic directors or employees exercise their options, they must apply for the amendment to the registration
with the SAFE. As of December 31, 2013, the Company has completed such SAFE registration and other related procedures according
to PRC law. If the Company or its Chinese domestic directors or employees fail to comply with these regulations in the future, the
Company or its Chinese domestic directors or employees may be subject to fines or other legal sanctions imposed by the SAFE or other
Chinese government authorities.
Capital outflow policies in China may hamper the Company’s ability to declare and pay dividends to its stockholders.
China has adopted currency and capital transfer regulations. These regulations may require the Company to comply with complex
regulations for the movement of capital. Although the Company’s management believes that it will be in compliance with these
regulations, should these regulations or the interpretation of them by courts or regulatory agencies change, the Company may not be
able to pay dividends to its stockholders outside of China. In addition, under current Chinese law, the Company’s joint-ventures and
wholly-owned enterprise in China must retain a reserve equal to 10% of its net income after taxes, not to exceed 50% of its registered
capital. Accordingly, this reserve will not be available to be distributed as dividends to the Company’s stockholders. The Company
presently does not intend to pay dividends for the foreseeable future. The Company’s board of directors intends to follow a policy of
retaining all of its earnings to finance the development and execution of its strategy and the expansion of its business.
Registered public accounting firms in China, including the Company’s independent registered public accounting firm, are not
inspected by the U.S. Public Company Accounting Oversight Board, which deprives the Company and its investors of the benefits of
such inspection.
Auditors of companies whose shares are registered with the U.S. Securities and Exchange Commission and traded publicly in the
United States, including the Company’s independent registered public accounting firm, must be registered with the U.S. Public Company
Accounting Oversight Board (the “PCAOB”) and are required by the laws of the United States to undergo regular inspections by the
PCAOB to assess their compliance with the laws of the United States and professional standards applicable to auditors. The Company’s
independent registered public accounting firm is located in, and organized under the laws of, the PRC, which is a jurisdiction where the
PCAOB, notwithstanding the requirements of U.S. law, is currently unable to conduct inspections without the approval of the Chinese
authorities, which approval has not been granted for auditors such as the Company’s independent registered public accounting firm.
This lack of PCAOB inspections in China prevents the PCAOB from fully evaluating audits and quality control procedures of the
Company’s independent registered public accounting firm. As a result, the Company and investors in its common stock are deprived of
the benefits of such PCAOB inspections.
The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of
the Company’s independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors
outside of China that are subject to PCAOB inspections, which could cause investors and potential investors in the Company’s stock to
lose confidence in its audit procedures and reported financial information and the quality of its financial statements.
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
If a recent initial decision rendered by the Administrative Law Judge (the “ALJ”) in administrative proceedings brought by the
SEC against the Big Four PRC-based accounting firms, including our independent registered public accounting firm, becomes final,
we could be unable to timely file future financial statements in compliance with the requirements of the Securities Exchange Act of 1934.
In December 2012, the SEC instituted administrative proceedings against the Big Four PRC-based accounting firms, including
our independent registered public accounting firm, alleging that these firms had violated U.S. securities laws and the SEC’s rules and
regulations thereunder by failing to provide to the SEC the firms’ audit work papers with respect to certain PRC-based companies that
are publicly traded in the United States. On January 22, 2014, the ALJ presiding over the matter rendered an initial decision that each
of the firms had violated the SEC’s rules of practice by failing to produce audit workpapers to the SEC. The initial decision censured
each of the firms and barred them from practicing before the SEC for a period of six months. The Big Four PRC-based accounting firms
recently appealed the ALJ’s initial decision to the SEC. The ALJ’s decision does not take effect unless and until it is endorsed by the
SEC. Any SEC endorsement or other determination could be appealed by the accounting firms through the U.S. federal courts. While
we cannot predict the outcome of the SEC’s review or that of any subsequent appeal process, if the accounting firms are ultimately
temporarily denied the ability to practice before the SEC, our ability to file our financial statements in compliance with SEC requirements
could be impacted. A determination that we have not timely filed financial statements in compliance with SEC requirements could
ultimately lead to the delisting of our common stock from NASDAQ or the termination of the registration of our common stock under
the Securities Exchange Act of 1934, or both, which would substantially reduce or effectively terminate the trading of our common
stock in the United States.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2. PROPERTIES
The Company’s headquarters are located at No. 1 Henglong Road, Yu Qiao Development Zone, Shashi District, Jing Zhou City
Hubei Province, the PRC. Set forth below are the manufacturing facilities operated by each joint venture. The Company has forty-five
to fifty years long-term rights to use the lands and buildings (in thousands of USD, except for references to area in square meters).
Total Area
(sq.m.)
Building Area
(sq.m.)
Original Cost of
Equipment
Site
Name of Entity
Henglong
Product
Automotive Parts
Jiulong
Power Steering Gear
97,818 (1)
13,393
39,478
20,226 $
13,707 $
23,728 $
Automotive Steering Gear
Steering Pumps
Electric Power Steering
Sensor Modular
Shenyang
Chongqing
Jielong
USAI
Hubei Henglong Automotive Steering Gear
Wuhu
Automotive Steering Gear
Total
35,354
17,188
-
-
170,520
83,705
457,456
10,425 $
10,413 $
- $
- $
65,749 $
15,273 $
159,521 $
51,404 Jingzhou City, Hubei Province
- Wuhan City, Hubei Province
34,847 Jingzhou City, Hubei Province
Shenyang City, Liaoning
Province
5,829
2,245 Zhuji City, Zhejiang Province
3,830 Wuhan City, Hubei Province
960 Wuhan City, Hubei Province
14,804 Jingzhou City, Hubei Province
4,407 Wuhu City, Anhui Province
118,326
(1)
The total area of the manufacturing facilities of Henglong was reduced from 225,221 square meters as of December 31, 2012 to
97,818 square meters as of December 31, 2013. The reduction was due to the Company’s sale of an idle land use right, see note
20.
The Company is not involved in investments in (i) real estate or interests in real estate, (ii) real estate mortgages, and (iii) securities
of or interests in persons primarily engaged in real estate activities, as all of its land rights are used for production purposes.
ITEM 3. LEGAL PROCEEDINGS
Securities Action - Southern District of New York. On October 25, 2011, a purported securities class action, the “Securities Action,”
was filed in the United States District Court for the Southern District of New York on behalf of all purchasers of the Company’s securities
between March 25, 2010 and March 17, 2011. On February 24, 2012, the plaintiffs filed an amended complaint, changing the purported
class period to between May 12, 2009 and March 17, 2011. The amended complaint alleges that the Company, certain of its present
officers and directors, and the Company’s former independent accounting firm violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, and the rules promulgated thereunder, and seeks unspecified damages. The Company filed a motion to dismiss
the amended complaint, which was fully briefed on April 18, 2012. On August 8, 2012, the court denied the Company’s motion to
dismiss the amended complaint. On September 4, 2012, the Company filed an answer to the amended complaint. On January 15, 2013,
plaintiffs filed a motion to certify the purported class, which was fully briefed on April 8, 2013. On May 31, 2013, the court denied
plaintiffs’ motion to certify the purported class, and, on July 3, 2013, the court issued its order and opinion. On July 17, 2013, plaintiffs
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
filed a petition for permission to appeal the order denying class certification, and, on August 1, 2013, the Company filed an answer in
opposition to the petition. On October 23, 2013, the Court of Appeals for the Second Circuit denied plaintiffs’ petition for permission
to appeal. On December 6, 2013, plaintiffs filed a motion for preliminary approval of a settlement with the Company’s former
independent accounting firm and certification of a proposed settlement class. On January 7, 2014, the district court held a status
conference. On January 15, 2014, the district court denied plaintiffs’ motion for preliminary approval of settlement and certification of
a proposed settlement class. On February 20, 2014, the district court held a telephonic status conference regarding plaintiffs’ remaining
individual claims and issued a scheduling order setting deadlines for fact and expert discovery (May 30, 2014 and June 30, 2014,
respectively), motions for summary judgment (August 1, 2014), and pretrial materials (September 25, 2014). The Company and
plaintiffs have reached a settlement in principle and, on March 28, 2014, entered into a settlement agreement, which includes a dismissal
of all claims by plaintiffs against the Company and its current and former officers and directors, with no admission of any wrongdoing
or liability. The settlement is not material to the consolidated financial statements for the year ended December 31, 2013.
Derivative Action - Delaware Chancery Court. On December 23, 2011, a purported shareholder derivative action was filed in the
Court of Chancery of the State of Delaware, the “Court of Chancery,” on behalf of the Company. The complaint alleged that certain of
the Company’s current officers and directors breached their fiduciary duties to the Company in relation to the Company’s accounting
of convertible notes issued in February 2008. On January 25, 2012, a second purported shareholder derivative action was filed in the
Court of Chancery on behalf of the Company. On February 3, 2012, the Court of Chancery consolidated the two cases, which were
stayed pending the outcome of the motion to dismiss in the Securities Action. On October 23, 2012, the derivative plaintiffs filed a
consolidated amended complaint on behalf of the Company, the “Derivative Action.” The consolidated complaint alleged that certain
of the Company’s current officers and directors breached their fiduciary duties to the Company in relation to the Company’s accounting
of the convertible notes issued in February 2008. The consolidated complaint set forth three causes of action for breach of fiduciary
duties, unjust enrichment and insider trading. On January 7, 2013, the Company filed a motion to dismiss the Derivative Action. That
motion was fully briefed on February 28, 2013, and oral argument was held before the Court of Chancery on May 6, 2013. On August
30, 2013, the Court of Chancery dismissed all of the derivative plaintiffs’ claims with prejudice. The time for the derivative plaintiffs to
appeal the Court of Chancery’s decision expired on September 30, 2013 and, accordingly, the Derivative Action has terminated.
Other than the above, the Company is not a party to any pending or, to the best of the Company’s knowledge, any threatened legal
proceedings. In addition, no director, officer or affiliate of the Company, or owner of record of more than five percent of the securities
of the Company, or any associate of any such director, officer or security holder is a party adverse to the Company or has a material
interest adverse to the Company in reference to pending litigation.
ITEM 4. MINE SAFETY DISCLOURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
MARKET PRICES OF COMMON STOCK
The Company’s common stock has been traded on the NASDAQ Capital Market under the symbol “CAAS.” The high and low
bid intra-day prices of the common stock in 2013 and 2012 were reported on NASDAQ for the time periods indicated on the table below.
Accordingly, the table below contains the high and low bid closing prices of the common stock as reported on the NASDAQ for the
time periods indicated.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
STOCKHOLDERS
Price Range
2013
2012
High
Low
High
Low
$
$
$
$
5.99 $
5.53 $
10.00 $
8.78 $
4.50 $
4.01 $
5.59 $
6.32 $
7.41 $
7.18 $
4.40 $
5.29 $
3.52
3.80
3.59
3.88
The Company’s common shares are issued in registered form. Securities Transfer Corporation in Frisco, Texas is the registrar and
transfer agent for the Company’s common stock. As of December 31, 2013, there were 28,043,019 shares of the Company’s common
stock (excluding 217,283 shares of the Company’s treasury stock) issued and outstanding and the Company had approximately 57
stockholders of record.
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
DIVIDENDS
The Company has never declared or paid any cash dividends on its common stock and it does not anticipate paying any cash
dividends in the foreseeable future. The Company currently intends to retain future earnings, if any, to finance operations and the
expansion of its business. Any future determination to pay cash dividends will be at the discretion of the Company’s board of directors
and will be based upon the Company’s financial condition, operating results, capital requirements, plans for expansion, restrictions
imposed by any financing arrangements and any other factors that the Company’s board of directors deems relevant.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The securities authorized for issuance under equity compensation plans at December 31, 2013 are as follows:
Equity compensation plans approved by security holders
Plan category
Number of securities to be
issued upon exercise of
outstanding options
Weighted average
exercise price of
outstanding options
8.78
Number of securities
remaining available for
future issuance
1,676,150
2,200,000 $
The stock option plan was approved at the Annual Meeting of Stockholders held on June 28, 2005, and the maximum common
shares for issuance under this plan are 2,200,000. The term of the plan is 10 years.
ITEM 6. SELECTED FINANCIAL DATA
Not Applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and
the related notes thereto and other financial information contained elsewhere in this report.
GENERAL OVERVIEW
China Automotive Systems, Inc., including, when the context so requires, its subsidiaries and the subsidiaries’ interests in the
Sino-foreign joint ventures described below, is referred to herein as the “Company.” The Company, through its Sino-foreign joint
ventures, engages in the manufacture and sales of automotive systems and components in the People’s Republic of China, the “PRC” or
“China.” Genesis, a company incorporated on January 3, 2003 under the Companies Ordinance of Hong Kong as a limited liability
company, is a wholly-owned subsidiary of the Company. Henglong USA Corporation, “HLUSA,” which was incorporated on January
8, 2007 in Troy, Michigan, is a wholly-owned subsidiary of the Company, and mainly engages in marketing of automotive parts in
North America, and provides after sales service and research and development support accordingly. Furthermore, the Company owns
the following aggregate net interests in the following wholly-owned subsidiaries and joint ventures organized in the PRC as of December
31, 2013 and 2012.
Name of Entity
Henglong
Jiulong
Shenyang
USAI
Wuhu
Jielong
Hubei Henglong (1)
Testing Center
Beijing Henglong
Chongqing Henglong(2)
Brazil Henglong (3)
Henglong
Aggregate Net Interest
December 31, 2013
December 31, 2012
80.00 %
81.00 %
70.00 %
83.34 %
77.33 %
85.00 %
100.00 %
80.00 %
50.00 %
70.00 %
80.00 %
80.00 %
80.00 %
81.00 %
70.00 %
83.34 %
77.33 %
85.00 %
100.00 %
80.00 %
50.00 %
70.00 %
80.00 %
80.00 %
(1)
On March 7, 2007, Genesis established Hubei Henglong (formerly known as Jingzhou Hengsheng Automotive System Co.,
Ltd), its wholly-owned subsidiary, to engage in the production and sales of automotive steering systems. The registered capital
of Hubei Henglong at the time of establishment was $10.0 million. On February 10, 2010, the registered capital of Hubei
Henglong was increased to $16.0 million. On October 12, 2011, the board of directors of the Company approved a
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
reorganization of the Company’s subsidiaries operating in China. As a result of the reorganization, all of Genesis’s equity
interests of its subsidiaries operating in China, except for Shenyang, were transferred to Hubei Henglong, the Company’s new
China-based holding company. The reorganization was completed on January 19, 2012, subsequent to which the registered
capital of Hubei Henglong was increased to $39.0 million. As the reorganized entities were under common control of the
Company, the reorganization did not have any impact on the Company’s consolidated financial position or results of operations
and should not impact the tax treatment of the Company or its subsidiaries in any material respect. On July 8, 2012, Hubei
Henglong changed its name to Hubei Henglong Automotive System Group Co., Ltd.
(2)
(3)
On February 21, 2012, Hubei Henglong and SAIC-IVECO established a Sino-foreign joint venture company, Chongqing
Henglong, to design, develop and manufacture both hydraulic and electric power steering systems and parts. The new joint
venture is located in Chongqing City and has a registered capital of RMB60.0 million, of which RMB42.0 million, or 70%, is
held by Hubei Henglong. The registered capital of Chongqing Henglong was fully contributed by Hubei Henglong in cash of
$6.7 million (equivalent to RMB42.0 million) in January and February 2012 and by SAIC-IVECO in property, plant and
equipment with a fair value of $2.8 million (equivalent to RMB18.0 million) in April 2012.
On August 21, 2012, Hubei Henglong established a joint venture company with two Brazilian citizens, Ozias Gaia Da Silva
and Ademir Dal’ Evedove. The joint-venture company is Brazil Henglong. Brazil Henglong engages mainly in the import and
sales of automotive parts in Brazil. The new joint venture is located in Brazil and has a registered capital of $1.0 million
(equivalent to BLR1.6 million), of which $0.8 million (equivalent to BLR1.3 million), or 80%, is held by Hubei Henglong, and
of which $0.2 million (equivalent to BLR0.3 million), or 20%, is held by Mr. Ozias Gaia Da Silva and Mr. Ademir Dal’
Evedove. As of December 31, 2013, Hubei Henglong and Mr. Ozias Gaia Da Silva and Mr. Ademir Dal’ Evedove have
completed their capital contributions.
RESULTS OF OPERATIONS
Net Sales and Cost of Sales
2013 VERSUS 2012 COMPARATIVE
For the years ended December 31, 2013 and 2012, net sales and cost of sales are summarized as follows (figures are in thousands
of USD):
Net Sales
Cost of sales
Change
2012
2013
$ 260,636 $ 187,051 $ 73,585
77,691 71,120
6,571
41,536 31,068 10,468
26,333 30,687 (4,354)
Henglong
Jiulong
Shenyang
Wuhu
Hubei
Henglong
7,125
48,087 40,962
Other Sectors 36,444 47,202 (10,758)
(75,569) (72,085 ) (3,484)
Eliminations
$ 415,158 $ 336,005 $ 79,153
Total
2013
2012
Change
39.3 % $ 215,481 $ 147,737 $ 67,744
4,539
9,457
(4,291)
9.2 67,989
33.7 36,752
-14.2 24,527
63,450
27,295
28,818
17.4 39,208
-22.8 30,638
35,445
3,763
43,356 (12,718)
4.8 (76,069) (70,847 ) (5,222)
23.6 % $ 338,526 $ 275,254 $ 63,272
45.9 %
7.2
34.6
-14.9
10.6
-29.3
7.4
23.0 %
Net Sales
Net sales were $415.2 million for the year ended December 31, 2013, compared with $336.0 million for the year ended December
31, 2012, representing an increase of $79.2 million, or 23.6%. The increase was mainly due to the increased sales of newly developed
products to North America and the continuing growth of automotive market demand in China.
The main market for the Company’s products is China. The Chinese government issued an incentive policy relating to purchase
of low-emission cars and fuel-efficient cars in May 2012. Encouraged by such incentive policy, the sales volume of passenger vehicles
in the China market increased by 15.7% in 2013 as compared to 2012.The Company’s sales volume of steering gear for passenger
vehicles increased by 23.9% as compared to 2012. The Company’s higher rate of increase was mainly due to the introduction of certain
new products to the market and improvement in the quality of some of the old products, which resulted in the expansion of the
Company’s market share in China, especially among the joint-brands’ auto customers.
In the third quarter of 2013, the Chinese government increased investment in infrastructure industries, such as railways and
highways, which led to an increase of 6.4% in the sales of commercial vehicles in the China market. The Company’s sales of steering
gears for commercial vehicles, one of the main products of the Company, also increased by 11.0%.
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
To compete with joint-brands' cars and address the over-capacity issue, the domestic brands’ car manufacturers, which are the
Company's main customers, had to lower their products' price to attract end customers. The price pressure was passed on from the
domestic brands’ car manufacturers to the Company, which led to continuing price decreases for the Company’s main products.
The Company had an increase in sales volume leading to a sales increase of $78.4 million, a decrease in selling price leading to a
sales decrease of $8.1 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a sales
increase of $8.9 million.
Further analysis is as follows:
—
Net sales for Henglong were $260.6 million for the year ended December 31, 2013, compared with $187.1 million for the year
ended December 31, 2012, representing an increase of $73.5 million, or 39.3%, which was mainly due to an increase in sales
volume with a sales increase of $76.6 million to the joint-brands auto companies and the effect of foreign currency translation of
the RMB against the U.S. dollar resulting in a sales increase of $4.2 million, offset by a decrease in selling prices, which led to a
sales decrease of $7.3 million.
— Net sales for Jiulong were $77.7 million for the year ended December 31, 2013, compared with $71.1 million for the year ended
December 31, 2012, representing an increase of $6.6 million, or 9.2%, which was mainly due to an increase in sales volume with
a sales increase of $6.6 million due to an increase in the demand for commercial vehicles in the Chinese market and the effect of
foreign currency translation of the RMB against the U.S. dollar, which led to a sales increase of $1.5 million, which was offset
by a decrease in selling prices, which led to a sales decrease of $1.5 million.
— Net sales for Shenyang were $41.5 million for the year ended December 31, 2013, compared with $31.1 million for the year
ended December 31, 2012, representing an increase of $10.4 million, or 33.7%. The net sales increase was mainly due to an
increase in sales volumes with a sales increase of $9.5 million, the effect of foreign currency translation of the RMB against the
U.S. dollar, which led to a sales increase of $0.7 million, and an increase in selling price which led to a sales increase of $0.2
million.
— Net sales for Wuhu were $26.3 million for the year ended December 31, 2013, compared with $30.7 million for the year ended
December 31, 2012, representing a decrease of $4.4 million, or 14.2%. Since the majority of the products of Wuhu was sold to
local Chinese brand auto distributors, the decreasing demand for local Chinese brand autos from end customers due to the
aggressive pricing strategy adopted by Sino-foreign joint venture brands auto manufacturers led to the decrease in sales volumes
and prices for Wuhu's products. There was a decrease in sales volumes with a sales decrease of $5.0 million, a decrease in selling
prices, which led to a sales decrease of $0.1 million, and the effect of foreign currency translation of the RMB against the U.S.
dollar, which led to a sales increase of $0.7 million.
— Net sales for Hubei Henglong were $48.1 million for the year ended December 31, 2013, compared with $41.0 million for the
year ended December 31, 2012, representing an increase of $7.1 million, or 17.4%. All of Hubei Henglong’s products were sold
to the United States. The net sales increase was mainly due to sales of the newly developed products to a United States customer.
An increase in sales volumes led to a sales increase of $4.2 million, an increase in selling prices, which led to a sales increase of
$2.0 million, and the effect of foreign currency translation of the RMB against the U.S. dollar, which led to a sales increase of
$0.9 million.
— Net sales for Other Sectors were $36.4 million for the year ended December 31, 2013, compared with $47.2 million for the year
ended December 31, 2012, representing a decrease of $10.8 million or 22.8%, mainly due to lower sales volume of the new
products launched in 2013 as compared to the sales volume of the old products sold in 2012, which led to a sales decrease of $9.1
million.
Cost of Sales
For the year ended December 31, 2013, the cost of sales was $338.5 million, compared with $275.3 million for the year ended
December 31, 2012, an increase of $63.2 million, or 23.0%. The increase in cost of sales was mainly due to a net increase in sales
volumes with a cost of sales increase of $72.7 million, a decrease in unit cost with a cost of sales decrease of $17.5 million and the
appreciation of the RMB against the U.S. dollar with a cost of sales increase of $8.0 million. The decrease in the unit cost of sales was
primarily due to a decrease in the costs of raw materials, such as steel. Further analysis is as follows:
—
Cost of sales for Henglong was $215.5 million for the year ended December 31, 2013, compared with $147.8 million for the year
ended December 31, 2012, representing an increase of $67.7 million, or 45.9%. The increase in cost of sales was mainly due to
an increase in sales volumes resulting in a cost of sales increase of $71.1 million, the adoption of technical innovations in
production processes in 2013 and a decrease in unit material costs leading to a cost of sales decrease of $6.7 million, which were
offset by the effect of foreign currency translation of the RMB against the U.S. dollar with a cost of sales increase of $3.3 million.
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
—
—
—
—
—
Cost of sales for Jiulong was $68.0 million for the year ended December 31, 2013, compared with $63.5 million for the year
ended December 31, 2012, representing an increase of $4.5 million, or 7.2%. The increase in cost of sales was mainly due to an
increase in sales volumes resulting in a cost of sales increase of $5.5 million, a decrease in unit cost resulting in a cost of sales
decrease of $2.4 million and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of
sales increase of $1.4 million.
Cost of sales for Shenyang was $36.8 million for the year ended December 31, 2013, compared with $27.3 million for the year
ended December 31, 2012, representing an increase of $9.5 million, or 34.6%. The increase in cost of sales was mainly due to an
increase in sales volumes resulting in a cost of sales increase of $9.6 million, a decrease in unit cost resulting in a cost of sales
decrease of $0.8 million and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of
sales increase of $0.7 million.
Cost of sales for Wuhu was $24.5 million for the year ended December 31, 2013, compared with $28.8 million for the year ended
December 31, 2012, representing a decrease of $4.3 million, or 14.9%. The decrease in cost of sales was mainly due to a decrease
in sales volumes resulting in a cost of sales decrease of $4.7 million and a decrease in unit cost resulting in a cost of sales decrease
of $0.3 million, which were offset by the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a
cost of sales increase of $0.7 million.
Cost of sales for Hubei Henglong was $39.2 million for the year ended December 31, 2013, compared with $35.5 million for the
year ended December 31, 2012, representing an increase of $3.7 million, or 10.6%. The net increase in cost of sales was mainly
due to an increase in sales volumes resulting in a cost of sales increase of $4.1 million, a decrease in unit cost resulting in a cost
of sales decrease of $1.2 million and the appreciation of the RMB against U.S. dollar resulting in a cost of sales increase of $0.8
million.
Cost of sales for Other Sectors was $30.6 million for the year ended December 31, 2013, compared with $43.4 million for the
year ended December 31, 2012, representing a decrease of $12.8 million, or 29.3%. The decrease in cost of sales was mainly due
to a decrease in sales volumes resulting in a cost of sales decrease of $7.6 million and a decrease in unit cost resulting in a cost
of sales decrease of $6.1 million, which were offset by the effect of foreign currency translation of the RMB against the U.S.
dollar resulting in a cost of sales increase of $0.9 million.
Gross margin was 18.5% for the year ended December 31, 2013, representing a 0.4% increase from 18.1% for the year ended
December 31, 2012, which was primarily due to an increase in sales volume of high gross margin products.
