China Automotive Systems, Inc.
Annual Report 2014

Plain-text annual report

Morningstar® Document Research℠ FORM 10-KCHINA AUTOMOTIVE SYSTEMS INC - CAASFiled: March 26, 2015 (period: December 31, 2014)Annual report with a comprehensive overview of the companyThe information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The userassumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot belimited or excluded by applicable law. Past financial performance is no guarantee of future results. UNITED STATESSECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K(Mark One) xANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2014Or ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File Number: 000-33123 CHINA AUTOMOTIVE SYSTEMS, INC.(Exact name of Registrant as specified in its charter) Delaware 33-0885775(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)organization) No. 1 Henglong Road, Yu Qiao Development Zone Shashi District, Jing Zhou City Hubei Province The People’s Republic of China 434000(Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code – (86) 716-412-7901 Securities registered pursuant to Section 12(b) of the Act: Title of each Class Name of each exchange on which registeredCommon Stock, $0.0001 par value The Nasdaq Capital Market Securities registered pursuant to Section 12(g) of the Act: Title of Class None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).Yes x No ¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K. x Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. Seedefinition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer¨Accelerated Filer¨ Non-Accelerated Filer¨Smaller Reporting Companyx Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ¨ No x Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2014, based upon the price of$8.69 that was the closing price of the common stock as reported on the NASDAQ Stock Market under the symbol “CAAS” on such date, was approximately$68.2 million. The Company has 32,121,019 shares of Common Stock outstanding as of March 26, 2015. DOCUMENTS INCORPORATED BY REFERENCE None. Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. CHINA AUTOMOTIVE SYSTEMS, INC. FORM 10-K INDEX PagePART I Item 1.Business. 4Item 1A.Risk Factors. 9Item 1B.Unresolved Staff Comments. 17Item 2.Properties. 17Item 3.Legal Proceedings. 18Item 4.Mine Safety Disclosures. 18 PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 18Item 6.Selected Financial Data. 19Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations. 19Item 7A.Quantitative and Qualitative Disclosures about Market Risk. 32Item 8.Financial Statements and Supplementary Data. 33Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 34Item 9A.Controls and Procedures. 34Item 9B.Other Information. 35 PART III Item 10.Directors, Executive Officers and Corporate Governance. 36Item 11Executive Compensation. 39Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 40Item 13.Certain Relationships and Related Transactions, and Director Independence. 41Item 14.Principal Accounting Fees and Services. 41 PART IV Item 15.Exhibits, Financial Statement Schedules. 42 Signatures 44Financial Statements 2Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 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 ofthe Securities Exchange Act of 1934. These statements relate to future events or the Company’s future financial performance. The Company has attempted toidentify 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 aresubject to certain risks and uncertainties, including the matters set forth in this Annual Report or other reports or documents the Company files with theSecurities 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 futureresults, levels of activity, performance or achievements. Undue reliance should not be placed on these forward-looking statements which speak only as of thedate 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-lookingstatements after the date this Annual Report on Form 10-K is filed to confirm these statements to actual results, unless required by law. 3Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PART I ITEM 1 . BUSINESS. COMPANY HISTORY China Automotive Systems, Inc., “China Automotive” or the “Company,” was incorporated in the State of Delaware on June 29, 1999. Through itssubsidiary, Great Genesis Holdings Limited, “Genesis,” a corporation organized under the laws of the Hong Kong Special Administrative Region, China, itowns interests in nine Sino-joint ventures and three wholly-owned subsidiaries in the People’s Republic of China, “China” or the “PRC,” which manufacturepower steering systems and/or related products for different segments of the automobile industry. Genesis also owns interests in a Brazil-based tradingcompany, which engages mainly in the import and sales of automotive parts in Brazil. Henglong USA Corporation, “HLUSA,” which was incorporated on January 8, 2007 in Troy, Michigan, is a wholly-owned subsidiary of the Company, andmainly engages in marketing of automotive parts in North America, and provides after sales service and research and development support accordingly. Unless the context indicates otherwise, the Company uses the terms “the Company,” “we,” “our” and “us” to refer to Genesis and China Automotivecollectively 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 themanufacture 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, 2014. China Automotive Systems, Inc. [NASDAQ:CAAS]↓ 100% ↓ 100%Great Genesis Holdings Limited Henglong USA Corporation↓ ↓ 100.00% ↓ 70%Hubei Shenyang JinbeiHenglong HenglongAutomotive AutomotiveSystem Group Steering SystemCo., Ltd. Co., Ltd.“ HubeiHenglong ” 1 “ Shenyang ” 2↓ ↓ 100%↓ 100%↓ 83.34%↓ 77.33%↓ 85%↓ 50.00%↓ 70%↓ 80.00%JingzhouShashiUniversalWuhuWuhanBeijingChongqingCAASHenglongJiulongSensorHenglongJielongHenglongHenglongBrazil’sAutomotivePowerApplication,AutomotiveElectricAutomotiveHongyanImports AndParts Co.,SteeringInc.SteeringPowerSystem Co.,AutomotiveTrade InLtd.Gears System Co.,Steering Co.,Ltd.,SystemAutomotive“ Henglong ” 3Co., Ltd.“ USAI ” 5Ltd.Ltd“ BeijingCo., LtdParts Ltd.,↓“ Jiulong ” 4 “ Wuhu ” 6“ Jielong ” 7Henglong” 8“ ChongqingHenglong ” 9“ BrazilHenglong” 10 ↓↓ 80.00%↓51% ↓85% JingzhouHenglongAutomotive Technology (Testing) Center “ Testing Center” 11FujianQiaolongSpecialPurposeVehicle Co.,Ltd., “FujianQiaolong” 12 Wuhan ChuguanjieAutomotive Science and TechnologyLtd.,“WuhanChuguanjie”13 4Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 1.On March 7, 2007, Genesis established Hubei Henglong, formerly known as Jingzhou Hengsheng Automotive System Co., Ltd., its wholly-ownedsubsidiary, to engage in the production and sales of automotive steering systems. On July 8, 2012, Hubei Henglong changed its name to HubeiHenglong 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 gears for cars and light-duty vehicles. OnAugust 11, 2014, the Company entered into a stock exchange agreement, the “Exchange Agreement”, with a third party, Jingzhou City JiulongMachinery Electricity Manufacturing Co., Ltd., “Jiulong Machine”, under which the Company issued 3,260,000 of its common shares in a privateplacement for the acquisition of the 20% equity interest in Henglong held by Jiulong Machine. On September 26, 2014, the Company obtained the 20%equity interest in Henglong and completed its share registration with the local government administrative bureau. While the Company retained itscontrolling interest in Henglong, the Company’s acquisition of the non-controlling interest was accounted for as an equity transaction. On October 13,2014, the Company completed its issuance of 3,260,000 common shares in a private placement to nominee holders of Jiulong Machine (See Notes 18and 22). 4.Jiulong was established in 1993 and mainly engages in the production of integral power steering gears for heavy-duty vehicles. On August 11, 2014, theCompany entered into the Exchange Agreement, with Jiulong Machine under which the Company issued 818,000 of its common shares in a privateplacement for the acquisition of the 19% equity interest in Jiulong held by Jiulong Machine. On September 26, 2014, the Company obtained the 19%equity interest in Jiulong and completed its share registration with the local government administrative bureau. While the Company retained itscontrolling interest in Jiulong, the Company’s acquisition of the non-controlling interest was accounted for as an equity transaction. On October 13,2014, the Company completed its issuance of 818,000 common shares in a private placement to nominee holders of Jiulong Machine (See Notes 18 and22). 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 automobile steering columns. 8.Beijing Henglong was established in 2010 and mainly engages in the design, development and manufacture of both hydraulic and electric powersteering systems and parts. According to the joint venture agreement, the Company does not have voting control of Beijing Henglong. Therefore, theCompany’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. 10.On August 21, 2012, Brazil Henglong was established as a Sino-foreign joint venture company by Hubei Henglong and two Brazilian citizens, OziasGaia Da Silva and Ademir Dal’ Evedove. Brazil Henglong engages mainly in the import and sale of automotive parts in Brazil. 11.Testing Center was established in 2009 and mainly engages in the research and development of new products. 12.In the second quarter of 2014, Hubei Henglong acquired a 51.0% ownership interest in Fujian Qiaolong Special Purpose Vehicle Co., Ltd., “FujianQiaolong”, a special purpose vehicle manufacturer and dealer with automobile repacking qualifications, based in Fujian, China. Fujian Qiaolongmainly manufactures and distributes drainage and rescue vehicles with mass flow, drainage vehicles with vertical downhole operation, crawler-typemobile pump stations, high-altitude water supply and discharge drainage vehicles, long-range control crawler-type mobile pump stations and othervehicles. 13.In May 2014, Jielong formed a subsidiary, Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie”, which mainly engagesin research and development, manufacture and sales of automobile electronic systems and parts. Wuhan Chuguanjie is located in Wuhan, China. Theregistered capital of Wuhan Chuguanjie is RMB30.0 million, equivalent to approximately $4.9 million. At the date of release of this annual report,Jielong has completed the capital injection of RMB25.0 million, equivalent to approximately $4.1 million. The Company has business relationships with more than sixty vehicle manufacturers, including FAW Group and Dongfeng Auto Group Co., Ltd, two of thefive 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 carmanufacturers in China. The PRC-based joint ventures of General Motors (GM), Volkswagen, Citroen and Chrysler North America are all key customers ofthe Company. Starting in 2008, the Company has supplied power steering gears to the Sino-foreign joint ventures established by GM, Citroen andVolkswagen in China. The Company has supplied power steering gear to Chrysler North America since 2009. 5Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. INTELLECTUAL PROPERTY RIGHTS Intellectual Property rights, “IP,” are important in helping the Company maintain its competitive position. Currently, the Company owns IP rights, includingtwo trademarks covering automobile parts, “HL” and “JL,” and more than eighty-five patents registered in China covering power steering technology. TheCompany is in the process of integrating new advanced technologies such as electronic chips in power steering systems into its current production line and ispursuing aggressive strategies in technology to maintain a competitive edge within the automobile industry. In December 2009, the Company, throughHenglong, formed Testing Center and cooperated with Nanyang Ind. Co. Ltd. and Tsinghua University to engage in the research and development of newproducts, 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 higherprofitability, the Company focuses on brand recognition, quality control, cost efficiency, research and development and strategic acquisitions. Set forthbelow 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 modelsof 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. —Cost Efficiency. By improving the Company’s production ability and enhancing equipment management, optimizing the process and productsstructure, 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 withNanyang Ind. Co. Ltd. and Tsinghua University for the development of advanced steering systems, the Company’s objective is to gain increasedmarket share in China. —International Expansion. The Company has entered into agreements with several international vehicle manufacturers and auto parts modulessuppliers 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 autocomponent 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 66.8% of the Company’s total sales for the year ended December 31, 2014. The following table sets forthinformation regarding the Company’s ten largest customers. Percentage of Total Name of Major Customers Revenue in 2014 Chrysler North America 11.5%Dongfeng Auto Group Co., Ltd. 8.6%Beiqi Foton 8.0%SAIC Motor 7.6%Baoding Great Wall Automobile Holding Co., Ltd. 6.5%Zhejiang Geely Holding Group 5.4%Shengyang Brilliance Jinbei Automobile Co., Ltd. 5.3%China FAW Group Corporation 5.0%BYD Auto Co., Ltd 4.6%Chery Automobile Co., Ltd. 4.3%Total 66.8% 6Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The Company primarily sells its products to the above-mentioned original equipment manufacturing, “OEM”, customers; it also has excellent relationshipswith them, including serving as their first-rank supplier and developer for product development for new models. While the Company intends to continue tofocus 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-mentionedOEM customers as a result of severe price competition and customers’ diversification of their supply base. The Company’s business would be materially andadversely affected if it loses one or more of these major customers. SALES AND MARKETING The Company’s sales and marketing team has 136 sales persons, which are divided into an OEM team, a sales service team and a working group dedicated tointernational business. These sales and marketing teams provide a constant interface with the Company’s key customers. They are located in all major vehicleproducing regions to represent more effectively the Company’s customers’ interests within the Company’s organization, to promote their programs and tocoordinate their strategies with the goal of enhancing overall service and satisfaction. The Company’s ability to support its customers is further enhanced byits 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 salesof the Company’s modular systems and components. To achieve that objective, the Company organized delegations to visit the United States, Korea, Indiaand Japan and has supplied power steering gear to Chrysler North America. Through these activities, the Company has generated potential business interestas 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 withmatters related to such customers in a timely fashion. The Company also established distribution warehouses close to major customers to ensure timelydeliveries. The Company maintains strict control over inventories. Each of these sales and service offices sends back to the Company through e-mail or faxinformation related to the inventory and customers’ needs. The Company guarantees product delivery in 8 hours for those customers who are located within200 km from the Company’s distribution warehouses, and 24 hours for customers who are located outside of 200 km from the Company’s distributionwarehouses. Delivery time is a very important competitive factor in terms of customer decision making, together with quality, pricing and long-termrelationships. EMPLOYEES AND FACILITIES As of December 31, 2014, the Company employed approximately 4,310 persons, including approximately: ·2,881 by Henglong (including Testing Center formed by Henglong) and Jiulong;·328 by Shenyang;·20 by USAI;·143 by Wuhu;·240 by Jielong;·472 by Hubei Henglong;·16 by HLUSA;·113 by Chongqing Henglong;·10 by Brazil Henglong; and·87 by Fujian Qiaolong. As of December 31, 2014, each of Henglong and Jiulong, as a whole, Shenyang, Wuhu, Jielong and Hubei Henglong, as a whole, Chongqing Henglong andFujian Qiaolong had a manufacturing and administration area of 150,689 square meters, 35,354 square meters, 83,705 square meters, 177,747 square meters,17,188 square meters and 34,449 square meters, respectively. Hubei Province, which is home to Dongfeng, one of the largest automakers in China, provides an ample supply of inexpensive but skilled labor toautomotive-related industries. The annual production of one of the Company’s main products, power steering gears, was approximately 5.0 million units and4.3 million units in 2014 and 2013, respectively. Although the production process continues to rely heavily on manual labor, the Company has investedsubstantially in high-level production machinery to improve capacity and production quality. Approximately $51.8 million was spent over the last threeyears to purchase professional-grade equipment and extend workshops, approximately 72.4% of which has been used in the production process as ofDecember 31, 2014. 7Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. RAW MATERIALS The Company purchases various manufactured components and raw materials for use in its manufacturing processes. The principal components and rawmaterials the Company purchases include castings, finished sub-components, aluminum, steel, fabricated metal electronic parts and molded plastic parts. Themost important raw material is steel. The Company enters into purchase agreements with local suppliers. The annual purchase plans are determined at thebeginning 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 monthlyproduction 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 23.4% of all components and raw materials it purchased for the yearended December 31, 2014, 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 ofmanufactured components or raw materials and normally does not carry inventories of these items in excess of what is reasonably required to meet itsproduction and shipping schedules. RESEARCH AND DEVELOPMENT The Company owns the Testing Center, a Hubei Provincial-Level technical center, which has been approved by the Hubei Economic Commission. The centerhas a staff of about 500, including 49 senior engineers, 6 foreign experts and 247 engineers, primarily focusing on steering system R&D, tests, productionprocess 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 AutomobileSteering 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 thelatest technologies, materials and processes to solve problems for its customers and to bring new, innovative products to market. The Company believes thatcontinued research and development activities, including engineering, are critical to maintaining its pipeline of technologically advanced products. TheCompany 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 $23.0 million and $20.9 million for the years ended December 31, 2014 and 2013, respectively. The increase in2014 is mainly due to the large expenditure in EPS R&D, because the Company believes demands for new EPS products will increase significantly in thefuture. In 2013 and 2014, the sales of such newly developed products accounted for about 9.3% and 12.1%, 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 inoperations, degree of global and local presence, effectiveness of customer service and overall management capability. The power steering system market isfragmented 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 betweenFirst 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 moreadvanced and may have existing relationships with global automobile assemblers, but they are generally not as competitive as the Company in China interms 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 Chinesevehicles could result in an increase or decrease of the Company’s results of operations. According to the latest statistics from the China Association ofAutomobile Manufacturers, “CAAM,” in 2014, the output and sales volume of vehicles in China have reached 23.7 million and 23.5 million units,respectively, an increase of 7.3% and 6.9% compared to 2013. The output and sales volume of passenger vehicles in 2014 was 19.9 million and 19.7 millionunits respectively, an increase of 10.2% and 9.9% compared to 2013. The output and sales volume of commercial vehicles in 2014 was 3.8 million and 3.8million units, respectively, a decrease of 5.7% and 6.5%, respectively, compared to 2013. Accordingly, in 2014, the Company’s sales of steering gears forpassenger vehicles and commercial vehicles increased by 19.6% and 1.4%, respectively, compared to 2013. 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 industryhad single-digit growth in 2014. Industry analysts expect that market growth will continue in 2015 at an annual rate of about 8% to 10%. 8Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Management believes that the continuing development of the highway system will have a significant positive long-term impact on the manufacture and saleof private automobiles in the PRC. Statistics from the Ministry of Transport show that 93,800 kilometers of highway and 7,450 kilometers of expressway werebuilt in 2014. Total highways and expressways in the PRC now amount to 4,335,800 kilometers and 111,450 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 healthlaws and regulations. These include laws regulating air emissions, water discharge and waste management. The Company has an environmental managementstructure designed to facilitate and support its compliance with these requirements globally. Although the Company intends to comply with all suchrequirements and regulations, it cannot provide assurance that it is at all times in compliance. The Company has made and will continue to make capital andother expenditures to comply with environmental requirements, although such expenditures were not material during the past two years. Environmentalrequirements are complex, change frequently and have tended to become more stringent over time. Accordingly, the Company cannot assure thatenvironmental requirements will not change or become more stringent over time or that its eventual environmental cleanup costs and liabilities will not bematerial. During the years ended December 31, 2013 and 2014, 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 consolidatedfinancial statements in this Report. The following table summarizes the percentage of sales and total assets by major geographic regions: Net Sales Long-term assets Year Ended December 31, As of December 31 2014 2013 2014 2013 Geographic region: United States 12.4% 12.1% 0.8% 0.9%China 87.5 87.7 99.1 99.1 Other foreign countries 0.1 0.2 0.1 0.0 Total consolidated 100.0% 100.0% 100.00% 100.0% WEBSITE ACCESS TO SEC FILINGS The Company files electronically with, or furnishes to, the SEC its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-Kand 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 website (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 fileelectronically 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, locatedat 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 theinformation contained elsewhere in this Annual Report, before you make a decision to invest in the Company. The Company’s business, financial conditionsand results of operations could be materially and adversely affected by many risk factors. Because of these risk factors, actual results might differsignificantly 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’sbusiness and results of operations. 9Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The Company’s business relies on automotive vehicle production and sales by its customers, which are highly cyclical and depend on general economicconditions and other factors, including consumer spending and preferences and the price and availability of gasoline. They also can be affected by laborrelations issues, regulatory requirements and other factors. In the last two years, the price of automobiles in China has generally declined. Additionally, thevolume 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 amaterial adverse effect on the Company’s results of operations. Moreover, if the prices of automobiles keep declining, the selling price of automotive partsalso 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. 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 tothe Company’s customers, a significant increase in the prices of the Company’s components and materials could materially increase the Company’s operatingcosts 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 bythe 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 inGenesis and its subsidiaries and affiliates. As a result, the Company is dependent upon the performance of Genesis and its subsidiaries and will be subject tothe financial, business and other factors affecting Genesis as well as general economic and financial conditions. As substantially all of the Company’soperations 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 structurallysubordinate 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 itsand 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 Companymay not be able to compete successfully. The automobile parts industry is a highly competitive business. 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 Company’s competitors include independent suppliers of parts, as well as suppliers formed by spin-offs from the Company’s customers, who arebecoming more aggressive in selling parts to other vehicle manufacturers. Depending on the particular product, the number of the Company’s competitorsvaries significantly. Many of the Company’s competitors have substantially greater revenues and financial resources than it does, as well as stronger brandnames, consumer recognition, business relationships with vehicle manufacturers, and geographic presence than it has. The Company may not be able tocompete 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 generatingrevenues in international markets due to the lack of recognition of its products or other factors. Developing product recognition overseas is expensive andtime-consuming and the Company’s international expansion efforts may be more costly and less profitable than it expects. If the Company is not successfulin 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 theCompany’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 manufacturersseek price reductions each year. Although the Company has tried to reduce costs and resist price reductions, these reductions have impacted the Company’ssales and profit margins. If the Company cannot offset continued price reductions through improved operating efficiencies and reduced expenditures, pricereductions will have a material adverse effect on the Company's results of operations. 10Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 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, 2014, approximately 11.5%, 8.6%, 8.0% and 7.6% of the Company’s sales were to Chrysler North America, Dongfeng AutoGroup Co., Ltd., Beiqi Foton and SAIC Motor, the Company’s four largest customers in 2014, respectively. In total, these four largest customers accounted for35.7% of total sales in 2014. For the year ended December 31, 2013, approximately 11.1%, 8.9%, 7.8% and 7.7% of the Company’s sales were to ChryslerNorth America, SAIC GM Wuling Automobile Co., Zhejiang Geely Holding Co., Ltd. and Baoding Great Wall Automobile Holding Co., Ltd., the Company’sfour largest customers in 2013, respectively. In total, these four largest customers accounted for 35.5% of total sales in 2013. The loss of, or significantreduction 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 continuedcreditworthiness of its customers. The Company’s customer base may change if its sales increase because of the Company’s expanded capacity. If theCompany 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 theCompany’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 itsproducts results, or is alleged to result, in bodily injury and/or property damage. The Company started to pay some of its customers’ increased after-salesservice expenses due to consumer rights protection policies of “recall” issued by the Chinese government in 2004, such as the recalling flawed vehiclespolicy. Beginning in 2004, automobile manufacturers unilaterally required their suppliers to pay a “3-R Guarantees” service charge for repair, replacementand refund in an amount of about 2%–6% of the total amount of parts supplied. Accordingly, the Company has experienced and will continue to experiencehigher 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 resultsof operations. The Company is subject to the requirements of environmental and occupational safety and health laws and regulations in China. The Company cannotprovide 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 inconnection with these requirements. Additionally, these regulations may change in a manner that could have a material adverse effect on the Company’sbusiness, results of operations and financial condition. The capital requirements and other expenditures that may be necessary to comply with environmentalrequirements 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 negativelyaffect demand, sales and profitability. The Company purchases various types of equipment, raw materials and manufactured component parts from its suppliers. The Company would be materiallyand adversely affected by the failure of its suppliers to perform as expected. The Company could experience delivery delays or failures caused by productionissues 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 orbankrupt. 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 keyemployees. The Company depends on the continued contributions of its senior management and other key personnel. The Company’s future success alsodepends on its ability to identify, attract and retain highly skilled technical staff, particularly engineers and other employees with mechanics and electronicsexpertise, 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 substantiallyharm the Company’s business. 11Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The Company’s management controls approximately 62.4% of its outstanding common stock and may have conflicts of interest with the Company’sminority stockholders. As of December 31, 2014, members of the Company’s management beneficially own approximately 62.4% of the outstanding shares of the Company’scommon 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 mightnot maximize overall stockholders’ value. Additionally, these stockholders control the election of members of the Company’s board, have the ability toappoint 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 commonstock. The interests of these majority stockholders may at times conflict with the interests of the Company’s other stockholders. The Company regularlyengages in transactions with entities controlled by one or more of its officers and directors, including those controlled by Mr. Hanlin Chen, the chairman ofthe 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 ofa 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, 2014, approximately 37.6% of the Company’s outstanding commonstock is considered part of the public float. The term “public float” refers to shares freely and actively tradable on the NASDAQ Capital Market and notowned 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 volumeon 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’scommon stock can have a disproportionate effect on the market price for its common stock. This stock price volatility could prevent a security holder seekingto 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 werebought, 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 anexercise price of less than $5.00 per share, subject to certain exemptions. As of December 31, 2014, the closing price for the Company’s common stock was$7.09. 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 togetherwith their spouses. For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have receivedthe 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 securitiesand 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 scheduleprepared by the SEC relating to the penny stock market. Disclosure also is required to be made about sales commissions payable to both the broker-dealerand the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent priceinformation 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’scommon 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 SECthe 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, couldmake 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’scertificate of incorporation and bylaws impose various procedural and other requirements, which could make it difficult for stockholders to effect certaincorporate actions and possibly prevent transactions that would maximize stockholders’ value. Failure to maintain effective internal control over financial reporting could have a material adverse effect on the Company’s business, results ofoperations 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 Section404 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 anassessment by management of the effectiveness of such company’s internal control over financial reporting. The Company’s management conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2013 andconcluded that the Company’s internal control over financial reporting was not effective as of December 31, 2013. As of December 31, 2014, the Companyhas implemented measures to address the material weakness and, in the opinion of management, the material weakness identified by management has beenfully remediated as of December 31, 2014. 12Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. If the Company fails to maintain the adequacy of its internal controls in the future, it will not be able to ensure that it can conclude on an ongoing basis thatit has effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary forthe Company to produce reliable financial reports and are important to help prevent fraud. Any failure to maintain effective internal control over financialreporting could result in the loss of investor confidence in the reliability of the Company’s financial statements, which in turn could harm its business andnegatively impact the trading price of its common stock. Furthermore, the Company may need to incur additional costs and use additional management andother resources in an effort to comply with Section 404 of the Sarbanes-Oxley Act and other requirements going forward. The Company generally does not pay cash dividends on its common stock. Although the Company announced a special cash dividend of $0.18 per common share to the Company’s shareholders of record as of the close of business onJune 26, 2014, it does not anticipate paying any other cash dividends in the foreseeable future. The Company currently intends to retain future earnings, ifany, 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 boardof directors and will be based upon the Company’s financial condition, operating results, capital requirements, plans for expansion, restrictions imposed byany 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 identicalsecurities 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 theborrowed 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 inthe 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 regardingthe 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 andnegative publicity has centered around allegations of a lack of effective internal control over financial reporting resulting in financial and accountingirregularities and mistakes, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result, manyof these companies are now conducting internal and external investigations into the allegations and, in the interim, are subject to shareholder lawsuits and/orSEC 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 unfavorableallegations, whether such allegations are proven to be true or untrue, the Company could have to expend a significant amount of resources to investigatesuch allegations and/or defend itself. While the Company would strongly defend against any such short seller attacks, the Company may be constrained inthe manner in which it can proceed against the relevant short seller by principles of freedom of speech, applicable state law or issues of commercialconfidentiality. Such a situation could be costly and time-consuming, and could distract the Company’s management from growing the Company. Even ifsuch allegations are ultimately proven to be groundless, allegations against the Company could severely impact its business operations and stockholdersequity, 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 ofthe 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 Companymust comply on an ongoing or periodic basis. These covenants include, but are not limited to, restrictions on the utilization of the funds and the maintenanceof certain financial ratios. If the Company violate any of these covenants, the Company’s outstanding debt under the Company’s secured credit facilitiescould become immediately due and payable, the Company’s lenders could proceed against any collateral securing such indebtedness and the Company’sability to borrow additional funds in the future may be limited. Alternatively, the Company could be forced to refinance or renegotiate the terms andconditions of the Company’s secured credit facilities, including the interest rates, financial and restrictive covenants and security requirements of the securedcredit 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 Chinesemarkets. Future economic crises, either within China or without, may lead to a drastic drop in demand for the Company’s products. 13Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 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 togrowth 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 thecost of production, it may harm the Company’s profitability. In order to control inflation, the Chinese government has imposed controls on bank credit, limitson loans and other restrictions on economic activities. Such policies have led to a slowing of economic growth. Additional measures could further sloweconomic activity in China, which could, in turn, materially increase the Company’s costs while also reducing demand for the Company’s products. 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 measuresmay have a negative effect on the Company over the short or long term. Recently, to cope with high inflation and economic imbalances, the Chinesegovernment has tightened monetary policy and implemented floating exchange rate policy. In addition, in order to alleviate some of the effects ofunbalanced growth and social discontent, the Chinese government has enacted a series of social programs and anti-inflationary measures. These, in turn, haveincreased the costs on the financial and manufacturing sectors, without having alleviated the effects of high inflation and economic imbalances. The Chinesegovernment’s macroeconomic policies, even if effected properly, may significantly slow down China’s economy or cause great social unrest, all of whichwould 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 countriesin many respects, including government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Theeconomy of China has been transitioning from a planned economy to a more market-oriented economy. Although the Chinese government has implementedmeasures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment ofsound 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 significantcontrol over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, settingmonetary policy and providing preferential treatment to particular industries or companies. Therefore, the Chinese government’s involvement in theeconomy 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 mayadversely 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 anddevaluations, changes in local economic conditions, changes in Chinese laws and regulations, exposure to possible expropriation or other PRC governmentactions, and unsettled political conditions. These factors may have a material adverse effect on the Company’s operations or on its business, results ofoperations 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 Statesand Brazil. The Company’s net sales outside of China increased from $51.3 million in 2013 to $58.3 million in 2014. Risks affecting the Company’sinternational expansion include challenges caused by distance, language and cultural differences, conflicting and changing laws and regulations, foreignlaws, international import and export legislation, trading and investment policies, foreign currency fluctuations, the burdens of complying with a widevariety of laws and regulations, protectionist laws and business practices that favor local businesses in some countries, foreign tax consequences, higher costsassociated with doing business internationally, restrictions on the export or import of technology, difficulties in staffing and managing internationaloperations, trade and tariff restrictions, and variations in tariffs, quotas, taxes and other market barriers. These risks could harm the Company’s internationalexpansion 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 PRCgovernment’s purported provision of subsidies to the automobile and automobile-parts enterprises in the PRC. If the WTO rules against China in this tradecase, 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 Statescould be limited, which could affect the Company’s business and operating results. 14Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. In addition, under Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC has adopted additional disclosure requirementsrelated to the source of certain “conflict minerals” for issuers for which such “conflict minerals” are necessary to the functionality or production of a productmanufactured, or contracted to be manufactured, by that issuer. The metals covered by the rules include tin, tantalum, tungsten and gold, commonly referredto as “3TG.” If these materials are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, the rules requirea 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 productionprocess 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 thatthe minerals did not originate from a covered country or conclude that there is no reason to believe that the minerals used in the production process may haveoriginated in a covered country, that issuer could be required to perform supply chain due diligence on members of its supply chain. Global supply chainscan have multiple layers, thus the costs of complying with these new requirements could be substantial. These new requirements may also reduce the numberof suppliers that provide conflict-free metals, and may affect a company’s ability to obtain products in sufficient quantities or at competitive prices. If theCompany 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. Conductingbusiness in currencies other than U.S. dollars subjects the Company to fluctuations in currency exchange rates that could have a negative impact on itsreported operating results. Fluctuations in the value of the U.S. dollar relative to other currencies impact the Company’s revenues, cost of revenues andoperating 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 ratefluctuations and involve costs and risks of their own, such as ongoing management time and expertise requirements, external costs to implement the strategyand 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 thefuture between these two countries. Any political or trade controversies between the United States and China could adversely affect the market price of theCompany’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 socialdevelopments. Over the past several years, the Chinese government has pursued economic reform policies including the encouragement of private economicactivity and greater economic decentralization. The Chinese government may not continue to pursue these policies or may alter them to the Company’sdetriment from time to time. Changes in policies, laws and regulations, or in their interpretation or the imposition of confiscatory taxation, restrictions oncurrency conversion, restrictions or prohibitions on dividend payments to stockholders, devaluations of currency or the nationalization or otherexpropriation of private enterprises could have a material adverse effect on the Company’s business. Nationalization or expropriation could result in the totalloss 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 theCompany’s foreign currency obligations. Foreign exchange transactions under the Company’s capital account, including principal payments in respect offoreign currency-denominated obligations, continue to be subject to significant foreign exchange controls and require the approval of the StateAdministration of Foreign Exchange in China. These limitations could affect the Company’s ability to obtain foreign exchange through debt or equityfinancing, 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”. Between July 2005 to December 2014, the exchangerate between the RMB and the U.S. dollar appreciated from RMB1.00 to $0.1205 to RMB1.00 to $0.1634. The Company believes that this significantappreciation will continue for the near future. Significant appreciation of the RMB is likely to decrease the income of export products and decrease theCompany’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 introducednew laws and regulations to modernize its business, securities and tax systems on January 1, 1994, China does not yet possess a comprehensive body ofbusiness law. Because Chinese laws and regulations are relatively new, interpretation, implementation and enforcement of these laws and regulations involveuncertainties and inconsistencies and it may be difficult to enforce contracts. In addition, as the Chinese legal system develops, changes in such laws andregulations, their interpretation or their enforcement may have a material adverse effect on the Company’s business operations. Moreover, interpretative caselaw 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. 15Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 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 substantialportions 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 theUnited States upon such persons to originate an action in the United States. Moreover, there is uncertainty that the courts of China would enforce judgmentsof 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 anoriginal 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 governmentauthorities if it or its Chinese directors or employees fail to comply with recent Chinese regulations relating to employee share options or shares grantedby 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 thecorresponding Implementation Rules were issued by SAFE on January 5, 2007. Both of these regulations became effective on February 1, 2007. According tothese regulations, all foreign exchange matters relating to employee stock holding plans, share option plans or similar plans with Chinese domesticindividuals’ participation require approval from the SAFE or its authorized branch. On March 28, 2007, the SAFE issued the Application Procedure ofForeign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-ListedCompany, or the Stock Option Rule. Under the Stock Option Rule, Chinese domestic individuals who are granted share options or shares by an offshorelisted company are required, through a Chinese agent or Chinese subsidiary of the offshore listed company, to register with the SAFE and complete certainother procedures. As the Company is an offshore listed company, its Chinese domestic directors and employees who may be granted share options or sharesshall become subject to the Stock Option Rule. Under the Stock Option Rule, employees stock holding plans, share option plans or similar plans of offshorelisted companies with Chinese domestic individuals’ participation must be filed with the SAFE. After the Chinese domestic directors or employees exercisetheir options, they must apply for the amendment to the registration with the SAFE. As of December 31, 2014, the Company has completed such SAFEregistration and other related procedures according to PRC law. If the Company or its Chinese domestic directors or employees fail to comply with theseregulations in the future, the Company or its Chinese domestic directors or employees may be subject to fines or other legal sanctions imposed by the SAFEor 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 themovement of capital. Although the Company’s management believes that it will be in compliance with these regulations, should these regulations or theinterpretation of them by courts or regulatory agencies change, the Company may not be able to pay dividends to its stockholders outside of China. Inaddition, under current Chinese law, the Company’s joint-ventures and wholly-owned enterprise in China must retain a reserve equal to 10% of its netincome 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’sstockholders. The Company presently does not intend to pay dividends for the foreseeable future. The Company’s board of directors intends to follow apolicy 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. PublicCompany 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 theCompany’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 Statesand professional standards applicable to auditors. The Company’s independent registered public accounting firm is located in, and organized under the lawsof, the PRC, which is a jurisdiction where the PCAOB, notwithstanding the requirements of U.S. law, is currently unable to conduct inspections without theapproval 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 independentregistered 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 independentregistered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOBinspections, which could cause investors and potential investors in the Company’s stock to lose confidence in its audit procedures and reported financialinformation and the quality of its financial statements. 16Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. If additional remedial measures are imposed on the Big Four PRC-based accounting firms, including our independent registered public accounting firm,in administrative proceedings brought by the SEC alleging the firms’ failure to meet specific criteria set by the SEC, we could be unable to timely filefuture 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 registeredpublic 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 theSEC the firms’ audit work papers with respect to certain PRC-based companies that are publicly traded in the United States. On January 22, 2014, theadministrative law judge (ALJ) presiding over the matter rendered an initial decision that each of the firms had violated the SEC’s rules of practice by failingto produce audit work papers to the SEC. The initial decision censured each of the firms and barred them from practicing before the SEC for a period of sixmonths. The Big Four PRC-based accounting firms appealed the ALJ’s initial decision to the SEC. The ALJ’s decision does not take effect unless and until itis endorsed by the SEC. In February 2015, the four China-based accounting firms each agreed to a censure and to pay a fine to the SEC to settle the disputeand avoid suspension of their ability to practice before the SEC and audit U.S.-listed companies. The settlement required the firms to follow detailedprocedures and to provide the SEC with access to Chinese firms’ audit documents via the China Securities Regulatory Commission, or the CSRC. If futuredocument productions fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending onthe nature of the failure. While we cannot predict whether the SEC will further review the four China-based accounting firms’ compliance with specifiedcriteria or if the results of such a review would result in the SEC imposing penalties such as suspensions or restarting the administrative proceedings, if theaccounting firms are subject to additional remedial measures, our ability to file our financial statements in compliance with SEC requirements could beimpacted. A determination that we have not timely filed financial statements in compliance with SEC requirements could ultimately lead to the delisting ofour common stock from NASDAQ or the termination of the registration of our common stock under the Securities Exchange Act of 1934, or both, whichwould 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. Setforth 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 andbuildings (in thousands of USD, except for references to area in square meters). Total Area Building Area Original Cost of Name of Entity Product (sq.m.) (sq.m.) Equipment SiteHenglong Automotive Parts 97,818(1) 20,226 $55,438 Jingzhou City, Hubei Province 13,393 13,707 $- Wuhan City, Hubei ProvinceJiulong Power Steering Gear 39,478 23,728 $35,690 Jingzhou City, Hubei ProvinceShenyang Automotive Steering Gear 35,354 10,425 $6,169 Shenyang City, LiaoningProvinceChongqing Steering Pumps 17,188 10,413 $2,431 Zhuji City, Zhejiang ProvinceJielong Electric Power Steering - - $4,813 Wuhan City, Hubei ProvinceUSAI Sensor Modular - - $1,021 Wuhan City, Hubei ProvinceHubei Henglong Automotive Steering Gear 177,747 65,749 $17,438 Jingzhou City, Hubei ProvinceWuhu Automotive Steering Gear 83,705 15,273 $4,610 Wuhu City, Anhui ProvinceFujian Qiaolong Special Purpose VehicleManufacturer 34,449 6,693 $257 Longyan City, Hujian ProvinceTotal 499,132 166,214 $127,867 The Company is not involved in investments in real estate or interests in real estate, real estate mortgages, and securities of or interests in persons primarilyengaged in real estate activities, as all of its land rights are used for production purposes. 17Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ITEM 3.LEGAL PROCEEDINGS. The Company is not a party to any pending or, to the best of the Company’s knowledge, any threatened legal proceedings. No director, officer or affiliate ofthe 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 isa party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation. ITEM 4.MINE SAFETY DISCLOSURES. Not applicable. PART II ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY 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 thecommon stock in 2014 and 2013 were reported on NASDAQ for the time periods indicated on the table below. Accordingly, the table below contains thehigh and low bid closing prices of the common stock as reported on the NASDAQ for the time periods indicated. Price Range 2014 2013 High Low High Low First Quarter $8.89 $7.14 $5.99 $4.50 Second Quarter $9.00 $7.26 $5.53 $4.01 Third Quarter $10.58 $8.36 $10.00 $5.59 Fourth Quarter $9.61 $6.73 $8.78 $6.32 STOCKHOLDERS The Company’s common shares are issued in registered form. Securities Transfer Corporation in Frisco, Texas is the registrar and transfer agent for theCompany’s common stock. As of December 31, 2014, there were 32,121,019 shares of the Company’s common stock (excluding 217,283 shares of theCompany’s treasury stock) issued and outstanding and the Company had approximately 62 stockholders of record. DIVIDENDS On May 27, 2014, the Company announced the payment of a special cash dividend of $0.18 per common share to the Company’s shareholders of record as ofthe close of business on June 26, 2014. The Company does not anticipate paying any other cash dividends in the foreseeable future. The Company currentlyintends 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 thediscretion of the Company’s board of directors and will be based upon the Company’s financial condition, operating results, capital requirements, plans forexpansion, 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, 2014 are as follows: Number of securities to be Weighted average Number of securities issued upon exercise of exercise price of remaining available for Plan category outstanding options outstanding options future issuance Equity compensation plans approved by security holders 2,200,000 $8.87 1,653,650 18Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The stock option plan was approved at the Annual Meeting of Stockholders held on June 28, 2005 and extended for ten years at the Annual Meeting ofStockholders held on September 16, 2014. The maximum common shares for issuance under the plan are 2,200,000. The term of the plan was extended toJune 27, 2025. 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 andother 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 venturesdescribed below, is referred to herein as the “Company.” The Company, through its Sino-foreign joint ventures, engages in the manufacture and sales ofautomotive systems and components in the People’s Republic of China, the “PRC,” or “China.” Genesis, a company incorporated on January 3, 2003 underthe 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 ofautomotive parts in North America, and provides after sales service and research and development support accordingly. Furthermore, the Company owns thefollowing aggregate net interests in the following wholly-owned subsidiaries and joint ventures organized in the PRC as of December 31, 2014 and 2013. Aggregate Net Interest December 31, December 31, Name of Entity 2014 2013 Henglong(1) 100.00% 80.00%Jiulong(2) 100.00% 81.00%Shenyang 70.00% 70.00%USAI 83.34% 83.34%Wuhu 77.33% 77.33%Jielong 85.00% 85.00%Hubei Henglong (3) 100.00% 100.00%Testing Center 80.00% 80.00%Beijing Henglong 50.00% 50.00%Chongqing Henglong (4) 70.00% 70.00%Brazil Henglong (5) 80.00% 80.00%Fujian Qiaolong Special Purpose Vehicle Co., Ltd. (6) 51.00% - Wuhan Chuguanjie Automotive Science and Technology Ltd. (7) 85.00% - (1)Henglong was established in 1997 and mainly engages in the production of rack and pinion power steering gears for cars and light-duty vehicles. OnAugust 11, 2014, the Company entered into the Exchange Agreement with Jiulong Machine under which the Company issued 3,260,000 of itscommon shares in a private placement for the acquisition of the 20% equity interest in Henglong held by Jiulong Machine. On September 26, 2014,the Company obtained the 20% equity interest in Henglong and completed its share registration with the local government administrative bureau.While the Company retained its controlling interest in Henglong, the Company’s acquisition of the non-controlling interest was accounted for as anequity transaction. (See Notes 18 and 22). (2)Jiulong was established in 1993 and mainly engages in the production of integral power steering gears for heavy-duty vehicles. On August 11, 2014,the Company entered into the Exchange Agreement with Jiulong Machine under which the Company issued 818,000 of its common shares in aprivate placement for the acquisition of the 19% equity interest in Jiulong held by Jiulong Machine. On September 26, 2014, the Company obtainedthe 19% equity interest in Jiulong and completed its share registration with the local government administrative bureau. While the Companyretained its controlling interest in Jiulong, the Company’s acquisition of the non-controlling interest was accounted for as an equity transaction.(See Notes 18 and 22). (3)On March 7, 2007, Genesis established Hubei Henglong, formerly known as Jingzhou Hengsheng Automotive System Co., Ltd., its wholly-ownedsubsidiary, to engage in the production and sales of automotive steering systems. On July 8, 2012, Hubei Henglong changed its name to HubeiHenglong Automotive System Group Co., Ltd. (4)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. 19Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (5)On August 21, 2012, Brazil Henglong was established as a Sino-foreign joint venture company by Hubei Henglong and two Brazilian citizens, OziasGaia Da Silva and Ademir Dal’ Evedove. Brazil Henglong engages mainly in the import and sale of automotive parts in Brazil. (6)In the second quarter of 2014, the Company acquired a 51.0% ownership interest in Fujian Qiaolong, a special purpose vehicle manufacturer anddealer with automobile repacking qualifications, based in Fujian, China. Fujian Qiaolong mainly manufactures and distributes drainage and rescuevehicles with mass flow, drainage vehicles with vertical downhole operation, crawler-type mobile pump stations, high-altitude water supply anddischarge drainage vehicles, long-range control crawler-type mobile pump stations and other vehicles. The consideration was approximately $3.0million. (7)In May 2014, Jielong formed a subsidiary, Wuhan Chuguanjie, which mainly engages in research and development, manufacture and sales ofautomobile electronic systems and parts. Wuhan Chuguanjie is located in Wuhan, China. The registered capital of Wuhan Chuguanjie is RMB30.0million, equivalent to approximately $4.9 million. At the date of release of this annual report, Jielong has completed the capital injection of RMB25.0 million, equivalent to approximately $4.1 million. RESULTS OF OPERATIONS 2014 Versus 2013 Comparative Net Sales and Cost of Sales For the years ended December 31, 2014 and 2013, net sales and cost of sales are summarized as follows (figures are in thousands of USD): Net Sales Cost of sales 2014 2013 Change 2014 2013 Change Henglong $293,866 $260,636 $33,230 12.7% $243,951 $215,481 $28,470 13.2%Jiulong 77,281 77,691 (410) -0.5 68,115 67,989 126 0.2 Shenyang 41,873 41,536 337 0.8 35,980 36,752 (772) -2.1 Wuhu 26,799 26,333 466 1.8 23,100 24,527 -1,427 -5.8 Hubei Henglong 56,653 48,087 8,566 17.8 45,561 39,208 6,353 16.2 Other Sectors 43,189 36,444 6,745 18.5 35,571 30,638 4,933 16.1 Eliminations (72,888) (75,569) 2,681 -3.5 (72,979) (76,069) 3,090 -4.1 Total $466,773 $415,158 $51,615 12.4% $379,299 $338,526 $40,773 12.0% Net Sales Net sales were $466.8 million for the year ended December 31, 2014, compared with $415.2 million for the year ended December 31, 2013, representing anincrease of $51.6 million, or 12.4%. The increase was mainly due to the continuing growth of automotive market demand in China and North America. For the year ended December 31, 2014, there was an increase in sales of passenger vehicle power steering gears compared with the same period last year,mainly due to the introduction of certain new products to the market, such as volume sales of EPS for mid-size cars, and improvement in the quality of someof the old products, such as improvement of the quality of power steering gear for MPV and SUV, which resulted in the expansion of the Company’s marketshare in China, especially among the joint-venture brands’ auto customers. In order to maintain the share of sales in the commercial vehicle market, most automobile component manufacturers have reduced the price of their products,which led to continuing price decreases of the Company’s steering gears for commercial vehicles. As result of a decrease in the price of steering gears forcommercial vehicles, during the year ended December 31, 2014, the increase in sales volume of steering gears for commercial vehicles was offset by the pricedecrease. In summary, the Company had an increase in sales volume leading to a sales increase of $49.4 million, an increase in average selling price of steering gearsleading to a sales increase 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$2.1 million. 20Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Further analysis is as follows: —Net sales for Henglong were $293.9 million for the year ended December 31, 2014, compared with $260.6 million for the year ended December 31,2013, representing an increase of $33.3 million, or 12.7%, which was mainly due to an increase in sales volume for passenger vehicles in the Chinamarket and the higher selling price of middle-level electric power steering compared with low-level electric power steering. An increase in sales volumeled to a sales increase of $25.2 million, an increase in selling price led to a sales increase of $6.9 million, and the effect of foreign currency translation ofthe RMB against the U.S. dollar led to a sales increase of $1.1 million. —Net sales for Jiulong were $77.3 million for the year ended December 31, 2014, compared with $77.7 million for the year ended December 31, 2013,representing a decrease of $0.4 million, or 0.5%, which was mainly due to the Company achieving higher sales volume in the commercial vehiclessteering gears market, offset by a decrease in average selling price. An increase in sales volume led to a sales increase of $7.7 million, the effect offoreign currency translation of the RMB against the U.S. dollar led to a sales increase of $0.4 million, and a decrease in selling price led to a salesdecrease of $8.5 million. —Net sales for Shenyang were $41.9 million for the year ended December 31, 2014, compared with $41.5 million for the year ended December 31, 2013,representing an increase of $0.4 million, or 0.8%. The net sales increase was mainly due to an increase in sales volumes with a sales increase of $3.0million, the effect of foreign currency translation of the RMB against the U.S. dollar, led to a sales increase of $0.2 million, and a decrease in sellingprice led to a sales decrease of $2.8 million. —Net sales for Wuhu were $26.8 million for the year ended December 31, 2014, compared with $26.3 million for the year ended December 31, 2013,representing an increase of $0.5 million, or 1.8%. An increase in selling prices led to a sales increase of $0.5 million, the effect of foreign currencytranslation of the RMB against the U.S. dollar led to a sales increase of $0.1 million, and a decrease in sales volumes led to a sales decrease of $0.1million. —Net sales for Hubei Henglong were $56.7 million for the year ended December 31, 2014, compared with $48.1 million for the year ended December 31,2013, representing an increase of $8.6 million, or 17.8%. All of Hubei Henglong’s products were sold to the United States. The net product salesincrease was mainly due to the growth of automotive market demand in North America. An increase in sales volumes led to a sales increase of $6.7million, an increase in selling price led to a sales increase of $1.7 million, and the effect of foreign currency translation of the RMB against the U.S.dollar led to a sales increase of $0.2 million. —Net sales for Other Sectors were $43.2 million for the year ended December 31, 2014, compared with $36.4 million for the year ended December 31,2013, representing an increase of $6.8 million or 18.5%, primarily due to the Company’s improved quality of machine columns, which led to anincrease in sales of Other Sectors of $1.3 million, and the sales of Fujian Qiaolong (acquired in the second quarter of 2014) having been consolidated inOther Sectors, which led to an increase in sales of Other Sectors of $5.5 million. Cost of Sales For the year ended December 31, 2014, the cost of sales was $379.3 million, compared with $338.5 million for the year ended December 31, 2013, an increaseof $40.8 million, or 12.0%. The increase in cost of sales was mainly due to a net increase in sales volumes with a cost of sales increase of $41.4 million, adecrease in unit cost with a cost of sales decrease of $2.4 million and the appreciation of the RMB against the U.S. dollar with a cost of sales increase of $1.8million. 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 $244.0 million for the year ended December 31, 2014, compared with $215.5 million for the year ended December 31,2013, representing an increase of $28.5 million, or 13.2%. This increase was mainly due to an increase in sales volumes and the higher unit cost ofmiddle-level EPS this year compared with low-level EPS in last year. An increase in sales volumes resulted in a cost of sales increase of $20.7 million, anincrease in unit material and subcomponents costs led to a cost of sales increase of $6.9 million and the effect of foreign currency translation of theRMB against the U.S. dollar led to a cost of sales increase of $0.9 million. —Cost of sales for Jiulong was $68.1 million for the year ended December 31, 2014, compared with $68.0 million for the year ended December 31, 2013,representing an increase of $0.1 million, or 0.2%. The increase in cost of sales was mainly due to an increase in sales volumes resulting in a cost of salesincrease of $7.0 million, a decrease in unit cost resulting in a cost of sales decrease of $7.2 million and the effect of foreign currency translation of theRMB against the U.S. dollar resulting in a cost of sales increase of $0.3 million. —Cost of sales for Shenyang was $36.0 million for the year ended December 31, 2014, compared with $36.8 million for the year ended December 31,2013, representing a decrease of $0.8 million, or 2.1%. The increase in cost of sales was mainly due to an increase in sales volumes resulting in a cost ofsales increase of $2.6 million, a decrease in unit cost resulting in a cost of sales decrease of $3.5 million and the effect of foreign currency translation ofthe RMB against the U.S. dollar resulting in a cost of sales increase of $0.1 million. 21Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. —Cost of sales for Wuhu was $23.1 million for the year ended December 31, 2014, compared with $24.5 million for the year ended December 31, 2013,representing a decrease of $1.4 million, or 5.8%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of salesdecrease of $0.2 million and a decrease in unit cost resulting in a cost of sales decrease of $1.3 million, which were offset by the effect of foreigncurrency translation of the RMB against the U.S. dollar resulting in a cost of sales increase of $0.1 million. —Cost of sales for Hubei Henglong was $45.6 million for the year ended December 31, 2014, compared with $39.2 million for the year ended December31, 2013, representing an increase of $6.4 million, or 16.2%. The net increase in cost of sales was mainly due to an increase in sales volumes resultingin a cost of sales increase of $5.4 million, an increase in unit cost resulting in a cost of sales increase of $0.8 million and the appreciation of the RMBagainst U.S. dollar resulting in a cost of sales increase of $0.2 million. —Cost of sales for Other Sectors was $35.6 million for the year ended December 31, 2014, compared with $30.6 million for the year ended December 31,2013, representing an increase of $5.0 million, or 16.1%. The increase in cost of sales for Other Sectors was mainly due to the Company’s improvedquality of manual columns, an increase in sales volume and cost of production, which led to a cost of products sold for Other Sectors increase of $0.9million, and the sales of Fujian Qiaolong (acquired in the second quarter of 2014) having been consolidated in Other Sectors, which led to a cost ofproducts sold for Other Sectors increase of $4.1 million. Gross margin was 18.7% for the year ended December 31, 2014, representing a 0.2% increase from 18.5% for the year ended December 31, 2013, which wasprimarily 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, property, plant and equipment, land use rights and scraps. For the yearended December 31, 2014, gain on other sales amounted to $11.8 million, while it amounted to $7.6 million for the year ended December 31, 2013,representing an increase of $4.2 million, or 55.3%, which was mainly due to the Company’s sale of the remaining land use rights in 2014 (See Note 7),whichresulted in a recognition of a gain of $7.5 million, while theCompany’s sale of land use rights in 2013 resulted in a recognition of a gain of $4.1 million for 2013. Selling Expenses For the years ended December 31, 2014 and 2013, selling expenses are summarized as follows (figures are in thousands of USD): Year Ended December 31, 2014 2013 Increase/(Decrease) Percentage Salaries and wages $3,680 $3,919 $(239) -6.1%Office expense 2,926 1,928 998 51.8 Transportation expense 6,802 5,450 1,352 24.8 Rent expense 2,043 1,883 160 8.5 Other expense 285 151 134 88.7 Total $15,736 $13,331 $2,405 18.0% Selling expenses were $15.7 million for the year ended December 31, 2014. As compared to $13.3 million for the year ended December 31, 2013, there wasan increase of $2.4 million, or 18.0%, which was mainly due to: ·a decrease in salaries and wages for the Company’s salesmen, as a result of the sales department have optimized the management process in 2014 andsalaries and wages of management decreased accordingly; ·an increase in office expenses, including office supplies, travel expenses and meeting expenses, as a result of an increase in marketing activities; ·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, 2014 and 2013, general and administrative expenses are summarized as follows (figures are in thousands of USD): 22Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Year Ended December 31, 2014 2013 Increase/(Decrease) Percentage Salaries and wages $5,589 $4,777 $812 17.0%Labor insurance expenses 2,356 1,854 502 27.1 Maintenance and repair expenses 692 510 182 35.7 Property and other taxes 1,834 1,490 344 23.1 Provision for bad debts 96 60 36 60.0 Office expense 1,858 1,330 528 39.7 Depreciation and amortization expense 971 822 149 18.1 Listing expenses (1) 2,525 2,387 138 5.8 Others expenses 240 23 217 943.5 Total $16,161 $13,253 $2,908 21.9% (1)Listing expenses consisted of the costs associated with legal, accounting and auditing fees for operating a public company. The expenses alsoincluded share-based compensation expense for options granted to independent directors. General and administrative expenses were $16.2 million for the year ended December 31, 2014, compared with $13.3 million for the year ended December31, 2013, representing an increase of $2.9 million, or 21.9%. The analysis of expense items with significant fluctuation is as follows: ·For the year ended December 31, 2014, an increase in salaries and wages mainly due to the increase in management’s salary and performance bonusas the Company achieved the performance targets as pre-determined by the board of directors and an increase in the number of subsidiaries. ·An increase in labor insurance expenses mainly because of the Company’s improvement in welfare benefits for the management, improvement ofcertain labor protection facilities and an increase in the number of subsidiaries. ·There was an increase in maintenance and repair expenses in 2014, which was mainly due to the scale up of repair and maintenance projects on theCompany’s office facilities in 2014 and an increase in the number of subsidiaries. ·There was an increase in property tax and other taxes in 2014, which was mainly due to the Company’s housing property increase in 2014. ·There was an increase in office expense which was mainly due to the Company’s replacement of office appliances and an increase in the number ofsubsidiaries. ·There was an increase in depreciation and amortization expense, which was mainly due to an increase of office equipment and an increase in thenumber of subsidiaries. Research and Development Expenses Research and development expenses, “R&D” expenses, were $23.0 million for the year ended December 31, 2014 as compared to $20.9 million for the yearended December 31, 2013, an increase of $2.1 million, or 10.0%, which was mainly due to the development and trial production of EPS. Expenses for moldimprovement increased by $1.5 million, external technical support fees decreased by $0.1 million and the salaries and wages expenses of research anddevelopment related staff increased by $0.7 million. The global automotive parts industry is highly competitive; winning and maintaining new business requires suppliers to rapidly produce new and innovativeproducts on a cost-competitive basis. In 2014, foreign OEMs significantly increased their demand for EPS, but the related technology in China was still in theresearch, development and testing stage. In order to expand into the market for EPS, the Company increased its investment in the research and developmentof EPS in 2014, including assigning the Company’s senior technicians and advanced manufacturing equipment to EPS, establishing the EPS trail-productiondepartment, hiring technologists and purchasing advanced technology and testing equipment. At present, the Company has developed several types of EPSsuitable for small-engine cars, and has sold certain quantities of EPS. Income from Operations Income from operations was $44.4 million for the year ended December 31, 2014 as compared to $36.7 million for the year ended December 31, 2013, anincrease of $7.7 million, or 21.0%, which mainly consisted of an increase of $10.8 million, or 14.1%, in gross profit and an increase of $4.2 million, or 55.3%,in gain on other sales, such as raw materials and property, plant and equipment sales, offset by an increase in operating expenses of $7.4 million, or 15.6%. 23Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Other Income, Net Other income, net was $1.0 million for the year ended December 31, 2014 as compared to $1.1 million for the year ended December 31, 2013, a decrease of$0.1 million, or 9.1%, primarily as a result of a decrease in the unspecific purpose subsidies being recognized in 2014. The Company’s government subsidies consisted of specific subsidies and other subsidies. Specific subsidies are the subsidies that the Chinese governmenthas specified its purpose for, such as product development and renewal of production facilities. Other subsidies are the subsidies that the Chinese governmenthas 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 anyfurther actions or performance of the Company and the amounts do not have to be refunded under any circumstances. The Company recorded specificpurpose subsidies as advances payable when received. For specific purpose subsidies, upon government acceptance of the related project development orasset acquisition, the specific purpose subsidies will be recognized to reduce related R&D expenses or cost of asset acquisition. The unspecific purposesubsidies are recognized as other income upon receipt as future performance by the Company is not required. Financial Income/(Expenses),Net Financial income, net was $0.6 million for the year ended December 31, 2014 as compared to $0.4 million for the year ended December 31, 2013, an increaseof $0.2 million, or 50.0%, primarily as a result of: (a) an increase in interest income of $0.1 million; (b) an increase in gain on notes discounted of $0.2million; and (c) a decrease in bank handling expenses of $0.2 million. 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 $46.1 million for the year ended December 31, 2014 compared with$38.2 million for the year ended December 31, 2013, an increase of $7.9 million, or 20.7%, including an increase in income from operations of $7.7 million, adecrease in gain on other income of $0.1 million, and an increase in financial income of $0.2 million. Income Taxes Income tax expense was $6.8 million for the year ended December 31, 2014 compared to $5.5 million for the year ended December 31, 2013, representing anincrease of $1.3 million, or 23.6%, which was mainly due to an increase in income before tax and an increase in effective tax rate. The effective tax rateincreased from 14.4% for the year ended December 31, 2013 to 14.7% for the year ended December 31, 2014, primarily due to an increase in income beforetax of certain high effective tax rate subsidiaries. Net Income Net income was $39.6 million for the year ended December 31, 2014, compared with net income of $33.1 million for the year ended December 31, 2013,representing an increase of $6.5 million, or 19.6%, mainly due to an increase in income before income tax expenses and equity in earnings of affiliatedcompanies of $7.8 million, offset by an increase in income tax expenses of $1.3 million. Net Income Attributable to Noncontrolling Interests The Company recorded net income attributable to noncontrolling interests of $6.1 million for the year ended December 31, 2014, compared to $6.3 millionfor the year ended December 31, 2013, representing a decrease of $0.2 million, or 3.2%, mainly due to the Company having completed the acquisition of thenoncontrolling interests of Henglong and Jiulong, the Company’s subsidiaries, on September 26, 2014. The Company owns different equity interests in ten non-wholly owned subsidiaries established in the PRC and Brazil, through which it conducts itsoperations. Except for Beijing Henglong, which is accounted for under the equity method, all of the operating results of these non-wholly owned subsidiarieswere consolidated in the Company’s consolidated financial statements as of December 31, 2014 and 2013. For the year ended December 31, 2014 and 2013,the Company recorded $6.1 million and $6.3 million, respectively, for the noncontrolling interests’ share in the earnings of the consolidated non-whollyowned subsidiaries. Net Income Attributable to Parent Company Net income attributable to parent company was $33.5 million for the year ended December 31, 2014. As compared to $26.8 million for the year endedDecember 31, 2013, there was an increase of $6.7 million, or 25.0%, due to an increase in net income of $6.5 million and a decrease in net incomeattributable to noncontrolling interests of $0.2 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, 2014, the Company had cash and cashequivalents and short-term investments of $109.5 million, compared with $89.5 million as of December 31, 2013, an increase of $20.0 million, or 22.3%. 24Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The Company had working capital of $198.1 million as of December 31, 2014, compared with $179.3 million as of December 31, 2013, representing anincrease of $18.8 million, or 10.5%. 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, 2014, the cash expected to be generated from the operations and fundsavailable 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, 2014. Capital Source The Company’s capital source is multifaceted, such as bank loans and banks’ acceptance facilities. In financing activities and operating activities, theCompany’s banks require the Company to sign line of credit agreements and repay such facilities within one year. On the condition that the Company canprovide 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. As of December 31, 2014, the Company had short-term bank loans of $44.0 million and bankers’ acceptances of $80.7 million (see Note 13 to theconsolidated 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 provideadequate mortgage security following the termination of the above-mentioned agreements, see the table under “Bank Arrangements” below for moreinformation. 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 availablefrom 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 $14.1 million over the next 12 months. If the Company wishes to obtainthe same amount of bank loans and banker's acceptances, it will have to provide additional mortgages of $14.1 million as of the maturity date of such line ofcredit agreements, see the table under “Bank Arrangements” below for more information. The Company can still obtain a reduced line of credit with areduction of $10.7 million, which is 75.8%, the mortgage ratio, of $14.1 million, if it cannot provide additional mortgages. The Company expects that thereduction in bank loans will not have a material adverse effect on its liquidity. Bank Arrangements As of December 31, 2014, the principal outstanding under the Company’s credit facilities and lines of credit was as follows (figures are in thousands of USD): Bank Due Date AmountAvailable(4) Amount Used AssessedMortgageValue(6) 1. Comprehensive credit facilities Bank of China (5) Mar 2015 $23,043 $9,066 $34,319 2. Comprehensive credit facilities Jingzhou Commercial Bank July 2015 29,417 20,637 59,377 3. Comprehensive credit facilities China Construction Bank(5) Nov 2014 11,440 - 30,928 4. Comprehensive credit facilities Shanghai Pudong DevelopmentBank (1) (5) Mar 2015 25,494 17,725 13,249 5. Comprehensive credit facilities China CITIC Bank (1) Jun 2015 19,611 9,837 16,083 China CITIC Bank July 2016 4,903 2,451 - 6. Comprehensive credit facilities China Everbright Bank Sep 2015 4,903 4,668 8,368 7. Comprehensive credit facilities China Huaxia Bank (1) Jan 2016 26,148 5,859 - 8. Comprehensive credit facilities ICBC Macau May 2015 30,000 30,000 32,987 9. Comprehensive credit facilities HSBC (China) Company Limited July 2015 5,000 5,000 5,393 Total $179,959 $105,243(2) $200,704(3) 25Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (1)Henglong’s comprehensive credit facility provided by China CITIC Bank and China Hua Xia Bank and each of Henglong and Jielong’scomprehensive credit facilities provided by Shanghai Pudong Development Bank are required to be guaranteed by Jiulong, another subsidiary ofthe Company, in addition to the above pledged assets. (2)The amount used includes bank loans of $39.1 million and notes payable of $66.2 million as of December 31, 2014. The remainder of $4.9million of government loans and $14.5 million of notes payable was 100% secured by bank notes and time deposits without utilization of creditlines.(3)As of December 31, 2014, the pledged assets included $67.3 million accounts and notes receivable and other pledged assets with assessed valueof $133.4 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 amountrepresents the amount that the Company can borrow immediately; for issuance of bank notes, the Company needs to pledge additional collateralin order to utilize these bank facilities. (5)As at the date of this Report, the comprehensive credit facilities with Bank of China, China Construction Bank, and Shanghai PudongDevelopment Bank have expired. The Company is negotiating the renewal of the credit facilities with these banks and expects to obtain therenewal in late April 2015. As the Company has obtained sufficient comprehensive lines of credit from other banks, the Company does notanticipate 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 2 to the consolidated financial statements in this Report, were not included in theassessed mortgage value. The Company may request the banks to issue notes payable or bank loans within its credit line using a 365-day revolving line. The Company renewed its existing short-term bank loans and borrowed new bank loans during 2014 at annual interest rates of 1.70% to 6.72%, and loanterms of eleven to twelve months. Pursuant to the comprehensive credit line arrangement the Company pledged and guaranteed: 1.Accounts receivable, land use rights and buildings with an assessed value of approximately $34.3 million as security for its comprehensive creditfacility with the Bank of China; 2.Equipment with an assessed value of approximately $59.4 million as security for its revolving comprehensive credit facility with Jingzhou CommercialBank; 3.Equipment, land use rights and buildings with an assessed value of approximately $30.9 million as security for its comprehensive credit facility withChina Construction Bank; 4.Land use rights and buildings with an assessed value of approximately $13.2 million as security for its comprehensive credit facility with ShanghaiPudong Development Bank; 5.Land use rights and buildings with an assessed value of approximately $16.1 million as security for its comprehensive credit facility with China CITICBank; and 26Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 6.Land use rights and buildings with an assessed value of approximately $8.4 million as security for its comprehensive credit facility with ChinaEverbright Bank. Henglong’s comprehensive credit facility with China Hua Xia Bank is guaranteed by Jiulong, another subsidiary of the Company. On May 18, 2012, the Company entered into a Credit Agreement with ICBC Macau to obtain the Credit Facility. The interest rate of the Credit Facility was calculated based on a three-month LIBOR plus 2.25% per annum, subject to the availability of funds andfluctuation at ICBC Macau’s discretion. Interest was calculated daily on a 360-day basis and it was to be fixed one day before the first day of eachinterest period. The interest period was 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 ofnot less than $31.6 million if the Credit Facility is 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 ofCredit for an amount of $31.6 million in favor of ICBC Macau. The Henglong Standby Letter of Credit issued by ICBC Jingzhou is collateralized byHenglong’s notes receivable of RMB201.8 million (equivalent to approximately $33.0 million). The Company also paid an arrangement fee of $0.1million 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 underthe extended term is calculated based on three-month LIBOR plus 2.0% per annum, Except for the above, all other terms and conditions stipulated inthe Credit Agreement remain unchanged. On May 13, 2014, ICBC Macau agreed to extend the maturity date of the Credit Facility to May 12, 2015. The interest rate of the Credit Facility underthe extended term is revised as three-month LIBOR plus 2.55% per annum. Except for the above, all other terms and conditions stipulated in the CreditAgreement remain unchanged. As of December 31, 2014, the interest rate of the Credit Facility was 2.81 % per annum (See Note 5). On July 16, 2014, Great Genesis entered into a credit facility agreement with HSBC HK to obtain a non-revolving credit facility in the amount of $5.0million, the “HSBC Credit Facility”. The HSBC Credit Facility will expire on July 1, 2015 and has an annual interest rate of 1.7%. Interest is paid onthe twentieth day of each month and the principal repayment is at maturity. As security for the HSBC Credit Facility, the Company’s subsidiary HubeiHenglong was required to provide HSBC HK with the Standby Letter of Credit for a total amount of not less than $5.4 million if the HSBC CreditFacility is fully drawn. On July 22, 2014, Great Genesis drew down a loan amounting to $5.0 million provided by HSBC HK and Hubei Henglong provided a Standby Letterof Credit for an amount of $5.4 million in favor of HSBC HK. Hubei Henglong’s Standby Letter of Credit was issued by HSBC Bank (China) CompanyLimited Wuhan branch and is collateralized by short-term investments of Hubei Henglong of RMB33.0 million (equivalent to approximately $5.4million). Cash Requirements The following table summarizes the Company’s expected cash outflows resulting from financial contracts and commitments. The Company has not includedinformation on its recurring purchases of materials for use in its manufacturing operations. These amounts are generally consistent from year to year, closelyreflecting 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) Less than 1 More than 5 Total year 1-3 years 3-5 years Years Short-term loan including interest payable $44,474 $44,474 $- $- $- Notes payable (1) 80,701 80,701 - - - Obligation for investment contract(2) 7,354 1,634 5,720 Other contractual purchase commitments,including service agreements 7,186 6,981 205 - - Total $139,715 $133,790 $5,925 $- $- 27Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (1)Notes payable do not bear interest. (2)On September 22, 2014, Hubei Henglong entered into an agreement with seven other parties to establish the Venture Fund, under which HubeiHenglong has committed to make investments of 17.9% or RMB50.0 million (equivalent to approximately $8.2 million) into the Venture Fundin three installments. On October 20, 2014, Hubei Henglong made its first capital contribution of RMB5.0 million (equivalent to approximately$0.8 million). The remaining capital commitment of RMB45.0 million (equivalent to approximately $7.4 million) will be paid upon capital callsreceived from the Venture Fund. Short-term Bank Loans The following table summarizes the contract information of short-term borrowings between the banks and the Company as of December 31, 2014 (figures arein thousands of USD). Bank / PRC Government Purpose Borrowing Date Borrowing Term (Months) Annual Interest Rate Date of Interest Payment Due Date Amount Payable on Due Date ICBC Macau (1) Working Capital 13 May, 2014 12 2.81% Pay quarterly 12 May 2015 $30,000 Shanghai Pudong Development Bank Working Capital 16 Dec, 2014 12 6.16% Pay quarterly 15 Dec 2015 654 Shanghai Pudong Development Bank Working Capital 17 Dec, 2014 11 6.16% Pay quarterly 13 Nov 2015 654 Shanghai Pudong Development Bank Working Capital 18 Dec, 2014 11 6.16% Pay quarterly 13 Nov 2015 326 China CITIC Bank Working Capital 29 Dec, 2014 12 6.72% Pay quarterly 29 Dec 2015 2,451 HSBC Bank (China) CompanyLimited Working Capital 22 Jul, 2014 12 1.70% Pay monthly 1 Jul 2015 5,000 Financial Bureau of JingzhouDevelopment Zone Working Capital 28 Mar, 2014 12 3.00% Pay uponmaturity 15 Mar 2015 4,903 Total $43,988 (1)The original borrowing date and maturity date of this loan was May 22, 2012 and May 22, 2013, respectively. The original maturity date was extendedto May 12, 2015. 