Gain On Other Sales
Gain on other sales mainly consisted of net amount retained from sales of materials and scraps. For the year ended December 31,
2013, gain on other sales amounted to $7.6 million, while it amounted to $4.4 million for the year ended December 31, 2012. T he
significant increase of $3.2 million, or 72.7%, was mainly due to the Company’s sale of part of its land use rights in the third quarter of
2013, which resulted in a recognition of a gain of $4.1 million (before tax) during the year ended December 31, 2013, representing the
difference between the total selling price of $4.6 million and the net book value of the land use rights of $0.5 million.
Selling Expenses
For the years ended December 31, 2013 and 2012, selling expenses are summarized as follows (figures are in thousands of USD):
Year Ended December 31,
2012
2013
Salaries and wages
Office expense
Transportation expense
Rent expense
Other expense
Total
$
$
3,919 $
1,928
5,450
1,883
151
13,331 $
Increase/(Decrease) Percentage
1,423
354
1,197
853
(53)
3,774
57.0 %
22.5
28.1
82.8
-26.2
39.5 %
2,496 $
1,574
4,253
1,030
204
9,557 $
Selling expenses were $13.3 million for the year ended December 31, 2013. As compared to $9.6 million for the year ended
December 31, 2012, there was an increase of $3.7 million, or 39.5%, which was mainly due to:
.
.
an increase in salaries and wages for the Company’s salesmen, as a result of higher sales commissions paid for their improved
sales performance in 2013;
an increase in office expenses (including office supplies, travel expenses and meeting expenses), as a result of an increase in
marketing activities;
CHINA AUTOMOTIVE SYSTEMS, INC.
- 20 -
FY2013 ANNUAL REPORT
.
.
an increase in transportation expenses due to an increase in sales activities and expansion of the Company’s domestic and
international markets, which are located farther away from the Company’s production bases; and
an increase in rent expense due to the increase of product warehouse rental space for the expansion of sales and commercial
networks.
General and Administrative Expenses
For the years ended December 31, 2013 and 2012, general and administrative expenses are summarized as follows (figures are in
thousands of USD):
Salaries and wages
Labor insurance expenses
Maintenance and repair expenses
Property and other taxes
Provision/(recovery) for bad debts
Office expense
Depreciation and amortization expense
Listing expenses (1)
Others expenses
Total
Year Ended December 31,
2012
2013
$
$
4,777 $
1,854
510
1,490
60
1,330
822
2,387
23
13,253 $
4.8 %
Increase/(Decrease) Percentage
218
305
(217)
231
(14)
60
(117)
88
(237)
317
19.7
-29.9
18.4
-19.2
4.8
-12.5
3.8
-91.2
4,559 $
1,549
727
1,259
74
1,270
939
2,299
260
12,936 $
2.5 %
(1)
Listing expenses consisted of the costs associated with legal, accounting and auditing fees for operating a public company. The
expenses also included share-based compensation expense for options granted to members of the audit committee.
General and administrative expenses were $13.3 million for the year ended December 31, 2013, compared with $12.9 million
for the year ended December 31, 2012, representing an increase of $0.3 million, or 2.5%.
The analysis of expense items with significant fluctuation is as follows:
. An increase in salaries and wages mainly due to the increase in management’s performance bonus in 2013 as the Company
achieved the performance targets as pre-determined by the board of directors, while the Company did not achieve its
performance targets for 2012.
. An increase in labor insurance expenses mainly because of the Company’s improvement in welfare benefits for the
management and improvement of certain labor protection facilities.
. There was a decrease in maintenance and repair expenses in 2013, which was mainly due to the scale down of repair and
maintenance projects on the Company’s office facilities in 2013.
. There was an increase in property tax and other taxes in 2013, which was mainly due to the Company’s housing property
increase in 2013.
. There was an increase in office expense which was mainly due to the Company’s replacement of office appliances.
. There was a decrease in depreciation and amortization expense, which was mainly due to certain office equipment that
continued to be utilized in 2013 having been fully depreciated at the beginning of the year.
Research and Development Expenses
Research and development expenses, “R & D” expenses, were $20.9 million for the year ended December 31, 2013 as compared
to $14.9 million for the year ended December 31, 2012, an increase of $6.0 million, or 40.3%, which was mainly due to the development
and trial production of EPS. Expenses for mold improvement increased by $1.0 million, external technical support fees increased by
$0.9 million and the salaries and wages expenses of research and development related staff increased by $4.1 million.
The global automotive parts industry is highly competitive; winning and maintaining new business requires suppliers to rapidly
produce new and innovative products on a cost-competitive basis. In 2013, foreign OEMs significantly increased their demand for EPS,
but the related technology in China was still in the research and development and testing stage. In order to expand into the market for
EPS, the Company increased its investment in the research and development of EPS in 2013, including assigning the Company’s senior
technicians and advanced manufacturing equipment to EPS, establishing the EPS trail-production department, hiring technologists and
purchasing advanced technology and testing equipment. At present, the Company has developed several types of EPSs suitable for
small-engine cars, and has sold certain quantities of EPS.
Income from Operations
CHINA AUTOMOTIVE SYSTEMS, INC.
- 21 -
FY2013 ANNUAL REPORT
Income from operations was $36.7 million for the year ended December 31, 2013 as compared to $27.8 million for the year ended
December 31, 2012, an increase of $8.9 million, or 32.0%, which mainly consisted of an increase of $15.8 million, or 26.0%, in gross
profit and an increase of $3.2 million, or 72.7%, in gain on other sales (such as raw materials and property, plant and equipment
sales), offset by an increase in operating expenses of $10.1 million, or 27.0%.
Other Income, Net
Other income, net was $1.1 million for the year ended December 31, 2013 as compared to $0.5 million for the year ended
December 31, 2012, an increase of $0.6 million, or 120.0%, primarily as a result of an increase in the unspecific purpose subsidies being
recognized in 2013.
The Company’s government subsidies consisted of specific subsidies and other subsidies. Specific subsidies are the subsidies that
the Chinese government has specified its purpose for, such as product development and renewal of production facilities. Other subsidies
are the subsidies that the Chinese government has not specified its purpose for and are not tied to future trends or performance of the
Company; receipt of such subsidy income is not contingent upon any further actions or performance of the Company and the amounts
do not have to be refunded under any circumstances. The Company recorded specific purpose subsidies as advances payable when
received. For specific purpose subsidies, upon government acceptance of the related project development or asset acquisition, the
specific purpose subsidies will be recognized to reduce related R&D expenses or cost of asset acquisition. The unspecific purpose
subsidies are recognized as other income upon receipt as future performance by the Company is not required.
Financial Income / (Expenses), Net
Financial income, net was $0.4 million for the year ended December 31, 2013 as compared to financial expenses, net of $2.2
million for the year ended December 31, 2012, a decrease of $2.6 million, or 118.2%, primarily as a result of: (a) the redemption of all
outstanding convertible notes on May 25, 2012, the “Redemption,” which led to a decrease in financial expenses of $1.6 million; and
(b) an increase in interest income of $1.4 million that was generated from the higher balance of time deposits during 2013.
Loss on Change in Fair Value of Derivatives
Loss on change in fair value of derivatives was $0.5 million for the year ended December 31, 2012. Due to the Redemption, there
was no gain or loss on change of fair value of derivative associated with convertible notes for the year ended December 31, 2013.
Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that
may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition,
option-based techniques are highly volatile and sensitive to changes in the trading market price of the Company's common stock, which
has a high estimated volatility. Derivative financial instruments are initially and subsequently carried at fair values and gain or loss on
change in fair value of derivative liabilities is equal to the difference between the beginning and ending balances of the Company's
derivative liabilities (see Note 23 to the consolidated financial statements in this Report). As of January 1, 2012 and December 31, 2012,
the Company calculated the fair value of derivative liabilities at $0.5 million and $0, respectively. Therefore, the Company recorded a
loss on change in fair value of derivative of $0.5 million for the year ended December 31, 2012.
Gain on Redemption of Convertible Notes
For the year ended December 31, 2012, the Company recorded a gain of $1.4 million for the Redemption. There was no gain on
redemption of convertible notes for the year ended December 31, 2013.
Income before Income Tax Expenses and Equity in Earnings of Affiliated Companies
Income before income tax expenses and equity in earnings of affiliated companies was $38.2 million for the year ended December
31, 2013 compared with $27.1 million for the year ended December 31, 2012, an increase of $11.1 million, or 41.0%, including an
increase in income from operations of $8.9 million, an increase in gain on other income of $0.6 million, a decrease in financial expense
of $2.6 million, a decrease in loss on change in fair value of derivative of $0.5 million and a decrease in gain on redemption of convertible
notes of $1.4 million.
Income Taxes
Income tax expense was $5.5 million for the year ended December 31, 2013 compared to $4.4 million for the year ended December
31, 2012, representing an increase of $1.1 million, or 25.0%, which was mainly due to an increase in income before tax and a decrease
in effective tax rate. The effective tax rate decreased from 16.2% for the year ended December 31, 2012 to 14.4% for the year ended
December 31, 2013, primarily due to an increase in technological development expenses of the Company in 2013. According to PRC
tax regulations, the Company can deduct up to 150% of the technological development expenses when its tax payable was calculated.
CHINA AUTOMOTIVE SYSTEMS, INC.
- 22 -
FY2013 ANNUAL REPORT
Income from Continuing Operations
Income from continuing operations was $33.0 million for the year ended December 31, 2013, compared with $22.8 million for
the year ended December 31, 2012, representing an increase of $10.2 million, or 44.7%, mainly due to an increase in income before
income tax expenses and equity in earnings of affiliated companies of $11.1 million offset by an increase in income tax expense of $1.1
million.
Income from Discontinued Operations
The Company sold its 51% equity interest in Zhejiang Henglong & Vie Pump-Manu Co., Ltd., “Zhejiang,” in May 2012 (see Note
25 to the consolidated financial statements in this Report). The net income from the discontinued operations was $2.7 million for the
year ended December 31, 2012, which included a gain on such sale of Zhejiang of $2.5 million (after tax) and net operating income of
$0.2 million.
Net Income
Net income was $33.0 million for the year ended December 31, 2013, compared with net income of $25.5 million for the year
ended December 31, 2012, representing an increase of $7.5 million, or 29.4%, mainly due to an increase in income from continuing
operations of $10.2 million offset by a decrease in income from discontinued operations of $2.6 million.
Net Income Attributable to Noncontrolling Interests
The Company recorded net income attributable to noncontrolling interests of $6.3 million for the year ended December 31, 2013,
compared to $4.7 million for the year ended December 31, 2012, representing an increase of $1.6 million, or 34.0%.
The Company owns different equity interests in ten non-wholly owned subsidiaries established in the PRC and Brazil, through
which it conducts its operations. Except for Beijing Henglong, which is accounted for under the equity method, all of the operating
results of these non-wholly owned subsidiaries were consolidated in the Company’s consolidated financial statements as of December
31, 2013 and 2012. For the year ended December 31, 2013 and 2012, the Company recorded $6.3 million and $4.7 million, respectively,
for the noncontrolling interests’ share in the earnings of the consolidated non-wholly owned subsidiaries.
Net Income Attributable to Parent Company
Net income attributable to parent company was $26.8 million for the year ended December 31, 2013. As compared to $20.7
million for the year ended December 31, 2012, there was an increase of $5.9 million, due to an increase in net income of $7.6 million,
offset by an increase in net income attributable to noncontrolling interests of $1.6 million.
LIQUIDITY AND CAPITAL RESOURCES
Capital Resources and Use of Cash
The Company has historically financed its liquidity requirements from a variety of sources, including short-term borrowings under
bank credit agreements, bankers’ acceptances, issuances of capital stock and notes and internally generated cash. As of December 31,
2013, the Company had cash and cash equivalents and short-term investments of $89.5 million, compared with $87.6 million as of
December 31, 2012, an increase of $1.9 million, or 2.2%.
The Company had working capital of $179.3 million as of December 31, 2013, compared with $138.8 million as of December 31,
2012, representing an increase of $40.5 million, or 29.2%.
The Company intends to indefinitely reinvest the funds in subsidiaries established in the PRC.
The Company believes that, in view of its current cash position as of December 31, 2013, the cash expected to be generated from
the operations and funds available from bank borrowings will be sufficient to meet its working capital and capital expenditure
requirements (including the repayment of bank loans) for at least twelve months commencing from December 31, 2013.
Capital Source
The Company’s capital source is multifaceted, such as bank loans and banker’s acceptance facilities. In financing activities and
operating activities, the Company’s banks require the Company to sign line of credit agreements and repay such facilities within one
year. On the condition that the Company can provide adequate mortgage security and has not violated the terms of the line of credit
agreement, such one year facilities can be extended for another year.
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
As of December 31, 2013, the Company had short-term bank loans of $37.4 million and bankers’ acceptances of $78.2 million
(see Note 11 to the consolidated financial statements in this Report).
The Company currently expects to be able to obtain similar bank loans (i.e., RMB loans) and bankers’ acceptance facilities in the
future if it can provide adequate mortgage security following the termination of the above-mentioned agreements (see the table under
“Bank Arrangements” below for more information). If the Company is not able to do so, it will have to refinance such debt as it becomes
due or repay that debt to the extent it has cash available from operations or from the proceeds of additional issuances of capital stock.
Owing to depreciation, the value of the mortgages securing the above-mentioned bank loans and banker's acceptances will be reduced
by approximately $14.7 million over the next 12 months. If the Company wishes to obtain the same amount of bank loans and banker's
acceptances, it will have to provide additional mortgages of $14.7 million as of the maturity date of such line of credit agreements (see
the table under “Bank Arrangements” below for more information). The Company can still obtain a reduced line of credit with a
reduction of $9.0 million, which is 61.4% (the mortgage rate) of $14.7 million, if it cannot provide additional mortgages. The Company
expects that the reduction in bank loans will not have a material adverse effect on its liquidity.
On May 18, 2012, the Company entered into a credit agreement with Industrial and Commercial Bank of China (Macau) Limited,
“ICBC Macau,” to obtain a non-revolving facility of $30 million, the “Credit Facility.” The Credit Facility would have expired on
November 3, 2012, unless the Company drew down the line of credit in full prior to such expiration date and the maturity date for the
loan drawdown was the earlier of (i) 18 months from the drawdown or (ii) 1 month before the expiry of the Henglong Standby Letter of
Credit issued by Industrial and Commercial Bank of China, Jingzhou Branch, “ICBC Jingzhou,” as described below.
The interest rate of the Credit Facility is calculated based on a three-month LIBOR plus 2.25% per annum, subject to the
availability of funds and fluctuation at ICBC Macau’s discretion. The interest is calculated daily on a 360-day basis and is to be fixed
one day before the first day of each interest period. The interest period is defined as three months from the date of drawdown.
As security for the Credit Facility, the Company was required to provide ICBC Macau with the Henglong Standby Letter of Credit
for a total amount of not less than $31.6 million if the Credit Facility were to be fully drawn.
On May 22, 2012, the Company drew down the full amount of $30.0 million under the Credit Facility and provided the Henglong
Standby Letter of Credit for an amount of $31.6 million in favor of ICBC Macau. The Henglong Standby Letter of Credit issued by
ICBC Jingzhou is collateralized by Henglong’s notes receivable of RMB196.3 million (equivalent to approximately $32.2 million). The
Company also paid an arrangement fee of $0.1 million to ICBC Macau and $0.1 million to ICBC Jingzhou. The original maturity date
of the Credit Facility was May 22, 2013. On May 7, 2013, ICBC Macau agreed to extend the maturity date of the Credit Facility to May
13, 2014. The interest rate of the Credit Facility under the extended term is calculated based on the three-month LIBOR plus 2.0% per
annum. Except for the above, all other terms and conditions as stipulated in the ICBC Macau credit agreement remain unchanged. As
of December 31, 2013, the interest rate on the Credit Facility was 2.24% per annum.
Bank Arrangements
As of December 31, 2012, the principal outstanding under the Company’s credit facilities and lines of credit was as follows:
Comprehensive credit facilities (7)
Bank
Bank of China
Due Date
Mar 2014 $
Available (4) Amount Used
9,787 $
23,127 $
Amount
Assessed
Mortgage Value (6)
15,793
Comprehensive credit facilities
Comprehensive credit facilities
Jingzhou
Commercial Bank Jul 2014
China
Construction Bank Nov 2014
32,804
26,340
63,087
11,481
1,640
32,210
Comprehensive credit facilities
(1)(5)
Shanghai Pudong
Development Bank Dec 2013
16,402
13,179
12,898
Comprehensive credit facilities (1)
China CITIC Bank Nov 2014
20,338
11,398
14,804
Comprehensive credit facilities
Comprehensive credit facilities (1)
Industrial and
Commercial Bank
of China
China Hua Xia
Bank
Sep 2014
13,121
3,280
3,280
Sep 2014
26,243
2,839
-
CHINA AUTOMOTIVE SYSTEMS, INC.
- 24 -
FY2013 ANNUAL REPORT
Comprehensive credit facilities
China Everbright
Bank
Aug 2014
4,921
4,189
Comprehensive credit facilities
ICBC Macau
May 2014
30,000
30,000
8,398
32,193
Total
$ 178,437
102,652 (2)
182,350 (3)
(1) Henglong’s comprehensive credit facility provided by China CITIC Bank and China Hua Xia Bank and each of Henglong and
Jielong’s comprehensive credit facilities provided by Shanghai Pudong Development Bank are required to be guaranteed by
Jiulong, another subsidiary of the Company, in addition to the above pledged assets.
(2)
The amount used includes bank loans of $37.4 million and notes payable of $65.3 million as of December 31, 2013. The remainder
of $12.9 million of notes payable out of the total notes payable of $78.2 million (see Note 13 to the consolidated financial
statements in this Report) was 100% secured by bank notes without utilization of credit lines.
(3) As of December 31, 2013, the pledged assets included $51.3 million accounts and notes receivable and other pledged assets with
assessed value of $131.1 million.
(4)
The amount available is used for the drawdown of bank loans and issuance of bank notes. For the drawdown of bank loans, this
amount represents the amount that the Company can borrow immediately; for issuance of bank notes, the Company needs to
pledge additional collateral in order to utilize these bank facilities.
(5) As at the date of this Report, the comprehensive credit facilities with Shanghai Pudong Development Bank have expired. The
Company is negotiating the renewal of the credit facilities with the bank and expects to obtain the renewal in early April 2014.
As the Company has obtained sufficient comprehensive lines of credit from other banks, the Company does not anticipate any
significant adverse impact on its financial position if the Company fails to renew these credit facilities.
(6)
The pledged cash deposits, which are disclosed in Note 3 to the consolidated financial statements in this Report, were not included
in the assessed mortgage value.
(7) As at the date of this Report, the comprehensive credit facilities with Bank of China have expired. The Company is negotiating
the renewal of the credit facilities with the bank and expects to obtain the renewal in late April 2014. As the Company has obtained
sufficient comprehensive lines of credit from other banks, the Company does not anticipate any significant adverse impact on its
financial position if the Company fails to renew these credit facilities.
The Company may request the banks to issue notes payable or bank loans within its credit line using a 365-day revolving line (see
Notes 12 and 11 to the consolidated financial statements in this Report).
The Company renewed its existing short-term bank loans and borrowed new bank loans during 2013 at annual interest rates of
2.24% to 7.20%, and maturity terms of twelve months. Pursuant to the comprehensive credit line arrangement the Company pledged:
(1) accounts receivable of $15.8 million as security for its comprehensive credit facility with the Bank of China; (2) equipment with an
assessed value of approximately $63.1 million as security for its revolving comprehensive credit facility with Jingzhou Commercial
Bank; (3) equipment, land use rights and buildings with an assessed value of approximately $31.0 million as security for its
comprehensive credit facility with China Construction Bank; (4) land use rights and buildings with an assessed value of approximately
$13.3 million as security for its comprehensive credit facility with Shanghai Pudong Development Bank; (5) land use rights and buildings
with an assessed value of approximately $15.3 million as security for its comprehensive credit facility with China CITIC Bank; (6)
accounts receivable of $3.3 million as security for its comprehensive credit facility with Industrial and Commercial Bank of China; (7)
Henglong’s comprehensive credit facility with China Hua Xia Bank is guaranteed by Jiulong, another subsidiary of the Company; (8)
land use rights and buildings with an assessed value of approximately $8.4 million as security for its comprehensive credit facility with
China Everbright Bank; and (9) $32.2 million of notes receivable held by Henglong.
Cash Requirements
The following table summarizes the Company’s expected cash outflows resulting from financial contracts and commitments. The
Company has not included information on its recurring purchases of materials for use in its manufacturing operations. These amounts
are generally consistent from year to year, closely reflecting the Company’s levels of production, and are not long-term in nature (being
less than three months in length).
Payment Due Dates
( in thousands of USD)
Total
< 1 year 1-3 years 3-5 years > 5 Years
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
Short-term loan including interest payable
Notes payable (1)
Other contractual purchase commitments, including service
agreements
Total
(1) Notes payable do not bear interest.
Short-term Bank Loans
$ 37,012 $ 37,012 $
78,217 78,217
- $
-
9,775
9,542
$ 125,004 $ 124,771 $
233
233 $
- $
-
-
- $
-
-
-
-
The following table summarizes the contract information of short-term borrowings between the banks and the Company as of
December 31, 2013 (figures are in thousands of USD).
Borrowing
Date
Bank
Purpose
ICBC Macau
Working Capital 13 May 2013
China CITIC Bank
Working Capital 7 Aug 2013
Working Capital 1 Oct 2013
ICBC
China Construction Bank Working Capital 18 Jul 2013
Total
(1) Such borrowing was duly repaid.
Borrowing
Term
(Months)
12
12
5
12
Annual
Percentage
Rate
Date of
Interest
Payment
2.24 % Pay quarterly
7.20 % Pay monthly 7 Aug 2014
27 Feb 2014(1)
5.60 % Pay monthly
18 Jul 2014
6.00 % Pay monthly
Amount
Payable on
Due Date
Due Date
13 May 2014 $ 30,000
2,460
3,280
1,641
$ 37,381
The Company must use the bank loans for the purpose described in the table. If the Company fails to do so, it will be charged a
penalty interest at 100% of the specified loan rate listed in the table above. Except for the loan granted by ICBC Macau as disclosed in
the section “Capital Source” above, the Company has to pay interest at the interest rate described in the table on the 20th of each month.
If the Company fails to do so, it will be charged compound interest at the specified rate in the above table. The Company has to repay
the principal outstanding on the specified date in the table. If it fails, it will be charged a penalty interest at 50% of the specified loan
rate.
Management believes that the Company had complied with such financial covenants as of December 31, 2013, and will continue
to comply with them.
Notes Payable
The following table summarizes the contract information of issuing notes payable between the banks and the Company as of
December 31, 2013 (figures are in thousands of USD):
Purpose
Working Capital (1)
Working Capital (1)
Working Capital (1)
Working Capital
Working Capital
Working Capital
Total
(1) The notes payable were repaid in full on their respective due dates.
Term (Month) Due Date
Amount Payable on
Due Date
3-6
3-6
3-6
3-6
3-6
3-6
$
Jan 2014
Feb 2014
Mar 2014
Apr 2014
May 2014
Jun 2014
$
16,101
12,047
12,428
13,493
11,792
12,356
78,217
The Company must use notes payable for the purpose described in the table. If it fails to do so, the banks will no longer issue the
notes payable, and it may have an adverse effect on the Company’s liquidity and capital resources. The Company has to deposit sufficient
cash in the designated account of the bank on the due date of notes payable for payment to the suppliers. If the bank has advanced
payment for the Company, it will be charged a penalty interest at 50% of the loan rate that is published by the People’s Bank of China
in the same period. Management believes that the Company had complied with such financial covenants as of December 31, 2013, and
will continue to comply with them.
Cash flows
(a) Operating activities
Net cash provided by operations for the year ended December 31, 2013 was $12.9 million, compared with net cash provided of
$16.2 million for the year ended December 31, 2012, representing a decrease of $3.3 million.
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
For the year ended December 31, 2013, the decrease in net cash provided by operations was mainly due to the net effect of (1) the
increase in net income (excluding non-cash items) by $9.9 million, (2) the change in the balance of accounts and notes receivable which
led to a decrease in net cash provided by operations of $35.2 million, which was mainly due to the sales of the Company’s products
generally on credit terms which range from 4 to 6 months, and the fact that, during the year ended December 31, 2013, there was a
significant increase in sales revenue of the Company’s products which led to an increase in the ending balance of the accounts receivable;
(3) the change in the balance of inventories which led to a decrease in net cash provided by operations of $8.9 million, which was mainly
due to the increase in inventory as a result of an increase in sales; (4) the change in the balance of accounts and notes payable which led
to an increase in net cash provided by operations of $18.9 million, which was mainly due to an increase in purchases of raw materials
by the Company for the year ended December 31, 2013. The credit terms for which the Company obtained from its suppliers generally
range from 4 to 6 months, and as a result, the ending balance of account payable significantly increased; (5) the change in the balance
of accrued expenses and other accounts payable which led to an increase in net cash provided by operations of $10.8 million, which was
mainly due to the Redemption and the Company’s payment of the make-whole redemption interest of $8.0 million pursuant thereto, and
an increase in sales which led to an increase in warranty expenses of the Company; and (6) the change in the balance of tax payable
which led to a decrease in cash provided by operations of $2.2 million.