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% ofthe specified loan rate listed in the table above. Except for the loan granted by ICBC Macau as disclosed in the section “Bank Arrangements” above, theCompany 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 compoundinterest 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 becharged 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, 2014, and will continue to comply with them. 28Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Notes Payable The following table summarizes the contract information of issuing notes payable between the banks and the Company as of December 31, 2014 (figures arein thousands of USD): Amount Payable on Purpose Term (Month) Due Date Due Date Working Capital (1) 3-6 Jan 2015 $12,038 Working Capital (1) 3-6 Feb 2015 13,393 Working Capital (1) 3-6 Mar 2015 14,440 Working Capital 3-6 Apr 2015 13,940 Working Capital 3-6 May 2015 12,891 Working Capital 3-6 Jun 2015 13,999 Total $80,701 (1)The notes payable were repaid in full on their respective due dates. 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 mayhave an adverse effect on the Company’s liquidity and capital resources. The Company has to deposit sufficient cash in the designated account of the bankon 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, 2014, and will continue to comply with them. Cash flows (a)Operating activities Net cash provided by operations for the year ended December 31, 2014 was 45.7 million, compared with net cash provided of $12.9 million for the yearended December 31, 2013, representing an increase of $32.8 million. During the year ended December 31, 2014, the increase 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 $5.7 million; (2)The change in balance of pledge deposits which led to an increase in net cash provided by operations of $6.9 million; (3)A decrease in the growth rate of balance of accounts and notes receivable which led to an increase in net cash provided by operations of $36.1 million,which was mainly due to the sales of the Company’s goods always on credit terms ranging from 4 to 6 months, and the fact that, during the year endedDecember 31, 2014, the Company strengthened accounts receivable, which led to a significant decrease in the growth rate of the ending balance ofaccounts receivable compared with last year; (4)The change in balance of inventories led to a decrease in net cash provided by operations of $1.4 million, which was mainly due to the Companyneeding certain inventory for turnover as a result of the increase in sales; (5)The change in balance of accounts and notes payable which led to a decrease in net cash provided by operations of $14.7 million, which was mainlydue to the Company having paid more accounts and notes payable as a result of more accounts and notes payable being due and payable in the currentperiod; (6)The change in accrued expenses and other payable which led to a decrease in net cash provided by operations of $3.3million, which was mainly due tothe Company paying certain legal expenses, audit fees and consulting fees that accrued in the prior year during the current period; and (7)The change of balance of tax payable, which led to an increase in net cash provided by operations of $2.2 million, mainly due to income tax payablebeing settled in the next year, pursuant to the tax laws and regulations in China. (b)Investing activities The Company used net cash of $21.8 million in investment activities during the year ended December 31, 2014, compared to $43.1 million in 2013,representing a decrease of $21.3 million, which was mainly due to an increase in purchases of equipment and patented technology of $4.5 million, theacquisition of Fujian Qiaolong and Venture Fund for $3.9 million in cash, and most time deposits having matured and carried forward to short-term depositsin the current period, which led to an increase of $29.6 million (See Note 4). 29Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (c)Financing activities During the year ended December 31, 2014, the Company used net cash of $9.1 million in financing activities, compared to net cash of $5.8 million used byfinancing activities for 2013, representing an increase of $3.3 million, which was mainly due to the net effect of: (1) increased proceeds of $8.8 million fromgovernment loans and bank loans; (2) the increase in dividends paid to the non-controlling shareholders of joint ventures of $7.9 million; and (3) theincrease in dividends paid to common stockholders of $4.3 million. OFF-BALANCE SHEET ARRANGEMENTS At December 31, 2014 and 2013, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheetarrangements. COMMITMENTS AND CONTINGENCIES At December 31, 2014, the Company did not enter into any other commitments except those cash requirements disclosed in the Liquidity and CapitalResources section. 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 themoney 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, itmay harm the Company’s profitability. In order to control inflation in the past, the Chinese government has imposed controls on bank credit, limits on loansfor fixed assets and restrictions on state bank lending. Such policies can lead to a slowing of economic growth. Rises in interest rates by the central bankwould likely slow economic activity in China which could, in turn, materially increase the Company’s costs and also reduce demand for the Company’sproducts. Foreign operations are subject to certain risks inherent in conducting business abroad, including price and currency exchange controls, and fluctuations inthe relative value of currencies. During 2014, the Company supplied products to North America and settled in cash in U.S. dollars. As a result, appreciation orcurrency fluctuation of the RMB against the U.S. dollar would increase the cost of export products, and adversely affect the Company’s financialperformance. In July 2005, the Chinese government adjusted its exchange rate policy from “Fixed Rate” to “Floating Rate.” During December 2013 to December 2014, theexchange rate between RMB and U.S. dollar appreciated from RMB1.00 to $0.1640 to RMB1.00 to $0.1634. With the Chinese government attempts to slowthe rate of inflation in the PRC, the appreciation of the RMB may continue. Significant appreciation of the RMB is likely to decrease the amount of exportproducts, thus decreasing the Company’s income. RECENT ACCOUNTING PRONOUNCEMENTS In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-08 “Presentation of Financial Statements(Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”.The new guidance changes the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, onlydisposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on theorganization’s operations and financial results. Additionally, ASU 2014-08 requires expanded disclosures about discontinued operations that will providefinancial statement users with more information about the assets, liabilities, income and expenses of discontinued operations. The new guidance also requiresdisclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting.ASU 2014-08 is effective for the Company in the first quarter of fiscal 2015. Early adoption is permitted, but only for disposals (or classifications as held forsale) that have not been reported in financial statements previously issued or available for issuance. The Company is currently evaluating the impact ofadopting this update on its financial statements. In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers (Topic 606)”. ASU2014-09 will eliminate transaction-specific and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods orservices as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cashflows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain orfulfill a contract. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016, including interim periods within that reporting period.Early adoption is not permitted. Entities can transition to the standard either retrospectively or as a cumulative effect adjustment as of the date of adoption.Management is currently assessing the impact the adoption of ASU 2014-09 and the effect of the standard on our ongoing financial reporting. 30Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. In June 2014, the FASB issued Accounting Standards Update No. 2014-12 (“ASU 2014-12”), “Compensation—Stock Compensation (Topic 718) -Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite ServicePeriod.” ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as aperformance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vestingto account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation costshould be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation costattributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved beforethe end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisiteservice period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that areexpected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease renderingservice and still be eligible to vest in the award if the performance target is achieved. As indicated in the definition of vest, the stated vesting period (whichincludes the period in which the performance target could be achieved) may differ from the requisite service period. For all entities, the amendments in thisUpdate are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted.The effective date is the same for both public business entities and all other entities. Entities may apply the amendments in this Update either (a)prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as ofthe beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition isadopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements should berecognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may usehindsight in measuring and recognizing the compensation cost. The Company is currently evaluating the impact of adopting this Update on its financialstatements. In August 2014, the FASB issued Accounting Standards Update No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a GoingConcern”, which will explicitly require management to assess an entity’s ability to continue as a going concern and to provide related footnote disclosures incertain circumstances. Currently, there is no guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about anentity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this Update provide that guidance. In doing so,the amendments should reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’s abilityto continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, theamendments (1) provide a definition of the term “substantial doubt”, (2) require an evaluation every reporting period including interim periods, (3) provideprinciples for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result ofconsideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated and (6) require anassessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this update areeffective for the first annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. TheCompany 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 thedisclosure of contingent assets and liabilities at the dates of the financial statements and the reported amount of revenues and expenses during the reportingperiods. Management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience andon various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of differentassumptions or conditions. The following critical accounting policies affect the more significant judgments and estimates used in the preparation of theCompany’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 financialcondition or results of operations. 31Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The table below presents information about the nature and rationale for the Company critical accounting estimates: Critical Balance Sheet Estimate Assumptions/Approaches Caption Item Nature of Estimates Required Used Key FactorsAccruedliabilities andother long-termliabilities Warrantyobligations Estimating warranty requires the Company toforecast the resolution of existing claims andexpected future claims on products sold.VMs (Vehicle Manufacturer) are increasinglyseeking to hold suppliers responsible forproduct warranties, which may impact theCompany’s exposure to these costs. The Company bases its estimate onhistorical trends of units sold andpayment amounts, combined with itscurrent understanding of the status ofexisting claims and discussions withits customers. ·VM sourcing·VM policy decisionsregarding warranty claims Property, plantand equipment,intangible assetsand other long-term assets Valuation oflong- lived assetsand investments The Company is required from time-to-timeto review the recoverability of certain of itsassets based on projections of anticipatedfuture cash flows, including futureprofitability assessments of various productlines. The Company estimates cash flowsusing internal budgets based on recentsales data, independent automotiveproduction volume estimates andcustomer commitments. ·Future production estimates·Customer preferences anddecisions Inventory Provision forinventoryimpairment The Company is required from time to timeto review the cashability of inventory basedon projections of anticipated future cashflows, including provision of inventoryimpairment for over market price andundesirable inventories. The Company estimates cash flowsusing internal budgets based on recentsales data, independent automotiveproduction volume estimates andcustomer commitments.. ·Future production estimates·Customer preferences anddecisions Deferred incometaxes Recoverabilityof deferred taxassets The Company is required to estimate whetherrecoverability of its deferred tax assets ismore likely than not based on forecasts oftaxable earnings in the related taxjurisdiction. The Company uses historical andprojected future operating results,based upon approved business plans,including a review of the eligible carryforward period, tax planningopportunities and other relevantconsiderations. ·Tax law changes·Variances in future projectedprofitability, including bytaxing entity Convertiblenotes payable,warrantliabilities,compoundderivativeliabilities Warrantliabilities andcompoundderivativeliabilities The Company is required to estimate the fairvalue of warrant liabilities and compoundderivative liabilities at conception andcompletion of each reporting period. The Company uses Black-Scholesoption pricing model to determine fairvalue of warrant; uses Monte Carlosimulation (“MCS”) valuationtechniques to determine fair value ofcompound derivative liabilities. ·Expected volatility·Risk-free rate·Interest market risk·Credit risk·Redemption activities beforematurity Uncertain tax Uncertain taxpositions The Company is required to determine andassess all material positions, including allsignificant uncertain positions in all taxyears that are still subject to assessment orchallenge under relevant tax statutes. The Company applies a more likelythan not threshold and a two-stepapproach for tax position measurementand financial statement recognition.For the two-step approach, the first stepis to evaluate the tax position forrecognition by determining if theweight of available evidence indicatesthat it is more likely than not that theposition will be sustained, includingresolution of related appeals orlitigation processes, if any. The secondstep is to measure the tax benefit as thelargest amount that is more than 50%likely to be realized upon settlement. ·An allocation or a shift ofincome between jurisdictions·The characterization ofincome or a decision toexclude reporting taxableincome in a tax return·A decision to classify atransaction, entity, or otherposition in a tax return as taxexempt In addition, there are other items within the Company’s financial statements that require estimation, but are not as critical as those discussed above, includingwrite-down of accounts and notes receivable. Although not significant in recent years, changes in estimates used in these and other items could have asignificant effect on the Company’s consolidated financial statements. 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, theCompany 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 currencyexchange rate risks come primarily from the sales of products to international customers. Most of the Company’s assets are denominated in RMB except forSource: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.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 affectedby fluctuations in the exchange rate between the U.S. dollar and the RMB. 32Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 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 notreadily convertible into U.S. dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the Bank of China orother 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 foreigncurrencies 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'sinterbank foreign exchange market rates and current exchange rates on the world financial markets. On December 31, 2014 and 2013, the exchange rates ofRMB against U.S. dollar were RMB1.00 to $0.1640 and RMB1.00 to $0.1634, respectively. With the Chinese government’s attempts to slow the rate ofinflation in the PRC, the Company expects that the RMB will appreciate against the U.S. dollar in 2015. Significant appreciation of the RMB is likely todecrease the amount of export products, thus decreasing the Company’s income. In order to mitigate the currency exchange rate risk, the Company has inserted a currency exchange rate fluctuation compensation provision in its salescontracts 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 doesnot require collateral or other security to support client receivables since most of its customers are large, well-established companies. The Company's creditrisk is also mitigated because its customers are all selected enterprises supported by the local government. One customer, Chrysler North America, accountedfor more than 10% (11.5%) of the Company’s consolidated revenues in 2014. The Company maintains an allowance for doubtful accounts for any potentialcredit losses related to its trade receivables. The Company does not use foreign exchange contracts to hedge the risk in receivables denominated in foreigncurrencies 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, 2014, the Company had $30.0million of outstanding indebtedness, which is subject to interest rate fluctuations. Based on the amount of such borrowings as of December 31, 2014, it isexpected 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 anannual 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. (a)The financial statements required by this item begin on page 59.(b)Selected quarterly financial data for the past two years are summarized in the following table (figures are in thousands of USD, except those for itemsheaded “Basic” and “Diluted”): Quarterly Results of Operations First Second Third Fourth 2014 2013 2014 2013 2014 2013 2014 2013 Net sales $114,306 $97,164 $115,476 $97,889 $101,735 $90,919 $135,256 $129,187 Gross profit 21,337 19,362 21,583 18,389 20,583 16,525 23,971 22,357 Income from operations 9,770 9,346 16,526 7,814 8,806 10,970 9,330 8,589 Net income 8,311 7,526 13,586 6,206 8,026 10,429 9,671 8,904 Net income attributable tononcontrolling interest 1,537 1,586 2,580 1,225 1,293 1,805 642 1,659 Net income attributable toparent company’s commonshareholders 6,774 5,940 11,006 4,981 6,733 8,624 9,029 7,245 Net income attributable toparent company’s commonshareholders per share- Basic $0.24 $0.21 $0.39 $0.18 $0.24 $0.31 $0.28 $0.26 Diluted $0.24 $0.21 $0.39 $0.18 $0.24 $0.31 $0.28 $0.26 33Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 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 Qizhouand Li Jie, respectively, evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2014, the end of the periodcovered 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 of1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to bedisclosed 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 andreported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act isaccumulated and communicated to the company’s management, including its chief executive officer and chief financial officer, as appropriate, to allowtimely decisions regarding required disclosure. Based on that evaluation, Messrs. Wu and Li concluded that the Company’s disclosure controls andprocedures were effective as of December 31, 2014. 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 underthe supervision of, the chief executive officer and chief financial officer and effected by the board of directors, management and other personnel to providereasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external reportingpurposes 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 transactionsand dispositions of the Company’s assets; b.provide reasonable assurance that transactions are recorded as necessary to permit preparation of theconsolidated financial statements in accordance with generally accepted accounting principles, and thatthe Company’s receipts and expenditures are being made only in accordance with appropriateauthorization of the Company’s management and board of directors; and c.provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, useor 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 executiveofficer and chief financial officer, used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in "InternalControl—Integrated Framework (2013)." In the second quarter of 2014, the Company acquired a 51.0% ownership interest in Fujian Qiaolong, a special purpose vehicle manufacturer and dealer withautomobile repacking qualifications, based in Fujian, China. Fujian Qiaolong mainly manufactures and distributes drainage and rescue vehicles with massflow, drainage vehicles with vertical downhole operation, crawler-type mobile pump stations, high-altitude water supply and discharge drainage vehicles,long-range control crawler-type mobile pump stations and other vehicles. As of December 31, 2014, Fujian Qiaolong was a separate control environment.Fujian Qiaolong was excluded from management’s report on internal control over financial reporting, as permitted by SEC guidance, for the year endedDecember 31, 2014. Fujian Qiaolong’s total assets and total revenues represented 3.0% and 1.2%, respectively, of the related consolidated financialstatement amounts as of and for the year ended December 31, 2014. Management has assessed the effectiveness of internal control over financial reporting as of December 31, 2014 and determined that internal control overfinancial reporting was effective as of December 31, 2014. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2014 has been audited by PricewaterhouseCoopers ZhongTian LLP, 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. Remediation Measures As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, the Company’s management identified thefollowing control deficiencies as of December 31, 2013 that constituted a material weakness: 34Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. •Although the Company has a policy requiring that related party transactions be reported and disclosed by the Finance Department and promptlydirected to the Audit Committee for its review and approval, and the Company historically has applied that policy and approval process to varioustransactions, Company personnel failed to adhere to the policy with respect to certain loan transactions that occurred during 2013 (the“Transactions”). The Company’s review revealed that this control failure was a result of differing interpretations on the part of individual Companypersonnel regarding the scope and application of the policy. Further, when certain of the Transactions later were reported to members of the FinanceDepartment, those persons did not promptly report the Transactions to the Audit Committee. The Transactions later were also identified by theInternal Audit Department of the Company as deviations from the Company’s internal control procedures during the normal course of its internalaudit procedures. However, Internal Audit personnel did not report the Transactions to the Audit Committee until the Internal Audit Department hadcompleted its broader and regular internal audit procedures and, therefore, they did not timely inform the Audit Committee about the Transactions. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibilitythat a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. In response to the material weakness identified above, the Audit Committee directed that management consider certain corrective or remedial actions inrespect of the relevant internal controls at the Company. Management, under the supervision of the Chief Executive Officer and Chief Financial Officer,adopted the recommendations of the Audit Committee and has implemented the measures described below to address the material weakness. In order to address the material weakness identified as of December 31, 2013, the Company has taken the following remedial measures: (1) the Company’spolicies and procedures with respect to related party transactions have been amended to clarify their scope, as well as certain definitions and internalreporting and approval requirements; (2) a training program has been designed and implemented, which is mandatory for relevant Company personnel andwhich focuses on the scope and application of the Company’s controls concerning related party transactions, including reporting and approval requirements;(3) policies and procedures have been amended to clarify that any identified errors relating to the reporting and submission for approval of related partytransactions should be immediately brought to the attention of the Audit Committee by the Finance Department or the Internal Audit Department; and (4) asdirected by the Audit Committee, the Company’s Internal Audit Department has conducted and reported to the Audit Committee with respect to a series ofspecial audits designed to assess the implementation of the subject policies and procedures, the Company’s controls regarding related party transactions andrelevant staff members’ awareness of the Company’s procedures and controls regarding related party transactions. The procedures of such audits have beenincluded in the programs of the Internal Audit Department and are now being carried out regularly throughout the year. Management believes that the measures described above have effectively remediated the referenced material weakness as of December 31, 2014. Under thedirection of the Audit Committee, management will continue to review and make any necessary changes to the system of internal controls and the controlenvironment, as well as policies and procedures to improve the overall effectiveness of internal control over financial reporting. 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 bemet. 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 theircosts. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due toerror or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitationsinclude the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also becircumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. Projections of anyevaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions ordeterioration in the degree of compliance with policies or procedures. Changes in Internal Control Over Financial Reporting During the quarter ended December 31, 2014, we have implemented and clarified policies and procedures with respect to related party transactions designedand implemented a new training program and conducted a series of special audits over the implementation of policies and procedures that will be performedon a regular basis going forward. These changes have materially affected, or are reasonably likely to materially affect, the Company’s internal control overfinancial reporting during the quarter ended December 31, 2014. ITEM 9B.OTHER INFORMATION. None. 35Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 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, 2014. The Board ofDirectors 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 andqualified, or until their earlier death, retirement, resignation or removal. Also provided herein are brief descriptions of the business experience of each directorand executive officer during the past five years and an indication of directorships held by each director in other companies subject to the reportingrequirements under the federal securities laws. Name Age Position(s) Hanlin Chen 57 Chairman of the Board Robert Tung 58 Director Guangxun Xu 64 Director Arthur Wong 55 Director Qizhou Wu 50 Chief Executive Officer and Director Jie Li 45 Chief Financial Officer Andy Tse 44 Senior Vice President Yijun Xia 52 Vice President Daming Hu 56 Chief Accounting Officer Haimian Cai 51 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 astanding committee member of the Chinese People’s Political Consultative Conference and vice president of Foreign Investors Association of HubeiProvince. 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 ofthe 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 operatingofficer from 2003 to 2007. He was the executive general manager of Shashi Jiulong Power Steering Gears Co., Ltd. from 1993 to 1999 and the generalmanager of Henglong Automotive Parts Co., Ltd. from 1999 to 2002. Mr. Wu graduated from Tsinghua University in Beijing with a Master’s degree inautomobile 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 thecompensation and nominating committees of the Board of Directors. Mr. Wong is currently the chief financial officer of Beijing Radio Cultural TransmissionCompany 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 EnergyCorp. (NYSE: DQ), Besunyen Holdings Company Limited (HKSE: 926), Termbray Petroking Oilfield Services Limited (HKSE: 2178), Sky Solar Holdings,Ltd. (NASDAQ: SKYS) and China Maple Leaf Educational Systems Limited (HKSE: 1317). Mr. Wong was formerly the chief financial officer of GreenTreeInns 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 inApplied Economics degree from the University of San Francisco and was awarded a Higher Diploma of Accountancy from Hong Kong Polytechnic. Hisprofessional affiliations include being a member of the American Institute of Certified Public Accountants, the Hong Kong Institute of Certified PublicAccountants and the Chartered Association of Certified Accountants. 36Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Robert Tung has been an independent director of the Company since September 2003. He is a member of the audit and nominating committees, and thechairman of the compensation committee of the Board of Directors. Mr. Tung is currently the president of Multi-Media Communications, Inc. and vicepresident 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 andinfrastructure 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. Currently, Mr. Tung acts as the managing director of North-South Resource International Ltd.which consults on the trading of copper cathodes, crude, fuel oil, diesel and jet fuels. Guangxun Xu has served as an independent director of the Company since December 2009. He is a member of the audit and compensation committees, andthe chairman of the nominating committee of the Board of Directors. Mr. Xu has been the Chief Representative of NASDAQ in China and a managing directorof 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 practicefocuses on providing package services on U.S. 