(b) Investing activities
The Company used net cash of $43.1 million in investment activities for the year ended December 31, 2013, compared with $6.3
million used during the year ended December 31, 2012, representing an increase of $36.8 million, which was mainly due to an increase of
$35.1 million in time deposits with banks with original maturities of over three months which are due within one year and a net cash
decrease of $7.5 million pursuant to the Company’s sale of its 51% equity interest in Zhejiang in May 2012 (see Note 25), whereas there
was no such income in 2013, offset by an increase in receipt of cash from sale of property, plant and equipment of $2.3 million and a
decrease in the payment for the acquisition of equipment of $4.3 million.
(c) Financing activities
During the year ended December 31, 2013, the Company used net cash of $5.8 million in financing activities, compared to net
cash of $4.6 million provided by financing activities for the same period of 2012, which was mainly due to the net effect of: (1) decreased
proceeds of $25.0 million from government loans and bank loans; (2) the decrease in dividends paid to the non-controlling shareholders
of joint ventures of $1.5 million; and (3) the Redemption in the year ended December 31, 2012, which resulted in a $23.6 million cash
outflow.
OFF-BALANCE SHEET ARRANGEMENTS
At December 31, 2013 and 2012, the Company did not have any transactions, obligations or relationships that could be considered
off-balance sheet arrangements.
COMMITMENTS AND CONTINGENCIES
In addition to bank loans, notes payables and the related interest, the following table summarizes the Company’s irrevocable
commitments having initial terms in excess of one year as of December 31, 2013 (figures are in thousands of USD):
Obligations for service agreements
Obligations for purchasing agreements
Total
SUBSEQUENT EVENTS
2015
2014
$
374 $
9,168
9,542 $
$
Payment Obligations by Period
2016
- $
233
233 $
- $
-
- $
2017
Thereafter Total
- $
-
- $
374
- $
-
9,401
- $ 9,2775
The Company and plaintiffs have reached a settlement in principle and, on March 28, 2014, entered into a settlement agreement,
which includes a dismissal of all claims by plaintiffs against the Company and its current and former officers and directors, with no
admission of any wrongdoing or liability. For more information, please see Item 3 - Legal Proceedings in this Annual Report on Form
10-K.
INFLATION AND CURRENCY MATTERS
China’s economy has experienced rapid growth recently, mostly through the issuance of debt. Debt-induced economic growth
can lead to growth in the money supply and rising inflation. If prices for the Company’s products rise at a rate that is insufficient to
compensate for the rise in the cost of supplies, it may harm the Company’s profitability. In order to control inflation in the past, the
Chinese government has imposed controls on bank credit, limits on loans for fixed assets and restrictions on state bank lending. Such
CHINA AUTOMOTIVE SYSTEMS, INC.
- 27 -
FY2013 ANNUAL REPORT
policies can lead to a slowing of economic growth. Rises in interest rates by the central bank would likely slow economic activity in
China which could, in turn, materially increase the Company’s costs and also reduce demand for the Company’s products.
Foreign operations are subject to certain risks inherent in conducting business abroad, including price and currency exchange
controls, and fluctuations in the relative value of currencies. During 2013, the Company supplied products to North America and settled
in cash in U.S. dollars. As a result, appreciation or currency fluctuation of the RMB against the U.S. dollar would increase the cost of
export products, and adversely affect the Company’s financial performance.
In July 2005, the Chinese government adjusted its exchange rate policy from “Fixed Rate” to “Floating Rate.” During December
2012 to December 2013, the exchange rate between RMB and U.S. dollar appreciated from RMB1.00 to $0.1591 to RMB1.00 to $0.1640.
The appreciation of the RMB may continue in the near term, as the Chinese government attempts to slow the rate of inflation in the
PRC. Significant appreciation of the RMB is likely to decrease the amount of export products, thus decreasing the Company’s income.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2013, the FASB issued ASU 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for
Which the Total Amount of the Obligation is Fixed at the Reporting Date” . This update provides guidance for the recognition,
measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the
obligation within the scope of this update is fixed at the reporting date, except for obligations addressed within existing guidance in U.S.
GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the
basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors.
The guidance in this update also requires an entity to disclose the nature and amount of the obligation as well as other information about
those obligations. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013.
This update should be applied retrospectively to all prior periods presented for those obligations resulting from joint and several liability
arrangements within this update’s scope that exist at the beginning of an entity’s fiscal year of adoption. An entity may elect to use
hindsight for the comparative periods (if it changed its accounting as a result of adopting the amendments in this update) and should
disclose that fact. Early adoption is permitted. The adoption of this standard is not expected to have any impact on the Company’s
financial position.
On July 18, 2013, the FASB issued ASU 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (Income Taxes - Topic 740). This update applies to all entities
that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the
reporting date. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements
as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, unless otherwise
provided in the update. To the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available
at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the
disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not
intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a
liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the
unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax
position at the reporting date. For example, an entity should not evaluate whether the deferred tax asset has expired before the statute of
limitations on the tax position or whether the deferred tax asset may be used prior to the unrecognized tax benefit being settled. The
amendments in this update do not require new recurring disclosures. The amendments in this update are effective for fiscal years, and
interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied
prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Company is
currently evaluating the impact of adopting this update on its financial statements.
SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES
The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements
and the reported amount of revenues and expenses during the reporting periods. Management periodically evaluates the estimates and
judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be
reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.
The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s
consolidated financial statements.
The Company considers an accounting estimate to be critical if:
.
.
it requires the Company to make assumptions about matters that were uncertain at the time it was making the estimate, and
changes in the estimate or different estimates that the Company could have selected would have had a material impact on
the Company’s financial condition or results of operations.
CHINA AUTOMOTIVE SYSTEMS, INC.
- 28 -
FY2013 ANNUAL REPORT
The table below presents information about the nature and rationale for the Company critical accounting estimates:
Balance Sheet
Caption
Critical
Estimate
Item
Accrued
liabilities and
other long-term
liabilities
Warranty
obligations
Nature of Estimates Required
Estimating warranty requires the
Assumptions/Approaches
Used
The Company bases its estimate on
Key Factors
• VM sourcing
Company to forecast the resolution
of existing claims and expected
future claims on products sold. VMs
(Vehicle Manufacturer) are
increasingly seeking to hold
suppliers responsible for product
warranties, which may impact the
Company’s exposure to these costs.
historical trends of units sold and payment
amounts, combined with its current
understanding of the status of existing
claims and discussions with its customers.
• VM policy decisions
regarding warranty claims
Property, plant
and equipment,
intangible assets
and other long-
term assets
Valuation of
long- lived assets
and investments
The Company is required from time-
to-time to review the recoverability
of certain of its assets based on
projections of anticipated future cash
flows, including future profitability
assessments of various product lines.
The Company estimates cash flows using
• Future production
internal budgets based on recent sales data,
independent automotive production
volume estimates and customer
commitments.
estimates
• Customer preferences
and decisions
Accounts and
notes receivables
Provision for
Estimating the provision for doubtful
The Company grants credit to its
• Customers’ credit
doubtful accounts
and notes
receivable
accounts and notes receivable
requires the Company to analyze and
monitor each customer’s credit
standing and financial condition
regularly. The Company grants
credit to its customers, generally on
an open account basis. It will impact
the Company’s expense disclosure
and results of operations if such
estimate is improper.
customers for three to four months based
on each customer’s current credit standing
and financial data. The Company assesses
allowance on an individual customer basis,
under normal circumstances. The
Company records provision for bad debts
based on specific identification methods.
standing and financial
condition
Deferred income
taxes
Recoverability of
deferred tax
assets
The Company is required to estimate
whether recoverability of its deferred
tax assets is more likely than not
based on forecasts of taxable
earnings in the related tax
jurisdiction.
The Company uses historical and projected
future operating results, based upon
approved business plans, including a
review of the eligible carry forward period,
tax planning opportunities and other
relevant considerations.
• Tax law changes
• Variances in future
projected profitability,
including by taxing entity
Convertible notes
payable, warrant
liabilities,
compound
derivative
liabilities
Warrant
liabilities and
compound
derivative
liabilities
The Company is required to estimate
the fair value of warrant liabilities
and compound derivative liabilities
at conception and completion of each
reporting period.
The Company uses Black-Scholes option
pricing model to determine fair value of
warrant; uses Monte Carlo simulation
(“MCS”) valuation techniques to
determine fair value of compound
derivative liabilities.
• Expected volatility
• Risk-free rate
• interest market risk
• Credit risk
• Redemption activities
before maturity
Uncertain tax
Uncertain tax
positions
The Company is required to
determine and assess all material
positions, including all significant
uncertain positions in all tax years
that are still subject to assessment or
challenge under relevant tax statutes.
The Company applies a more likely than
not threshold and a two-step approach for
tax position measurement and financial
statement recognition. For the two-step
approach, the first step is to evaluate the
tax position for recognition by determining
if the weight of available evidence
indicates that it is more likely than not that
the position will be sustained, including
resolution of related appeals or litigation
processes, if any. The second step is to
measure the tax benefit as the largest
amount that is more than 50% likely to be
realized upon settlement.
• An allocation or a shift
of income between
jurisdictions
• The characterization of
income or a decision to
exclude reporting taxable
income in a tax return
•A decision to classify a
transaction, entity, or
other position in a tax
return as tax exempt
In addition, there are other items within the Company’s financial statements that require estimation, but are not as critical as those
discussed above. These include the allowance for reserves for excess and obsolete inventory. Although not significant in recent years,
changes in estimates used in these and other items could have a significant effect on the Company’s consolidated financial statements.
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates and foreign currency exchange rates. For purposes of
specific risk analysis, the Company uses sensitivity analysis to determine the effects that market risk exposures may have.
FOREIGN CURRENCY RISK
The Company’s reporting currency is the U.S. dollar and the majority of its revenues will be settled in RMB and U.S. dollars. The
Company’s currency exchange rate risks come primarily from the sales of products to international customers. Most of the Company’s
assets are denominated in RMB except for part of cash and accounts receivable. As a result, the Company is exposed to foreign exchange
risk as its revenues and results of operations may be affected by fluctuations in the exchange rate between the U.S. dollar and the RMB.
The value of the RMB fluctuates and is affected by, among other things, changes in China's political and economic conditions. In
addition, the RMB is not readily convertible into U.S. dollars or other foreign currencies. All foreign exchange transactions continue to
take place either through the Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rate quoted by
the People’s Bank of China. The conversion of RMB into foreign currencies such as the U.S. dollar has been generally based on rates
set by the People's Bank of China, which are set daily based on the previous day's interbank foreign exchange market rates and current
exchange rates on the world financial markets. On December 31, 2013 and 2012, the exchange rates of RMB against U.S. dollar were
RMB1.00 to $0.1591 and RMB1.00 to $0.1640, respectively. This floating exchange rate, and any appreciation of the RMB that may
result from such rate, could have various adverse effects on the Company’s business. If the RMB appreciates against foreign currencies,
it will make the Company’s sales income increase.
In order to mitigate the currency exchange rate risk, the Company has inserted a currency exchange rate fluctuation compensation
provision in its sales contracts with its international customers to the effect that both parties will bear 50% of such loss when the
fluctuation is over 8% within that contract year.
CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts
receivable. The Company does not require collateral or other security to support client receivables since most of its customers are large,
well-established companies. The Company's credit risk is also mitigated because its customers are all selected enterprises supported by
the local government. One customer, Chrysler North America, accounted for more than 10% (11.1%) of the Company’s consolidated
revenues in 2013. The Company maintains an allowance for doubtful accounts for any potential credit losses related to its trade
receivables. The Company does not use foreign exchange contracts to hedge the risk in receivables denominated in foreign currencies
and the Company does not hold or issue derivative financial instruments for trading or speculative purposes.
INTEREST RATE RISK
The Company’s exposure to changes in interest rates results primarily from its credit facility borrowings. As of December 31,
2013, the Company had $30.0 million of outstanding indebtedness, which is subject to interest rate fluctuations. Based on the amount
of such borrowings as of December 31, 2013, it is expected that a hypothetical 100 basis point increase in the then current LIBOR rate
would increase the Company’s interest expense by $0.3 million on an annual basis.
The Company’s level of outstanding indebtedness fluctuates from time to time and may result in additional payable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Selected quarterly financial data for the past two years are summarized in the following table (figures are in thousands of USD,
except those for items headed “Basic” and “Diluted”):
First
Quarterly Results of Operations
Third
Second
Fourth
2013 2012 2013 2012 2013 2012 2013 2012
$ 97,164 $ 80,920 $ 97,889 $ 80,379 $ 90,919 $ 73,184 $ 129,187 $ 101,523
19,362 15,378 18,389 15,632 16,525 12,501 22,357 17,240
9,346
6,336
7,814
8,574 10,970
5,463
8,589
7,425
7,526
254
6,206 11,631 10,429
4,400
8,904
6,551
-
31
-
2,620
-
-
-
-
Net sales
Gross profit
Operating income from
continuing operations
Net income from
continuing operations
Net income from
discontinued operations
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
Net income
Net income attributable to
noncontrolling interest
Net income (loss)
attributable to parent
company
Earnings/(loss) per share
attributable to parent
company
Basic -
Income from continuing
operations attributable to
shareholders
Income per share from
discontinued operations
Basic
Diluted-
Income from continuing
operations attributable to
shareholders
Income per share from
discontinued operations
Diluted
7,526
285
6,206 14,251 10,429
4,400
8,904
6,551
1,586
1,054
1,225
1,229
1,805
996
1,659
1,465
5,940
(769 )
4,981 13,022
8,624
3,404
7,245
5,086
$
0.21 $ (0.03) $
0.18 $
0.35 $
0.31 $
0.12 $
0.26 $
0.18
$
$
- $
- $
0.21 $ (0.03) $
- $
0.18 $
0.08 $
0.43 $
- $
0.31 $
- $
0.12 $
- $
0.26 $
-
0.18
$
0.21 $ (0.03) $
0.18 $
0.21 $
0.31 $
0.12 $
0.26 $
0.18
$
$
- $
- $
0.21 $ (0.03) $
- $
0.18 $
0.08 $
0.29 $
- $
0.31 $
- $
0.12 $
- $
0.26 $
-
0.18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM 9A.
CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company’s management, under the supervision and with the participation of its chief executive officer and chief financial
officer, Messrs. Wu Qizhou and Li Jie, respectively, evaluated the effectiveness of the Company’s disclosure controls and procedures
as of December 31, 2013, the end of the period covered by this Report. The term "disclosure controls and procedures," as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other
procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this
Form 10-K, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed
to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company’s management, including its chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, Messrs. Wu and Li concluded that the
Company’s disclosure controls and procedures were not effective as of December 31, 2013.
The Company’s disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives
of its disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues, if any, within a company have been detected.
BACKGROUND OF REVIEW
In the first quarter of 2014, the Company identified certain loan transactions (the "Transactions") between certain of the
Company’s subsidiaries, on the one hand, and various other companies, on the other hand, that occurred during 2013. The Company has
determined that the Transactions constituted "related party transactions" and that the Company’s procedures were not followed so as to
properly identify the Transactions as related party transactions, submit them in advance to the Audit Committee of the Company’s Board
of Directors (the "Audit Committee") for its examination and approval and make timely disclosure of the Transactions in the Company’s
quarterly financial statements. Upon learning of the Transactions, the Audit Committee engaged independent legal and accounting
consultants and undertook a thorough review of these matters (the "Review") to determine the nature and financial impact of the
Transactions, as well as any deficiencies in the internal controls of the Company with respect to the Transactions, and analyze certain
additional related party transactions that were identified in the context of the Review. The Company’s management cooperated fully
with the Audit Committee and its advisers with respect to the Review. The Audit Committee concluded that the failure to identify the
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
Transactions as related party transactions, submit them in advance to the Audit Committee for its examination and approval and timely
disclose the Transactions evidenced a failure of the Company’s controls that management should be directed to address. The Company’s
Board of Directors agreed with the Audit Committee’s conclusions.
The Transactions, which are detailed in Note 28 to the Consolidated Financial Statements included in this Annual Report on Form
10-K, were short-term loan transactions that were designed to use the Company’s idle cash resulting from the seasonality of its business
to generate returns and at the same time to assist the borrowing entities in addressing certain cash flow needs. All of the loans were
timely repaid, with interest, if any, at commercially stated rates. Nevertheless, because certain of the borrowers were entities in which
certain senior members of the Company’s management held a direct or indirect financial interest, the Transactions were required to be
treated as related party transactions for purposes of the Company’s internal policies and procedures and financial reporting.
The Review determined that the errors resulted from inconsistent interpretations and application of the Company’s written policies
and procedures with respect to related party transactions. These deficiencies represented a material weakness in the Company’s internal
control over financial reporting as of December 31, 2013, as more fully described below.
The Review concluded that the errors did not result from any fraud or intentional misconduct and that the Transactions did not
constitute loans that are prohibited by Section 402 of the Sarbanes-Oxley Act of 2002.
INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control
system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits
of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of
fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making
can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual
acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of
controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to
future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, is a
process designed by, or under the supervision of, the chief executive officer and chief financial officer and effected by the board of
directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of the consolidated financial statements for external reporting purposes in accordance with generally accepted accounting
principles. Internal control over financial reporting includes those policies and procedures that:
a. pertain to the maintenance of records that, in reasonable detail accurately and fairly reflect the transactions and dispositions
of the Company’s assets;
b. provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial
statements in accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures
are being made only in accordance with appropriate authorization of the Company’s management and board of directors; and
c. provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the consolidated financial statements.
In making its assessment of internal control over financial reporting, management, under the supervision and with the participation
of the chief executive officer and chief financial officer, used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in "Internal Control - Integrated Framework (1992)."
Management has assessed the effectiveness of internal control over financial reporting as of December 31, 2013 and determined
that internal control over financial reporting was not effective as of December 31, 2013.
DESCRIPTION OF MATERIAL WEAKNESS
In connection with the Review, management has identified the following control deficiencies as of December 31, 2013 that
constituted a material weakness:
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
Although the Company has a policy requiring that related party transactions be reported and disclosed by the Finance Department
and promptly directed to the Audit Committee for its review and approval, and the Company historically has applied that policy and
approval process to various transactions, Company personnel failed to adhere to the policy with respect to the Transactions. The Review
revealed that this control failure was a result of differing interpretations on the part of individual Company personnel regarding the scope
and application of the policy. Further, when certain of the Transactions later were reported to members of the Finance Department, those
persons did not promptly report the Transactions to the Audit Committee. The Transactions later were also identified by the Internal
Audit Department of the Company as deviations from the Company’s internal control procedures during the normal course of its internal
audit procedures. However, Internal Audit personnel did not report the Transactions to the Audit Committee until the Internal Audit
Department had completed its broader and regular internal audit procedures and, therefore, they did not timely inform the Audit
Committee about the Transactions.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2013 has been audited by
PricewaterhouseCoopers Zhong Tian LLP (formerly known as PricewaterhouseCoopers Zhong Tian CPAs Limited Company), an
independent registered public accounting firm, as stated in its report which is included in Item 15 of this Annual Report on Form 10-K.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Other than as described herein, there have been no changes in the Company’s internal control over financial reporting during the
fourth quarter of the year ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
REMEDIATION STEPS TO ADDRESS MATERIAL WEAKNESS
In response to the material weakness identified above, the Audit Committee has directed that management consider certain
corrective or remedial actions in respect of the relevant internal controls at the Company. Management, under the supervision of the
Chief Executive Officer and Chief Financial Officer, has adopted the recommendations of the Audit Committee and it has begun to
implement the measures described below to address the material weakness. This remediation effort is intended both to address the
identified material weakness and to enhance the Company’s overall financial control environment. Management believes that the
remediation measures described below will remediate the identified control deficiencies. However, management continues to evaluate
and work to improve its internal control over financial reporting. It may be determined that additional measures must be taken to address
control deficiencies.
Pursuant to the Review and the resulting conclusions by management, the Company is taking the following steps to remediate the
identified material weakness: (1) the Company’s policies and procedures with respect to related party transactions are being amended
to clarify their scope, as well as certain definitions and internal reporting and approval requirements; (2) a training program is being
designed and implemented, which will be mandatory for relevant Company personnel and which will focus on the scope and application
of the Company’s controls concerning related party transactions, including reporting and approval requirements; (3) policies and
procedures will be amended to clarify that any identified errors relating to the reporting and submission for approval of related party
transactions should be immediately brought to the attention of the Audit Committee by the Finance Department or the Internal Audit
Department; and (4) as directed by the Audit Committee, the Company’s Internal Audit Department will conduct and report to the Audit
Committee with respect to a series of special audits designed to assess the implementation of the subject policies and procedures, the
Company’s controls regarding related party transactions and relevant staff members’ awareness of the Company’s procedures and
controls regarding related party transactions.
The material weakness identified by management is not fully remediated as of the date of the filing of this Annual Report on Form
10-K. The Company has performed substantive procedures in an effort to ensure that the information reflected in this report is supported
and fairly presented as of the date of this report. The Audit Committee has directed management to develop a detailed plan and timetable
for the implementation of the above-referenced remediation measures and will monitor their implementation. In addition, under the
direction of the Audit Committee, management will continue to review and make necessary changes to the overall design of the system
of internal controls and the control environment, as well as policies and procedures to improve the overall effectiveness of internal
control over financial reporting.
ITEM 9B.
OTHER INFORMATION
None.
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table and text set forth the names and ages of all directors and executive officers of the Company as of December
31, 2013. The Board of Directors is comprised of only one class. All of the directors will serve until the next annual meeting of
stockholders and until their successors are elected and qualified, or until their earlier death, retirement, resignation or removal. Also
provided herein are brief descriptions of the business experience of each director and executive officer during the past five years and an
indication of directorships held by each director in other companies subject to the reporting requirements under the federal securities
laws.
Name
Hanlin Chen
Robert Tung
Guangxun Xu
Arthur Wong
Qizhou Wu
Jie Li
Andy Tse
Yijun Xia
Daming Hu
Haimian Cai
Age
56
57
63
54
49
44
43
51
55
50
Position(s)
Chairman of the Board
Director
Director
Director
Chief Executive Officer and Director
Chief Financial Officer
Senior Vice President
Vice President
Chief Accounting Officer
Vice President
BIOGRAPHIES OF DIRECTORS AND EXECUTIVE OFFICERS
Directors
Hanlin Chen has served as the chairman of the board of directors and an executive officer since March 2003. Since January 2013,
Mr. Chen has been a standing committee member of the Chinese People’s Political Consultative Conference CPPCC) and vice president
of Foreign Investors Association of Hubei Province. From 1993 to 1997, Mr. Chen was the general manager of Shashi Jiulong Power
Steering Gears Co., Ltd. Since 1997, he has been the chairman of the Board of Henglong Automotive Parts, Ltd. Mr. Hanlin Chen is the
brother-in-law of the Company’s senior vice president, Mr. Andy Tse.
Qizhou Wu has served as a director since March 2003 and as the chief executive officer of the Company since September 2007.
He served as chief operating officer from 2003 to 2007. He was the executive general manager of Shashi Jiulong Power Steering Gears
Co., Ltd. from 1993 to 1999 and the general manager of Henglong Automotive Parts Co., Ltd. from 1999 to 2002. Mr. Wu graduated
from Tsinghua University in Beijing with a Master’s degree in automobile engineering.
Arthur Wong has been an independent director of the Company since May 2012 and is the chairman of the audit committee and
a member of the compensation and nominating committees of the Board of Directors. Mr. Wong is currently the chief financial officer
of Beijing Radio Cultural Transmission Company Limited, a music production and music data management service company, and the
independent director of YOU On Demand Holdings, Inc., (NASDAQ:YOD). He also serves as a board member and chairman of the
audit committees for VisionChina Media Inc. (NASDAQ:VISN), Daqo New Energy Corp. (NYSE: DQ), Besunyen Holdings Company
Limited (HKSE: 926) and Termbray Petroking Oilfield Services Limited (HKSE: 2178). Mr. Wong was formerly the chief financial
officer of GreenTree Inns Hotel Management Group, Nobao Renewable Energy, and Asia New-Energy. Prior to that, he worked at
Deloitte Touche Tohmatsu from 1982 to 2008, in that firm’s San Jose, Hong Kong and Beijing offices, and most recently as a partner
in the Beijing office. Mr. Wong received a Bachelor of Science in Applied Economics degree from the University of San Francisco and
was awarded a Higher Diploma of Accountancy from Hong Kong Polytechnic. His professional affiliations include being a member of
the American Institute of Certified Public Accountants, the Hong Kong Institute of Certified Public Accountants and the Chartered
Association of Certified Accountants.
Robert Tung has been an independent director of the Company since September 2003. He is a member of the audit and
nominating committees, and the chairman of the compensation committee of the Board of Directors. Mr. Tung is currently the president
of Multi-Media Communications, Inc. and vice president of Herbal Blends International, LLC. Mr. Tung holds a Master’s degree in
chemical engineering from the University of Virginia. At present, Mr. Tung is the China operation vice president of Iraq Development
Company of Canada, a leading North American corporation engaging in oilfield and infrastructure development in the Republic of Iraq.
In addition, Mr. Tung holds the Grand China sales representative position of TRI Products, Inc., a well-known North American iron ore
and scrap metals supplier. Mr. Tung is also actively involved in minerals, iron ore and petroleum derivatives trading.
Guangxun Xu has served as an independent director of the Company since December 2009. He is a member of the audit and
compensation committees, and the chairman of the nominating committee of the Board of Directors. Mr. Xu has been the Chief
Representative of NASDAQ in China and a managing director of the NASDAQ Stock Market International, Asia for over 10 years.
With a professional career in the finance field spanning over 25 years, Mr. Xu’s practice focuses on providing package services on U.S.