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 tojoining the Company in September 2003, Mr. Li was the assistant president of Jingzhou Jiulong Industrial Inc. from 1999 to 2003 and the general manger ofJingzhou Tianxin Investment Management Co. Ltd. from 2002 to 2003. Mr. Li has a Bachelor's degree from the University of Science and Technology ofChina. 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 viceGM 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 strategicdevelopment. 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 toDecember 2011. Prior to that position he served as the Vice-G.M. of Henglong from December 2002. Mr. Xia graduated from Wuhan University of WaterTransportation 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 ITTAutomotive Inc. Dr. Cai has written more than fifteen technical papers and co-authored a technical book regarding the Powder Metallurgy industry forautomotive application. Dr. Cai has more than ten patents including pending patents. Dr. Cai holds a B.S. Degree in Automotive Engineering from TsinghuaUniversity and a M.S. and Ph. D. in manufacturing engineering from Worcester Polytechnic Institute. Since December 2009, Mr. Cai has not served asindependent director and a member of the Company’s Audit Committee, Compensation and Nominating Committees, because he was nominated as vicepresident 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 August2007, he served as Chief Financial Officer of the Company. Mr. Hu was the Finance Manager of Jiulong from 1996 to 1999 and Finance Manager ofHenglong 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, asamended. The Audit Committee is operated under a written charter. The Audit Committee consists of the following individuals, all of whom the Companyconsiders to be independent, as defined under the SEC’s rules and regulations and the Nasdaq’s definition of independence: Mr. Robert Tung, Mr. GuangxunXu and Mr. Arthur Wong. Mr. Arthur Wong is the Chairman of the Audit Committee. The Board has determined that Mr. Arthur Wong is the audit committeefinancial 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 determiningcompensation for the Company’s executive officers. Three of the Company’s independent directors, as defined under the SEC’s rules and regulations and theNasdaq’s definition of independence, Mr. Robert Tung, Mr. Guangxun Xu and Mr. 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 areindependent 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 andbenefits of the Company’s officers and employees. The Compensation Committee operates under a written charter that is made available on the Company’swebsite, www.caasauto.com. 37Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The Company’s Compensation Committee is empowered to review and approve the annual compensation and compensation procedures for the executiveofficers of the Company. The primary goals of the Compensation Committee of the Company’s Board of Directors with respect to executive compensation areto attract and retain the most talented and dedicated executives possible and to align executives’ incentives with stockholder value creation. TheCompensation Committee evaluates individual executive performance with a goal of setting compensation at levels the committee believes are comparablewith executives in other companies of similar size and stage of development operating in similar industry while taking into account the Company’s relativeperformance and its strategic goals. The Company has not retained a compensation consultant to review its policies and procedures with respect to executive compensation. The Companyconducts an annual review of the aggregate level of its executive compensation, as well as the mix of elements used to compensate its executive officers. TheCompany 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. TheNominating Committee will consider candidates based upon their business and financial experience, personal characteristics, and expertise that arecomplementary to the background and experience of other Board members, willingness to devote the required amount of time to carry out the duties andresponsibilities of Board membership, willingness to objectively appraise management performance, and any such other qualifications the NominatingCommittee deems necessary to ascertain the candidates’ ability to serve on the Board. The Nominating Committee will not consider nomineerecommendations from security holders, other than the recommendations received from a security holder or group of security holders that beneficially ownedmore 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 theCompany’s independent directors, as defined under the SEC’s rules and regulations and the Nasdaq’s definition of independence, Mr. Robert Tung, Mr.Guangxun Xu and Mr. Arthur Wong, serve on the Nominating Committee. Since December 17, 2009, Mr. Guangxun Xu has been the Chairman of theNominating 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 theCompany copies of all such correspondence that deals with the functions of the Board or committees thereof or that he otherwise determines requires theirattention. Directors may at any time review all of the correspondence received that is addressed to members of the board of directors of the Company andrequest copies of such correspondence. Concerns relating to accounting, internal controls or auditing matters will immediately be brought to the attention ofthe 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. 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 andConduct 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 onMarch 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 than10% 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, 4and 5 respectively. Executive officers, directors and greater than 10% stockholders are required by Commission regulations to furnish the Company withcopies 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, asamended. 38Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 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 theCompany’s policies regarding compensation and benefits and administering the Company’s benefit plans. At the end of fiscal year 2014, the CompensationCommittee consisted of Mr. Robert Tung, Mr. Guangxun Xu and Mr. Arthur Wong. The members of the Compensation Committee approved the amount andform 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 dedicatedexecutives 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 ofelements used to compensate the Company’s executive officers. The Company compares compensation levels with amounts currently being paid toexecutives at similar companies in the same area and the same industry. Most importantly, the Company compares compensation levels with local practicesin 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 insimilar positions and with similar responsibilities. Base salaries are adjusted from time to time to realign salaries with market levels after taking into accountindividual responsibilities, performance and experience. The Compensation Committee established a salary structure to determine base salaries and isresponsible for initially setting executive officer compensation in employment arrangements with each individual. The base salary amounts are intended toreflect the Company’s philosophy that the base salary should attract experienced individuals who will contribute to the success of the Company’s businessgoals 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: RMB1.5 million (equivalent toapproximately $0.24) million) for the Chairman, RMB1.0 million (equivalent to approximately $0.16 million) for the CEO, and RMB0.6 million (equivalentto approximately $0.09 million) individually for other officers in 2014. Performance Bonus a.Grantees: Mr. Hanlin Chen, Mr. Qizhou Wu, Mr. Andy Tse, Mr. Jie Li, Mr. Yijun Xia, and Mr. Daming Hu. b.Conditions: (i) based on the Company’s consolidated financial statements, the year over year growth rates of sales, net profits and earnings pershare for 2014 must exceed 15%; and (ii) the average growth rate of the foregoing indicators must exceed that of China auto industry in 2014published by CAAM. c.Bonus: 50% of each officer’s annual salary in 2014. The Company accrued performance bonuses for Named Executive Officers in 2014 as the Company reached the above conditions for awarding performancebonuses. 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 longterm operating goals and stockholder benefits, was approved at the Annual Meeting of Stockholders held on June 28, 2005, and extended for ten years at theAnnual Meeting of Stockholders held on September 16, 2014. The maximum common shares available for issuance under the plan is 2,200,000. The term ofthe plan was extended to June 27, 2025. There were no stock options granted to management in 2014. 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 Companydoes not have any other benefits and perquisites for its Named Executive Officers. However, the Compensation Committee in its discretion may providebenefits and perquisites to these executive officers if it deems advisable to do so. 39Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Compensation Tables Executive Officers The compensation that Named Executive Officers received for their services for fiscal years ended 2014 and 2013 were as follows (figures are in thousands ofUSD): Name and principal position Year Salary (1) Bonus (2) Option Awards (3) Total Hanlin Chen (Chairman) 2014 $237 $119 $- $356 2013 $210 $- $- $210 Qizhou Wu (CEO) 2014 $158 $79 $- $237 2013 $140 $- $- $140 Jie Li (CFO) 2014 $95 $47 $ $142 2013 $87 $- $ $87 Haimian Cai (Vice President) 2014 $150 $- $- $150 2013 $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 19 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 thatthe pay for the members of the Board of Directors was appropriate as of December 31, 2014. The compensation that directors received for serving on theBoard of Directors for fiscal year 2014 was as follows (figures are in thousands of USD): Name Fees earned or paid in cash Option awards (1) Total Robert Tung $44 $64 $108 Guangxun Xu $40 $64 $104 Arthur Wong $50 $64 $114 (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 awardsto each director every year. In accordance with ASC Topic 718, the cost of the above mentioned stock options issued to directors was measured onthe grant date based on their fair value. The fair value is determined using the Black-Scholes option pricing model and certain assumptions. Pleasesee Note 19 to the consolidated financial statements in this Report. The cost of the above-mentioned compensation paid to directors was measured based on investment, operating, technology, and consulting services theyprovided. All other directors did not receive compensation for their service on the Board of Directors. ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS. 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, asamended, 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 thepower 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 32,121,019 shares of common stock outstanding at December31, 2014 (exclusive of 217,283 shares of treasury stock). Name/Title Total Number of Shares Percentage Ownership Hanlin Chen, Chairman (1) 17,849,014 55.57%Li Ping Xie (1) 17,849,014 55.57%Wiselink Holdings Limited, “Wiselink” (1) 17,849,014 55.57%Qizhou Wu, CEO and Director 1,325,136 4.13%Robert Tung, Director 7,500 0.02%Haimian Cai, Director - -%Jie Li, CFO(2) 83,403 0.26%Daming Hu, CAO - -%Tse Andy, Sr. VP 400,204 1.25%Yijun Xia, VP 17,200 0.05% All Directors and Executive Officers (8 persons) 19,682,457 61.28% Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.40Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (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 stockbeneficially owned by Wiselink, a company controlled by Mr. Hanlin Chen. (2)Includes 50,000 shares held as nominee for Jiulong Machinery Electricity. On October 13, 2014, the Company issued 4,078,000 of its commonshares in a private placement to nominee holders of Jiulong Machinery Electricity for the acquisition of the 19.0% and 20.0% equity interest inJiulong and Henglong held by Jiulong Machinery Electricity, respectively. All of the nominee holders of Jiulong Machinery Electricity areunrelated parties except for Mr. Jie Li (CFO). 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 RelatedTransactions) and Note 29 (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 thosetransactions required to be disclosed under Item 404 of Regulation S-K of the rules and regulations under the Exchange Act. The Company has a formalwritten set of policies and procedures for the review, approval or ratification of related party transactions. Where a related party transaction is identified, theAudit Committee reviews and, where appropriate, approves the transaction based on whether it believes that the transaction is at arm’s length and containsterms 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 asPricewaterhouseCoopers Zhong Tian CPAs Limited Company) for the audit of the Company’s annual financial statements, and fees billed for other servicesfor the fiscal years 2014 and 2013. The Audit Committee has approved all of the following fees (figures are in thousands of USD): Fiscal Year Ended 2014 2013 Audit Fees $863 $844 Audit-Related Fees - - Tax Fees - - Total Fees Paid $863 $844 At the discretion of the PRC government in accordance with the Scheme for the Localization Restructuring of Chinese-Foreign Cooperative AccountingFirms, PricewaterhouseCoopers Zhong Tian CPAs Limited Company has converted to a new partnership and changed its name to PricewaterhouseCoopersZhong Tian LLP, effective from July 1, 2013. PricewaterhouseCoopers Zhong Tian LLP has succeeded PricewaterhouseCoopers Zhong Tian CPAs LimitedCompany for all purposes and assumed all of the obligations and rights of PricewaterhouseCoopers Zhong Tian CPAs Limited Company with effect from July1, 2013. AUDIT COMMITTEE’S PRE-APPROVAL POLICY During the fiscal years ended December 31, 2014 and 2013, 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 beingprovided by the independent auditor. The Company may not engage the Company’s independent auditor to render any audit or non-audit service unless theservice 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 bythe independent auditor during the fiscal year. At the time such pre-approval is granted, the Audit Committee specifies the pre-approved services andestablishes a monetary limit with respect to each particular pre-approved service, which limit may not be exceeded without obtaining further pre-approvalunder the policy. For any pre-approval, the Audit Committee considers whether such services are consistent with the rules of the Securities and ExchangeCommission on auditor independence. 41Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. (a)(1) FINANCIAL STATEMENTS 1.Report of Independent Registered Public Accounting Firm, PricewaterhouseCoopers Zhong Tian LLP 2.Consolidated Balance Sheets as of December 31, 2014 and 2013 3.Consolidated Statements of Income for the years ended December 31, 2014 and 2013 4.Consolidated Statements of Comprehensive Income for the years ended December 31, 2014 and 2013 5.Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2014 and 2013 6.Consolidated Statements of Cash Flows for the years ended December 31, 2014 and 2013 7.Notes to Consolidated Financial Statements (b) EXHIBITS The following is a list of exhibits filed as part of this Annual Report on Form 10-K. Where so indicated by footnote, exhibits that were previously filed areincorporated by reference. 42Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ExhibitNumber Description 3.1(i) Certificate of Incorporation (incorporated by reference from the filing on Form 10KSB File No. 000-33123) 3.1(ii) Bylaws (incorporated by reference from the Form 10KSB for the year ended December 31, 2002) 10.5 Joint-venture Agreement, dated March 31, 2006, as amended on May 2, 2006, between Great Genesis Holdings Limited and Wuhu CheryTechnology Co., Ltd. (incorporated by reference to exhibit 10.8 to the Company’s Form 10-Q Quarterly Report on May 10, 2006) 10.20 Translation of the Equity Transfer Agreement dated March 31, 2008 in English (incorporated by reference to exhibit 99.1 of theCompany’s Form 8-K filed on April 2, 2008) 10.21 English Translation of the Sino-Foreign Equity Joint Venture Contract dated January 24, 2010 between Great Genesis Holdings Limitedand Beijing Hainachuan Auto Parts Co., Ltd. (incorporated by reference to the Company’s Form 10-K for the year ended December 31,2010 filed on March 25, 2010) 21 Schedule of Subsidiaries (incorporated by reference to Note 1 of the consolidated financial statements of the Company in this AnnualReport on Form 10-K) 23.1 Consent of PricewaterhouseCoopers Zhong Tian LLP* 31.1 Rule 13a-14(a) Certification* 31.2 Rule 13a-14(a) Certification* 32.1 Section 1350 Certification* 32.2 Section 1350 Certification* 101* The following materials from the China Automotive Systems, Inc. Annual Report on Form 10-K for the year ended December 31, 2014,filed on March 26, 2015, formatted in Extensible Business Reporting Language (XBRL): (i)Consolidated Balance Sheets; (ii)Consolidated Statements of Income; (iii)Consolidated Statements of Comprehensive Income; (iv)Consolidated Statements of Changes in Stockholders’ Equity; (v)Consolidated Statements of Cash Flows; and (vi)Related notes. *Filed herewith. 43Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company duly caused this Annual Report to be signed on itsbehalf by the undersigned, thereunto duly authorized. CHINA AUTOMOTIVE SYSTEMS, INC. Dated: March 26, 2015 /s/ Qizhou Wu Name: Qizhou Wu Title: Chief Executive Officer and President 44Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Qizhou Wu his attorney-in-fact andagent, with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file thesame, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming allthat said attorneys-in-fact, or substitutes, may do or cause to be done by virtue hereof. In accordance with the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Company andin the capacities and on the dates indicated. Dated: March 26, 2015 /s/ Hanlin Chen Name:Hanlin Chen Title:Chairman and Director Dated: March 26, 2015 /s/ Qizhou Wu Name:Qizhou Wu Title:Chief Executive Officer, President and Director Dated: March 26, 2015 /s/ Jie Li Name:Jie Li Title:Chief Financial Officer Dated: March 26, 2015 /s/ Daming Hu Name:Daming Hu Title:Chief Accounting Officer Dated: March 26, 2015 /s/ Robert Tung Name:Robert Tung Title:Director Dated: March 26, 2015 /s/ Guangxun Xu Name:Guangxun Xu Title:Director Dated: March 26, 2015 /s/ Arthur Wong Name:Arthur Wong Title:Director 45Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO BOARD OF DIRECTORS AND STOCKHOLDERS OFCHINA AUTOMOTIVE SYSTEMS, INC.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, changes instockholders' 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, 2014 and December 31, 2013, and the results of its operations and its cash flows for each of the two years inthe period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, theCompany maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established inInternal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). TheCompany's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessmentof the effectiveness of internal control over financial reporting, included in management’s report on Internal Control over Financial Reporting appearingunder Item 9A. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting basedon 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 materialmisstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statementsincluded examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles usedand significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financialreporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing andevaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures aswe 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 reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention ortimely 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 ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. As described in Item 9A Management’s Report on Internal Control Over Financial Reporting, management has excluded Fujian Qiaolong Special PurposeVehicle Co., Ltd. (“Fujian Qialong”) from its assessment of internal control over financial reporting as of December 31, 2014 because it was acquired by theCompany in a purchase business combination during 2014. We have also excluded Fujian Qiaolong from our audit of internal control over financialreporting. Fujian Qiaolong is a 51% owned subsidiary whose total assets and total revenues represent 3.0% and 1.2%, respectively, of the relatedconsolidated financial statement amounts as of and for the year ended December 31, 2014. /s/ PricewaterhouseCoopers Zhong Tian LLP__________________________________________________PricewaterhouseCoopers Zhong Tian LLPShanghai, People’s Republic of ChinaMarch 26, 2015 46Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. China Automotive Systems, Inc. and SubsidiariesConsolidated Balance Sheets(In thousands of USD, except share and per share amounts) December 31, 2014 2013 ASSETS Current assets: Cash and cash equivalents $68,505 $53,979 Pledged cash deposits 33,633 33,963 Short-term investments 41,017 35,510 Accounts and notes receivable, net - unrelated parties 282,348 267,639 Accounts and notes receivable, net - related parties 22,760 17,194 Advance payments and others - unrelated parties 2,124 3,156 Advance payments and others - related parties 741 866 Inventories 64,419 51,392 Assets held for sale - 925 Current deferred tax assets 7,078 5,783 Total current assets 522,625 470,407 Non-current assets: Property, plant and equipment, net 82,466 80,018 Intangible assets, net 3,419 686 Other receivables, net - unrelated parties 1,619 252 Other receivables, net - related parties 76 108 Advance payment for property, plant and equipment - unrelated parties 6,755 3,488 Advance payment for property, plant and equipment - related parties 2,085 2,097 Long-term investments 4,575 4,023 Goodwill 645 - Non-current deferred tax assets 4,896 4,528 Total assets $629,161 $565,607 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Bank loans $43,988 $37,381 Accounts and notes payable - unrelated parties 213,090 198,419 Accounts and notes payable - related parties 4,857 4,634 Customer deposits 1,885 1,677 Accrued payroll and related costs 7,554 7,052 Accrued expenses and other payables 35,429 29,062 Accrued pension costs 5,586 4,626 Taxes payable 11,557 7,792 Amounts due to shareholders/directors 380 312 Current deferred tax liabilities 189 117 Total current liabilities 324,515 291,072 Long-term liabilities: Advances payable 6,156 2,764 Non-current deferred tax liabilities 321 - Total liabilities 330,992 293,836 Commitments and Contingencies (Note 30) Stockholders’ Equity Common stock, $0.0001 par value - Authorized - 80,000,000 shares Issued –32,338,302 and 28,260,302 shares atDecember 31, 2014 and 2013, respectively 3 3 Additional paid-in capital 64,522 39,565 Retained earnings- Appropriated 10,178 10,048 Unappropriated 179,435 146,023 Accumulated other comprehensive income 36,119 32,061 Treasury stock –217,283 and 217,283 shares at December 31, 2014 and 2013, respectively (1,000) (1,000)Total parent company stockholders’ equity 289,257 226,700 Non-controlling interests 8,912 45,071 Total stockholders’ equity 298,169 271,771 Total liabilities and stockholders’ equity $629,161 $565,607 The accompanying notes are an integral part of these consolidated financial statements. 47Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. China Automotive Systems, Inc. and SubsidiariesConsolidated Statements of Income(In thousands of USD, except share and per share amounts) Year Ended December 31, 2014 2013 Net product sales, including $50,442 and $37,453 to related parties for the years ended December 31, 2014 and2013 $466,773 $415,158 Cost of products sold, including $23,506 and $25,916 purchased from related parties for the years ended December31, 2014 and 2013 379,299 338,526 Gross profit 87,474 76,632 Net gain on other sales 11,821 7,555 Operating expenses: Selling expenses 15,736 13,331 General and administrative expenses 16,161 13,253 Research and development expenses 22,966 20,885 Total operating expenses 54,863 47,469 Operating income 44,432 36,718 Other income, net 1,021 1,096 Interest expense (1,788) (1,569)Financial income, net 2,416 1,996 Income before income tax expenses and equity in earnings of affiliated companies 46,081 38,241 Less: Income taxes 6,785 5,483 Add: Investment income, net 298 307 Net income 39,594 33,065 Net income attributable to noncontrolling interest 6,052 6,276 Net income attributable to parent company’s common shareholders 33,542 26,789 Net income attributable to parent company’s common shareholders per share – Basic $1.15 $0.96 Diluted $1.15 $0.95 Weighted average number of common shares outstanding – Basic 29,062,519 28,043,019 Diluted 29,082,809 28,056,144 The accompanying notes are an integral part of these consolidated financial statements. 48Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. China Automotive Systems, Inc. and SubsidiariesConsolidated Statements of Comprehensive Income(In thousands of USD unless otherwise indicated) Year Ended December 31, 2014 2013 Net income $39,594 $33,065 Other comprehensive income: Foreign currency translation loss (gain) (1,057) 7,411 Comprehensive income 38,537 40,476 Comprehensive income attributable to noncontrolling interest 5,680 7,524 Comprehensive income attributable to parent company $32,857 $32,952 The accompanying notes are an integral part of these consolidated financial statements. 49Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. China Automotive Systems, Inc. and SubsidiariesConsolidated Statements of Changes in Stockholders’ Equity(In thousands of USD, except share and per share amounts) 2014 2013 Common Stock Balance at January 1, 2014 and 2013 - 28,260,302 and 28,260,302 shares, respectively $3 $3 Issuance of 4,078,000 shares in a private placement on October 13, 2014 0 - Balance at December 31, 2014 and 2013 - 32,338,302 and 28,260,302 shares, respectively $3 $3 Additional paid-in capital Balance at January 1 $39,565 $39,371 Stock-based compensation 193 194 Return of common shareholders’ investment cost (5,047) - Acquisition of the non-controlling interests in Henglong and Jiulong (7,502) - Issuance of 4,078,000 shares in a private placement on October 13, 2014 37,313 - Balance at December 31 $64,522 $39,565 Retained earnings— Appropriated Balance at January 1 $10,048 $9,953 Appropriation of retained earnings 130 95 Balance at December 31 $10,178 $10,048 Unappropriated Balance at January 1 $146,023 119,329 Net income attributable to parent company 33,542 26,789 Appropriation of retained earnings (130) (95)Balance at December 31 $179,435 $146,023 Accumulated Other Comprehensive Income Balance at January 1 $32,061 25,898 Other comprehensive income related to the non-controlling interests acquired by the Company 4,743 - Net foreign currency translation adjustment attributable to parent company (685) 6,163 Balance at December 31 $36,119 $32,061 Treasury stock Balance at January 1, 2014 and 2013 - 217,283 and 217,283 shares, respectively (1,000) (1,000)Balance at December 31, 2014 and 2013 - 217,283 and 217,283 shares, respectively (1,000) (1,000) Total parent company stockholders’ equity $289,257 $226,700 Non-controlling interest Balance at January 1 $45,071 $38,846 Net foreign currency translation adjustment attributable to non-controlling interest (372) 1,248 Net income attributable to non-controlling interest 6,052 6,276 Fair value of the non-controlling interests arising from the acquisition of Fujian Qiaolong 2,793 - Acquisition of the non-controlling interests in Henglong and Jiulong (29,812) - Other comprehensive income related to the non-controlling interests acquired by the Company (4,743) - Distribution of retained earnings (10,077) (1,299)Balance at December 31 $8,912 $45,071 Total stockholders' equity $298,169 $271,771 The accompanying notes are an integral part of these consolidated financial statements. 50Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. China Automotive Systems, Inc. and SubsidiariesConsolidated Statements of Cash Flows(In thousands of USD unless otherwise indicated) Year Ended December 31, 2014 2013 Cash flows from operating activities: Net income $39,594 $33,065 Adjustments to reconcile net income to net cash provided by operating activities: Stock-based compensation 193 194 Depreciation and amortization 15,523 14,587 Deferred income taxes (1,684) (1,471)Inventory write downs 3,908 2,313 Provision for doubtful accounts 96 60 Equity in earnings of affiliated companies (260) (307)Gain on disposal of fixed assets (7,475) (4,282)Amortization of debt issue cost - 57 Changes in operating assets and liabilities: (Increase) decrease in: Pledged cash deposits 195 (6,701)Accounts and notes receivable (18,712) (54,820)Advance payments and other 1,272 8 Inventories (10,156) (8,716)Increase (decrease) in: Accounts and notes payable 11,940 26,600 Customer deposits 207 787 Accrued payroll and related costs 526 1,403 Accrued expenses and other payables 2,057 5,335 Accrued pension costs 969 235 Taxes payable 4,231 1,994 Advances payable 3,273 2,535 Net cash provided by operating activities 45,697 12,876 Cash flows from investing activities: Purchase of short-term investments (46,419) (46,492)Proceeds from maturities of short-term investments 40,828 11,330 Dividends from investment under cost method - 66 Decrease (increase) in other receivables (43) 625 Cash received from property, plant and equipment sales 7,048 6,284 Cash paid to acquire property, plant and equipment (18,038) (14,708)Cash paid to acquire intangible assets (1,376) (163)Acquisition of Fujian Qiaolong, net of cash acquired (2,976) - Investment under cost method (817) - Net cash used in investing activities (21,793) (43,058) Cash flows from financing activities: Proceeds from government and bank loan 19,922 24,017 Repayment of bank loans (15,501) (28,359)Dividends paid to the holders of the Company’s common stock (4,291) - Dividends paid to the non-controlling interest holders of joint venture companies (9,316) (1,433)Increase (decrease) in amounts due to shareholders/directors 69 (35)Net cash provided by financing activities (9,117) (5,810) Cash and cash equivalents affected by foreign currency (261) 2,322 Net increase (decrease) in cash and cash equivalents 14,526 (33,670)Cash and equivalents at beginning of year 53,979 87,649 Cash and equivalents at end of year $68,505 $53,979 The accompanying notes are an integral part of these consolidated financial statements. 51Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. China Automotive Systems, Inc. and SubsidiariesConsolidated Statements of Cash Flows (continued)(In thousands of USD unless otherwise indicated) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Year Ended December 31, 2014 2013 Cash paid for interest $1,214 $1,295 Cash paid for income taxes $5,877 $6,043 SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: Non-cash investing activities: Year Ended December 31, 2014 2013 Advance payments for acquiring property, plant and equipment $4,492 $5,586 Accounts payable for acquiring property, plant and equipment $1,569 $- Accounts receivable for the sale of land use rights $1,890 $- Accounts payable for purchasing patented technology $817 $- Government subsidies recorded as a reduction of property, plant and equipment cost $- $2,460 Non-cash financing activities: Year Ended December 31, 2014 2013 Non-controlling interests arising as a result of acquisition of Fujian Qiaolong $2,793 $- Issuance of common stock for the acquisition of non-controlling interests in Henglong and Jiulong $37,314 $- Dividends payable to the Company’s shareholders $757 $- Dividend payable to non-controlling interest shareholders of joint-ventures $817 $34 The accompanying notes are an integral part of these consolidated financial statements 52Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. China Automotive Systems, Inc. and SubsidiariesNotes to Consolidated Financial Statements 1.Organization and Business 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 describedbelow. 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, andmainly 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 organizedin the PRC and Brazil as of December 31, 2014 and 2013. Aggregate Net Interest Name of Entity 2014 2013 Jingzhou Henglong Automotive Parts Co., Ltd., “ Henglong ” 1 100.00% 80.00%Shashi Jiulong Power Steering Gears Co., Ltd., “ Jiulong ” 2 100.00% 81.00%Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “ Shenyang ” 3 70.00% 70.00%Universal Sensor Application Inc., “ USAI ” 4 83.34% 83.34%Wuhu Henglong Auto Steering System Co., Ltd., “ Wuhu ” 5 77.33% 77.33%Wuhan Jielong Electric Power Steering Co., Ltd., “ Jielong ” 6 85.00% 85.00%Jingzhou Hubei Henglong Automotive System Co., Ltd, “ Hubei Henglong ” 7 100.00% 100.00%Jingzhou Henglong Automotive Technology (Testing) Center, “ Testing Center ” 8 80.00% 80.00%Beijing Hainachun Henglong Automotive Steering System Co., Ltd, “ Beijing HengLong ” 9 50.00% 50.00%Chongqing Henglong Hongyan Automotive System Co., Ltd, “ Chongqing Henglong ” 10 70.00% 70.00%CAAS Brazil’s Imports And Trade In Automotive Parts Ltd., “ Brazil Henglong ” 11 80.00% 80.00%Fujian Qiaolong Special Purpose Vehicle Co., Ltd., “Fujian Qiaolong” 12 51.00% - Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie” 13 85.00% - 1.Henglong was established in 1997 and mainly engages in the production of rack and pinion power steering gears for cars and light duty vehicles. OnAugust 11, 2014, the Company entered into a Stock Exchange Agreement, the “Exchange Agreement”, with a third party, Jingzhou City JiulongMachinery Electricity Manufacturing Co., Ltd., “Jiulong Machine”, under which the Company issued 3,260,000 of its common shares in a privateplacement for the acquisition of the 20% equity interest in Henglong held by Jiulong Machine. On September 26, 2014, the Company obtained the20% equity interest in Henglong and completed its share registration with the local government administrative bureau. While the Company retainedits controlling interest in Henglong, the Company’s acquisition of the non-controlling interest was accounted for as an equity transaction (See Notes18 and 22). 2.Jiulong was established in 1993 and mainly engages in the production of integral power steering gears for heavy-duty vehicles. On August 11, 2014,the Company entered into the Exchange Agreement with Jiulong Machine under which the Company issued 818,000 of its common shares in aprivate placement for the acquisition of the 19% equity interest in Jiulong held by Jiulong Machine. On September 26, 2014, the Company obtainedthe 19% equity interest in Jiulong and completed its share registration with the local government administrative bureau. While the Companyretained its controlling interest in Jiulong, the Company’s acquisition of the non-controlling interest was accounted for as an equity transaction (SeeNotes 18 and 22). 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 automobile steering columns. 7.On March 7, 2007, Genesis established Hubei Henglong, formerly known as Jingzhou Hengsheng Automotive System Co., Ltd., its wholly-ownedsubsidiary, to engage in the production and sales of automotive steering systems. On July 8, 2012, Hubei Henglong changed its name to HubeiHenglong Automotive System Group Co., Ltd. 53Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 8.In December 2009, Henglong, a subsidiary of Genesis, formed the Testing Center, which mainly engages in the research and development of newproducts. The registered capital of the Testing Center was RMB30.0 million, equivalent to approximately $4.4 million. 9.Beijing Henglong was established in 2010 and mainly engages in the design, development and manufacture of both hydraulic and electric powersteering 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 accountingmethod. 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. 11.On August 21, 2012, Brazil Henglong was established as a Sino-foreign joint venture company by Hubei Henglong and two Brazilian citizens, OziasGaia Da Silva and Ademir Dal’ Evedove. Brazil Henglong engages mainly in the import and sale of automotive parts in Brazil. 12. In the second quarter of 2014, the Company acquired a 51.0% ownership interest in Fujian Qiaolong Special Purpose Vehicle Co., Ltd., “FujianQiaolong”, a special purpose vehicle manufacturer and dealer with automobile repacking qualifications, based in Fujian, China. Fujian Qiaolongmainly manufactures and distributes drainage and rescue vehicles with mass flow, drainage vehicles with vertical downhole operation, crawler-typemobile pump stations, high-altitude water supply and discharge drainage vehicles, long-range control crawler-type mobile pump stations and othervehicles. 13.On May 2014, together with Hubei Wanlong, Jielong formed a subsidiary, Wuhan Chuguanjie Automotive Science and Technology Ltd., “WuhanChuguanjie”, which mainly engages in research and development, manufacture and sales of automobile electronic systems and parts. WuhanChuguanjie is located in Wuhan, China. The registered capital of Wuhan Chuguanjie is RMB30.0 million, equivalent to approximately $4.9million. At the date of release of this annual report, Jielong has completed the capital injection of RMB25.0 million, equivalent to approximately$4.1 million. On September 22, 2014, Hubei Henglong entered into an agreement with seven other parties to establish a venture capital fund, the “Venture Fund”, whichmainly focuses on investments in emerging automobiles and parts industries. Total share capital of the Venture Fund is RMB280.0 million (equivalent toapproximately $45.5 million). The initial term of the fund is eight years. Hubei Henglong has committed to make investments into the Venture Fund of17.9% or RMB50.0 million (equivalent to approximately $8.1 million), which will be paid in three installments. As Hubei Henglong is a limited partner ofthe Venture Fund and has no significant influence on the operation and decision-making of the Venture Fund, this investment will be accounted for using thecost method. On October 20, 2014, Hubei Henglong made its first capital contribution of RMB5.0 million (equivalent to approximately $0.8 million) (SeeNote 32). 2.Basis of Presentation and Significant Accounting Policies Basis of Presentation - For the years ended December 31, 2014 and 2013, the consolidated financial statements include the accounts of the Company and itswholly-owned subsidiaries and joint ventures, which are described in Note 1. Significant inter-company balances and transactions have been eliminatedupon consolidation. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the UnitedStates of America. The Company has no voting control in Beijing Henglong, thus such investment was accounted for using the equity method. Shenyang was formed in 2002, with 70% owned and controlled by the Company, and 30% owned by Shenyang Automotive Industry InvestmentCorporation, “JB Investment.” The highest authority of the joint venture is Shenyang’s board of directors, which is comprised of seven directors, four ofwhom, 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 morethan 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 March2003, the Company and Jinbei entered into an act-in-concert agreement, under which the directors appointed by Jinbei agree to act in concert with thedirectors appointed by the Company. As a result, the Company obtained control of Shenyang in March 2003. The general manager of Shenyang is appointedby the Company. 54Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. USAI was formed in 2005. At December 31, 2014, 83.34% of USAI was owned by the Company, and 16.66% of USAI was owned by Hubei WanlongInvestment Inc., “Hubei Wanlong.” The highest authority of the joint venture is USAI’s board of directors, which is comprised of three directors, two ofwhom, 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 leasttwo-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 managerof USAI is appointed by the Company. Jielong was formed in April 2006. As at December 31, 2014, 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 theCompany, 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 ofsuch board of directors is required. Both the chairman of such board of directors and the general manager of Jielong are 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.” Thehighest 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 suchboard of directors is required. The directors of the Company and Chery Technology executed an “Act in Concert” agreement, resulting in the Companyhaving voting control in the joint venture. The chairman of such board of directors is appointed by the Company. The general manager of Wuhu is appointedby 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 isChongqing 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. InFebruary 2012, the Company and SAIC-IVECO signed an “Act in Concert” agreement. According to the agreement, the directors appointed by SAIC-IVECOagreed to execute the “Act in Concert” agreement with the directors designated by the Company. The chairman of such board of directors and the generalmanager 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. Thehighest authority of the joint venture is Brazil Henglong’s board of directors. In making operational decision, approval by voting rights representing at least3/4 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 theCompany. 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.” Thehighest authority of the joint venture is Beijing Henglong’s board of directors, which is comprised of seven directors, four of whom, 57%, are appointed bythe 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 ofsuch board of directors is required. The chairman of such board of directors is appointed by Hainachuan. The general manager of Beijing Henglong isappointed by the Company. The Company has no voting control in Beijing Henglong, thus such investment was accounted for using the equity method. In 2014, the Company acquired a 51.0% ownership interest in Fujian Qiaolong. The remaining 49.0% ownership interest of Fujian Qiaolong is owned byLongyan Huanyu Emergency Equipment Technology Co., Ltd. and Mr. Lin lilun. The highest authority of the joint venture is the board of directors, which iscomprised of five directors, three of whom, 60%, are appointed by the Company, and two of whom, 40%, are appointed by Longyan Huanyu. As for day-to-day operating matters, approval by at least three members of such board of directors is required. The chairman of such board of directors is appointed by theCompany. The general manager of Fujian Qiaolong is appointed by Longyan Huanyu. In 2014, Jielong formed a subsidiary, Wuhan Chuguanjie, with 85% owned by the Company and 15% owned by Hubei Wanlong. The highest authority ofthe joint venture is the board of directors, which is comprised of three directors, two of whom, 67%, are appointed by the Company, and one of whom, 33%, isappointed 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. Boththe chairman of such board of directors and the general manager of Chuguanjie are appointed by the Company. The minority partners of each of the joint ventures are all private companies not controlled, directly or indirectly, by any PRC municipal government or othersimilar government entity. Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets andliabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The Company is of theopinion 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, the amounts of accruals, warranty liabilities and deferred tax assets and the determination of fair value ofidentifiable assets and liabilities acquired through business combinations. 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 ofpurchase. 55Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Pledged Cash Deposits - Pledged as guarantee for the Company's notes payable and restricted to use. The Company regularly pays some of its suppliers bybank 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 banknote. Short-term investments - Short-term investments are comprised of time deposits with terms of three months or more which are due within one year. Thecarrying values of time deposits approximate fair value because of their short maturities. The interest earned is recognized in the consolidated statements ofincome over the contractual term of the deposits. Allowance for doubtful accounts - In order to determine the value of the Company’s accounts receivable, the Company records a provision for doubtfulaccounts to cover estimated credit losses. Management reviews and adjusts this allowance periodically based on historical experience and its evaluation ofthe collectability of outstanding accounts receivable. The Company evaluates the credit risk of its customers utilizing historical data and estimates of futureperformance. 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 toacquire and other costs to bring the inventories to their present location and condition. The Company evaluates the net realizable value of its inventories ona 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 formachinery and equipment is classified as advance payment for property, plant and equipment in the consolidated balance sheet and advance payment of rawmaterials 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 andmaintenance and repairs are charged to operations. Depreciation is calculated on the straight-line method over the estimated useful lives of the respectiveassets as follows: Category Estimated Useful Life (Years)Land use rights and buildings: Land use rights 45 -50Buildings 25Machinery and equipment 6Electronic equipment 4Motor vehicles 8 Assets under construction - represent buildings under construction and plant and equipment pending installation— are stated at cost. Cost includesconstruction and acquisitions, and interest charges arising from borrowings used to finance assets during the period of construction or installation andtesting. No provision for depreciation is made on assets under construction until such time as the relevant assets are completed and ready for their intendedcommercial 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 ofthe relevant asset, and are recognized in the consolidated statements of income on the date of disposal. Interest Costs Capitalized - Interest costs incurred in connection with borrowings for the acquisition, construction or installation of property, plant andequipment 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, 2014 and 2013, interest costs which were incurred as a result of using such 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 impairmentlosses. 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 circumstancesindicate that the carrying amount of an asset may not be fully recoverable. If required, an impairment loss is recognized as the difference between the carryingvalue and the fair value of the assets. 56Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 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. TheCompany considers projected future undiscounted cash flows, trends and other factors in its assessment of whether impairment conditions exist. Whilst theCompany believes that its estimates of future cash flows are reasonable, different assumptions regarding such factors as future automotive productionvolumes, 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. Long-Term Investments - Investments in which the Company owns less than 20% of the investee company and does not have the ability to exert significantinfluence are stated at cost, and are reviewed periodically for realization. Investments in which the Company owns 20% - 50% of the investee company anddoes 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 hassignificant influence but it does not control. Investment in Beijing Henglong is accounted for by the equity method of accounting. Under this method, theCompany’s income (loss) from investment in Beijing Henglong is recognized in the consolidated statements of income. Unrealized gains on transactionsbetween the Company and Beijing Henglong are eliminated to the extent of the Company’s interest in Beijing Henglong, if any; unrealized losses are alsoeliminated unless the transaction provides evidence of an impairment of the asset transferred. When the Company’s share of losses in Beijing Henglongequals or exceeds its interest in Beijing Henglong, the Company does not recognize further losses, unless the Company has incurred obligations or madepayments on behalf of Beijing Henglong. On September 22, 2014, Hubei Henglong entered into an agreement with seven other parties to establish a venture capital fund, the “Venture Fund”, whichmainly focuses on investments in emerging automobiles and parts industries. On October 20, 2014, Hubei Henglong made its first capital contribution of$0.8 million. This investment will be accounted for using the cost method. The Company continually reviews its investment to determine whether a decline in fair value below the carrying value is other than temporary. The primaryfactors 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 thefinancial condition, operating performance and near term prospects of the investee. In addition, the Company considers the reason for the decline in fairvalue, including general market conditions, industry-specific or investee-specific reasons, changes in valuation subsequent to the balance sheet date and theCompany’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 deemedto 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 theyears ended December 31, 2014 and 2013. Business Combinations – A business combination is recorded using the purchase method of accounting, and the cost of an acquisition is measured as theaggregate of the fair values at the date of exchange of the assets given, liabilities incurred and equity instruments issued as well as the contingentconsiderations and all contractual contingencies as of the acquisition date. The costs directly attributable to the acquisition are expensed as incurred.Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespectiveof the extent of any non-controlling interests. The excess of (i) the total of consideration of acquisition, fair value of the non-controlling interests andacquisition date fair value of any previously held equity interest in the subsidiary acquired over (ii) the fair value of the identifiable net assets of thesubsidiary acquired is recorded as goodwill. If the consideration of acquisition is less than the fair value of the net assets of the subsidiary acquired, thedifference is recognized directly in the consolidated statements of income. Goodwill - Goodwill represents the excess of the purchase price over the fair value of the identifiable assets and liabilities acquired as a result of theCompany’s acquisition of interests in its subsidiary. The Company tests goodwill for impairment at the reporting unit level on an annual basis, and betweenannual tests when an event occurs or circumstances change that could indicate that the asset might be impaired. The Company adopted the FASB revisedguidance on “Testing of Goodwill for Impairment.” Under this guidance, the Company has the option to choose whether it will apply the qualitativeassessment first and then the quantitative assessment, if necessary, or to apply the quantitative assessment directly. For a reporting unit applying a qualitativeassessment first, the Company starts the goodwill impairment test by assessing qualitative factors to determine whether it is more likely than not that the fairvalue of a reporting unit is less than its carrying amount. If the Company determines that it is more likely than not the fair value of a reporting unit is less thanits carrying amount, the quantitative impairment test is mandatory. Otherwise, no further testing is required. The quantitative impairment test uses a two-stepprocess. In the first step, the fair value of a reporting unit is compared to its carrying value. If the fair value of a reporting unit exceeds the carrying value ofthe net assets assigned to a reporting unit, goodwill is considered not impaired and no further testing is required. If the carrying value of the net assetsassigned to a reporting unit exceeds the fair value of a reporting unit, the second step of the impairment test is performed in order to determine the impliedfair value of a reporting unit’s goodwill. Determining the implied fair value of goodwill requires valuation of a reporting unit’s tangible and intangible assetsand liabilities in a manner similar to the allocation of purchase price in a business combination. If the carrying value of a reporting unit’s goodwill exceedsits implied fair value, goodwill is deemed impaired and is written down to the extent of the difference. The Company estimates total fair value of thereporting unit using discounted cash flow analysis, and makes assumptions regarding future revenue, gross margins, working capital levels, investments innew products, capital spending, tax, cash flows, and the terminal value of the reporting unit. There is no loss on goodwill impairment during the year endedDecember 31, 2014. 57Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Revenue from Product Sales Recognition - The Company recognizes revenue when the significant risks and rewards of ownership have been transferred to thecustomers including factors such as when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, salesand value added tax laws have been complied with, and collectability is probable. The Company recognizes product sales generally at the time the product isinstalled on OEMs’ production line, and a small number of product sales is recognized at the time the product is shipped. Concurrent with the recognition ofrevenue, 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, somematerials 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 Companyis 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 areobligated to restitution. Income generated from selling materials is recorded as the net amount retained, that is, the amount billed to the customers less theamount paid to suppliers, in the consolidated statement of income in accordance with the provisions of ASC Topic 350. Revenue from other asset salesrepresents gains or losses from other assets, for example, unused property, plant and equipment. Income generated from selling other assets is recorded as thenet 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 inits consolidated statements of income. Government subsidies - The Company’s PRC based subsidiaries received government subsidies according to related policy from local government. TheCompany’s government subsidies consisted of specific subsidies and other subsidies. Specific subsidies are the subsidies that the Chinese government hasspecified its purpose for, such as product development and renewal of production facilities. Other subsidies are the subsidies that the Chinese government hasnot 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 anyfurther actions or performance of the Company and the amounts do not have to be refunded under any circumstances. The Company recorded specificpurpose subsidies as advances payable when received. For specific purpose subsidies, upon government acceptance of the related project development orasset acquisition, the specific purpose subsidies are recognized to reduce related R &D expenses or cost of asset acquisition. The unspecific purpose subsidiesare 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 VATliability is determined by applying the applicable tax rate to the invoiced amount of goods sold less VAT paid on purchases made with the relevantsupporting invoices. VAT is collected from customers by the Company on behalf of the PRC tax authorities and is therefore not charged to the consolidatedstatements 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 taxposition measurement and financial statement recognition. For the two-step approach, the first step is to evaluate the tax position for recognition bydetermining if the weight of available evidence indicates that it is more likely than not that the position will be sustained, including resolution of relatedappeals 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 uponsettlement. As of December 31, 2014, the Company has no uncertain tax positions. Product Warranties - The Company provides for the estimated cost of product warranties when the products are sold. Such estimates of product warrantieswere based on, among other things, historical experience, product changes, material expenses, service and transportation expenses arising from themanufactured product. Estimates will be adjusted on the basis of actual claims and circumstances. For the years ended December 31, 2014 and 2013, the warranties activities were as follows (figures are in thousands of USD): Year Ended December 31, 2014 2013 Balance at the beginning of year $22,104 $18,081 Additions during the year 12,341 12,707 Settlement within the year (9,354) (9,244)Foreign currency translation (80) 560 Balance at end of year $25,011 $22,104 Pension - Most of the operations and employees of the Company are located in China. The Company records pension costs and various employment benefitsin accordance with the relevant Chinese social security laws, which is approximately at a total of 31% of base salary as required by local governments. Basesalary 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 oftrade accounts receivable. The Company performs ongoing credit evaluations with respect to the financial condition of its debtors, but does not requirecollateral. In order to determine the value of the Company’s accounts receivable, the Company records a provision for doubtful accounts to cover probablecredit losses. Management reviews and adjusts this allowance periodically based on historical experience and its evaluation of the collectability ofoutstanding accounts receivable. 58Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Interest Rate Risk - As of December 31, 2014, the Company had bank loans of $30.0 million which were charged at floating interest rates. The remainingbank loans and convertible notes payable were charged at fixed interest rates. Management is monitoring the change of floating interest rates. The Companyplans to repay the bank loans with floating interest rates when the floating interest rates exceed fixed interest rates, because such bank loans are short-termand 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 oftemporary differences by applying statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the taxbases 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, itis considered more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. Additionally, theCompany accounts for uncertainty in income taxes using a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluatethe 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 sustainedon 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 morethan 50% likely of being realized upon settlement. The Company classifies the liability for unrecognized tax benefits as current to the extent that theCompany anticipates payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision forincome 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 theincome 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. Shippingand handling costs relating to sales of $6.8 million and $5.5 million were included in selling expenses for the years ended December 31, 2014 and 2013,respectively. Income Per Share - Basic income per share is computed by dividing net income attributable to ordinary shareholders by the weighted average number ofordinary shares outstanding during the period using the two-class method. Under the two-class method, net income is allocated between ordinary shares andother participating securities, convertible note holders, based on their participating rights. Diluted income per share is calculated by dividing net incomeattributable to ordinary shareholders, as adjusted for the effects on income of participating securities as if they were dilutive ordinary shares, if any, by theweighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the period. Ordinary equivalent shares consist of ordinaryshares issuable upon the conversion of the convertible notes using the if-converted method, and shares issuable upon the exercise of stock options andwarrants for the purchase of ordinary shares using the treasury stock method. Ordinary equivalent shares are not included in the denominator of the dilutedearnings 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 accumulatedbalances in a full set of general purpose financial statements. ASC Topic 220 defines comprehensive income to include all changes in equity except thoseresulting from investments by owners and distributions to owners, including adjustments to minimum pension liabilities, accumulated foreign currencytranslation, 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 Measurementsand Disclosures.” Accordingly, fair value for the Company’s financial accounting and reporting purposes represents the estimated price that would bereceived to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the designated measurement date. With anobjective to increase consistency and comparability in fair value measurements and related disclosures, the Financial Accounting Standard Board establishedthe 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 themeasurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency andvolume 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 beused to measure fair value whenever available. As at December 31, 2014 and 2013, the Company did not have any fair value assets and liabilities classified asLevel 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 assetor 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 31,2014 and 2013, 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 arenot 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 fairvalue 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 theasset or liability (including assumptions about risk). Accordingly, the compound derivative liabilities are classified as Level 3 as the inputs reflectedmanagement’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. As of December 31, 2014 and2013, the Company did not have any fair value assets and liabilities classified as Level 3. 59Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The Company’s financial instruments consist principally of cash and cash equivalents, pledged cash deposits, short-term investments, accounts and notesreceivable, accounts and notes payable, advance payment or payable, other receivable or payable, accrued expenses and bank loans. As of December 31,2014 and 2013, the respective carrying values of all financial instruments approximated their fair values based on their short-term maturities. Stock-Based Compensation - The Company may issue stock options to employees and stock options or warrants to non-employees in non-capital raisingtransactions 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 numberof 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 theCompany’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 546,350 stock options, and 1,653,650 stock options remain to be issuable in the future. As of December 31, 2014, the Company had97,500 stock options outstanding. The Company has adopted ASC Topic 718, “Accounting for Stock-Based Compensation,” which establishes a fair value based method of accounting forstock-based compensation plans. In accordance with ASC Topic 718, the cost of stock options and warrants issued to employees and non-employees ismeasured on the grant date based on the fair value. The fair value is determined using the Black-Scholes option pricing model. The resulting amount ischarged 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. Foreign Currencies - China Automotive, the parent company, and HLUSA maintain their books and records in United States Dollars, “USD,” their functionalcurrency. The Company’s subsidiaries based in the PRC and Genesis maintain their books and records in Renminbi, “RMB,” their functional currency. TheCompany’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 intothe 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 netincome 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'sreporting currency of United States dollars, balance sheet accounts are translated using the closing exchange rate in effect at the balance sheet date andincome and expense accounts are translated using an average exchange rate prevailing during the reporting period. Adjustments resulting from thetranslation, 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: ·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 ” ·Shanghai Hongxi Investment Inc., “ Hongxi ” ·Hubei Wiselink Equipment Manufacturing Co., Ltd., “ Hubei Wiselink ” ·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 ” ·Jingzhou Yude Machining Co., Ltd., “ Jingzhou 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 ” 60Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. ·Xiamen Joylon Automotive Parts Co., Ltd., “Xiamen Automotive Parts ” ·Jingzhou Jiulong Machinery and Electronic Trading Co., Ltd., “ Jiulong Machinery ” ·WuHan Tongkai Automobile Motor Co., Ltd., “ WuHanTongkai ” ·Jingzhou Natural Astaxanthin Inc., “Jingzhou Astaxanthin” ·Hubei Asta Biotech Inc., “Hubei Asta” 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 onan 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 ofthree to four months on an open account basis. These transactions were consummated under similar terms as the Company's other suppliers. Equipment and production technology purchased from related parties - The Company purchased equipment and production technology from related partiesat 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 purchaseagreement between the two parties, because such equipment manufacturing and technology development was required for a long period. These transactionsare 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 addressingcertain 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 Companycharges interest by referencing to the prevailing borrowing interest rates published by PBOC except for the loans to related parties with repayment terms lessthan 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 ofthe Company. Recent Accounting Pronouncements In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-08 “Presentation of Financial Statements(Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”.The new guidance changes the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, onlydisposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on theorganization’s operations and financial results. Additionally, ASU 2014-08 requires expanded disclosures about discontinued operations that will providefinancial statement users with more information about the assets, liabilities, income and expenses of discontinued operations. The new guidance also requiresdisclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting.ASU 2014-08 is effective for the Company in the first quarter of fiscal 2015. Early adoption is permitted, but only for disposals (or classifications as held forsale) that have not been reported in financial statements previously issued or available for issuance. The Company is currently evaluating the impact ofadopting this update on its financial statements. In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers (Topic 606)”. ASU2014-09 will eliminate transaction-specific and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods orservices as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cashflows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain orfulfill a contract. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016, including interim periods within that reporting period.Early adoption is not permitted. Entities can transition to the standard either retrospectively or as a cumulative effect adjustment as of the date of adoption.Management is currently assessing the impact the adoption of ASU 2014-09 and the effect of the standard on our ongoing financial reporting. 61Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. In June 2014, the FASB issued Accounting Standards Update No. 2014-12 (“ASU 2014-12”), “Compensation—Stock Compensation (Topic 718) -Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite ServicePeriod.” ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as aperformance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vestingto account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation costshould be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation costattributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved beforethe end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisiteservice period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that areexpected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease renderingservice and still be eligible to vest in the award if the performance target is achieved. As indicated in the definition of vest, the stated vesting period (whichincludes the period in which the performance target could be achieved) may differ from the requisite service period. For all entities, the amendments in thisUpdate are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted.The effective date is the same for both public business entities and all other entities. Entities may apply the amendments in this Update either (a)prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as ofthe beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition isadopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements should berecognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may usehindsight in measuring and recognizing the compensation cost. The Company is currently evaluating the impact of adopting this Update on its financialstatements. In August 2014, the FASB issued Accounting Standards Update No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a GoingConcern”, which will explicitly require management to assess an entity’s ability to continue as a going concern and to provide related footnote disclosures incertain circumstances. Currently, there is no guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about anentity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this Update provide that guidance. In doing so,the amendments should reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’s abilityto continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, theamendments (1) provide a definition of the term “substantial doubt”, (2) require an evaluation every reporting period including interim periods, (3) provideprinciples for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result ofconsideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated and (6) require anassessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this update areeffective for the first annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. TheCompany is currently evaluating the impact of adopting this update on its financial statements. 3.Acquisition In the second quarter of 2014, the Company acquired a 51.0% ownership interest in Fujian Qiaolong, a special purpose vehicle manufacturer and dealer withautomobile repacking qualification, based in Fujian, China. Fujian Qiaolong mainly manufactures and distributes drainage and rescue vehicle with massflow, drainage vehicles with vertical downhole operation, crawler-type mobile pump stations, high-altitude water supply and discharge drainage vehicles,long-range control crawler-type mobile pump stations and other vehicles. The acquisition expands the Company’s scope of business and improves theCompany’s product mix. The results of Fujian Qiaolong have been included since the date of acquisition and are reflected in the Company’s consolidatedstatements of income. The total purchase price was approximately $3.0 million. The goodwill resulting from the acquisition is not deductible for taxpurposes. The following table summarizes the allocation of consideration and the respective fair values of the assets acquired and liabilities assumed in the FujianQiaolong acquisition as of the date of purchase (figures are in thousands of USD): Total purchase price: Cash consideration paid to acquire ownership interest $3,007 Assets Cash and cash equivalents $31 Current assets, net of cash acquired 8,428 Deferred tax asset 69 Property and equipment 3,694 Intangible assets 864 Goodwill 642 Total assets consolidated into the Company $13,728 Liabilities Current liabilities, excluding current deferred tax liabilities (7,352)Deferred tax liabilities (448)Other liabilities (128)Total liabilities consolidated into the Company (7,928)Non-controlling interests at fair value (2,793)Total equity consolidated into the Company $(3,007) 62Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The acquisition of Fujian Qiaolong resulted in the recognition of goodwill and intangible assets amounting to $ 0.6 million and $ 0.9 million, respectively.Intangible assets which have been assessed and recognized, such as patents and developed technology, have a weighted-average useful life of 4.7 years. Nosignificant contingencies were identified which should be valued. Fujian Qiaolong contributed net revenues of $ 5.6 million and a net loss of $ 0.2 million tothe Company for the year ended December 31, 2014. Pro forma results of operations for the acquisition of Fujian Qiaolong have not been presented because they are not material to the consolidated results ofoperations. 4.Short-term investments Short-term investments comprise time deposits with maturity terms of more than three months but due within one year. The carrying values of time depositsapproximate fair value because of their short maturities. The interest earned is recognized in the consolidated statements of income over the contractual termof the deposit. As of December 31, 2014, the Company had pledged short-term investments of RMB33.0 million (equivalent to approximately $5.4 million) to secure loansunder the credit facility issued by HSBC Bank (China) Company Limited Hong Kong branch (“HSBC HK”) and the use of the pledged short-terminvestments is restricted (See Note 13). 5.Accounts and Notes Receivable The Company’s accounts receivable at December 31, 2014 and 2013, are summarized as follows (figures are in thousands of USD): December 31, 2014 2013 Accounts receivable - unrelated parties (1) $137,165 $140,920 Notes receivable - unrelated parties (2) (3) 146,597 128,068 Total accounts and notes receivable- unrelated parties 283,762 268,988 Less: allowance for doubtful accounts- unrelated parties (1,414) (1,349)Accounts and notes receivable- unrelated parties 282,348 267,639 Accounts and notes receivable - related parties 22,760 17,194 Accounts and notes receivable, net $305,108 $284,833 (1)As of December 31, 2014, the Company has pledged $34.3 million of accounts receivable as security for its comprehensive credit facility with banksin China. 63Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (2)Notes receivable represents accounts receivable in the form of bills of exchange whose acceptances and settlements are handled by banks. (3)As of December 31, 2014, Henglong collateralized its notes receivable in an amount of RMB232.5 million (equivalent to approximately $38.0million) as security for the credit facilities with banks in China and the Chinese government, including RMB201.8 million (equivalent toapproximately $33.0 million) in favor of Industrial and Commercial Bank of China, Jingzhou Branch, “ICBC Jingzhou,” for the purpose ofobtaining the Henglong Standby Letter of Credit (as defined in Note 13) which is used as security for the non-revolving credit facility in the amountof $30.0 million provided by Industrial and Commercial Bank of China (Macau) Limited, “ICBC Macau,” and RMB30.7 million (equivalent toapproximately $5.0 million) in favor of the Chinese government as security for the low-interest government loan (See Note 13). As of December 31,2013, Henglong collateralized its notes receivable in an amount of RMB196.3 million (equivalent to approximately $32.2 million) in favor ofIndustrial and Commercial Bank of China, Jingzhou Branch, “ICBC Jingzhou,” for the purpose of obtaining the Henglong Standby Letter of Credit(as defined in Note 13) which is used as security for the non-revolving credit facility in the amount of $30.0 million provided by Industrial andCommercial Bank of China (Macau) Limited, “ICBC Macau.” The activity in the Company’s allowance for doubtful accounts of accounts receivable during the years ended December 31, 2014 and 2013, are summarizedas follows (figures are in thousands of USD): Year Ended December 31, 2014 2013 Balance at beginning of year $1,349 $1,266 Amounts provided for during the year 124 183 Amounts reversed of collection during the year (54) (48)Written off during the year - (92)Foreign currency translation (5) 40 Balance at end of year $1,414 $1,349 6. Other Receivables The Company’s other receivables at December 31, 2014 and 2013, are summarized as follows (figures are in thousands of USD): December 31, 2014 2013 Other receivables- unrelated parties (1) $707 $314 Other receivables - employee housing loans (2) 990 - Less: allowance for doubtful accounts - unrelated parties (78) (62)Balance at end of year $1,619 $252 December 31, 2014 2013 Other receivables - related parties $725 $729 Less: allowance for doubtful accounts - related parties (649) (621)Balance at end of year $76 $108 (1)Other receivables consist of amounts advanced to unrelated parties, primarily as unsecured demand loans, with no stated interest rate or due date.These receivables originate as part of the Company's normal operating activities and are periodically settled in cash. (2)On May 28, 2014, the board of directors of the Company approved a loan program under which the Company will lend an aggregate of up toRMB50.0 million (equivalent to approximately $8.1 million) to the employees of the Company to assist them in purchasing houses. Employees arerequired to pay interest at an annual rate of 6.4%. These loans are unsecured and the term of the loans is generally for five years. The Companyaccounts for employee loans to be repaid within 12 months from the ending date of reporting period in Advance payments and others - unrelatedparties and loans to be repaid in more than 12 months in Other receivables - unrelated parties. As of December 31, 2014, total loans to employeesunder this program were $1.1 million, consisting of $1.0 million included in Other receivables - unrelated parties and $0.1 million included inAdvance payments and others - unrelated parties in the consolidated balance sheets. 64Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The activity in the Company’s allowance for doubtful accounts of other receivable during the years ended December 31, 2014 and 2013, are summarized asfollows (figures are in thousands of USD): Year Ended December 31, 2014 2013 Balance at beginning of year- unrelated parties $62 $56 Amounts provided for during the year- unrelated parties 16 5 Amounts reversed of collection during the year- unrelated parties - - Foreign currency translation- unrelated parties - 1 Balance at end of year $78 $62 Year Ended December 31, 2014 2013 Balance at beginning of year- related parties $621 $608 Amounts provided for during the year- related parties 30 9 Amounts reversed of collection during the year- related parties - (15)Foreign currency translation- related parties (2) 19 Balance at end of year $649 $621 7. Assets held for sale According to the agreement signed between the Company and Jingzhou Land Reserve Center, “JLRC”, a local PRC government bureau, the Company hasagreed to transfer the land use rights over 136,392 square meters of a piece of land in total located at Jingzhou city, Hubei Province, the PRC, to JLRC fortotal consideration of approximately $13.0 million. The collection of the consideration was subject to JLRC’s completion of its sale of such land use rights tobe tendered in the open market. In the third quarter of 2013, the Company recognized and received consideration of $4.6 million upon the completion of the sale of the first portion of theland use rights by JLRC. As of December 31, 2013, the balance of assets held for sale represented the remaining land use rights to be sold within the 12months following such date. In April 2014, JLRC successfully sold the remaining land use rights through an open tender, and the Company recorded $7.5 million for the sale of the rest ofthe land use rights as gain on other sales in the consolidated statements of income. The consideration for the remaining land use rights was approximately$8.4 million, of which $6.5 million had been received by the Company as of December 31, 2014. The remaining $1.9 million was recorded in accounts andnotes receivable in the consolidated balance sheets and was received in March 2015. 8. Inventories The Company’s inventories at December 31, 2014 and 2013, consisted of the following (figures are in thousands of USD): December 31, 2014 2013 Raw materials $15,842 $12,185 Work in process 11,849 8,079 Finished goods 36,728 31,128 Balance at end of year $64,419 $51,392 Provision for inventories valuation amounted to $3.9 million and $2.3 million for the years ended December 31, 2014 and 2013, respectively. 9. Long-term Investments On December 31, 2014 and 2013, the Company’s balance of long-term investment was $4.6 million and $4.0 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. 65Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. On January 24, 2010, the Company invested $3.1 million to establish a joint venture company, Beijing Henglong, with Hainachuan. The Company owns50% equity in Beijing Henglong, as discussed in Note 2. The Company accounted for Beijing Henglong’s operational results with the equity method. OnDecember 31, 2014 and 2013, the Company had $3.6 million and $3.9 million, respectively, of net equity in Beijing Henglong, respectively. Summarizedstatement of balance sheet data of Beijing Henglong as of December 31 is as follows (figures are in thousands of USD): December 31, 2014 2013 Assets: Current assets $15,171 $13,364 Other assets 7,908 6,510 Total assets $23,079 $19,874 Liabilities and shareholders’ equity: Current liabilities $12,853 $9,109 Other liabilities 2,886 2,897 Shareholders’ equity 7,340 7,868 Total liabilities and shareholders’ equity $23,079 $19,874 Statement of operations data for the years ended December 31 of 2014 and 2013, are summarized as follows (figures are in thousands of USD): Net Sales Gross Margin Net Income(Loss) 2014 2013 2014 2013 2014 2013 Beijing Henglong $38,210 $28,046 $1,100 $869 $520 $482 The Company’s share of net assets and net income is “long-term investments” on the consolidated balance sheets and “equity in earnings of affiliatedcompanies” on the consolidated statements of operations. The Company’s consolidated financial statements contain the net income of non-consolidatedaffiliates of $0.3 million and $0.2 million at December 31, 2014 and 2013, respectively. On September 22, 2014, Hubei Henglong entered into an agreement with seven other parties to establish a venture capital fund, the “Venture Fund”, whichmainly focuses on investments in emerging automobiles and parts industries. As of December 31, 2014, Hubei Henglong has made its first capitalcontribution of $0.8 million. This investment is accounted for using the cost method. 10. Property, Plant and Equipment The Company’s property, plant and equipment at December 31, 2014 and 2013, are summarized as follows (figures are in thousands of USD): December 31, 2014 2013 Costs: Land use rights and buildings $48,956 $43,849 Machinery and equipment 119,597 110,322 Electronic equipment 7,706 7,414 Motor vehicles 4,609 3,195 Construction in progress 5,463 5,133 186,331 169,913 Less: Accumulated depreciation (103,865) (89,895)Balance at end of year $82,466 $80,018 66Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Depreciation charges for the years ended December 31, 2014 and 2013, were $15.2 million and $14.4 million, respectively. As of December 31, 2014, the Company has pledged property, plant and equipment with a net book value of approximately $45.5 million as security for itscomprehensive credit facilities with banks in China. 11. Intangible Assets The Company’s intangible assets at December 31, 2014 and 2013, are summarized as follows (figures are in thousands of USD): December 31, 2014 2013 Costs: Patent technology $4,887 $2,067 Management software license 932 699 Total intangible assets - at cost (1) 5,819 2,766 Less: Accumulated amortization(2) (2,400) (2,080)Balance at end of the year, net $3,419 $686 (1)Through the acquisition of Fujian Qiaolong in the second quarter of 2014, the Company acquired $0.9 million of intangible assets, consisting of$0.9 million of patent technology and $0.001 million of management software licenses, which are amortized over their average remaining usefullives of 4.7 years and 1.1 years, respectively. (2)Accumulated amortization expenses were $0.3 million and $0.2 million for the year ended December 31, 2014 and 2013, respectively. Theestimated aggregated amortization expense for the five succeeding years is $2.1 million with $0.4 million for each year. 12. 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 itsdeferred tax assets is necessary. In determining the need for a valuation allowance, the Company considered the following significant factors: an assessmentof 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 undertax 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, 2014 and 2013, were as follows (figures are in thousands of USD): December 31, 2014 2013 Losses carryforward (U.S.) ( 1) $7,014 $6,825 Losses carryforward (PRC) 2,000 1,838 Product warranties and other reserves 4,531 4,207 Property, plant and equipment 4,684 4,346 Share-based compensation 266 296 Bonus accrual 372 557 Other accruals 1,319 850 Others 1,496 1,103 Total deferred tax assets 21,682 20,022 Less: taxable temporary difference related to revenue recognition (472) (793)Total deferred tax assets, net 21,210 19,229 Less: valuation allowance (9,236) (8,918)Total deferred tax assets, net of valuation allowance (2) $11,974 $10,311 67Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (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 carryforwards 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 forwardfor 5 years to offset taxable income. However, as of December 31, 2014, valuation allowance was $9.2 million, including $7.4 million allowance for theCompany’s deferred tax assets in the United States and $1.8 million allowance for the Company’s non-U.S. deferred tax assets. Based on theCompany’s current operations in the United States, management believes that the deferred tax assets in the United States are not likely to be realized inthe 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 beused to offset future taxable income. (2)Approximately $4.9 million and $4.5 million of deferred income tax assets as of December 31, 2014 and 2013, respectively, is included in non-currentdeferred tax assets in the consolidated balance sheets. The remaining $7.1 million and $5.8 million of deferred income tax assets as of December 31,2014 and 2013, 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, 2014 and 2013 are summarized as follows(figures are in thousands of USD): Year Ended December 31, 2014 2013 Balance at beginning of year $8,918 $8,988 Amounts provided for during the year 485 70 Amounts used during the year (160) (188)Foreign currency translation (7) 48 Balance at end of year $9,236 $8,918 13. Bank Loans Loans consist of the following at December 31, 2014 and 2013 (figures are in thousands of USD): December 31, 2014 2013 Short-term bank loan (RMB) ( 1) $4,085 $7,381 Short-term bank loan (USD) (2) (3) 35,000 30,000 Short-term government loan (4) 4,903 - Subtotal 43,988 37,381 Debt issue cost - (57)Amortization - 57 Balance at end of the year $43,988 $37,381 (1)These loans are secured by property, plant and equipment of the Company and are repayable within one year. At December 31, 2014 and 2013, theweighted average interest rate was 6.5% and 6.22% per annum, respectively. Interest is to be paid monthly or quarterly on the twentieth day of theapplicable month or quarter and the principal repayment is at maturity. (2)On May 18, 2012, the Company entered into a credit facility agreement, the “Credit Agreement,” with ICBC Macau to obtain a non-revolving creditfacility in the amount of $30.0 million, the “Credit Facility”. The Credit Facility would have expired on November 3, 2012 unless the Company drewdown 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 thedrawdown or (ii) 1 month before the expiry of the standby letter of credit obtained by Henglong from ICBC Jingzhou as security for the Credit Facility,the “Henglong Standby Letter of Credit”. The interest rate of the Credit Facility was 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 was calculated daily based on a 360-day year and it wasfixed one day before the first day of each interest period. The interest period was defined as three months from the date of drawdown. As security for theCredit Facility, the Company was required to provide ICBC Macau with the Henglong Standby Letter of Credit for a total amount not less than $31.6million if the Credit Facility is 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 ofCredit for an amount of $31.6 million in favor of ICBC Macau. The Henglong Standby Letter of Credit issued by ICBC Jingzhou is collateralized byHenglong’s notes receivable of RMB201.8 million (equivalent to approximately $33.0 million). The Company also paid an arrangement fee of $0.1million to ICBC Macau and $0.1 million to ICBC Jingzhou. The original maturity date of the Credit Facility was May 22, 2013. 68Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 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 underthe extended term is revised as the three-month LIBOR plus 2.0% per annum, Except for the above, all other terms and conditions as stipulated in theCredit Agreement remain unchanged. On May 13, 2014, ICBC Macau agreed to extend the maturity date of the Credit Facility to May 12, 2015. The interest rate of the Credit Facility underthe extended term is revised as the three-month LIBOR plus 2.55% per annum. Except for the above, all other terms and conditions as stipulated in theCredit Agreement remain unchanged. As of December 31, 2014, the interest rate of the Credit Facility was 2.81% per annum. (3)On July 16, 2014, Great Genesis entered into a credit facility agreement with HSBC HK to obtain a non-revolving credit facility in the amount of $5.0million, the “HSBC Credit Facility”. The HSBC Credit Facility will expire on July 1, 2015, and has an annual interest rate of 1.7%. Interest is paid onthe twentieth day of each month and the principal repayment is at maturity. As security for the HSBC Credit Facility, the Company’s subsidiary HubeiHenglong was required to provide HSBC HK with the Standby Letter of Credit for a total amount of not less than $5.4 million if the HSBC CreditFacility is fully drawn. On July 22, 2014, Great Genesis drew down a loan amounting to $5.0 million provided by HSBC HK and Hubei Henglong provided a Standby Letterof Credit for an amount of $5.4 million in favor of HSBC HK. Hubei Henglong’s Standby Letter of Credit was issued by HSBC Bank (China) CompanyLimited Wuhan branch and is collateralized by short-term investments of Hubei Henglong of RMB33.0 million (equivalent to approximately $5.4million). (4)On March 28, 2014, the Company received a Chinese government loan of RMB30.0 million (equivalent to approximately $4.9 million), with aninterest rate of 3.0% per annum, which matured on March 15, 2015. Henglong pledged RMB30.7 million (equivalent to approximately $5.0 million) ofnotes receivable as security for such government loan (See Note 5). 14. Accounts and Notes Payable The Company’s accounts and notes payable at December 31, 2014 and 2013, are summarized as follows (figures are in thousands of USD): December 31, 2014 2013 Accounts payable - unrelated parties $132,389 $120,202 Notes payable - unrelated parties ( 1) 80,701 78,217 Accounts and notes payable - unrelated parties 213,090 198,419 Accounts payable - related parties 4,857 4,634 Balance at end of year $217,947 $203,053 (1)Notes payable represent payables in the form of notes issued by the Company. The notes are endorsed by banks to ensure that noteholders will be paidafter maturity. The Company has pledged cash deposits, notes receivable and certain property, plant and equipment to secure notes payable granted bybanks. 