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
and U.K. listings, advising on and arranging for private placements, PIPEs, IPOs, pre-IPO restructuring, M&A, corporate and project
finance, corporate governance, post-IPOIR compliance, and risk control.
Executive Officers
Jie Li has served as the chief financial officer since September 2007. Prior to that position he served as the corporate secretary
from December 2004. Prior to joining the Company in September 2003, Mr. Li was the assistant president of Jingzhou Jiulong Industrial
Inc. from 1999 to 2003 and the general manger of Jingzhou Tianxin Investment Management Co. Ltd. from 2002 to 2003. Mr. Li has a
Bachelor's degree from the University of Science and Technology of China. He also completed his graduate studies in economics and
business management at the Hubei Administration Institute.
Andy Tse has served as a senior vice president of the Company since March 2003. He has also served as chairman of the board
of Shenyang. He was the vice GM of Jiulong from 1993 to 1997 and the vice GM of Henglong. Mr. Tse has over 10 years of experience
in automotive parts sales and strategic development. Mr. Tse has an MBA from the China People University. He is brother in-law to
Hanlin Chen.
Yijun Xia has served as a vice president of the Company since December 2009. He also served as the general manager of
Henglong from April 2005 to December 2011. Prior to that position he served as the Vice-G.M. of Henglong from December 2002. Mr.
Xia graduated from Wuhan University of Water Transportation Engineering with a bachelor degree in Metal Material and Heat
Treatment.
Haimian Cai was an independent director of the Company from September 2003 to December 2009, and also a member of the
Company’s Audit, Compensation and Nominating Committees. Dr. Cai is a technical specialist in the automotive industry. Prior to that,
Dr. Cai was a staff engineer in ITT Automotive Inc. Dr. Cai has written more than fifteen technical papers and co-authored a technical
book regarding the Powder Metallurgy industry for automotive application. Dr. Cai has more than ten patents including pending patents.
Dr. Cai holds a B.S. Degree in Automotive Engineering from Tsinghua University and a M.S. and Ph. D. in manufacturing engineering
from Worcester Polytechnic Institute. Since December 2009, Mr. Cai has not served as independent director and a member of the
Company’s Audit Committee, Compensation and Nominating Committees, because he was nominated as vice president of the Company.
Daming Hu has served as the chief accounting officer since September 2007 and had overall charge of the financial report. During
March 2003 to August 2007, he served as Chief Financial Officer of the Company. Mr. Hu was the Finance Manager of Jiulong from
1996 to 1999 and Finance Manager of Henglong from 1999 to 2002. Mr. Hu graduated from Zhongnan University of Economics and
Law with bachelor’s degree in accounting.
BOARD COMPOSITION AND COMMITTEES
Audit Committee and Independent Directors
The Company has a standing Audit Committee of the Board of Directors established in accordance with Section 3(a)(58)(A) of
the Exchange Act, as amended. The Audit Committee is operated under a written charter. The Audit Committee consists of the following
individuals, all of whom the Company considers to be independent, as defined under the SEC’s rules and regulations and the Nasdaq’s
definition of independence: Robert Tung, Guangxun Xu and Arthur Wong. Arthur Wong is the Chairman of the Audit Committee. The
Board has determined that Mr. Arthur Wong is the audit committee financial expert, as defined in Item 407(d) (5) of Regulation S-K,
serving on the Company’s Audit Committee.
Compensation Committee
The Company has a standing Compensation Committee of the Board of Directors. The Compensation Committee is responsible
for determining compensation for the Company’s executive officers. Three of the Company’s independent directors, as defined under
the SEC’s rules and regulations and the Nasdaq’s definition of independence, Robert Tung, Guangxun Xu and Arthur Wong serve on
the Compensation Committee. Since July 8, 2010, Mr. Robert Tung has been the Chairman of the Compensation Committee. The Board
has determined that all members of the Compensation Committee are independent directors under the rules of the Nasdaq Stock Market,
as applicable. The Compensation Committee administers the Company’s benefit plans, reviews and administers all compensation
arrangements for executive officers, and establishes and reviews general policies relating to the compensation and benefits of the
Company’s officers and employees. The Compensation Committee operates under a written charter that is made available on the
Company’s website, www.caasauto.com.
The Company’s Compensation Committee is empowered to review and approve the annual compensation and compensation
procedures for the executive officers of the Company. The primary goals of the Compensation Committee of the Company’s Board of
Directors with respect to executive compensation are to attract and retain the most talented and dedicated executives possible and to
align executives’ incentives with stockholder value creation. The Compensation Committee evaluates individual executive performance
with a goal of setting compensation at levels the committee believes are comparable with executives in other companies of similar size
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
and stage of development operating in similar industry while taking into account the Company’s relative performance and its strategic
goals.
The Company has not retained a compensation consultant to review its policies and procedures with respect to executive
compensation. The Company conducts an annual review of the aggregate level of its executive compensation, as well as the mix of
elements used to compensate its executive officers. The Company compares compensation levels with amounts currently being paid to
executives in its industry and most importantly with local practices in China. The Company is satisfied that its compensation levels are
competitive with local conditions.
Nominating Committee
The Company has a standing Nominating Committee of the Board of Directors. Director candidates are nominated by the
Nominating Committee. The Nominating Committee will consider candidates based upon their business and financial experience,
personal characteristics, and expertise that are complementary to the background and experience of other Board members, willingness
to devote the required amount of time to carry out the duties and responsibilities of Board membership, willingness to objectively
appraise management performance, and any such other qualifications the Nominating Committee deems necessary to ascertain the
candidates’ ability to serve on the Board. The Nominating Committee will not consider nominee recommendations from security holders,
other than the recommendations received from a security holder or group of security holders that beneficially owned more than five (5)
percent of the Company’s outstanding common stock for at least one year as of the date the recommendation is made. Three of the
Company’s independent directors, as defined under the SEC’s rules and regulations and the Nasdaq’s definition of independence, Robert
Tung, Guangxun Xu and Arthur Wong, serve on the Nominating Committee. Since December 17, 2009, Mr. Guangxun Xu has been the
Chairman of the Nominating Committee.
Stockholder Communications
Stockholders interested in communicating directly with the Board of Directors, or individual directors, may email the Company’s
independent director Mr. Arthur Wong at arthurltwong@yahoo.com. Mr. Wong will review all such correspondence and will regularly
forward to the board of directors of the Company copies of all such correspondence that deals with the functions of the Board or
committees thereof or that he otherwise determines requires their attention. Directors may at any time review all of the correspondence
received that is addressed to members of the board of directors of the Company and request copies of such correspondence. Concerns
relating to accounting, internal controls or auditing matters will immediately be brought to the attention of the Audit Committee and
handled in accordance with procedures established by the Audit Committee with respect to such matters.
Family Relationships
Mr. Hanlin Chen and Mr. Yiu Wong Andy Tse are brothers-in-law.
Code of Ethics and Conduct
The Board of Directors has adopted a Code of Ethics and Conduct which is applicable to all officers, directors and employees.
The Code of Ethics and Conduct was filed as an exhibit to the Form 10-K for the year ended December 31, 2009, which was filed with
the Securities and Exchange Commission on March 25, 2010.
Section 16(a) Beneficial Ownership Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s executive officers and directors and
persons who own more than 10% of a registered class of the Company’s equity securities to file with the Securities and Exchange
Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership
of common stock and other of the Company’s equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and
greater than 10% stockholders are required by Commission regulations to furnish the Company with copies of all Section 16(a) reports
they file. To the best of the Company’s knowledge, based solely upon a review of the Form 3, 4 and 5 filed, no officer, director or 10%
beneficial shareholder failed to file on a timely basis any reports required by Section 16(a) of the Securities Exchange Act of 1934, as
amended.
ITEM 11.
EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
In 2003, the Board of Directors established a Compensation Committee consisting only of independent Board members, which is
responsible for setting the Company’s policies regarding compensation and benefits and administering the Company’s benefit plans. At
the end of fiscal year 2012, the Compensation Committee consisted of Robert Tung, Guangxun Xu and Arthur Wong. The members of
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
the Compensation Committee approved the amount and form of compensation paid to executive officers of the Company and set the
Company’s compensation policies and procedures during these periods.
The primary goals of the Company’s compensation committee with respect to executive compensation are to attract and retain
highly talented and dedicated executives and to align executives’ incentives with stockholder value creation.
The Compensation Committee will conduct an annual review of the aggregate level of the Company’s executive compensation,
as well as the mix of elements used to compensate the Company’s executive officers. The Company compares compensation levels with
amounts currently being paid to executives at similar companies in the same area and the same industry. Most importantly, the Company
compares compensation levels with local practices in China. The Company believes that its compensation levels are competitive with
local conditions.
Elements of compensation
The Company’s executive compensation consists of the following elements:
Base Salary
Base salaries for the Company’s executives are established to be amounts of compensation that are similar to those paid by other
companies to executives in similar positions and with similar responsibilities. Base salaries are adjusted from time to time to realign
salaries with market levels after taking into account individual responsibilities, performance and experience. The Compensation
Committee established a salary structure to determine base salaries and is responsible for initially setting executive officer compensation
in employment arrangements with each individual. The base salary amounts are intended to reflect the Company’s philosophy that the
base salary should attract experienced individuals who will contribute to the success of the Company’s business goals and represent
cash compensation that is commensurate with the compensation of individuals at similarly situated companies.
The Company’s Board of Directors and Compensation Committee have approved the current salaries for executives: RMB1.3
million ($0.2 million) for the Chairman, RMB0.9 million ($0.1 million) for the CEO, and RMB0.5 million ($0.1 million) individ ually
for other officers in 2013.
Performance Bonus
a. Grantees: Hanlin Chen, Qizhou Wu, Andy Tse, Jie Li, Yijun Xia and Daming Hu
b. Conditions: (i) based on the Company’s consolidated financial statements, the year over year growth rates of net sales, net
profits and earnings per share for 2013 must exceed 20%; and (ii) the average growth rate of the foregoing indicators must
exceed that of China auto industry in 2013 published by CAAM.
c. Bonus: 50% of each officer’s annual salary in 2013.
The Company accrued performance bonuses for Named Executive Officers in 2013 as the Company reached the above conditions
for awarding performance bonuses. As at December 31, 2013, such bonuses have not been paid.
Stock Option Awards
The stock options plan proposed by management, which aims to incentivize and retain core employees, to meet employees’
benefits, the Company’s long term operating goals and stockholder benefits, was approved at the Annual Meeting of Stockholders held
on June 28, 2005, and the maximum common shares for issuance under this is 2,200,000. The term of the plan is 10 years.
There were no stock options granted to management in 2013.
Other Compensation
Other than the base salary for the Company’s Named Executive Officers, the performance bonus and the stock option awards
referred to above, the Company does not have any other benefits and perquisites for its Named Executive Officers. However, the
Compensation Committee in its discretion may provide benefits and perquisites to these executive officers if it deems advisable to do
so.
Compensation Tables
Executive Officers
The compensation that Named Executive Officers received for their services for fiscal years ended 2012 and 2011 were as follows
(figures are in thousands of USD):
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
Name and principal position
Hanlin Chen (Chairman)
Year
2013
2012
Salary (1) Bonus (2) Option Awards (3)
$
$
$
$
$
$
210
210
-
-
-
-
$
$
Total
Qizhou Wu (CEO)
Haimian Cai (Vice President)
2013
2012
$
$
2013
2012
$
$
140
140
150
150
$
$
$
$
-
-
-
-
$
$
$
$
-
-
-
-
$
$
$
$
210
210
140
140
150
150
(1) Salary – Please refer to Base Salary disclosed under “Elements of compensation” section above for further details.
(2) Bonus – Please refer to Performance Bonus disclosed under “Elements of compensation” section above for further details.
(3) Option Awards – Please refer to Stock Option Awards disclosed under “Elements of compensation” section above for further
details.
For detailed information on option exercises and stock vested, please see Note 18 to the consolidated financial statements in this
report.
Compensation for Directors
Based on the number of the board of directors’ service years, workload and performance, the Company decides on their pay. The
management believes that the pay for the members of the Board of Directors was appropriate as of December 31, 2013. The
compensation that directors received for serving on the Board of Directors for fiscal year 2013 was as follows (figures are in thousands
of USD):
Name
Robert Tung
Guangxun Xu
Arthur Wong
Fees earned or paid in cash Option awards (1) Total
44 $
$
40 $
$
50 $
$
49 $
49 $
49 $
93
89
99
(1) Other than the cash payment based on the number of a director’s service years, workload and performance, the Company grants
7,500 option awards to each director every year. In accordance with ASC Topic 718, the cost of the above mentioned stock options
issued to directors was measured on the grant date based on their fair value. The fair value is determined using the Black-Scholes
option pricing model and certain assumptions. Please see Note 18 to the consolidated financial statements in this report for more
details.
The cost of the above-mentioned compensation paid to directors was measured based on investment, operating, technology, and
consulting services they provided. All other directors did not receive compensation for their service on the Board of Directors.
ITEM 12.
STOCKHOLDER MATTERS.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
As used in this section, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Securities
Exchange Act of 1934, as amended, as consisting of sole or shared voting power, including the power to vote or direct the vote, and/or
sole or shared investment power, including the power to dispose of or direct the disposition of, with respect to the security through any
contract, arrangement, understanding, relationship or otherwise, subject to community property laws where applicable. The percentage
ownership is based on 28,043,019 shares of common stock outstanding at December 31, 2013 (exclusive of 217,283 treasury stock).
Name/Title
Total Number of Shares Percentage Ownership
Hanlin Chen, Chairman (1)
Li Ping Xie (1)
Wiselink Holdings Limited, “Wiselink” (1)
Qizhou Wu, CEO and Director
Robert Tung, Director
Haimian Cai, Director
Jie Li, CFO
Daming Hu, CAO
Tse Andy, Sr. VP
Yijun Xia, VP
All Directors and Executive Officers (8 persons)
17,849,014
17,849,014
17,849,014
1,445,136
7,500
3,750
33,403
26,400
400,204
17,200
19,782,607
63.65 %
63.65 %
63.65 %
5.15 %
0.03 %
0.01 %
0.12 %
0.09 %
1.43 %
0.06 %
70.54 %
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
(1) These 17,849,014 shares of common stock include: (i) 13,322,547 shares of common stock beneficially owned by Mr. Hanlin
Chen; (ii) 1,502,925 shares of common stock beneficially owned by Ms. Liping Xie, Mr. Hanlin Chen’s wife; and (iii) 3,023,542
shares of common stock beneficially owned by Wiselink, a company controlled by Mr. Hanlin Chen.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
For the information required by Item 13 please refer to Note 2 (Basis of Presentation and Significant Accounting Policies–Certain
Relationships and Related Transactions) and Note 28 (Related Party Transactions) to the consolidated financial statements in this Report.
The Company’s Audit Committee’s charter provides that one of its responsibilities is to review and approve related party
transactions defined as those transactions required to be disclosed under Item 404 of Regulation S-K of the rules and regulations under
the Exchange Act. The Company has a formal written set of policies and procedures for the review, approval or ratification of related
party transactions. Where a related party transaction is identified, the Audit Committee reviews and, where appropriate, approves the
transaction based on whether it believes that the transaction is at arm’s length and contains terms that are no less favorable than what
the Company could have obtained from an unaffiliated third party.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees for professional audit services rendered by PricewaterhouseCoopers Zhong Tian
LLP (formerly known as PricewaterhouseCoopers Zhong Tian CPAs Limited Company) for the audit of the Company’s annual financial
statements, and fees billed for other services for the fiscal years 2013 and 2012. The Audit Committee has approved all of the following
fees (figures are in thousands of USD):
Audit Fees
Audit-Related Fees
Tax Fees
Total Fees Paid
Fiscal Year Ended
2013
2012
$
$
844 $
-
-
844 $
820
-
-
820
At the discretion of the PRC government in accordance with the Scheme for the Localization Restructuring of Chinese-Foreign
Cooperative Accounting Firms, PricewaterhouseCoopers Zhong Tian CPAs Limited Company has converted to a new partnership and
changed its name to PricewaterhouseCoopers Zhong Tian LLP, effective from July 1, 2013. PricewaterhouseCoopers Zhong Tian LLP
has succeeded PricewaterhouseCoopers Zhong Tian CPAs Limited Company for all purposes and assumed all of the obligations and
rights of PricewaterhouseCoopers Zhong Tian CPAs Limited Company with effect from July 1, 2013.
AUDIT COMMITTEE’S PRE-APPROVAL POLICY
During the fiscal years ended December 31, 2013 and 2012, the Audit Committee of the Board of Directors adopted policies and
procedures for the pre-approval of all audit and non-audit services to be provided by the Company’s independent auditor and for the
prohibition of certain services from being provided by the independent auditor. The Company may not engage the Company’s
independent auditor to render any audit or non-audit service unless the service is approved in advance by the Audit Committee or the
engagement to render the service is entered into pursuant to the Audit Committee’s pre-approval policies and procedures. On an annual
basis, the Audit Committee may pre-approve services that are expected to be provided to the Company by the independent auditor during
the fiscal year. At the time such pre-approval is granted, the Audit Committee specifies the pre-approved services and establishes a
monetary limit with respect to each particular pre-approved service, which limit may not be exceeded without obtaining further pre-
approval under the policy. For any pre-approval, the Audit Committee considers whether such services are consistent with the rules of
the Securities and Exchange Commission on auditor independence.
[Internationally left blank]
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
PART IV
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
CHINA AUTOMOTIVE SYSTEMS, INC.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive
income, changes in stockholders' equity and cash flows present fairly, in all material respects, the financial position of China Automotive
Systems, Inc. and its subsidiaries (collectively “the Company”) at December 31, 2013 and 2012, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal
control over financial reporting as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework
(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because a material weakness in
internal control over financial reporting related to the effectiveness of controls over identification, examination, approval and reporting
of related party transactions existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial
statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in Management's
Report on Internal Control over Financial Reporting appearing under Item 9A. We considered this material weakness in determining the
nature, timing, and extent of audit tests applied in our audit of the 2013 consolidated financial statements, and our opinion regarding the
effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial
statements. The Company's management is responsible for these financial statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in management's report
referred to above. Our responsibility is to express opinions on these financial statements and on the Company's internal control over
financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We do not express an opinion or any other form of assurance on management's statements referring to management’s actions and
plans of remediation of the identified material weakness included in the Management’s Report on Internal Control Over Financial
Reporting.
/s/ PricewaterhouseCoopers Zhong Tian CPAs Limited Company
PricewaterhouseCoopers Zhong Tian LLP
Shanghai, People’s Republic of China
March 31, 2014
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
China Automotive Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands of USD, except share and per share amounts)
Year Ended December 31,
2013
2012
ASSETS
Current assets:
Cash and cash equivalents
Pledged cash deposits
Short-term investments
Accounts and notes receivable, net - unrelated parties
Accounts and notes receivable, net - related parties
Advance payments and others - unrelated parties
Advance payments and others - related parties
Inventories
Assets held for sale
Current deferred tax assets
Total current assets
Non-current assets:
Property, plant and equipment, net
Intangible assets, net
Other receivables, net - unrelated parties
Other receivables, net - related parties
Advance payment for property, plant and equipment - unrelated parties
Advance payment for property, plant and equipment - related parties
Long-term investments
Non-current deferred tax assets
Total assets
$
$
$
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Bank loans
Accounts and notes payable - unrelated parties
Accounts and notes payable - related parties
Customer deposits
Accrued payroll and related costs
Accrued expenses and other payables
Accrued pension costs
Taxes payable
Amounts due to shareholders/directors
Deferred tax liabilities
Total current liabilities
Long-term liabilities:
Advances payable
Total liabilities
Commitments and Contingencies (Note 30)
Stockholders’ Equity
Common stock, $0.0001 par value - Authorized - 80,000,000 shares Issued –28,260,302 and
28,260,302 shares at December 31, 2013 and 2012, respectively
Additional paid-in capital
Retained earnings-
Appropriated
Unappropriated
Accumulated other comprehensive income
Treasury stock –217,283 and 217,283 shares at December 31, 2013 and 2012, respectively
Total parent company stockholders’ equity
Non-controlling interests
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
53,979 $
33,963
35,510
267,639
17,194
3,156
866
51,392
925
5,783
470,407
80,018
686
252
108
3,488
2,097
4,023
4,528
565,607 $
37,381 $
198,419
4,634
1,677
7,052
29,062
4,626
7,792
312
117
291,072
2,764
293,836
3
39,565
10,048
146,023
32,061
(1,000)
226,700
45,071
271,771
565,607 $
87,649
26,481
-
211,306
12,286
3,127
779
43,542
-
4,392
389,562
81,691
676
849
107
1,001
4,162
3,665
4,112
485,825
40,284
166,380
4,521
870
5,472
23,063
4,255
5,593
332
46
250,816
2,609
253,425
3
39,371
9,953
119,329
25,898
(1,000)
193,554
38,846
232,400
485,825
CHINA AUTOMOTIVE SYSTEMS, INC.
- 41 -
FY2013 ANNUAL REPORT
China Automotive Systems, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands of USD, except share and per share amounts)
$
Net product sales, including $37,453 and $27,442 to related parties for the years
ended December 31, 2013 and 2012
Cost of products sold, including $25,916 and $19,990 purchased from related parties
for the years ended December 31, 2013 and 2012
Gross profit
Net gain on other sales
Operating expenses:
Selling expenses
General and administrative expenses
Research and development expenses
Total operating expenses
Operating income
Other income, net
Financial income (expenses), net
Loss on change in fair value of derivative
Gain on redemption of convertible notes
Income before income tax expenses and equity in earnings of affiliated companies
Less: Income taxes
Add: Equity in earnings of affiliated companies
Income from continuing operations
Discontinued operations (including after-tax disposition gain of $26) - net of income
tax (Note 24)
Net income
Net income attributable to noncontrolling interest
Net income attributable to parent company
Allocation to convertible notes holders
Net income attributable to parent company’s common shareholders
$
Net income attributable to parent company’s common shareholders per share –
Basic –
Income from continuing operations attributable to shareholders
Income per share from discontinued operations
Basic
Diluted–
Income from continuing operations attributable to shareholders
Income per share from discontinued operations
Diluted
Weighted average number of common shares outstanding –
Basic
Diluted
$
$
Year Ended December 31,
2013
2012
415,158
$
336,005
338,526
76,632
7,555
13,331
13,253
20,885
47,469
36,718
1,096
427
-
-
38,241
5,483
307
33,065
-
33,065
6,276
26,789
-
26,789
0.96
-
0.96
0.95
-
0.95
$
$
$
275,254
60,751
4,426
9,557
12,936
14,886
37,379
27,798
461
(2,175)
(449)
1,420
27,055
4,391
171
22,835
2,651
25,486
4,744
20,742
(934)
19,808
0.61
0.09
0.70
0.61
0.09
0.70
28,043,019
28,056,144
28,213,163
28,215,367
China Automotive Systems, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In thousands of USD unless otherwise indicated)
Net income
Other comprehensive income:
Foreign currency translation gain - continuing operations
Foreign currency translation loss - discontinued operations
Comprehensive income
Year Ended December 31,
2013
2012
$
33,065
$
7,411
-
40,476
25,486
751
(75)
26,162
CHINA AUTOMOTIVE SYSTEMS, INC.
- 42 -
FY2013 ANNUAL REPORT
Comprehensive income attributable to noncontrolling interest
Comprehensive income attributable to parent company
$
7,524
32,952
$
4,814
21,348
China Automotive Systems, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(In thousands of USD, except share and per share amounts)
Common Stock
Balance at January 1, 2013 and 2012 - 28,260,302 and 28,260,302 shares, respectively
Balance at December 31, 2013 and 2012 - 28,260,302 and 28,260,302 shares, respectively
Additional paid-in capital
Balance at January 1
Stock-based compensation
Balance at December 31
Retained earnings— Appropriated
Balance at January 1
Appropriation of retained earnings
Balance at December 31
Unappropriated
Balance at January 1
Net income attributable to parent company
Appropriation of retained earnings
Balance at December 31
Accumulated Other Comprehensive Income
Balance at January 1
Net foreign currency translation adjustment attributable to parent company
Balance at December 31
Treasury stock
Balance at January 1, 2013 and 2012 - 217,283 and 0 shares, respectively
Repurchased stock at December 31, 2013 and 2012 - 0 and 217,283 shares, respectively
Balance at December 31, 2013 and 2012 - 217,283 and 217,283 shares, respectively
Total parent company stockholders’ equity
Non-controlling interest
Balance at January 1
Net foreign currency translation adjustment attributable to non-controlling interest
Net income attributable to non-controlling interest
Capital contribution from noncontrolling interests
Distribution of retained earnings
Disposal of Zhejiang
Balance at December 31
Total stockholders' equity
Year Ended December 31,
2012
2013
3 $
3 $
3
3
39,371 $
194
39,565 $
9,953 $
95
10,048 $
39,296
75
39,371
9,026
927
9,953
119,329
26,789
(95)
146,023 $
99,513
20,742
(926)
119,329
25,898
6,163
32,061 $
25,291
607
25,898
(1,000)
-
(1,000)
226,700 $
38,846 $
1,248
6,276
-
(1,299)
-
45,071 $
271,771 $
-
(1,000)
(1,000)
193,554
43,028
70
4,744
3,012
(6,846)
(5,162)
38,846
232,400
$
$
$
$
$
$
$
$
$
$
$
$
$
$
China Automotive Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands of USD unless otherwise indicated)
Cash flows from operating activities:
Net income
$
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation
33,065
$
25,486
194
76
CHINA AUTOMOTIVE SYSTEMS, INC.
- 43 -
FY2013 ANNUAL REPORT
Year Ended December 31,
2013
2012
Depreciation and amortization
Deferred income taxes
Inventory write downs
Provision for doubtful accounts
Gain on disposal of a subsidiary
Equity in earnings of affiliated companies
Gain on redemption of convertible notes
Loss on change in fair value of derivative
Gain on disposal of fixed assets
Amortization of debt issue cost
Changes in operating assets and liabilities:
(Increase) decrease in:
Pledged cash deposits
Accounts and notes receivable
Advance payments and other
Inventories
Increase (decrease) in:
Accounts and notes payable
Customer deposits
Accrued payroll and related costs
Accrued expenses and other payables
Accrued pension costs
Taxes payable
Advances payable
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of short-term investments
Proceeds from maturities of short-term investments
Dividends from investment under cost method
Decrease in other receivables
Cash received from property, plant and equipment sales
Cash paid to acquire property, plant and equipment
Cash paid to acquire intangible assets
Proceeds from disposal of a subsidiary
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from government and bank loan
Repayment of government and bank loans
Debt issuance costs paid for bank loan
Capital contribution from noncontrolling interests
Dividends paid to the non-controlling interest holders of joint venture companies
Decrease in amounts due to shareholders/directors
Redemption of convertible notes
Repurchase common stock
Net cash provided by financing activities
Cash and cash equivalents affected by foreign currency
Net increase (decrease) in cash and cash equivalents
Cash and equivalents at beginning of year
Cash and equivalents at end of year
$
14,587
(1,471)
2,313
60
-
(307)
-
-
(4,282)
57
(6,701)
(54,820)
8
(8,716)
26,600
787
1,403
5,335
235
1,994
2,535
12,876
(46,492)
11,330
66
625
6,284
(14,708)
(163)
-
(43,058)
24,017
(28,359)
-
-
(1,433)
(35)
-
-
(5,810)
2,322
(33,670)
87,649
53,979
$
13,910
(1,557)
876
204
(2,848)
(171)
(1,421)
449
(849)
173
(6,888)
(19,551)
(1,283)
229
7,745
(52)
514
(5,422)
176
4,170
2,243
16,209
-
-
-
1,376
3,940
(19,004)
(75)
7,471
(6,292)
43,612
(11,389)
(230)
166
(2,936)
(21)
(23,571)
(1,000)
4,631
140
14,688
72,961
87,649
China Automotive Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(In thousands of USD unless otherwise indicated)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest
Cash paid for income taxes
Year Ended December 31,
2013
2012
$
$
1,295
6,043
$
$
10,874
5,769
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Non-cash investing activities
Advance payments for acquiring property, plant and equipment
Accounts receivable from sale of property, plant and equipment
Government subsidies recorded as a reduction of property, plant and equipment
cost
$
$
$
Non-cash financing activities
Year Ended December 31,
2013
2012
5,586
-
2,460
$
$
$
5,163
1,128
-
Year Ended December 31,
2013
2012
Noncontrolling interests contribution of capital with property, plant and equipment $
$
Dividend Payable to non-controlling interest shareholders of joint-ventures
-
34
$
$
2,846
162
1. Organization and Business
Notes to Consolidated Financial Statements
China Automotive Systems, Inc., “China Automotive,” was incorporated in the State of Delaware on June 29, 1999 under the name
of Visions-In-Glass, Inc. China Automotive, including, when the context so requires, its subsidiaries and the subsidiaries’ interests in
the Sino-foreign joint ventures described below, is referred to herein as the “Company.” The Company is primarily engaged in the
manufacture and sale of automotive systems and components, as described below.
Great Genesis Holdings Limited, a company incorporated on January 3, 2003 under the Companies Ordinance of Hong Kong as a
limited liability company, “Genesis,” is a wholly-owned subsidiary of the Company.
Henglong USA Corporation, “HLUSA,” which was incorporated on January 8, 2007 in Troy, Michigan, is a wholly-owned
subsidiary of the Company, and mainly engages in marketing of automotive parts in North America, and provides after-sales service
and research and development support accordingly.
The Company owns the following aggregate net interests in the following Sino-foreign joint ventures, wholly-owned subsidiary
and joint ventures organized in the PRC and Brazil as of December 31, 2013 and 2012.
Name of Entity
Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong” 1
Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong” 2
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “Shenyang” 3
Universal Sensor Application Inc., “USAI” 4
Wuhu Henglong Auto Steering System Co., Ltd., “Wuhu” 5
Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong” 6
Jingzhou Hubei Henglong Automotive System Co., Ltd, “Hubei Henglong” 7
Jingzhou Henglong Automotive Technology (Testing) Center, “Testing Center” 8
Beijing Hainachuan Henglong Automotive Steering System Co., Ltd, “Beijing Henglong” 9
Chongqing Henglong Hongyan Automotive System Co., Ltd, “Chongqing Henglong” 10
CAAS Brazil’s Imports And Trade In Automotive Parts Ltd., “Brazil Henglong” 11
Aggregate Net Interest
2012
2013
80.00 %
81.00 %
70.00 %
83.34 %
77.33 %
85.00 %
100.00 %
80.00 %
50.00 %
70.00 %
80.00 %
80.00 %
81.00 %
70.00 %
83.34 %
77.33 %
85.00 %
100.00 %
80.00 %
50.00 %
70.00 %
80.00 %
1. Henglong was established in 1997 and mainly engages in the production of rack and pinion power steering gear for cars and
light duty vehicles.
2. Jiulong was established in 1993 and mainly engages in the production of integral power steering gear for heavy-duty vehicles.
3. Shenyang was established in 2002 and focuses on power steering parts for light duty vehicles.
4. USAI was established in 2005 and mainly engages in the production and sales of sensor modules.
5. Wuhu was established in 2006 and mainly engages in the production and sales of automobile steering systems.
6. Jielong was established in 2006 and mainly engages in the production and sales of electric power steering gear, “EPS.”
7. On March 7, 2007, Genesis established Hubei Henglong (formerly known as Jingzhou Hengsheng Automotive System Co.,
Ltd.), its wholly-owned subsidiary, to engage in the production and sales of automotive steering systems. The registered capital
of Hubei Henglong at the time of establishment was $10 million. On February 10, 2010, the registered capital of Hubei Henglong
was increased to $16 million. On October 12, 2011, the board of directors of the Company approved a reorganization of the
Company’s subsidiaries operating in China. As a result of the reorganization, all of Genesis’s equity interests of its subsidiaries
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
operating in China, except for Shenyang and Zhejiang, were transferred to Hubei Henglong, the Company’s new China-based
holding company. The reorganization was completed on January 19, 2012, subsequent to which the registered capital of Hubei
Henglong was increased to $39.0 million. As the reorganized entities were under common control of the Company, the
reorganization did not have any impact on the Company’s consolidated financial position or results of operations and should
not impact the tax treatment of the Company or its subsidiaries in any material respect. On July 8, 2012, Hubei Henglong
changed its name to Hubei Henglong Automotive System Group Co., Ltd.
8. In December 2009, Henglong, a subsidiary of Genesis, formed the Testing Center, which mainly engages in the research and
development of new products. The registered capital of the Testing Center was RMB30.0 million, equivalent to approximately
$4.4 million.
9. On January 24, 2010, Genesis entered into a joint venture contract with Beijing Hainachuan Auto Parts Co., Ltd., to establish
Beijing Henglong as a joint venture company to design, develop and manufacture both hydraulic and electric power steering
systems and parts. On September 16, 2010, with Beijing Hainachuan’s agreement, Genesis transferred its interest in the joint
venture to Hubei Henglong, and left the other terms of the joint venture contract unchanged. According to the joint venture
agreement, the Company does not have voting control of Beijing Henglong. Therefore, the Company’s consolidated financial
statements do not include Beijing Henglong, and such investment is accounted for by the equity method.
10. On February 21, 2012, Hubei Henglong and SAIC-IVECO Hongyan Company, “SAIC-IVECO,” established a Sino-foreign
joint venture company, Chongqing Henglong, to design, develop and manufacture both hydraulic and electric power steering
systems and parts. The new joint venture is located in Chongqing City and has a registered capital of RMB60 million, of which
RMB42 million, or 70%, is held by Hubei Henglong. The registered capital of Chongqing Henglong was fully contributed by
Hubei Henglong in cash of $6.7 million (equivalent to RMB42 million) in January and February 2012 and by SAIC-IVECO in
property, plant and equipment with a fair value of $2.8 million (equivalent to RMB18 million) in April 2012.
11. On August 21, 2012, Hubei Henglong established a Sino-foreign joint venture company with two Brazilian citizens, Ozias Gaia
Da Silva and Ademir Dal’ Evedove. The joint-venture company is called CAAS Brazil’s Imports And Trade In Automotive
Parts Ltd., “Brazil Henglong.” Brazil Henglong engages mainly in the import and sales of automotive parts in Brazil. The new
joint venture is located in Brazil and has a registered capital of $1.0 million (equivalent to BRL1.6 million), of which $0.8
million (equivalent to BRL1.3 million), or 80%, is held by Hubei Henglong, and of which $0.2 million (equivalent to BRL0.3
million), or 20%, is held by Mr. Ozias Gaia Da Silva and Mr. Ademir Dal’ Evedove. As of December 31, 2013, Hubei
Henglong and Mr. Ozias Gaia Da Silva and Mr. Ademir Dal’ Evedove have completed their capital contributions.
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation - For the years ended December 31, 2013 and 2012, the accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries and joint ventures, which are described in Note 1. Significant
inter-company balances and transactions have been eliminated upon consolidation. The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the United States of America. The Company has no voting
control in Beijing Henglong, thus such investment was accounted for using the equity method.
Henglong was formed in 1997. The Company increased its shareholdings from 44.5% to 80% in 2008 and the remaining 20% is
owned by Jingzhou Jiulong Machinery and Electronic Manufacturing Co., Ltd., “Jiulong Machine.” The highest authority of the joint
venture is Henglong’s board of directors, which is comprised of five directors, four of which, 80%, are appointed by the Company, and
one of which, 20%, is appointed by Jiulong Machine. As for day-to-day operating matters, approval by more than two-thirds of the
members of such board of directors, 67%, is required. Both the chairman of such board of directors and the general manager of Henglong
are appointed by the Company.
Jiulong was formed in 1993, with 81% owned and controlled by the Company, 10% owned by Jiulong Machine, and 9% owned
by Jingzhou Tianxin Investment Consulting Co., Ltd., “Tianxin.” The highest authority of the joint venture is Jiulong’s board of directors,
which is comprised of five directors, four of which, 80%, are appointed by the Company, and one of whom, 20%, is appointed by Jiulong
Machine. As for day-to-day operating matters, approval by more than two-thirds of the members of such board of directors, 67%, is
required. The chairman of such board of directors is appointed by Jiulong Machine. The general manager of Jiulong is appointed by the
Company.
Shenyang was formed in 2002, with 70% owned and controlled by the Company, and 30% owned by Shenyang Automotive
Industry Investment Corporation, “JB Investment.” The highest authority of the joint venture is Shenyang’s board of directors, which is
comprised of seven directors, four of whom, 57%, are appointed by the Company, and three of whom, 43%, are appointed by JB
Investment. As for day-to-day operating matters, approval by more than two-thirds of the members of such board of directors, 67%, is
required. The chairman of the board of directors is appointed by the Company. In March 2003, the Company and Jinbei entered into an
act-in-concert agreement, under which the directors appointed by Jinbei agree to act in concert with the directors appointed by the
Company. As a result, the Company obtained control of Shenyang in March 2003. The general manager of Shenyang is appointed by
the Company.
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
USAI was formed in 2005. At December 31, 2013, 83.34% of USAI was owned by the Company, and 16.66% of USAI was
owned by Hubei Wanlong Investment Inc., “Hubei Wanlong.” The highest authority of the joint venture is USAI’s board of directors,
which is comprised of three directors, two of whom, 67%, are appointed by the Company, one of whom, 33%, is appointed by Hubei
Wanlong. As for day-to-day operating matters, approval by at least two-thirds of the members of such board of directors is required.
The chairman of such board of directors is appointed by the Company. The general manager of USAI is appointed by the Company.
Jielong was formed in April 2006. As at December 31, 2013, 85% of Jielong was owned by the Company, and 15% of Jielong
was owned by Hubei Wanlong. The highest authority of the joint venture is Jielong’s board of directors, which is comprised of three
directors, two of whom, 67%, are appointed by the Company, and one of whom, 33%, is appointed by Hubei Wanlong. As for day-to-
day operating matters, approval by at least two-thirds of the members of such board of directors is required. The chairman of such board
of directors is appointed by the Company. The general manager of Jielong is appointed by the Company.
Wuhu was formed in May 2006, with 77.33% owned by the Company, and 22.67% owned by Wuhu Chery Technology Co., Ltd.,
“Chery Technology.” The highest authority of the joint venture is Wuhu’s board of directors, which is comprised of five directors, three
of whom, 60%, are appointed by the Company, and two of whom, 40%, are appointed by Chery Technology. As for day-to-day operating
matters, approval by at least two-thirds of the members of such board of directors is required. The directors of the Company and Chery
Technology executed an “Act in Concert” agreement, resulting in the Company having voting control in the joint venture. The chairman
of such board of directors is appointed by the Company. The general manager of Wuhu is appointed by the Company.
Testing Center was formed in December 2009, as a wholly-owned subsidiary of Henglong. The highest authority of the entity is
its board of directors, which is comprised of three directors, all of them are appointed by the Company.
Chongqing Henglong was formed in 2012, with 70% owned by the Company and 30% owned by SAIC-IVECO. The highest
authority of the joint venture is Chongqing Henglong’s board of directors, which is comprised of five directors, three of whom, 60%,
are appointed by the Company, and two of whom, 40%, are appointed by SAIC-IVECO. As for day-to-day operating matters, approval
by at least two-thirds of the members of such board of directors is required. In February 2012, the Company and SAIC-IVECO signed
an “Act in Concert” agreement. According to the agreement, the directors appointed by SAIC-IVECO agreed to execute the “Act in
Concert” agreement with the directors designated by the Company. The chairman of such board of directors and the general manager of
Chongqing Henglong are both appointed by the Company.
Brazil Henglong was formed in 2012, with 80% owned by the Company and 20% owned by Mr. Ozias Gaia Da Silva and Mr.
Ademir Dal’ Evedove. The highest authority of the joint venture is Brazil Henglong’s board of directors. In making operational decision,
approval by voting rights representing at least 3/4 of the capital, 75%, is required and 80% of voting rights were owned by the Company.
The chairman of such board of directors is appointed by the Company. The general manager is Mr. Ozias Gaia Da Silva.
Beijing Henglong was formed in 2010, with 50% owned by the Company and 50% owned by Beijing Hainachuan Auto Parts Co.
Ltd., "Hainachuan.” The highest authority of the joint venture is Beijing Henglong’s board of directors, which is comprised of seven
directors, four of whom, 57%, are appointed by the Company, and three of whom, 43%, are appointed by Hainachuan. As for day-to-
day operating matters, approval by at least two-thirds of the members of such board of directors is required. The chairman of such board
of directors is appointed by Hainachuan. The general manager of Beijing Henglong is appointed by the Company. The Company has no
voting control in Beijing Henglong, thus such investment was accounted for using the equity method.
The minority partners of each of the joint ventures are all private companies not controlled, directly or indirectly, by any PRC
municipal government or other similar government entity.
Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues
and expenses during the reporting periods. The Company is of an opinion that the significant estimates related to impairment of long
term assets and investment, the realizable value of accounts receivable and inventories, useful lives of property, plant and equipment,
and the amounts of accruals, warranty liabilities and deferred tax assets. Actual results could differ from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents include all highly-liquid investments with an original maturity of three
months or less at the date of purchase.
Pledged Cash Deposits - Pledged as guarantee for the Company's notes payable and restricted to use. The Company regularly
pays some of its suppliers by bank notes. The Company has to deposit a cash deposit, equivalent to 30%- 100% of the face value of the
relevant bank note, in order to obtain the bank note.
Short-term investments - Short-term investments are comprised of time deposits with terms of three months or more which are
due within one year. The carrying values of time deposits approximate fair value because of their short maturities. The interest earned
is recognized in the consolidated statements of income over the contractual term of the deposits.
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
Allowance for doubtful accounts - In order to determine the value of the Company’s accounts receivable, the Company records a
provision for doubtful accounts to cover estimated credit losses. Management reviews and adjusts this allowance periodically based on
historical experience and its evaluation of the collectability of outstanding accounts receivable. The Company evaluates the credit risk
of its customers utilizing historical data and estimates of future performance.
Inventories - Inventories are stated at the lower of cost and net realizable value. Cost is calculated on the moving-average basis
and includes all costs to acquire and other costs to bring the inventories to their present location and condition. The Company evaluates
the net realizable value of its inventories on a regular basis and records a provision for loss to reduce the computed moving-average cost
if it exceeds the net realizable value.
Advance Payments - These amounts represent advances to acquire various assets to be utilized in the future in the Company’s
normal business operations, such as machine equipment, raw materials and technology. Such amounts are paid according to their
respective contract terms. Advance payment for machinery and equipment is classified as advance payment for property, plant and
equipment in the consolidated balance sheet and advance payment of raw materials and technology are classified as advance payments
and others in the consolidated balance sheet.
Property, Plant and Equipment – Property, plant and equipment are stated at cost. Major renewals and improvements are
capitalized; minor replacements and maintenance and repairs are charged to operations. Depreciation is calculated on the straight-line
method over the estimated useful lives of the respective assets as follows:
Category
Land use rights
Buildings
Machinery and equipment
Electronic equipment
Motor vehicles
Estimated Useful Life (Years)
45-50
25
6
4
8
Assets under construction - represent buildings under construction and plant and equipment pending installation— are stated at
cost. Cost includes construction and acquisitions, and interest charges arising from borrowings used to finance assets during the period
of construction or installation and testing. No provision for depreciation is made on assets under construction until such time as the
relevant assets are completed and ready for their intended commercial use.
Gains or losses on disposal of property, plant and equipment are determined as the difference between the net disposal proceeds
and the carrying amount of the relevant asset, and are recognized in the consolidated statements of operations and comprehensive income
on the date of disposal.
Interest Costs Capitalized - Interest costs incurred in connection with specific borrowings for the acquisition, construction or
installation of property, plant and equipment are capitalized (if significant) and depreciated as part of the asset’s total cost when the
respective asset is placed into service.
However, for the fiscal year ended December 31, 2013 and 2012, interest costs which were incurred as a result of using such
specific borrowings for the acquisition, construction or installation of property, plant and equipment were not significant, so the
Company did not capitalize interest costs.
Intangible Assets - Intangible assets, representing patents and technical know-how acquired, are stated at cost less accumulated
amortization and impairment losses. Amortization is calculated on the straight-line method over the estimated useful life of 5 to 15 years.
Long-Lived Assets - The Company has adopted the provisions of ASC Topic 360, “Accounting for the Impairment or Disposal
of Long-Lived Assets.” Property, plant and equipment and definite life intangible assets are reviewed periodically for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If required, an
impairment loss is recognized as the difference between the carrying value and the fair value of the assets.
In assessing long-lived assets for impairment, management considered the Company’s product line portfolio, customers and
related commercial agreements, labor agreements and other factors in grouping assets and liabilities at the lowest level for which
identifiable cash flows are largely independent. The Company considers projected future undiscounted cash flows, trends and other
factors in its assessment of whether impairment conditions exist. Whilst the Company believes that its estimates of future cash flows are
reasonable, different assumptions regarding such factors as future automotive production volumes, customer pricing, economics and
productivity and cost saving initiatives, could significantly affect its estimates. In determining fair value of long-lived assets,
management uses appraisals, management estimates or discounted cash flow calculations.
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
Long-Term Investments - Investments in which the Company owns less than 20% of the investee company and does not have the
ability to exert significant influence are stated at cost, and are reviewed periodically for realization. Investments in which the Company
owns 20% - 50% of the investee company and does have the ability to exert significant influence are accounted for using the equity
method.
In 2010, the Company set up a joint venture with Beijing Hainachuan, Beijing Henglong. Beijing Henglong is an entity over
which the Company has significant influence but it does not control. Investment in Beijing Henglong is accounted for by the equity
method of accounting. Under this method, the Company’s income (loss) from investment in Beijing Henglong is recognized in the
consolidated statements of income. Unrealized gains on transactions between the Company and Beijing Henglong are eliminated to the
extent of the Company’s interest in Beijing Henglong, if any; unrealized losses are also eliminated unless the transaction provides
evidence of an impairment of the asset transferred. When the Company’s share of losses in Beijing Henglong equals or exceeds its
interest in Beijing Henglong, the Company does not recognize further losses, unless the Company has incurred obligations or made
payments on behalf of Beijing Henglong.
The Company continually reviews its investment in Beijing Henglong to determine whether a decline in fair value below the
carrying value is other than temporary. The primary factors the Company considers in its determination are the length of time that the
fair value of the investment is below the Company’s carrying value and the financial condition, operating performance and near term
prospects of the investee. In addition, the Company considers the reason for the decline in fair value, including general market conditions,
industry-specific or investee-specific reasons, changes in valuation subsequent to the balance sheet date and the Company’s intent and
ability to hold the investment for a period of time sufficient to allow for a recovery in fair value. If the decline in fair value is deemed
to be other than temporary, the carrying value of the security is written down to fair value. There were no impairment losses for its long-
term investment in the years ended December 31, 2013 and 2012.
Revenue from Product Sales Recognition - The Company recognizes revenue when the significant risks and rewards of ownership
have been transferred to the customers including factors such as when persuasive evidence of an arrangement exists, delivery has
occurred, the sales price is fixed or determinable, sales and value added tax laws have been complied with, and collectability is probable.
The Company recognizes product sales generally at the time the product is installed on OEMs’ production line, and a small number of
product sales is recognized at the time the product is shipped. Concurrent with the recognition of revenue, the Company reduces revenue
for estimated product returns. Revenue is presented net of any sales tax and value added tax.
Revenue from Materials and Other Assets Sales Recognition – Normally, the Company purchases materials only for its production.
Occasionally, some materials will be sold to other suppliers in case of temporary inventory overage of such materials and to make a
profit on any price difference. The Company is essentially the agent in these transactions because it does not have any risk of product
return. When there is any quality or quantity loss, the suppliers are obligated to restitution. Income generated from selling materials is
recorded as the net amount retained, that is, the amount billed to the customers less the amount paid to suppliers, in the consolidated
statement of income in accordance with the provisions of ASC Topic 350. Revenue from other asset sales represents gains or losses
from other assets, for example, unused property, plant and equipment. Income generated from selling other assets is recorded as the net
sales amount less the carrying value of the assets. The Company has classified such revenue from materials and other asset sales into
gain on other sales in its consolidated statements of income.
Government subsidies - the Company’s PRC based subsidiaries received government subsidies according to related policy from
local government. The Company’s government subsidies consisted of specific subsidies and other subsidies. Specific subsidies are the
subsidies that the Chinese government has specified its purpose for, such as product development and renewal of production facilities.
Other subsidies are the subsidies that the Chinese government has not specified its purpose for and are not tied to future trends or
performance of the Company; receipt of such subsidy income is not contingent upon any further actions or performance of the Company
and the amounts do not have to be refunded under any circumstances. The Company recorded specific purpose subsidies as advances
payable when received. For specific purpose subsidies, upon government acceptance of the related project development or asset
acquisition, the specific purpose subsidies are recognized to reduce related R &D expenses or cost of asset acquisition. The unspecific
purpose subsidies are recognized as other income upon receipt as further performance by the Company is not required.
Sales Taxes - The Company is subject to value added tax, “VAT.” The applicable VAT tax rate is 17% for products sold in the
PRC. The amount of VAT liability is determined by applying the applicable tax rate to the invoiced amount of goods sold less VAT
paid on purchases made with the relevant supporting invoices. VAT is collected from customers by the Company on behalf of the PRC
tax authorities and is therefore not charged to the consolidated statements of income.
Uncertain Tax Positions - In order to assess uncertain tax positions, the Company applies a more likely than not threshold and a
two-step approach for tax position measurement and financial statement recognition. For the two-step approach, the first step is to
evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that
the position will be sustained, including resolution of related appeals or litigation processes, if any. The second step is to measure the
tax benefit as the largest amount that is more than 50% likely to be realized upon settlement.
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
Product Warranties - The Company provides for the estimated cost of product warranties when the products are sold. Such
estimates of product warranties were based on, among other things, historical experience, product changes, material expenses, service
and transportation expenses arising from the manufactured product. Estimates will be adjusted on the basis of actual claims and
circumstances.
For the years ended December 31, 2013 and 2012, the warranties activities were as follows (figures are in thousands of USD):
Balance at the beginning of year
Additions during the year
Settlement within the year
Decrease for warranty related to the subsidiary sold
Foreign currency translation
Balance at end of year
Year Ended December 31,
2013
2012
$
$
18,081 $
12,707
(9,244)
-
560
22,104 $
16,809
10,931
(9,264)
(436)
41
18,081
Pension - Most of the operations and employees of the Company are located in China. The Company records pension costs and
various employment benefits in accordance with the relevant Chinese social security laws, which is approximately at a total of 31% of
base salary as required by local governments. Base salary levels are the average salary determined by the local governments.
Concentration of Credit Risk - Financial instruments that potentially subject the Company to significant concentrations of credit
risk consist primarily of trade accounts receivable. The Company performs ongoing credit evaluations with respect to the financial
condition of its debtors, but does not require collateral. In order to determine the value of the Company’s accounts receivable, the
Company records a provision for doubtful accounts to cover probable credit losses. Management reviews and adjusts this allowance
periodically based on historical experience and its evaluation of the collectability of outstanding accounts receivable.
Interest Rate Risk - As of December 31, 2013, the Company had bank loans of $30 million which were charged at floating interest
rates. The remaining bank loans and convertible notes payable were charged at fixed interest rates. Management is monitoring the change
of floating interest rates. The Company plans to repay the bank loans with floating interest rates when the floating interest rates exceed
fixed interest rates, because such bank loans are short-term and the Company has sufficient credit lines with fixed interest rates.
Income Taxes - The Company accounts for income taxes using the liability method whereby deferred income taxes are recognized
for the tax consequences of temporary differences by applying statutory tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of certain assets and liabilities, changes in deferred tax assets and liabilities, if
any, include the impact of any tax rate changes enacted during the year. ASC Topic 350 , “Accounting for Income Taxes,” requires
that deferred tax assets be reduced by a valuation allowance if, based on all available evidence, it is considered more likely than not that
some portion or all of the recorded deferred tax assets will not be realized in future periods. Additionally, the Company accounts for
uncertainty in income taxes using a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the
tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position
will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax
benefit as the largest amount that is more than 50% likely of being realized upon settlement. The Company classifies the liability for
unrecognized tax benefits as current to the extent that the Company anticipates payment (or receipt) of cash within one year. Interest
and penalties related to uncertain tax positions are recognized in the provision for income taxes.
If the amount of the Company’s taxable income or income tax liability is a determinant of the amount of a grant, the grant is
treated as a reduction of the income tax provision in the year the grant is realized.
Research and Development Costs - Research and development costs are expensed as incurred.
Advertising, Shipping and Handling Costs – Advertising, shipping and handling costs are expensed as incurred and recorded in
selling expenses. Shipping and handling costs relating to sales of $5.5 million and $4.3 million were included in selling expenses for the
years ended December 31, 2013 and 2012, respectively.
Income Per Share - Basic income per share is computed by dividing net income attributable to ordinary shareholders by the
weighted average number of ordinary shares outstanding during the period using the two-class method. Under the two-class method, net
income is allocated between ordinary shares and other participating securities (convertible note holders) based on their participating
rights. Diluted income per share is calculated by dividing net income attributable to ordinary shareholders, as adjusted for the effects on
income of participating securities as if they were dilutive ordinary shares, if any, by the weighted average number of ordinary and
dilutive ordinary equivalent shares outstanding during the period. Ordinary equivalent shares consist of ordinary shares issuable upon
the conversion of the convertible notes using the if-converted method, and shares issuable upon the exercise of stock options and warrants
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
for the purchase of ordinary shares using the treasury stock method. Ordinary equivalent shares are not included in the denominator of
the diluted earnings per share calculation when inclusion of such shares would be antidilutive.
Comprehensive Income – ASC Topic 220 establishes standards for the reporting and display of comprehensive income, its
components and accumulated balances in a full set of general purpose financial statements. ASC Topic 220 defines comprehensive
income to include all changes in equity except those resulting from investments by owners and distributions to owners, including
adjustments to minimum pension liabilities, accumulated foreign currency translation, and unrealized gains or losses on marketable
securities.
Fair Value Measurements – For purposes of fair value measurements, the Company applies the applicable provisions of ASC
820 “Fair Value Measurements and Disclosures.” Accordingly, fair value for the Company’s financial accounting and reporting purposes
represents the estimated price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the designated measurement date. With an objective to increase consistency and comparability in fair value
measurements and related disclosures, the Financial Accounting Standard Board established the fair value hierarchy which prioritizes
the inputs to valuation techniques used to measure fair value into three broad levels.
Level 1 Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the
ability to access at the measurement date. An active market for the asset or liability is a market in which transactions for the asset or
liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active
market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available. As at December 31,
2013 and 2012, the Company did not have any fair value assets and liabilities classified as Level 1.
Level 2 Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either
directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the
full term of the asset or liability. As at December 31, 2013 and 2012, the Company did not have any fair value assets and liabilities
classified as Level 2.
Level 3 Inputs are unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent
that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or
liability at the measurement date. However, the fair value measurement objective remains the same, that is, an exit price from the
perspective of a market participant that holds the asset or owes the liability. Therefore, unobservable inputs shall reflect the reporting
entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions
about risk). Accordingly, the compound derivative liabilities are classified as Level 3 as the inputs reflected management’s best estimate
of what market participants would use in pricing the asset or liability at the measurement date. As of December 31, 2013 and 2012, the
Company did not have any fair value assets and liabilities classified as Level 3. For a summary of changes in Level 3 derivative liabilities
for the years ended December 31, 2013 and 2012, please see Note 23.
The Company’s financial instruments consist principally of cash and cash equivalents, pledged cash deposits, short-term
investments, accounts and notes receivable, accounts and notes payable, advance payment or payable, other receivable or payable,
accrued expenses and bank loans. As of December 31, 2013 and 2012, the respective carrying values of all financial instruments
approximated their fair values based on their short-term maturities. The convertible notes payable and derivative liabilities were settled
upon redemption of the convertible notes on May 25, 2012.
Stock-Based Compensation - The Company may issue stock options to employees and stock options or warrants to non-employees
in non-capital raising transactions for services and for financing costs.
The stockholders of the Company approved a stock incentive plan at the Annual Meeting of the Company held on June 28, 2005,
and the maximum number of common shares for issuance under this plan is 2,200,000. The term of the plan is 10 years. The stock
incentive plan provides for the issuance, to the Company’s officers, directors, management and employees, of options to purchase shares
of the Company’s common stock. Under the stock incentive plan, the Company has issued 523,850 stock options, and 1,676,150 stock
options remain to be issuable in the future. As of December 31, 2013, the Company had 105,000 stock options outstanding.
The Company has adopted ASC Topic 718, “Accounting for Stock-Based Compensation,” which establishes a fair value based
method of accounting for stock-based compensation plans. In accordance with ASC Topic 718, the cost of stock options and warrants
issued to employees and non-employees is measured on the grant date based on the fair value. The fair value is determined using the
Black-Scholes option pricing model. The resulting amount is charged to expense on the straight-line basis over the period in which the
Company expects to receive the benefit, which is generally the vesting period.
Registration Payment Arrangements - The Company has entered into registration payment arrangements with certain investors
that provide for the payment of damages for failures to register common shares underlying the investor’s financial instruments. ASC
Topic 825, Accounting for Registration Payment Arrangements, provides for the exclusion of registration payments, such as the
liquidated damages, from the consideration of classification of financial instruments. Rather, such registration payments would
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
be accounted for pursuant to ASC Topic 450, “Accounting for Contingencies,” which is the Company’s current accounting practice.
That is, all registration payments will require recognition when they are both probable and reasonably estimable. The Company does
not currently believe that damages are probable.
As the investors may sell the convertible notes and underlying shares freely pursuant to Rule 144, there are no liquidated damages.
Foreign Currencies - China Automotive, the parent company, and HLUSA maintain their books and records in United States
Dollars, “USD,” their functional currency. The Company’s subsidiaries based in the PRC and Genesis maintain their books and records
in Renminbi, “RMB,” their functional currency. The Company’s subsidiary based in Brazil maintains its books and records in Brazilian
reais, “BRL,” its functional currency. In accordance with ASC Topic 830, “FASB Accounting Standards Codification”, foreign currency
transactions denominated in currencies other than the functional currency are remeasured into the functional currency at the rate of
exchange prevailing at the balance sheet date for monetary items. Nonmonetary items are remeasured at historical rates. Income and
expenses are remeasured at the rate in effect on the transaction dates. Transaction gains and losses, if any, are included in the
determination of net income for the period.
In translating the financial statements of the Company’s China and Brazil subsidiaries and Genesis from their functional currency
into the Company's reporting currency of United States dollars, balance sheet accounts are translated using the closing exchange rate in
effect at the balance sheet date and income and expense accounts are translated using an average exchange rate prevailing during the
reporting period. Adjustments resulting from the translation, if any, are included in cumulative other comprehensive income (loss) in
stockholders’ equity.
Certain Relationships and Related Transactions
The following are the related parties of the Company. The major shareholders of the Company directly or indirectly have interests
in these related parties:
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Jingzhou Henglong Fulida Textile Co., Ltd., “Jingzhou”
Xiamen Joylon Co., Ltd., “Xiamen Joylon”
Shanghai Tianxiang Automotive Parts Co., Ltd., “Shanghai Tianxiang”
Shanghai Fenglong Materials Co., Ltd., “Shanghai Fenglong”
Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong”
Jiangling Tongchuang Machining Co., Ltd., “Jiangling Tongchuang”
Beijing Hualong Century Digital S&T Development Co., Ltd., “Beijing Hualong”
Jingzhou Jiulong Material Co., Ltd., “Jiulong Material”
Shanghai Hongxi Investment Inc., “Hongxi”
Hubei Wiselink Equipment Manufacturing Co., Ltd., “Hubei Wiselink”
Jingzhou Tongyi Special Parts Co., Ltd., “Jingzhou Tongyi”
Jingzhou Derun Agricultural S&T Development Co., Ltd., “Jingzhou Derun”
Jingzhou Tongying Alloys Materials Co., Ltd., “Jingzhou Tongying”
Wuhan Dida Information S&T Development Co., Ltd., “Wuhan Dida”
Hubei Wanlong Investment Co., Ltd., “Hubei Wanlong”
Jiangling Yude Machining Co., Ltd., “Jiangling Yude”
Wiselink Holdings Limited, “Wiselink”
Beijing Hainachuan Henglong Automotive Steering System Co., Ltd., “Beijing Henglong”
Honghu Changrun Automotive Parts Co., Ltd., “Honghu Changrun”
Jingzhou Henglong Real Estate Co., Ltd., “Henglong Real Estate”
Xiamen Joylon Automotive Parts Co., Ltd., “Xiamen Automotive Parts”
Jingzhou Jiulong Machinery and Electronic Manufacturing Co., Ltd., “Jiulong Machine”
Wuhan Tongkai Automobile Motor Co., Ltd., “Wuhan Tongkai”
Principal policies of the Company in connection with transactions with related parties are as follows:
Products sold to related parties – The Company sold products to related parties at fair market prices, and also granted them credit
of three to four months on an open account basis. These transactions were consummated under similar terms as the Company's other
customers.
Materials purchased from related parties – The Company purchased materials from related parties at fair market prices, and also
received from them credit of three to four months on an open account basis. These transactions were consummated under similar terms
as the Company's other suppliers.
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
Equipment and production technology purchased from related parties - The Company purchased equipment and production
technology from related parties at fair market prices, or reasonable cost plus pricing if fair market prices are not available and was
required to pay in advance based on the purchase agreement between the two parties, because such equipment manufacturing and
technology development was required for a long period. These transactions are consummated under similar terms as the Company's
other suppliers.
Short-term loans extended to related parties - The Company provides short-term loans to related parties and assists the borrowing
entities in addressing certain cash flow needs. The contractual period of each loan is three months or less from the date of the extension
of the loan. In general, the Company charges interest by referencing to the prevailing borrowing interest rates published by PBOC except
for the loans to related parties with repayment terms less than 3 days, which bear no interest rate due to their short-term maturities and
are required to be approved by the audit committee of the board of directors of the Company.
Recent Accounting Pronouncements
In February 2013, the FASB issued ASU 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for
which the total amount of the obligation is fixed at the Reporting Date”. This update provides guidance for the recognition, measurement
and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within
the scope of this update is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The
guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its
arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The
guidance in this update also requires an entity to disclose the nature and amount of the obligation as well as other information about
those obligations. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013.
This update should be applied retrospectively to all prior periods presented for those obligations resulting from joint and several liability
arrangements within this update’s scope that exist at the beginning of an entity’s fiscal year of adoption. An entity may elect to use
hindsight for the comparative periods (if it changed its accounting as a result of adopting the amendments in this update) and should
disclose that fact. Early adoption is permitted. The adoption of this standard is not expected to have any impact on the Company’s
financial position.
On July 18, 2013, the FASB issued ASU 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (Income Taxes - Topic 740). This update applies to all entities
that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the
reporting date. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements
as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, unless otherwise
provided in the update. To the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available
at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the
disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not
intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a
liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the
unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax
position at the reporting date. For example, an entity should not evaluate whether the deferred tax asset has expired before the statute of
limitations on the tax position or whether the deferred tax asset may be used prior to the unrecognized tax benefit being settled. The
amendments in this update do not require new recurring disclosures. The amendments in this update are effective for fiscal years, and
interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied
prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Company is
currently evaluating the impact of adopting this update on its financial statements.
3. Accounts and Notes Receivable
The Company’s accounts receivable at December 31, 2013 and 2012, are summarized as follows (figures are in thousands of
USD):
Accounts receivable - unrelated parties (1)
Notes receivable - unrelated parties (2)(3)
Less: allowance for doubtful accounts- unrelated parties
Accounts and Notes Receivable- unrelated parties
Accounts and Notes Receivable - related parties
Balance at end of year
December 31,
2013
2012
$
$
140,920 $
128,068
268,988
(1,349)
267,639
17,194
284,833 $
117,136
95,436
212,572
(1,266)
211,306
12,286
223,592
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
(1) As of December 31, 2013, the Company has pledged $19.1 million of accounts receivable as security for its comprehensive credit
facility with banks in China.
(2) Notes receivable represents accounts receivable in the form of bills of exchange whose acceptances and settlements are handled
by banks.
(3) Henglong collateralized its notes receivable in an amount of RMB 196.3 million (equivalent to approximately $32.2 million) to
Industrial and Commercial Bank of China, Jingzhou Branch, “ICBC Jingzhou,” for the purpose of obtaining the Henglong Standby
Letter of Credit (as defined in Note 11) which is used as security for the non-revolving credit facility in the amount of $30.0 million,
the “Credit Facility,” provided by Industrial and Commercial Bank of China (Macau) Limited, “ICBC Macau,” to the Company
in May 2012. The Credit Facility was drawn down on May 22, 2012 and its original maturity date was May 22, 2013. Such maturity
date was extended to May 13, 2014 (see Note 11).
The activity in the Company’s allowance for doubtful accounts of accounts receivable during the years ended December 31, 2013
and 2012, are summarized as follows (figures are in thousands of USD):
Balance at beginning of year
Amounts provided for during the year
Amounts reversed of collection during the year
Written off during the year
Disposition of Zhejiang
Foreign currency translation
Balance at end of year
4. Other Receivables
Year Ended December 31,
2012
2013
$
$
1,266 $
183
(48)
(92)
-
40
1,349 $
1,191
232
(77)
-
(83)
3
1,266
The Company’s other receivables at December 31, 2013 and 2012, are summarized as follows (figures are in thousands of USD):
Other receivables- unrelated parties
Less: allowance for doubtful accounts - unrelated parties
Balance at end of year
Other receivables - related parties
Less: allowance for doubtful accounts - related parties
Balance at end of year
December 31,
2013
2012
314 $
(62)
252 $
905
(56 )
849
December 31,
2013
2012
729 $
(621)
108 $
715
(608 )
107
$
$
$
$
Other receivables consist of amounts advanced to both related and unrelated parties, primarily as unsecured demand loans, with
no stated interest rate or due date.
The activity in the Company’s allowance for doubtful accounts of other receivable during the years ended December 31, 2013
and 2012, are summarized as follows (figures are in thousands of USD):
Balance at beginning of year- unrelated parties
Amounts provided for during the year- unrelated parties
Amounts reversed of collection during the year- unrelated parties
Disposition of Zhejiang
Foreign currency translation- unrelated parties
Balance at end of year
Balance at beginning of year- related parties
Amounts provided for during the year- related parties
Year Ended December 31,
2013
2012
56 $
5
-
-
1
62 $
59
-
-
(3 )
-
56
Year Ended December 31,
2012
2013
608 $
9
638
-
$
$
$
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
Amounts reversed of collection during the year- related parties
Foreign currency translation- related parties
Balance at end of year
(15)
19
621 $
(32 )
2
608
$
5. Inventories
The Company’s inventories at December 31, 2013 and 2012, consisted of the following (figures are in thousands of USD):
Raw materials
Work in process
Finished goods
Balance at end of year
December 31,
2013
2012
$
$
12,185 $
8,079
31,128
51,392 $
11,144
7,094
25,304
43,542
Provision for inventories valuation amounted to $2.3 million and $0.9 million for the years ended December 31, 2013 and 2012,
respectively.
6. Long-term Investments
On December 31, 2013 and 2012, the Company’s balance of long-term investment was $4.0 million and $3.7 million, respectively.
As discussed in Note 2, for the long-term investments that the Company has no voting control, such investments were accounted for
using the equity method or the cost method.
On January 24, 2010, the Company invested $3.1 million to establish a joint venture company, Beijing Henglong, with
Hainachuan. The Company owns 50% equity in Beijing Henglong, as discussed in Note 2. The Company accounted for Beijing
Henglong’s operational results with the equity method. On December 31, 2013 and 2012, the Company had $3.9 million and $3.6
million, respectively, of net equity in Beijing Henglong, respectively. Summarized statement of balance sheet data of Beijing Henglong
as of December 31 is as follows (figures are in thousands of USD):
Assets:
Current assets
Other assets
Total assets
Liabilities and shareholders’ equity:
Current liabilities
Other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
December 31,
2013
2012
$
$
$
$
13,364
6,510
19,874
$
$
9,109
2,897
7,868
19,874
$
$
12,009
4,851
16,860
6,892
2,810
7,158
16,860
Statement of operations data for the years ended December 31 of 2013 and 2012, are summarized as follows (figures are in
thousands of USD):
Beijing Henglong
$
28,046 $
20,954 $
869 $
646 $
482
$
342
Net Sales
Gross Margin
Net Income(Loss)
2013
2012
2013
2012
2013
2012
The Company’s share of net assets and net income is “long-term investments” on the consolidated balance sheets and “equity in
earnings of affiliated companies” on the consolidated statements of operations. The Company’s consolidated financial statements contain
the net income of non-consolidated affiliates of $0.2 million and $0.2 million at December 31, 2013 and 2012, respectively.
7. Property, Plant and Equipment
The Company’s property, plant and equipment at December 31, 2013 and 2012, are summarized as follows (figures are in
thousands of USD):
December 31,
2013
2012
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
Costs:
Land use rights and buildings
Machinery and equipment
Electronic equipment
Motor vehicles
Construction in progress
Less: Accumulated depreciation
Balance at end of year
$
$
43,849
110,322
7,414
3,195
5,133
169,913
(89,895)
80,018
$
$
36,881
96,368
6,174
2,942
13,280
155,645
(73,954)
81,691
Depreciation charges for the years ended December 31, 2013 and 2012, were $14.4 million and $13.7 million, respectively.
As of December 31, 2013, the Company has pledged property, plant and equipment with a net book value of approximately $51.4
million of as security for its comprehensive credit facilities with banks in China.
8. Intangible Assets
The Company’s intangible asset at December 31, 2013 and 2012, are summarized as follows (figures are in thousands of USD):
Costs:
Patent technology
Management software license
Less: Accumulated amortization
Balance at end of the year
December 31,
2013
2012
$
$
2,067
699
2,766
(2,080)
686
$
$
1,901
622
2,523
(1,847)
676
For the years ended December 31, 2013 and 2012, amortization expenses were $0.2 million and $0.2 million, respectively.
The estimated aggregated amortization expense for the five succeeding years is $1.0 million with $0.2 million for each year.
9. Assets Held for Sale
Assets held for sale represent the remaining land use rights to be sold within the 12 months following December 31, 2013.
According to the agreement signed between the Company and Jingzhou Land Reserve Center, “JLRC,” a local PRC government bureau,
the Company agreed to sell the land use rights of Henglong with respect to 136,392 square meters of land located at Jingzhou City,
Hubei Province, the PRC, to JLRC for consideration of approximately $13.0 million. The settlement of the consideration is subject
to JLRC’s completion of its sale of such land use rights to be tendered in the open market. As of December 31, 2013, the Company
recognized and received consideration of $4.6 million upon the completion by JLRC of its sale of a portion of the land use rights, and
a related gain of $4.1 million (before tax) for the payment of the sale of partial land use rights was recorded as gain on other sales. The
costs of the land use rights for the remaining portion of the land was recorded as assets held for sale. Gain for the consideration of the
remaining land use rights to be sold will be recognized upon the completion by JLRC of its sale of such land use rights and the settlement
of the related payment to the Company.
10. Deferred Income Tax Assets
In accordance with the provisions of ASC Topic 740 “Income Taxes,” the Company assesses, on a quarterly basis, its ability to
realize its deferred tax assets. Based on the more likely than not standard in the guidance and the weight of available evidence, the
Company believes a valuation allowance against its deferred tax assets is necessary. In determining the need for a valuation allowance,
the Company considered the following significant factors: an assessment of recent years’ profitability and losses by tax authorities; the
Company’s expectation of profits based on margins and volumes expected to be realized (which are based on current pricing and volume
trends); the long period in all significant operating jurisdictions before the expiry of net operating losses, noting further that a portion of
the deferred tax asset is composed of deductible temporary differences that are subject to an expiry period until realized under tax law.
The Company will continue to evaluate the provision of valuation allowance in future periods.
The components of deferred income tax assets at December 31, 2013 and 2012, were as follows (figures are in thousands of USD):
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
December 31,
2013
2012
Losses carryforward (U.S.)( 1)
Losses carryforward (PRC)
Product warranties and other reserves
Property, plant and equipment
Share-based compensation
Bonus accrual
Other accruals
Others
Total deferred tax assets
Less: taxable temporary difference related to revenue recognition
Total deferred tax assets, net
Less: Valuation allowance
Total deferred tax assets, net of valuation allowance(2)
$
$
6,825 $
1,838
4,207
4,346
296
557
850
1,103
20,022
(793)
19,229
(8,918)
10,311 $
7,004
1,887
3,253
3,774
240
196
696
839
17,889
(397)
17,492
(8,988)
8,504
(1) The net operating loss carry forwards for the U.S. entity for income tax purposes are available to reduce future years' taxable
income. These carry forwards will expire, if not utilized, at varying times over the next 20 years. Net operating loss carryforwards
for non-U.S. entities can be carried forward for 5 years to offset taxable income. However, as of December 31, 2013, valuation
allowance was $8.9 million, including $7.3 million allowance for the Company’s deferred tax assets in the United States and $1.6
million allowance for the Company’s non-U.S. deferred tax assets. Based on the Company’s current operations in the United
States, management believes that the deferred tax assets in the United States are not likely to be realized in the future. For the
non-U.S. deferred tax assets, pursuant to certain tax laws and regulations in China, the management believes such amount will
not be used to offset future taxable income.
(2) Approximately $4.5 million and $4.1 million of deferred income tax asset as of December 31, 2013 and 2012, respectively, is
included in non-current deferred tax assets in the accompanying consolidated balance sheets. The remaining $5.8 million and
$4.4 million of deferred income tax asset as of December 31, 2013 and 2012, respectively, is included in the current deferred tax
assets.
The activity in the Company’s valuation allowance for deferred tax assets during the years ended December 31, 2013 and 2012,
are summarized as follows (figures are in thousands of USD):
Balance at beginning of year
Amounts provided for during the year
Amounts recovered during the year
Foreign currency translation
Balance at end of year
11. Bank Loans
Year Ended December 31,
2013
2012
8,988
70
(188)
48
8,918
$
$
8,138
4,111
(3,264)
3
8,988
$
$
Loans consist of the following at December 31, 2013 and 2012 (figures are in thousands of USD):
Short-term bank loan (RMB) (1)(2)
Short-term bank loan (USD) ( 3)
Subtotal
Debt issue cost
Amortization
Balance at end of the year
December 31,
2013
2012
$
$
7,381 $
30,000
37,381
(57)
57
37,381 $
10,341
30,000
40,341
(230)
173
40,284
(1) These loans are secured by property, plant and equipment of the Company and are repayable within one year. At December 31,
2013 and 2012, the weighted average interest rate was 6.22% and 6.46% per annum, respectively. Interest is to be paid on the
twentieth day of each month and the principal repayment is at maturity.
(2) On July 18, 2013, 2012, Jiulong entered in to a one-year loan agreement with China Construction Bank Jingzhou branch in the
amount of $1.6 million. The agreement contains certain financial and non-financial covenants, including but not limited to
restrictions on the utilization of the funds and the maintenance of an assets-liability ratio not exceeding 60%. As of December
31, 2013, the assets-liability ratio of Jiulong was 54.8% and the Company was in compliance with these covenants at December
31, 2013.
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
(3) On May 18, 2012, the Company entered into a credit agreement with ICBC Macau to obtain the Credit Facility of $30.0 million.
The Credit Facility would have expired on November 3, 2012, unless the Company drew down the line of credit in full prior to
such expiration date and the maturity date for the loan drawdown was the earlier of (i) 18 months from the drawdown or (ii) 1
month before the expiry of the Henglong Standby Letter of Credit issued by Industrial and Commercial Bank of China, Jingzhou
Branch, “ICBC Jingzhou,” as described below.
The interest rate of the Credit Facility is calculated based on a three-month LIBOR plus 2.25% per annum, subject to the
availability of funds and fluctuation at ICBC Macau’s discretion. The interest is calculated daily on a 360-day basis and is to be fixed
one day before the first day of each interest period. The interest period is defined as three months from the date of drawdown.
As security for the Credit Facility, the Company was required to provide ICBC Macau with the Henglong Standby Letter of
Credit for a total amount of not less than $31.6 million if the Credit Facility were to be fully drawn.
On May 22, 2012, the Company drew down the full amount of $30.0 million under the Credit Facility and provided the Henglong
Standby Letter of Credit for an amount of $31.6 million in favor of ICBC Macau. The Henglong Standby Letter of Credit issued by
ICBC Jingzhou is collateralized by Henglong’s notes receivable of RMB196.3 million (equivalent to approximately $32.2 million). The
Company also paid an arrangement fee of $0.1 million to ICBC Macau and $0.1 million to ICBC Jingzhou. The original maturity date
of the Credit Facility was May 22, 2013. On May 7, 2013, ICBC Macau agreed to extend the maturity date of the Credit Facility to May
13, 2014. The interest rate of the Credit Facility under the extended term is calculated based on the three-month LIBOR plus 2.0% per
annum. Except for the above, all other terms and conditions as stipulated in the ICBC Macau’s credit agreement remain unchanged. As
of December 31, 2013, the interest rate on the Credit Facility was 2.24% per annum.
12. Accounts and Notes Payable
The Company’s accounts and notes payable at December 31, 2013 and 2012, are summarized as follows (figures are in thousands
of USD):
Accounts payable - unrelated parties
Notes payable - unrelated parties (1)
Accounts and notes payable - unrelated parties
Accounts payable - related parties
Balance at end of year
December 31,
2013
2012
$
$
120,202 $
78,217
198,419
4,634
203,053 $
99,100
67,280
166,380
4,521
170,901
(1) Notes payable represent payables in the form of notes issued by the Company. The notes are endorsed by banks to ensure that
note holders will be paid after maturity. The Company has pledged cash deposits, notes receivable and certain property, plant and
equipment to secure notes payable granted by banks.
13. Accrued Expenses and Other Payables
The Company’s accrued expenses and other payables at December 31, 2013 and 2012, are summarized as follows (figures are in
thousands of USD):
Accrued expenses
Accrued interest
Other payables
Warranty reserves
Dividend payable to non-controlling interest shareholders of joint-ventures
Balance at end of year
14. Taxes Payable
December 31,
2013
2012
4,980 $
85
1,858
22,104
35
29,062 $
2,557
87
2,176
18,081
162
23,063
$
$
The Company’s taxes payable at December 31, 2013 and 2012, is summarized as follows (figures are in thousands of USD):
Value-added tax payable
Income tax payable
Other tax payable
CHINA AUTOMOTIVE SYSTEMS, INC.
- 58 -
$
December 31,
2013
2012
5,494 $
1,841
457
4,347
878
368
FY2013 ANNUAL REPORT
Balance at end of year
$
7,792 $
5,593
15. Amounts Due to Shareholders / Directors
The activity in the amounts due to shareholders/directors during the years ended December 31, 2013 and 2012, are summarized
as follows (figures are in thousands of USD):
Balance at beginning of the year
Increase (decrease) during the year
Foreign currency translation
Balance at end of year
December 31,
2013
2012
$
$
332 $
(35)
15
312 $
352
(21)
1
332
The amounts due to shareholders/directors were unsecured, interest-free and repayable on demand mainly resulting from expenses
paid on behalf of the Company by shareholders/directors.
16. Advances Payable
On December 31, 2013 and 2012, advances payable of the Company was $2.8 million and $2.6 million, respectively.
The amounts are special subsidies made by the Chinese government to the Company, to offset the cost and charges related to the
improvement of production capacities and improvement of the quality of products. For the government subsidies with no further
conditions to be met, the amounts are recorded as other income when received; for the amounts with certain operating conditions, the
government subsidies are recorded as advances payable when received and will be recorded as a deduction of related expenses and cost
when the conditions are met.
The balances are unsecured and interest-free and will be repayable to the Chinese government if the usage of such advance does
not continue to qualify for the subsidy.
17. Stock Options
The stockholders of the Company approved a stock incentive plan at the Annual Meeting of the Company held on June 28, 2005,
and the maximum number of common shares for issuance under this plan is 2,200,000. The term of the plan is 10 years. The stock
incentive plan provides for the issuance, to the Company’s officers, directors, management and employees who served over three years
or have given outstanding performance, of options to purchase shares of the Company’s common stock. Under the stock incentive plan,
the Company has issued 523,850 stock options under this plan, and there remain 1,676,150 stock options issuable in the future as of
December 31, 2013.
Under the aforementioned plans, the stock options granted will have an exercise price equal to the closing price of the Company’s
common stock traded on NASDAQ on the date of grant, and will expire two to five years after the grant date. Except for the 298,850
options granted to management on December 2008, which became exercisable on a ratable basis over the vesting period (3 years), the
others were exercisable immediately on the grant date. Stock options will be settled in shares of the Company’s common stock upon
exercise and are recorded in the Company’s consolidated balance sheets under the caption “Additional paid-in capital.” As of December
31, 2013, the Company has sufficient unissued registered common stock for settlement of the stock incentive plan mentioned above.
The fair value of stock options was determined at the date of grant using the Black-Scholes option pricing model. The Black-
Scholes option model requires management to make various estimates and assumptions, including expected term, expected volatility,
risk-free rate, and dividend yield. The expected term represents the period of time that stock-based compensation awards granted are
expected to be outstanding and is estimated based on considerations including the vesting period, contractual term and anticipated
employee exercise patterns. Expected volatility is based on the historical volatility of the Company’s stock. The risk-free rate is based
on the U.S. Treasury yield curve in relation to the contractual life of stock-based compensation instruments. The dividend yield
assumption is based on historical patterns and future expectations for the Company dividends.
During 2013 and 2012, assumptions used to estimate the fair value of stock options on the grant dates are as follows:
Issuance Date
August 13, 2013
August 15, 2012
Expected volatility
131.5
149.2
%
%
Risk-free rate
1.49
0.67
%
%
Expected term (years)
Dividend yield
5
5
0.00
0.00
%
%
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
The stock options granted during 2013 and 2012 were exercisable immediately and their fair value on the grant date using the
Black-Scholes option pricing model were $0.2 million and $0.1 million, respectively. For the years ended December 31, 2013 and 2012,
the Company recognized stock-based compensation expenses of $0.2 million and $0.1 million, respectively.
The activities of stock options are summarized as follows, including granted, exercised and forfeited.
Outstanding - January 1, 2012
Granted
Outstanding - December 31, 2012
Granted
Cancelled
Outstanding - December 31, 2013
Shares
67,500
22,500
90,000
22,500
(7,500)
105,000
Weighted-Average
Exercise Price
9.72
3.71
8.22
10.00
5.65
8.78
$
$
$
Weighted-Average Contractual
Term (years)
5
5
5
5
5
5
The following is a summary of the range of exercise prices for stock options that are outstanding and exercisable at December
31, 2013:
Range of Exercise Prices
$3.50 - $10.00
$10.01 - $18.00
Outstanding Stock
Weighted Average
Weighted Average
Number of Stock
Options
82,500
22,500
105,000
Remaining Life
3.13
1.52
Exercise Price
$
$
6.60
16.80
Options Exercisable
82,500
22,500
105,000
As of December 31, 2013 and 2012, the total intrinsic value of the Company’s stock options that were outstanding was $0.2
million and $0.04 million, respectively.
As of December 31, 2013 and 2012, the total intrinsic value of Company’s stock options that were exercisable was $0.2 million
and $0.04 million, respectively.
For the years ended December 31, 2013 and 2012, no Company’s stock options were exercised.
As of December 31, 2013 and 2012, the weighted average fair value of the Company’s stock options that were granted was $8.64
and $3.71, respectively.
18. Retained Earnings
Appropriated
Pursuant to the relevant PRC laws, the profits distribution of the Company’s Sino-foreign subsidiaries, which are based on their
PRC statutory financial statements, other than the financial statement that was prepared in accordance with generally accepted
accounting principles in the United States of America, are available for distribution in the form of cash dividends after these subsidiaries
have paid all relevant PRC tax liabilities, provided for losses in previous years, and made appropriations to statutory surplus at 10%.
When the statutory surplus reserve reaches 50% of the registered capital of a company, additional reserve is no longer required.
However, the reserve cannot be distributed to joint venture partners. Based on the business licenses of the PRC subsidiaries, the
registered capital of Henglong, Jiulong, Shenyang, USAI, Jielong, Wuhu, Hubei Henglong and Chongqing are $10.0 million, $4.2
million (equivalent to RMB35.0 million), $8.1 million (equivalent to RMB67.5 million), $2.6 million, $6.0 million, $3.8 million
(equivalent to RMB30.0 million), $39 million and $9.5 million (equivalent to RMB60.0 million), respectively.
For the years ended December 31, 2013 and 2012, the parent company did not declare any dividend or appropriate any statutory
reserves, and the subsidiaries appropriated statutory reserves of $0.1 million and $0.9 million, respectively, in respect of the dividends
that were declared.
19. Treasury Stock
Treasury stock represents share repurchased by the Company that are no longer outstanding and are held by the Company.
Treasury stock is accounted for under the cost method.
On August 15, 2012, the Board of Directors of the Company approved a share repurchase program under which the Company
may repurchase up to $3 million of its common stock for a period from August 13, 2012 to August 12, 2013. The repurchase program
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
does not obligate the Company to repurchase a minimum number of shares, and the program may be suspended or canceled without
prior notice.
As of December 31, 2013, under the repurchase program, which expired on August 12, 2013, the Company had repurchased
217,283 shares of the Company’s common stock for cash consideration of $1.0 million on the open market. The repurchased shares are
presented as “treasury stock” on the balance sheet.
20. Gain on Other Sales
Gain on other sales mainly consisted of net amount retained from sales of materials, property, plant and equipment and scraps.
For the year ended December 31, 2013, gain on other sales amounted to $7.6 million, including $3.3 million of gain on sales of materials
and iron scrap and aluminum scrap, and $4.3 million of gain on sales of property, plant and equipment, as compared to $4.4 million for
2012, including $3.5 million of gain on sales of materials and iron scrap and aluminum scrap, and $0.9 million of gain on sales of
property, plant and equipment.
21. Other Income, Net
The Company recorded government subsidies received with no further condition to be met as other income. As of December 31,
2013 and 2012, the Company has received such subsidies in the amounts of $1.1 million and $0.5 million, respectively.
The Chinese government provides subsidies to support enterprises in their Research and development, “R&D,” and renewal of
equipment. Government subsidies are generally classified as specific purpose subsidies (such as R&D activities and renewal of
equipment) and unspecified purpose subsidies. For specific purpose subsidies, accounting by the occurred evidence, subsidies for the
R&D activities first offset related R&D expenses that occurred, and subsidies for renewal of equipment offset the cost of related assets.
Unspecific purpose subsidies are generally recognized as other income.
22. Financial (Income) Expenses, Net
During the years ended December 31, 2013 and 2012, the Company recorded financial (income) expenses which are summarized
as follows (figures are in thousands of USD):
Accrual on maturity and make-whole redemption interest and coupon interest
Interest expense
Interest income
Foreign exchange loss, net
(Income) loss of note discount, net
Bank fees
Total financial (income) expenses, net
$
$
23. Loss on Change in Fair Value of Derivative
Year Ended December 31,
2013
2012
-
1,569
(2,836)
110
31
699
(427)
$
$
1,551
1,564
(1,422)
53
(38)
467
2,175
In February 2008, the Company issued to two accredited institutional investors, namely Lehman Brothers Commercial
Corporation Asia Limited, “Lehman Brothers,” and YA Global Investments L.P, “YA Global,” convertible notes in the principal amount
of $35.0 million, with a scheduled maturity date of February 15, 2013, the “convertible notes.”
The Company and YA Global reached a settlement agreement on April 8, 2009. Under the terms of the settlement agreement, the
Company paid on April 15, 2009 a redemption amount of $5.0 million to YA Global and YA Global waived its entitlement to the Other
Make Whole Amount (as defined in the convertible notes).
On March 1, 2011, the provisional liquidator acting on behalf of Lehman Brothers, the “LBCCA Liquidator,” converted
$6.4 million principal amount of the convertible notes at a conversion price of $7.0822 per share, and in turn the Company issued
907,708 shares of its common stock to LBCCA Liquidator.
On May 24, 2012, the Company and LBCCA Liquidator reached a settlement agreement. Under the terms of the settlement
agreement, the Company redeemed all the remaining convertible notes, the “Redemption,” and paid a redemption amount of
$32.4 million to LBCCA Liquidator on May 25, 2012, the “Redemption Date,” including $23.6 million of principal and $8.8 million of
interest. On the Redemption Date, the carrying value of the convertible notes was $33.8 million, including $23.6 million of principal,
$0.6 million of coupon interest, $8.6 million of make-whole amount payable and $1.0 million of derivative liabilities related to the
convertible notes.
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
The Company’s derivative financial instruments (liabilities) consist of the compound embedded derivative that originated in
connection with the above-mentioned convertible note payable and financing arrangement. Derivative liabilities are carried at fair value.
Changes in the fair value of compound derivative liabilities were recorded as a loss on change in fair value of derivative in the
condensed unaudited consolidated statement of operations and comprehensive income for the year ended December 31, 2012. For the
year ended December 31, 2012, the Company recorded a loss on change in fair value of derivative of $0.5 million. Due to the Redemption,
there was no gain or loss on change in fair value of derivative for the year ended December 31, 2013.
The following table summarizes the components of loss on change in fair value of derivative arising from fair value adjustments
to compound derivative liabilities during the year ended December 31, 2012 (figures are in thousands of USD):
Year Ended
Balances at January 1
Decrease due to convertible notes redemption on May 25, 2012
Loss in fair value adjustments
Balances at December 31
December 31, 2012
$
559
(1,008)
449
-
$
Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that
may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition,
option-based techniques are highly volatile and sensitive to changes in the trading market price of the Company's common stock, which
has a high estimated volatility. As of January 1, 2012 and December 31, 2012, the Company calculated the fair value of derivative
liabilities to be $0.6 million and $nil, respectively. During the year ended December 31, 2012, there was a change in the balance of the
fair value of the Company’s derivative liabilities at the beginning and the end of the period, mainly due to the Redemption. On January
1, 2012 and the Redemption Date, the Company calculated the fair value of derivative liabilities to be $0.6 million and $1.0 million,
respectively, mainly due to changes in the price of the Company’s common stock. From January 1 to the Redemption Date, the market
price of the Company’s common stock rose to $3.82 from $3.30 on January 1, 2012. Since the Company’s derivative liabilities consisted
of a conversion option that was embedded in the convertible notes payable, the intrinsic value of the conversion option was sensitive to
changes in the trading market price of the Company’s common stock. Since derivative financial instruments are initially and
subsequently carried at fair values, the Company’s income or loss reflects the volatility in these estimate and assumption changes.
The Company’s embedded conversion option derivative represents the conversion option, term-extending option, certain
redemption and put features in the Company’s convertible notes payable. The features embedded in the convertible notes were combined
into one compound embedded derivative that the Company measured at fair value using the Monte Carlo valuation technique. Monte
Carlo simulates multiple outcomes over the period to maturity using multiple assumption inputs. The following table sets forth (i) the
range of inputs for each significant assumption and (ii) the equivalent, or averages, of each significant assumption as of May 25, 2012,
the Redemption Date.
May 25, 2012 Assumptions:
Volatility
Market adjusted interest rates
Credit risk adjusted rates
Implied expected life (years)
Low
65.33 %
5.89 %
16.87 %
-
Range
High
Equivalent
102.57 %
17.95 %
16.87 %
-
79.02 %
11.97 %
16.87 %
0.73
The Monte Carlo technique requires the use of inputs that range across all levels in the fair value hierarchy. As a result, the
technique is a Level 3 valuation technique in its entirety. The calculations of fair value utilized the Company’s trading market values on
the calculation dates. The contractual conversion prices were adjusted to give effect to the value associated with the down-round and
anti-dilution protection. Expected volatility for each interval in the Monte Carlo process was established based upon the Company’s
historical volatility for historical periods consistent with the term of each interval in the calculation. Market adjusted interest rates give
effect to expected trends or changes in market interest rates by reference to historical trends in LIBOR. Credit risk adjusted rates, or
yields, were developed using bond curves, risk-free rates, market and industry adjustment factors for companies with similar credit
standings to the Company’s.
24. Income Taxes
The Company’s subsidiaries registered in the PRC are subject to state and local income taxes within the PRC at the applicable
tax rate of 25% on the taxable income as reported in their PRC statutory financial statements in accordance with the relevant income tax
laws applicable to foreign invested enterprise, unless preferential tax treatment is granted by local tax authorities. If the enterprise meets
certain preferential terms according to the China income tax law, such as assessment as an “Advanced Technology Enterprise” by the
government, then, the enterprise will be subject to enterprise income tax at a rate of 15%.
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
Pursuant to the New China Income Tax Law and the Implementing Rules, “New CIT,” which become effective as of January 1,
2008, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise to its foreign investors will be subject to a
10% withholding tax if the foreign investors are considered as non-resident enterprises without any establishment or place within China
or if the dividends payable have no connection with the establishment or place of the foreign investors within China, unless any such
foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.
Genesis, the Company’s wholly-owned subsidiary and the direct holder of the equity interests in the Company’s subsidiaries in
China, is incorporated in Hong Kong. According to the Mainland and Hong Kong Taxation Arrangement, dividends paid by a foreign-
invested enterprise in China to its direct holding company in Hong Kong will be subject to withholding tax at a rate of no more than 5%,
if the foreign investor owns directly at least 25% of the shares of the foreign-invested enterprise. Under the New CIT, if Genesis is
regarded as a non-resident enterprise and therefore is required to pay an additional 5% withholding tax for any dividends payable to it
from the PRC subsidiaries.
According to PRC tax regulation, the Company should withhold income taxes for the profit distributed from the PRC subsidiaries
to Genesis, the subsidiaries’ holding company incorporated in Hong Kong. The Company accounts for the profit that the PRC
subsidiaries intended to distribute to Genesis as deferred tax liabilities. For the years ended December 31, 2013 and 2012, the Company
recognized deferred tax liabilities of $0.07 million and $0.04 million, respectively, for profit to be distributed to Genesis of $1.4 million
and $0.8 million, respectively. For the remaining undistributed profits generated from the PRC subsidiaries, the Company intended to
reinvest in subsidiaries in mainland China permanently. As of December 31, 2013, the Company still has undistributed earnings of
approximately $158.5 million from investment in the PRC subsidiaries that are considered permanently reinvested. Had the undistributed
earnings been distributed to Genesis and not permanently reinvested, the tax provision of approximately $7.9 million would have been
recorded. Such undistributed profits would be kept in Genesis (if distributed by PRC subsidiaries) and not further distributed to the
United States going forward.
During 2008, Jiulong was awarded the title of “High & New Technology Enterprise” and, based on the PRC income tax law, it
was subject to enterprise income tax at a rate of 15% for 2008, 2009 and 2010. In 2011, the Company passed the re-assessment by the
government based on PRC income tax laws. Accordingly, the Company will continue to be taxed at the 15% tax rate in 2011, 2012 and
2013.
During 2008, Henglong was awarded the title of “High & New Technology Enterprise” and, based on the PRC income tax law,
it was subject to enterprise income tax at a rate of 15% for 2008, 2009 and 2010. In 2011, the Company passed the re-assessment by the
government, based on PRC income tax laws. Accordingly, it will continue to be taxed at the 15% tax rate in 2011, 2012 and 2013.
During 2009, Shenyang was awarded the title of “High & New Technology Enterprise” and, based on the PRC income tax law,
it was subject to enterprise income tax at a rate of 15% for 2009, 2010 and 2011. In 2012, the Company passed the re-assessment by the
government based on PRC income tax laws. Accordingly, it will continue to be taxed at the 15% tax rate in 2012, 2013 and 2014.
According to the New CIT, Wuhu has been subject to income tax at a rate of 11%, 12% and 12.5%, respectively, for 2010, 2011
and 2012. Wuhu was awarded the title of “High & New Technology Enterprise” and, based on the PRC income tax law, it will be subject
to enterprise income tax at a rate of 15% for 2013 and 2014.
According to the New CIT, Jielong has been subject to tax at a rate of 12.5 % in 2010 and 2011, and 25 % in 2012 and 2013.
According to the New CIT, Hubei Henglong has been subject to tax at a rate of 12.5 % from 2010 to 2012. In November 2011,
Hubei Henglong was awarded the title of “High & New Technology Enterprise”, based on the PRC income tax law. Accordingly, it will
be subject to enterprise income tax at a rate of 15 % for 2013.
According to the New CIT, USAI and Testing Center were exempted from income tax in 2009, and each has been subject to
income tax at a rate of 12.5 % in 2010 and 2011, and 25 % in 2012 and 2013.
Chongqing Henglong was established in 2012. According to the New CIT, Chongqing Henglong is subject to income tax at a
uniform rate of 25%. No provision for Chongqing Henglong is made as it had no assessable income for the years ended December 31,
2013 and 2012.
Based on Brazilian income tax laws, Brazil Henglong is subject to income tax at a uniform rate of 15%, and a resident legal
person is subject to additional tax at a rate of 10% for the part of taxable income over $0.12 million (equivalent to BRL 0.24 million).
The Company had no assessable income in Brazil for the years ended December 31, 2013 and 2012.
The profits tax rate of Hong Kong is 16.5%. No provision for Hong Kong tax is made as Genesis is an investment holding
company, and had no assessable income in Hong Kong for the years ended December 31, 2013 and 2012.
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
The enterprise income tax rate of the United States is 35%. No provision for U.S. tax is made as the Company had no assessable
income in the United States for the years ended December 31, 2013 and 2012.
Income tax expense was $5.5 million for the year ended December 31, 2013, compared to $4.4 million for the year ended
December 31, 2012, representing an increase of $1.1 million, or 25.0%, which was mainly due to an increase in income before tax and
a decrease in effective tax rate. The effective tax rate decreased from 16.2% for the year ended December 31, 2012 to 14.3% for the
year ended December 31, 2013, primarily due to an increase in technological development expenses of the Company in 2013. According
to PRC tax regulations, the Company can deduct 1.5 times the technological development expenses when its tax payable was calculated.
The provision for income taxes from continuing operations was calculated as follows (figures are in thousands of USD):
Tax rate
Income before income taxes
Federal tax at statutory rate
Fair value change in convertible bond
Change of income tax rate
Tax benefit of double-deductible R&D expense
Gain on redemption of convertible notes
Effect of differences in foreign tax rate
Provision on valuation allowance for deferred income tax – U.S.
Provision on valuation allowance for deferred income tax – PRC
Other differences
Total income tax expense
Year Ended December 31,
2013
35 %
2012
35 %
$
$
$
38,241
13,384
-
-
(2,793)
-
(6,175)
(178)
107
1,138
5,483
$
$
$
27,055
9,470
157
511
(1,813)
(497)
(5,427)
406
443
1,141
4,391
The combined effects of the income tax exemption and reduction available to the Company are as follows (figures are in thousands
of USD unless otherwise indicated):
Tax holiday effect
Basic net income per share effect
Diluted net income per share effect
Year Ended December 31,
2013
2012
$
$
6,175
0.22
0.22
5,427
0.19
0.19
The Company is subject to examination in the United States and China. The Company's tax years for 2003 through 2013 are still
open for examination in China. The Company's tax years for 2005 through 2013 are still open for examination in the United States.
Uncertain Tax Positions
The Company did not have any uncertain tax positions for the years ended December 31, 2012 and 2013.
25. Discontinued operations – Zhejiang
Zhejiang Henglong & Vie Pump-Manu Co., Ltd., “Zhejiang,” in which the Company owned a 51 % equity interest prior to its
disposal in May 2012, was mainly engaged in the production and sales of power steering pumps. Given the power steering pump business
has slowly lost its market share in the recent years due to market competition, lower market demand and replacement of hydraulic
pressure steering by electric power steering, the Company sold its 51% equity interest in Zhejiang to Vie Group, the non-controlling
shareholder of Zhejiang, on May 21, 2012. Pursuant to ASC Topic 205-20, “Presentation of Financial Statements—Discontinued
Operations” , the business of Zhejiang, the “Zhejiang business,” is considered as discontinued operations because: (a) the operations
and cash flows of Zhejiang will be eliminated from the Company’s operations as the Company will not continue to purchase power
steering pumps from Zhejiang starting from August 2012; and (b) the Company would not have the ability to influence the operation or
financial policies of Zhejiang subsequent to the sale. Before the sale, Zhejiang was identified as a product sector for the sales of power
steering pumps of the Company, please see Note 32 for the details of segment reporting. For the year ended December 31, 2012, the
purchases from Zhejiang by the Company amounted to $0.4 million, which were eliminated for the preparation of the consolidated
financial statements before the disposal of Zhejiang. There was no purchase from Zhejiang for the year ended December 31, 2013.
The following table summarizes the results of the Zhejiang business included in the consolidated statements of operations and
comprehensive income as discontinued operations (figures are in thousands of USD).
CHINA AUTOMOTIVE SYSTEMS, INC.
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Year Ended
December 31, 2012
FY2013 ANNUAL REPORT
Operational profit from component of discontinued operations, net of tax
Income from disposing of component of discontinued operations, net of tax
Income from discontinued operations, net of tax
$
$
157
2,494
2,651
The following table summarizes the revenue and pretax profit of the Zhejiang business reported as discontinued operations
(figures are in thousands of USD).
Revenue from component of discontinued operations
Pretax profit from component of discontinued operations
Year Ended
December 31, 2012
$
$
7,423
165
Summarized assets and liabilities from the discontinued operations as of the disposal date were as follows (figures are in thousands
of USD):
Assets of discontinued operations
Current assets
Non-current assets
Total assets of discontinued operations
Liabilities of discontinued operations
Current liabilities
Non-current liabilities
Total liabilities of discontinued operations
May 21, 2012
$
$
$
20,735
6,623
27,358
16,823
-
16,823
The Company did not make separate disclosure of the cash flows of Zhejiang in its condensed consolidated statements of cash
flows in this Report, as they are considered to be immaterial in the periods presented.
26. Income per Share
In periods when the Company generates income, the Company calculates basic earnings per share using the two-class method,
pursuant to ASC 260 , “Earnings Per Share.” The two-class method is required as the Company’s convertible notes qualify as
participating securities, having the right to receive dividends should dividends be declared on common stock. Under this method,
earnings for the period are allocated on a pro-rata basis to the common stockholders and to the holders of convertible notes based on the
weighted average number of common shares outstanding and the number of shares that could be converted. The Company does not use
the two-class method in periods when it generates a loss as the holders of the convertible notes do not participate in losses.
For diluted earnings per share, the Company uses the more dilutive of the if-converted method or the two-class method for
convertible notes and the treasury stock method for options, assuming the issuance of common shares, if dilutive, resulting from the
exercise of options and warrants.
The calculations of diluted income per share attributable to the parent company were (figures are in thousands of USD):
$
Numerator:
Net income attributable to parent company
Allocation to convertible notes holders
Net income attributable to the parent company’s common shareholders – Basic
and Diluted
Denominator:
Weighted average ordinary shares outstanding – Basic
Dilutive effects of stock options
Denominator for dilutive income per share – Diluted
Net income per share attributable to the parent company’s common shareholders
Basic
Diluted
Year Ended December 31,
2013
2012
26,789
-
$
26,789
28,043,019
13,125
28,056,144
0.96
0.95
20,742
(934)
19,808
28,213,163
2,204
28,215,367
0.70
0.70
The calculations of diluted income from continuing operations per share attributable to the parent company were (figures are in
thousands of USD):
Year Ended December 31,
2013
2012
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
Numerator:
Net income from continuing operations
Net income from continuing operations attributable to noncontrolling interest
Net income from continuing operations attributable to shareholders
Allocation to convertible notes holders
Net income from continuing operations attributable to the parent company’s
common shareholders – Basic and Diluted
$
Denominator:
Weighted average shares outstanding
Dilutive effects of stock options
Denominator for dilutive income per share – Diluted
$
33,065
6,276
26,789
-
26,789
22,835
4,667
18,168
(819)
17,349
28,043,019
13,125
28,056,144
28,213,163
2,204
28,215,367
Net income from continuing operations per common share attributable to parent
company – Basic
Net income from continuing operations per common share attributable to parent
company – Diluted
$
$
0.96
0.95
$
$
0.61
0.61
As of December 31, 2013 and 2012, the exercise prices for 52,500 shares and 67,500 shares, respectively, of outstanding stock
options were above the weighted average market price of the Company’s common stock during the year ended December 31, 2013 and
2012, respectively, and these stock options were excluded from the calculation of the diluted income per share for the corresponding
periods presented.
For the year ended December 31, 2012, 1,331,305 shares issuable upon conversion of convertible notes that were then outstanding
have not been included in the computation, because such inclusion would have had an anti-dilutive effect.
27. Significant Concentrations
A significant portion of the Company’s business is conducted in China where the currency is the RMB. Regulations in China
permit foreign owned entities to freely convert the RMB into foreign currency for transactions that fall under the "current account",
which includes trade related receipts and payments, interest and dividends. Accordingly, the Company’s Chinese subsidiaries may use
RMB to purchase foreign exchange for settlement of such "current account" transactions without pre-approval.
China Automotive, the parent company, may depend on Genesis and HLUSA dividend payments, which are generated from their
subsidiaries and their subsidiaries’ interests in the Sino-foreign joint ventures in China, “China-based Subsidiaries,” after they receive
payments from the China-based Subsidiaries. Regulations in the PRC currently permit payment of dividends of a PRC company only
out of accumulated profits as determined in accordance with accounting standards and regulations in China. Under PRC law China-
based Subsidiaries are required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year to their
general reserves until the cumulative amount reaches 50% of their paid-in capital. These reserves are not distributable as cash dividends,
or as loans or advances. These foreign-invested enterprises may also allocate a portion of their after-tax profits, at the discretion of their
boards of directors, to their staff welfare and bonus funds. Any amounts so allocated may not be distributed and, accordingly, would not
be available for distribution to Genesis and HLUSA.
The PRC government also imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the
remittance of currencies out of China, the China-based Subsidiaries may experience difficulties in completing the administrative
procedures necessary to obtain and remit foreign currencies. If China Automotive is unable to receive dividend payments from its
subsidiaries and China-based subsidiaries, China Automotive may be unable to effectively finance its operations or pay dividends on its
shares.
Transactions other than those that fall under the "current account" and that involve conversion of RMB into foreign currency are
classified as "capital account" transactions; examples of "capital account" transactions include repatriations of investment by or loans to
foreign owners, or direct equity investments in a foreign entity by a China domiciled entity. "Capital account" transactions require prior
approval from China's State Administration of Foreign Exchange, or SAFE, or its provincial branch to convert a remittance into a foreign
currency, such as U.S. Dollars, and transmit the foreign currency outside of China.
This system could be changed at any time and any such change may affect the ability of the Company or its subsidiaries in China
to repatriate capital or profits, if any, outside China. Furthermore, SAFE has a significant degree of administrative discretion in
implementing the laws and has used this discretion to limit convertibility of current account payments out of China. Whether as a result
of a deterioration in the Chinese balance of payments, a shift in the Chinese macroeconomic prospects or any number of other reasons,
China could impose additional restrictions on capital remittances abroad. As a result of these and other restrictions under the laws and
regulations of the People's Republic of China, or the PRC, the Company’s China subsidiaries are restricted in their ability to transfer a
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
portion of their net assets to the parent. The Company has no assurance that the relevant Chinese governmental authorities in the future
will not limit further or eliminate the ability of the Company’s Chinese subsidiaries to purchase foreign currencies and transfer such
funds to the Company to meet its liquidity or other business needs. Any inability to access funds in China, if and when needed for use
by the Company outside of China, could have a material and adverse effect on the Company’s liquidity and its business.
The Company grants credit to its customers including Xiamen Joylon, Shanghai Fenglong, Beijing Henglong and Jiangling Yude
that are related parties of the Company. The Company’s customers are mostly located in the PRC except for Chrysler North America,
which is in the U.S.
In 2013, the Company’s ten largest customers accounted for 71.8% of the Company’s consolidated sales, with 1 customer
accounting for more than 10% of consolidated sales (as 11.1% of consolidated sales).
In 2012, the Company’s ten largest customers accounted for 73.8% of the Company’s consolidated sales, with 1 customer
accounting for more than 10% of consolidated sales (as 11.7% of consolidated sales).
At December 31, 2013 and 2012, approximately 3.1% and 4.5% of accounts receivable were from trade transactions with the
aforementioned customer.
28. Related Party Transactions
The Company’s related party transactions include product sales, material purchases and purchases of equipment and technology.
These transactions were consummated at fair market price and under similar terms as those with the Company's customers and suppliers.
On some occasions, the Company’s related party transactions also include purchase/sale of capital stock of the joint ventures and sale
of property, plant and equipment.
Related sales and purchases: During the years ended December 31, 2013 and 2012, the joint ventures entered into related party
transactions with companies with common directors as shown below (figures are in thousands of USD):
Merchandise Sold to Related Parties
Honghu Changrun
Xiamen Joylon
Xiamen Automotive Parts
Shanghai Fenglong
Jiangling Yude
Beijing Henglong
Other Related Parties
Total
Technology Sold to Related Parties
Year Ended December 31,
2013
2012
-
6,152
2,757
406
583
27,283
272
37,453
$
$
81
7,055
-
377
103
19,826
-
27,442
$
$
Year Ended December 31,
2013
2012
Beijing Henglong
$
88
$
86
Materials Purchased from Related Parties
Honghu Changrun
Jiangling Tongchuang
Jingzhou Tongying
Hubei Wiselink
Wuhan Tongkai
Other Related Parties
Total
Technology and Services Purchased from Related Parties
Year Ended December 31,
2013
2012
$
$
1,258
9,025
12,622
1,106
1,897
8
25,916
$
$
1,018
7,653
9,436
1,190
693
-
19,990
Year Ended December 31,
2013
2012
CHINA AUTOMOTIVE SYSTEMS, INC.
- 67 -
FY2013 ANNUAL REPORT
Changchun Hualong
Jingzhou Derun
Honghu Changrun
Beijing Hualong
Total
Equipment Purchased from Related Parties
$
$
422
492
285
432
1,631
365
-
317
137
819
Year Ended December 31,
2013
2012
Hubei Wiselink
$
5,373
$
4,250
Related receivables, advance payments and account payable: As at December 31, 2013 and 2012, accounts receivables, advance
payments and account payable between the Company and related parties are as shown below (figures are in thousands of USD):
Accounts receivables from Related Parties
Xiamen Joylon
Xiamen Automotive Parts
Shanghai Fenglong
Jiangling Yude
Jingzhou Tongying
Beijing Henglong
Other Related Parties
Total
Other Receivables from Related Parties
Wuhan Dida
Jiulong Material
Other Related Parties
Total
Less: provisions for bad debts
Balance at end of year
December 31,
2013
2012
4,076 $
843
298
2,008
485
9,426
58
17,194 $
4,182
-
208
903
604
6,389
-
12,286
December 31,
2013
2012
62 $
621
46
729
(621)
108 $
78
608
29
715
(608)
107
$
$
$
$
Other receivables from related parties are primarily unsecured demand loans, with no stated interest rate or due date.
Accounts payable to Related Parties
Shanghai Tianxiang
Jiangling Tongchuang
Hubei Wiselink
Jingzhou Tongying
Wuhan Tongkai
Honghu Changrun
Other Related Parties
Total
Advanced equipment payments to Related Parties
Hubei Wiselink
Other advance payments to Related Parties
December 31,
2013
2012
341 $
891
755
1,911
620
94
22
4,634 $
362
1,791
520
1,508
184
156
-
4,521
$
$
December 31,
2013
2012
$
2,097 $
4,162
CHINA AUTOMOTIVE SYSTEMS, INC.
- 68 -
FY2013 ANNUAL REPORT
Jiangling Tongchuang
Jingzhou Tongying
Changchun Hualong
Jingzhou Derun
Wuhan Tongkai
Honghu Changrun
Total
Loan to Related Parties
December 31,
2013
2012
176 $
-
86
-
181
423
866 $
542
62
159
13
-
3
779
$
$
During the year ended December 31, 2013, certain of the Company’s subsidiaries provided short-term loans to related parties of
the Company in the aggregate principal amount of approximately $22.9 million (RMB 140.8 million). The contractual period of each
loan was three months or less from the date of the extension of the loan. Out of the total amount, loans of approximately US$ 15.8
million (RMB 97.0 million) bore an interest rate of 5.6% per annum, which were entered into for the purpose of generating returns for
the Company’s idle cash resulting from the seasonality of its business and assisting the borrowing entities in addressing certain cash
flow needs. For loans of approximately US$ 7.1 million (RMB 43.8 million) to related parties which primarily consisted of loans with
repayment terms of less than 3 days, the Company did not charge interest due to their short-term maturity.
All of these loans qualify for net reporting in accordance with ASC 230 “Statement of Cash Flows”. As of December 31, 2013,
all of these loans have been repaid to the Company. For the year ended December 31, 2013, the Company received $0.2 million in
interest income from these loans to the related parties.
For the years ended December 31, 2013 and 2012, the loans to related parties were comprised of the following:
Henglong Real Estate(1)
Hubei Wiselink(2)
Xiamen Joylon(2)
Jiulong Machine(3)
Total
For the Year Ended December 31,
2013
2012
$
$
18,309 $
3,253
943
399
22,904 $
-
-
-
-
-
(1) Mr. Hanlin Chen, Chairman of the Company, Mr. Wu Qizhou, the CEO of the Company, and the spouse of Mr. Andy Tse, Senior
Vice President of the Company, collectively own 59.22% of the equity interests of Henglong Real Estate.
(2) Hubei Wiselink and Xiamen Joylon are directly and indirectly controlled by Mr. Hanlin Chen, Chairman of the Company.
(3) Jiulong Machine is a non-controlling interest shareholder that owns 20% and 10% of the equity interests of Henglong and Jiulong,
subsidiaries of the Company, respectively.
The Company has no ongoing commitments for the loans to related parties.
All of the above loans, including short-term loans entered into with related parties prior to September 30, 2013, were identified
as related party transactions subsequent to December 31, 2013. These loans were not disclosed in the Company’s Form 10-Q for each
of the three-month periods ended March 31, 2013 and September 30, 2013. The missing disclosure related to such loans to related parties
in the Form 10-Qs is as follows:
For the Three Months Ended
Henglong Real Estate
Hubei Wiselink
Xiamen Joylon
Jiulong Machine
Total
March 31, 2013
September 30, 2013
16,669
3,253
-
-
19,922
-
-
287
399
686
The Company recognized interest income from these loans of $0 and $0.2 million for the three-month periods ended March 31,
2013 and September 30, 2013, respectively.
All the short-term loans were entered into and settled within the same quarter. There were no loan activities with related parties
for the three-month period ended June 30, 2013.
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
The Company has evaluated the significance of this disclosure omission in the Form 10-Qs for previous periods and, in the
opinion of management, the effect is not material to the Company’s condensed unaudited financial statements for any period previously
reported. The Company will include the historical disclosure information in subsequent Quarterly Reports on Form 10-Q as applicable.
The Company's related parties, such as Jingzhou Derun, and Wuhan Dida, pledged certain land use rights and buildings as security
for the Company’s comprehensive credit facility.
As of March 31, 2014, the date the Company issued the financial statements, Hanlin Chen, Chairman, owns 63.65% of the
common stock of the Company and has the effective power to control the vote on substantially all significant matters without the
approval of other stockholders.
29. Commitments and Contingencies
Legal proceedings
Securities Action - Southern District of New York. On October 25, 2011, a purported securities class action, the “Securities
Action,” was filed in the United States District Court for the Southern District of New York on behalf of all purchasers of the Company’s
securities between March 25, 2010 and March 17, 2011. On February 24, 2012, the plaintiffs filed an amended complaint, changing the
purported class period to between May 12, 2009 and March 17, 2011. The amended complaint alleges that the Company, certain of its
present officers and directors, and the Company’s former independent accounting firm violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934, and the rules promulgated thereunder, and seeks unspecified damages. The Company filed a motion to dismiss
the amended complaint, which was fully briefed on April 18, 2012. On August 8, 2012, the court denied the Company’s motion to
dismiss the amended complaint. On September 4, 2012, the Company filed an answer to the amended complaint. On January 15, 2013,
plaintiffs filed a motion to certify the purported class, which was fully briefed on April 8, 2013. On May 31, 2013, the court denied
plaintiffs’ motion to certify the purported class, and, on July 3, 2013, the court issued its order and opinion. On July 17, 2013, plaintiffs
filed a petition for permission to appeal the order denying class certification, and, on August 1, 2013, the Company filed an answer in
opposition to the petition. On October 23, 2013, the Court of Appeals for the Second Circuit denied plaintiffs’ petition for permission
to appeal. On December 6, 2013, plaintiffs filed a motion for preliminary approval of a settlement with the Company’s former
independent accounting firm and certification of a proposed settlement class. On January 7, 2014, the district court held a status
conference. On January 15, 2014, the district court denied plaintiffs’ motion for preliminary approval of settlement and certification of
a proposed settlement class. On February 20, 2014, the district court held a telephonic status conference regarding plaintiffs’ remaining
individual claims and issued a scheduling order setting deadlines for fact and expert discovery (May 30, 2014 and June 30, 2014,
respectively), motions for summary judgment (August 1, 2014), and pretrial materials (September 25, 2014). The Company and
plaintiffs have reached a settlement in principle and, on March 28, 2014, entered into a settlement agreement, which includes a dismissal
of all claims by plaintiffs against the Company and its current and former officers and directors, with no admission of any wrongdoing
or liability. The settlement is not material to the consolidated financial statements for the year ended December 31, 2013.
Derivative Action - Delaware Chancery Court. On December 23, 2011, a purported shareholder derivative action was filed in the
Court of Chancery of the State of Delaware, the “Court of Chancery,” on behalf of the Company. The complaint alleged that certain of
the Company’s current officers and directors breached their fiduciary duties to the Company in relation to the Company’s accounting
of convertible notes issued in February 2008. On January 25, 2012, a second purported shareholder derivative action was filed in the
Court of Chancery on behalf of the Company. On February 3, 2012, the Court of Chancery consolidated the two cases, which were
stayed pending the outcome of the motion to dismiss in the Securities Action. On October 23, 2012, the derivative plaintiffs filed a
consolidated amended complaint on behalf of the Company, the “Derivative Action.” The consolidated complaint alleged that certain
of the Company’s current officers and directors breached their fiduciary duties to the Company in relation to the Company’s accounting
of the convertible notes issued in February 2008. The consolidated complaint set forth three causes of action for breach of fiduciary
duties, unjust enrichment and insider trading. On January 7, 2013, the Company filed a motion to dismiss the Derivative Action. That
motion was fully briefed on February 28, 2013, and oral argument was held before the Court of Chancery on May 6, 2013. On August
30, 2013, the Court of Chancery dismissed all of the derivative plaintiffs’ claims with prejudice. The time for the derivative plaintiffs to
appeal the Court of Chancery’s decision expired on September 30, 2013 and, accordingly, the Derivative Action has terminated.
Other than the above, the Company is not a party to any pending or, to the best of the Company’s knowledge, any threatened
legal proceedings. In addition, no director, officer or affiliate of the Company, or owner of record of more than five percent of the
securities of the Company, or any associate of any such director, officer or security holder is a party adverse to the Company or has a
material interest adverse to the Company in reference to pending litigation.
Commitments
In addition to bank loans, notes payables and the related interest, the following table summarizes the Company’s noncancelable
commitments and having initial terms in excess of one year as of December 31, 2013 (figures are in thousands of USD):
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
2014
2015
2016
2017
Thereafter
Total
Payment Obligations by Period
Obligations for service agreements
Obligations for purchasing
agreements
Total
$
374 $
- $
$
9,168
9,542 $
233
233 $
- $
-
- $
- $
-
- $
- $
-
- $
374
9,401
9,775
30. Off-Balance Sheet Arrangements
At December 31, 2013 and 2012, the Company did not have any transactions, obligations or relationships that could be considered
off-balance sheet arrangements.
31. Subsequent Events
The Company and plaintiffs have reached a settlement in principle and, on March 28, 2014, entered into a settlement agreement,
which includes a dismissal of all claims by plaintiffs against the Company and its current and former officers and directors, with no
admission of any wrongdoing or liability (see Note 29).
32. Segment Reporting
The accounting policies of the product sectors are the same as those described in the summary of significant accounting policies
except that the disaggregated financial results for the product sectors have been prepared using a management approach, which is
consistent with the basis and manner in which management internally disaggregates financial information for the purposes of assisting
them in making internal operating decisions. Generally, the Company evaluates performance based on stand-alone product sector
operating income and accounts for inter segment sales and transfers as if the sales or transfers were to third parties, at current market
prices.
As of both December 31, 2013 and 2012, the Company had eleven product sectors, five of which were principal profit makers
and were reported as separate sectors and engaged in the production and sales of power steering (namely Henglong, Jiulong, Shenyang,
Wuhu and Hubei Henglong). The other six sectors were engaged in the production and sale of sensor modular (namely USAI), EPS
(namely Jielong), provision of after sales and R&D services (namely HLUSA), production and sale of power steering (namely
Chongqing Henglong), and trade (namely Brazil Henglong), and the holding company (namely Genesis). Since the revenues, net income
and net assets of these six sectors are less than 10% of its segment in the condensed consolidated financial statements, the Company
incorporated these six sectors into “Other Sectors”.
As discussed in Discontinued Operation - Zhejiang above (see Note 25), Zhejiang was identified as a product sector for the sales
of power steering pumps of the Group prior to disposal on May 21, 2012. After the Company sold its 51% equity interest in Zhejiang
on May 21, 2012 and presented it as a discontinued operation.
The Company’s product sector information from continuing operations is as follows (figures are in thousands of USD):
Net Sales
Year Ended December 31,
Net Income from Continuing Operations
Year Ended December 31,
2013
2012
2013
2012
$
$
Henglong
Jiulong
Shenyang
Wuhu
Hubei Henglong
Other Sectors
Total Segments
Corporate
Eliminations
Total consolidated
(1) $5.2 million and $7.0 million included in the respective balances of $8.9 million and $9.2 million were income from investment
187,051 $
71,120
31,068
30,687
40,962
47,202
408,090
-
(72,085)
336,005 $
22,061
932
863
529
9,188 (1)
1,142
34,715
1,973
(13,853)
22,835
260,636
77,691
41,536
26,333
48,087
36,444
490,727
-
(75,569)
415,158
25,686
2,141
1,796
223
8,871 (1)
1,087
39,804
(2,035)
(4,704)
33,065
$
$
$
in Henglong in 2013 and 2012, respectively, which have been eliminated at the consolidation level.
Inventories
Year Ended December 31,
Total Assets
Year Ended December 31,
2013
2012
2013
2012
Henglong
$
21,451
$
18,192 $
315,309
$
250,291
CHINA AUTOMOTIVE SYSTEMS, INC.
- 71 -
FY2013 ANNUAL REPORT
Jiulong
Shenyang
Wuhu
Hubei Henglong
Other Sectors
Total Segments
Corporate
Eliminations
Total consolidated
12,186
2,994
2,958
12,054
3,807
55,450
-
(4,058)
51,392
$
9,727
3,462
3,330
9,734
5,969
50,414
-
(6,872)
43,542 $
74,997
43,358
25,528
138,674
44,743
642,609
157,158
(234,160)
565,607
71,190
37,896
25,185
119,342
55,723
559,627
156,007
(229,809)
485,825
Depreciation and Amortization
Year Ended December 31,
Capital Expenditures
Year Ended December 31,
2013
2012
2013
2012
$
$
Henglong
Jiulong
Shenyang
Wuhu
Hubei Henglong
Other Sectors
Total Segments
Zhejiang(1)
Corporate
Eliminations
Total consolidated
$
(1) Please refer to Discontinued Operation - Zhejiang above (see Note 25)
5,460
4,546
723
605
2,104
1,384
14,822
-
21
(256)
14,587
$
4,952 $
4,655
600
580
1,858
1,318
13,963
569
20
(642)
13,910 $
8,073
673
451
759
4,239
1,043
15,238
-
-
(367)
14,871
$
$
14,470
3,120
576
399
2,075
1,069
21,709
570
-
(3,200)
19,079
Financial information segregated by geographic region is as follows (figures are in thousands of USD):
Net Sales(1)
Year Ended December 31,
Long-term assets
As of December 31
2013
2012
2013
2012
Geographic region:
United States
China
Other foreign countries
Total consolidated
$
(1) Revenue is attributed to each country based on location of customers.
50,281
363,901
976
415,158
$
$
$
43,470 $
290,883
1,652
336,005 $
$
841
89,818
13
90,672 (2) $
751
91,380
20
92,151 (2)
Pursuant to ASC 280-10-50-41, the non-current deferred tax assets of $4.5 million and $4.1 million were excluded from the long-
term assets as of December 31, 2013 and 2012, respectively.
[Internationally left blank]
CHINA AUTOMOTIVE SYSTEMS, INC.
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FY2013 ANNUAL REPORT
Investor Information
Annual Meeting
The Annual Meeting of China Automotive Systems
stockholders will be held on September 16, 2014
(Tuesday) at 10 am local time at Conference Hall,
Royal Victoria Hotel, 6699 South Huandao Road,
Siming District, Xiamen City, Fujian Province, PRC
Independent Public Accountant
PRICEWATERHOUSECOOPERS ZHONG TIAN LLP
11/F PricewaterhouseCoopers Center
2 Corporate Ave., 202 Hu Bin Road
Huangpu District, Shanghai, PRC
www.pwccn.com
Transfer Agent and Registrar
SECURITIES TRANSFER CORPORATION
2591 Dallas Parkway Suite102
Frisco, Texas 75034, USA
Phone: +1-469-633-0101
www.stctransfer.com
Investor Relations
GRAYLING
102 Madison Avenue
12th Floor, New York 10016
Phone: +1-646-284-9400
www.grayling.com
Corporate Headquarters
CHINA AUTOMOTIVE SYSTEMS, INC.
D8 Henglong Building
Optics Valley Software Park
No. 1 Guanshan Avenue
Wuhan City
No. 1 Henglong Road
Yu Qiao Development Zone
Shashi District, Jingzhou City
Hubei Province
People’s Republic of China
www.caasauto.com
Board of Directors
HANLIN CHEN
Chairman
QIZHOU WU
Director, Chief Executive Officer
ROBERT TUNG
Independent Non-executive Director
GUANGXUN XU
Independent Non-executive Director
ARTHUR WONG
Independent Non-executive Director
Executive Officers
QIZHOU WU
Chief Executive Officer
JIE LI
Chief Financial Officer
DAMING HU
Chief Accountant
ANDY YIU WONG TSE
Senior Vice President
YIJUN XIA
Vice President
HAIMIAN CAI
Vice President
CHINA AUTOMOTIVE SYSTEMS, INC.
Henglong Building, D8 Optics Valley Software Park
No.1 Guanshan Avenue, East Lake Hi-tech Zone
Wuhan City, Hubei Province, 430073, PR of China
Tel: +86(27) 8757 0027 Fax: +86(27) 8757 0088
http://www.caasauto.com