15. Accrued Expenses and Other Payables The Company’s accrued expenses and other payables at December 31, 2014 and 2013, are summarized as follows (figures are in thousands of USD): December 31, 2014 2013 Accrued expenses $6,988 $4,980 Accrued interest 121 85 Other payables 1,735 1,858 Dividends payable to common shareholders (1) 757 - Dividends payable to non-controlling interests (2) 817 35 Warranty reserves 25,011 22,104 Balance at end of year $35,429 $29,062 (1)On May 27, 2014, the Company announced the payment of a special cash dividend of $0.18 per common share to the Company’s shareholders of recordas of the close of business on June 26, 2014. As of December 31, 2014, dividends payable of $0.8 million remained unpaid. 69Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (2)In accordance with the resolution of the board of directors of Henglong, in 2014, Henglong declared a dividend amounting to $50.4 million to itsshareholders, of which $10.1 million was payable to the holder of the non-controlling interests. As of December 31, 2014, dividends payable of $0.8million remained unpaid. 16. Taxes Payable The Company’s taxes payable at December 31, 2014 and 2013, are summarized as follows (figures are in thousands of USD): December 31, 2014 2013 Value-added tax payable $6,393 $5,494 Income tax payable 4,537 1,841 Other tax payable 627 457 Balance at end of year $11,557 $7,792 17. Advances Payable On December 31, 2014 and 2013, advances payable of the Company was $6.3 million and $2.3 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 productioncapacities and improvement of the quality of products. For the government subsidies with no further conditions to be met, the amounts are recorded as otherincome when received; for the amounts with certain operating conditions, the government subsidies are recorded as advances payable when received and willbe 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 forthe subsidy. 18. Additional paid-in capital The Company’s positions in respect of the amounts of additional paid-in capital for the year ended December 31, 2014 and 2013, are summarized as follows(figures are in thousands of USD): Year Ended December 31, 2014 2013 Balance at beginning of year $39,565 $39,371 Return of common shareholders’ investment cost (1) (5,047) - Acquisition of the non-controlling interests in Henglong and Jiulong (2) (7,502) - Issuance of common stock in exchange for the non-controlling interests in Henglong and Jiulong (2) 37,313 - Share-based compensation (3) 193 194 Balance at end of year $64,522 $39,565 (1)On May 27, 2014, the Company announced a special cash dividend of $0.18 per common share to the Company’s shareholders of record as of the closeof business on June 26, 2014. As China Automotive Systems, the parent company, had an accumulated deficit position as of the date of the dividenddeclaration, the dividends distributed to the Company’s common shareholders described above are treated as a return of common shareholders’investment cost. (2)On August 11, 2014, the Company entered into the Exchange Agreement with Jiulong Machinery Electricity, under which the Company issued3,260,000 and 818,000 of its common shares in consideration for the acquisition of the 20% and 19% equity interests in Henglong and Jiulong,respectively, held by Jiulong Machinery Electricity. On September 26, 2014, the Company obtained the 20% and 19% equity interests in Henglong andJiulong, respectively, and completed its share registrations with the local government administrative bureau. The Company owned 100% of the equityinterests in both Henglong and Jiulong as of September 30, 2014. The Company’s acquisitions of the non-controlling interests were accounted for asequity transactions in the year ended December 31, 2014. The total carrying value for the non-controlling interests in both Henglong and Jiulong was$34.5 million, including the accumulated other comprehensive income of $4.7 million related to the noncontrolling interests acquired and other non-controlling interest of $29.8 million. Therefore, the total carrying value of $34.5 million for the non-controlling interests acquired was reclassified fromnon-controlling interests to the controlling interest’s equity as of September 30, 2014. On October 13, 2014, the Company completed its issuance of4,078,000 common shares to nominee holders designated by Jiulong Machinery Electricity. The fair market value of the Company’s common stockissued was $37.3 million or $9.15 per share, which was determined on the issuance date of the common shares. The difference between the fair marketvalue of $37.3 million for the Company’s common shares issued and the carrying value of $34.5 million for the non-controlling interest acquired of $2.8million was recorded as a reduction of additional paid-in capital. Additional paid-in capital of the Company was also decreased by $4.7 million and theaccumulated other comprehensive income attributable to Henglong and Jiulong was increased by a corresponding amount. 70Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. (3)On September 16, 2014 and August 13, 2013, the Company granted 22,500 and 22,500 stock options, respectively, to the Company’s independentdirectors, with the exercise price equal to the closing price of the Company’s common stock traded on NASDAQ on the date of grant. The fair value ofstock options was determined at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option model requires managementto make various estimates and assumptions, including expected term, expected volatility, risk-free rate and dividend yield. The expected term representsthe period of time that stock-based compensation awards granted are expected to be outstanding and is estimated based on considerations including thevesting period, contractual term and anticipated employee exercise patterns. Expected volatility is based on the historical volatility of the Company’sstock. The risk-free rate is based on the U.S. Treasury yield curve in relation to the contractual life of stock-based compensation instruments. Thedividend yield assumption is based on historical patterns and future expectations for the Company’s dividends. 19. Stock Options The stock option plan was approved at the Annual Meeting of Stockholders held on June 28, 2005, and extended for ten years at the Annual Meeting ofStockholders held on September 16, 2014. The maximum common shares available for issuance under this plan is 2,200,000. The term of the plan wasextended to June 27, 2025. The stock incentive plan provides for the issuance, to the Company’s officers, directors, management and employees who servedover three years or have given outstanding performance, of options to purchase shares of the Company’s common stock. The Company has issued 546,350stock options under this plan, and there remain 1,653,650 stock options issuable in the future as of December 31, 2014. Under the aforementioned plan, the stock options granted will have an exercise price equal to the closing price of the Company’s common stock traded onNASDAQ 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 in December2008, which became exercisable on a ratable basis over the vesting period (3 years), the others were exercisable immediately on the grant date. Stock optionswill 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, 2014, the Company has sufficient unissued registered common stock for settlement of the stock incentiveplan 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 requiresmanagement to make various estimates and assumptions, including expected term, expected volatility, risk-free rate, and dividend yield. The expected termrepresents the period of time that stock-based compensation awards granted are expected to be outstanding and is estimated based on considerationsincluding the vesting period, contractual term and anticipated employee exercise patterns. Expected volatility is based on the historical volatility of theCompany’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. Thedividend yield assumption is based on historical patterns and future expectations for the Company dividends. During 2014 and 2013, assumptions used to estimate the fair value of stock options on the grant dates are as follows: Issuance Date Expected volatility Risk-free rate Expected term (years) Dividend yield September 16, 2014 120.6% 1.78% 5 0.00%August 13, 2013 131.5% 1.49% 5 0.00% The stock options granted during 2014 and 2013 were exercisable immediately and their fair value on the grant date using the Black-Scholes option pricingmodel were $0.2 million and $0.2 million, respectively. For the years ended December 31, 2014 and 2013, the Company recognized stock-basedcompensation expenses of $0.2 million and $0.2 million, respectively. The activities of stock options are summarized as follows, including granted, exercised and forfeited. Weighted-Average Weighted-Average Contractual Shares Exercise Price Term (years) Outstanding - January 1, 2013 90,000 $8.22 5 Granted 22,500 10.00 5 Cancelled (7,500) 5.65 5 Outstanding - December 31, 2013 105,000 $8.78 5 Granted 22,500 10.31 5 Cancelled (30,000) 9.64 5 71Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The following is a summary of the range of exercise prices for stock options that are outstanding and exercisable at December 31, 2014: Outstanding Stock Weighted Average Weighted Average Number of Stock Range of Exercise Prices Options Remaining Life Exercise Price Options Exercisable $3.50 - $10.00 60,000 2.75 $6.35 60,000 $10.01 - $18.00 37,500 3.00 $12.91 37,500 97,500 97,500 As of December 31, 2014 and 2013, the total intrinsic value of the Company’s stock options that were outstanding was $0.2 million and $0.2 million,respectively. As of December 31, 2014 and 2013, the total intrinsic value of Company’s stock options that were exercisable was $0.2 million and $0.2 million,respectively. For the years ended December 31, 2014 and 2013, no Company’s stock options were exercised. As of December 31, 2014 and 2013, the weighted average fair value of the Company’s stock options that were granted was $8.59 and $8.64, respectively. 20. Retained Earnings Pursuant to the relevant PRC laws, the profits distribution of the Company’s Sino-foreign subsidiaries, which are based on their PRC statutory financialstatements, 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 previousyears, 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 cannotbe 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 RMB67.5million), $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, 2014 and 2013, the subsidiaries in China appropriated statutory reserves of $0.1 million and $0.1 million, respectively, inrespect of the dividends that were declared. On May 27, 2014, China Automotive Systems, the parent company, announced a special cash dividend of $0.18 per common share to the Company’sshareholders of record as of the close of business on June 26, 2014. As China Automotive Systems had an accumulated deficit position as of the date of thedividend declaration, the dividends distributed to the Company’s common shareholders described above are treated as a return of common shareholders’investment cost. 21. Accumulated other comprehensive income The Company’s activities in respect of the amounts of the accumulated other comprehensive income for the year ended December 31, 2014 and 2013, aresummarized as follows (figures are in thousands of USD): Year Ended December 31, 2014 2013 Balance at beginning of year $32,061 $25,898 Other comprehensive income related to the non-controlling interests acquired by the Company (See Note 18) 4,743 - Foreign currency translation adjustment attributable to parent company (685) 6,163 Balance at end of year $36,119 $32,061 72Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. 22. Non-controlling interests The Company’s activities in respect of the amounts of the non-controlling interests’ equity for the year ended December 31, 2014 and 2013, are summarizedas follows (figures are in thousands of USD): Year Ended December 31, 2014 2013 Balance at beginning of year $45,071 $38,846 Fair value of the non-controlling interests arising from the acquisition of Fujian Qiaolong (1) 2,793 - Acquisition of the non-controlling interests in Henglong and Jiulong (See Note 18) (29,812) - Other comprehensive income related to the non-controlling interests acquired by the Company (See Note18) (4,743) - Income attributable to non-controlling interests 6,052 6,276 Dividends declared to the non-controlling interest holders of joint-venture companies(See Note 15) (10,077) (1,299)Foreign currency translation adjustment attributable to non-controlling interests (372) 1,248 Balance at end of year $8,912 $45,071 (1)In the second quarter of 2014, the Company acquired a 51.0% equity interest in Fujian Qiaolong (See Note 3). The fair value of the non-controllinginterest in Fujian Qiaolong is $2.8 million. 23. 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 December31, 2014, gain on other sales amounted to $11.8 million, including $4.3 million of gain on sales of materials and iron scrap and aluminum scrap, and $7.5million of gain on sales of property, plant and equipment, as compared to $7.6 million for 2013, including $3.3 million of gain on sales of materials and ironscrap and aluminum scrap, and $4.3 million of gain on sales of property, plant and equipment. Gain on sales of property, plant and equipment mainly come from the income of selling land use rights. During 2014, the Company sold the remaining landuse rights (See Note 7) and recognized a gain of $7.5 million, which represented the difference between the selling price of $8.4 million and the net bookvalue of the land use rights of $0.9 million. For 2013, the Company sold part of its land use rights and recognized a gain of $ 4.1 million, which representedthe difference between the selling price of $ 4.6 million and the net book value of the land use rights of $ 0.5 million. 24. Other Income, Net The Company recorded government subsidies received with no further condition to be met as other income. As of December 31, 2014 and 2013, theCompany has received such subsidies in the amounts of $1.0 million and $1.1 million, respectively. The Chinese government provides subsidies to support enterprises in their Research and development, “R&D,” and renewal of equipment. Governmentsubsidies are generally classified as specific purpose subsidies, such as R&D activities and renewal of equipment, and unspecified purpose subsidies. Forspecific purpose subsidies, accounting by the occurred evidence, subsidies for the R&D activities first offset related R&D expenses that occurred, andsubsidies for renewal of equipment offset the cost of related assets. Unspecific purpose subsidies are generally recognized as other income. 25. Financial Income, Net During the years ended December 31, 2014 and 2013, the Company recorded financial income (expenses) which are summarized as follows (figures are inthousands of USD): Year Ended December 31, 2014 2013 Interest income $2,957 $2,836 Foreign exchange loss, net (96) (110)Gain (loss) on notes discounted, net 136 (31)Bank fees (581) (699)Total financial income, net $2,416 $1,996 26. 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 taxableincome 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 a “High & New Technology Enterprise” by the government, then, the enterprise will be subject to enterprise income tax at a rate of15%. 73Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Pursuant to the New China Income Tax Law and the Implementing Rules (“New CIT”) which became effective as of January 1, 2008, dividends generatedafter 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 areconsidered as non-resident enterprises without any establishment or place within China or if the dividends payable have no connection with theestablishment or place of the foreign investors within China, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China thatprovides 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 inHong Kong. According to the Mainland China and Hong Kong Taxation Arrangement, dividends paid by a foreign-invested enterprise in China to its directholding 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 theshares 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 additional5% 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, thesubsidiaries’ holding company incorporated in Hong Kong. For the profit that the PRC subsidiaries intended to distribute to Genesis, the Company accruesthe withholding income tax as deferred tax liabilities. As of December 31, 2014, the Company has recognized deferred tax liabilities of $0.18 million for theremaining undistributed profits to Genesis of $3.6 million. The Company intended to re-invest the remaining undistributed profits generated from the PRCsubsidiaries in those subsidiaries permanently. As of December 31, 2014 and 2013, the Company still has undistributed earnings of approximately $188.3million and $158.5 million, respectively, from investment in the PRC subsidiaries that are considered permanently reinvested. Had the undistributed earningsbeen distributed to Genesis and not permanently reinvested, the tax provision as of December 31, 2014 and 2013, of approximately $9.4 million and $7.9million, respectively, would have been recorded. Such undistributed profits will be reinvested in Genesis and not further distributed to the parent companyincorporated in 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 enterpriseincome tax at a rate of 15% for 2008, 2009 and 2010. In 2011, the Company passed the re-assessment of the government based on PRC income tax laws.Accordingly, the Company continued to be taxed at the 15% tax rate in 2011, 2012 and 2013. The Company submitted the re-assessment application in2014 and believes it will continue to be qualified as a “High & New Technology Enterprise” and the applied tax rate from 2014 through 2016 is 15%accordingly. The government has published its preliminary re-assessment results on its official website and expects to issue the formal license of “High &New Technology Enterprise” by April 2015. During 2008, Henglong was awarded the title of “High & New Technology Enterprise” and, based on the PRC income tax law, it was subject to enterpriseincome tax at a rate of 15% for 2008, 2009 and 2010. In 2011, the Company passed the re-assessment of the government, based on PRC income tax laws.Accordingly, it continued to be taxed at the 15% tax rate in 2011, 2012 and 2013. The Company has passed the re-assessment in 2014 and continues toqualify as a “High & New Technology Enterprise”. Accordingly, it continues to be taxed at the 15% tax rate in 2014, 2015 and 2016. During 2009, Shenyang was awarded the title of “High & New Technology Enterprise” and, based on the PRC income tax law, it was subject to enterpriseincome tax at a rate of 15% for 2009, 2010 and 2011. In 2012, the Company passed the re-assessment of the government based on PRC income tax laws.Accordingly, it continues 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 wasawarded 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% for2013 and 2014. During 2013, Jielong was awarded the title of “High & New Technology Enterprise” and, based on the PRC income tax law, it is subject to enterprise incometax at a rate of 15% for 2013, 2014 and 2015. 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 awardedthe 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. The Company has passed the re-assessment in 2014 and continues to qualify as a “High & New Technology Enterprise”. Accordingly, it continuesto be taxed at the 15% tax rate in 2014, 2015 and 2016. 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% in2010 and 2011, and 25% in 2012, 2013 and 2014. 74Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Chongqing Henglong was established in 2012. According to the New CIT, it is subject to enterprise income tax at a rate of 25% for 2014. No provision forChongqing Henglong is made as it had no assessable income for the year ended December 31, 2014. 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 taxat 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 theyears ended December 31, 2014 and 2013. Fujian Qiaolong was acquired in the second quarter of 2014. In November 2011, Fujian Qiaolong was awarded the title of “High & New TechnologyEnterprise” and, based on the PRC income tax law, it was subject to enterprise income tax at a rate of 15% for 2011, 2012 and 2013. In 2014, the Companypassed the re-assessment of the government based on PRC income tax laws. Accordingly, it will continue to be taxed at the 15% tax rate in 2014, 2015 and2016. 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 assessableincome in Hong Kong for the years ended December 31, 2014 and 2013. The enterprise income tax rate of the United States is 35%. No provision for U.S. tax is made for HLUSA as HLUSA had no assessable income in the UnitedStates in 2013. HLUSA made a provision for assessable income for the year ended December 31, 2014. The enterprise income tax rate of the United States is 35%. No provision for U.S. tax is made for CAAS as the Company had no assessable income in theUnited States for the years ended December 31, 2014 and 2013. The provision for income taxes was calculated as follows (figures are in thousands of USD): Year Ended December 31, 2014 2013 Tax rate 35% 35%Income before income taxes $46,081 $38,241 Income tax at federal statutory tax rate 16,128 13,384 Tax benefit of double-deductible R&D expense (2,871) (2,793)Effect of differences in foreign tax rate (7,756) (6,175)Provision on valuation allowance for deferred income tax – U.S. 188 (178)Provision on valuation allowance for deferred income tax – PRC 297 107 Other differences 799 1,138 Total income tax expense $6,785 $5,483 The combined effects of the income tax exemption and reduction available to the Company are as follows (figures are in thousands of USD unless otherwiseindicated): Year Ended December 31, 2014 2013 Tax holiday effect $7,756 $6,175 Basic net income per share effect 0.27 0.22 Diluted net income per share effect 0.27 0.22 The Company is subject to examination in the United States and China. The Company's tax years for 2004 through 2014 are still open for examination inChina. The Company's tax years for 2006 through 2014 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, 2013 and 2014. 27. Income Per Share Basic net income per share is computed using the weighted average number of the ordinary shares outstanding during the year. For diluted income per share, the Company uses the treasury stock method for options and warrants, assuming the issuance of common shares, if dilutive,resulting from the exercise of options and warrants. 75Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The calculations of basic and diluted income per share attributable to the parent company were (figures are in thousands of USD): Year Ended December 31, 2014 2013 Numerator: Net income attributable to the parent company’s common shareholders – Basic and Diluted $33,542 26,789 Denominator: Weighted average ordinary shares outstanding – Basic 29,062,519 28,043,019 Dilutive effects of stock options 20,290 13,125 Denominator for dilutive income per share – Diluted 29,082,809 28,056,144 Net income per share attributable to the parent company’s common shareholders Basic 1.15 0.96 Diluted 1.15 0.95 As of December 31, 2014 and 2013, the exercise prices for 60,000 shares and 52,500 shares, respectively, of outstanding stock options were above theweighted average market price of the Company’s common stock during the year ended December 31, 2014 and 2013, respectively, and these stock optionswere excluded from the calculation of the diluted income per share for the corresponding periods presented. 28. 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 entitiesto 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 "currentaccount" transactions without pre-approval. China Automotive, the parent company, may depend on Genesis and HLUSA dividend payments, which are generated from their subsidiaries and theirsubsidiaries’ 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 withaccounting standards and regulations in China. Under PRC law China-based Subsidiaries are required to set aside at least 10% of their after-tax profit basedon PRC accounting standards each year to their general reserves until the cumulative amount reaches 50% of their paid-in capital. These reserves are notdistributable as cash dividends, or as loans or advances. These foreign-invested enterprises may also allocate a portion of their after-tax profits, at thediscretion of their boards of directors, to their staff welfare and bonus funds. Any amounts so allocated may not be distributed and, accordingly, would not beavailable 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 ofChina, the China-based Subsidiaries may experience difficulties in completing the administrative procedures necessary to obtain and remit foreigncurrencies. If China Automotive is unable to receive dividend payments from its subsidiaries and China-based subsidiaries, China Automotive may be unableto 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 "capitalaccount" transactions; examples of "capital account" transactions include repatriations of investment by or loans to foreign owners, or direct equityinvestments in a foreign entity by a China domiciled entity. "Capital account" transactions require prior approval from China's State Administration ofForeign Exchange, or SAFE, or its provincial branch to convert a remittance into a foreign currency, such as U.S. Dollars, and transmit the foreign currencyoutside 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 orprofits, if any, outside China. Furthermore, SAFE has a significant degree of administrative discretion in implementing the laws and has used this discretionto 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 theChinese macroeconomic prospects or any number of other reasons, China could impose additional restrictions on capital remittances abroad. As a result ofthese 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 intheir ability to transfer a portion of their net assets to the parent. The Company has no assurance that the relevant Chinese governmental authorities in thefuture will not limit further or eliminate the ability of the Company’s Chinese subsidiaries to purchase foreign currencies and transfer such funds to theCompany 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 ofthe Company. The Company’s customers are mostly located in the PRC except for Chrysler North America, which is in the U.S. 76Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. In 2014, the Company’s ten largest customers accounted for 66.8% of the Company’s consolidated sales, with 1 customer accounting for more than 10% ofconsolidated sales (as 11.5% of consolidated sales). 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% ofconsolidated sales (as 11.1% of consolidated sales). At December 31, 2014 and 2013, approximately 5.4% and 3.1% of accounts receivable were from trade transactions with the aforementioned customer(accounting for more than 10% of consolidated sales). 29. Related Party Transactions The Company’s related party transactions include product sales, material purchases and purchases of equipment and technology. These transactions wereconsummated at fair market price and under similar terms as those with the Company's customers and suppliers. On some occasions, the Company’s relatedparty 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, 2014 and 2013, the joint ventures entered into related party transactions with companieswith common directors as shown below (figures are in thousands of USD): Merchandise Sold to Related Parties Year Ended December 31, 2014 2013 Xiamen Joylon $7,159 $6,152 Xiamen Automotive Parts 4,327 2,757 Shanghai Fenglong 384 406 JingzhouYude 3 583 Jingzhou Tongying 1,321 - Beijing Henglong 37,176 27,283 Other Related Parties 72 272 Total $50,442 $37,453 Technology Sold to Related Parties Year Ended December 31, 2014 2013 Beijing Henglong $88 $88 Rental income obtained from related parties Year Ended December 31, 2014 2013 Total rental income $111 $- Materials sold to related parties Year Ended December 31, 2014 2013 Jingzhou Tongying 638 - Jiangling Tongchuang 204 - Jingzhou Yude 910 - Other Related Parties 92 - Total $1,844 $- 77Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Materials Purchased from Related Parties Year Ended December 31, 2014 2013 Honghu Changrun $891 $1,258 Jiangling Tongchuang 7,243 9,025 Jingzhou Tongying 11,206 12,622 Hubei Wiselink 1,629 1,106 Wuhan Tongkai 2,536 1,897 Other Related Parties 1 8 Total $23,506 $25,916 Technology and Services Purchased from Related Parties Year Ended December 31, 2014 2013 Changchun Hualong $407 $422 Jingzhou Derun - 492 Honghu Changrun - 285 Beijing Hualong 287 432 Hubei Asta 204 - Total 898 1,631 Equipment Purchased from Related Parties Year Ended December 31, 2014 2013 Hubei Wiselink $3,365 $5,373 Related receivables, advance payments and account payable: As at December 31, 2014 and 2013, accounts receivables, advance payments and accountpayable between the Company and related parties are as shown below (figures are in thousands of USD): Accounts and Notes Receivable from Related Parties December 31, 2014 2013 Xiamen Joylon $4,916 $4,076 Xiamen Automotive Parts 929 843 Shanghai Fenglong 332 298 Jingzhou Yude 1,953 2,008 Jingzhou Tongying 349 485 Beijing Henglong 14,252 9,426 Other Related Parties 29 58 Total $22,760 $17,194 Other Receivables from Related Parties December 31, 2014 2013 Wuhan Dida $48 $62 Jiulong Machinery 667 621 Other Related Parties 10 46 Total 725 729 Less: provisions for bad debts (649) (621)Balance at end of year $76 $108 Other receivables from related parties are primarily unsecured demand loans, with no stated interest rate or due date. 78Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Accounts payable to Related Parties December 31, 2014 2013 Shanghai Tianxiang $176 $341 Jiangling Tongchuang 584 891 Hubei Wiselink 1,815 755 Jingzhou Tongying 1,645 1,911 Wuhan Tongkai 576 620 Honghu Changrun 58 94 Other Related Parties 3 22 Total $4,857 $4,634 Advanced equipment payments to Related Parties December 31, 2014 2013 Hubei Wiselink $2,085 $2,097 Other advance payments to Related Parties December 31, 2014 2013 Jiangling Tongchuang $30 $176 Changchun Hualong 82 86 Wuhan Tongkai 4 181 Honghu Changrun 511 423 Other Related Parties 114 - Total $741 $866 Loan to Related Parties During the year ended December 31, 2013, certain of the Company’s subsidiaries provided short-term loans to related parties of the Company in theaggregate principal amount of approximately $22.9 million (RMB140.8 million). The contractual period of each loan was three months or less from the dateof the extension of the loan. Out of the total amount, loans of approximately US$15.8 million (RMB97.0 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 theborrowing entities in addressing certain cash flow needs. For loans of approximately US$7.1 million (RMB43.8 million) to related parties which primarilyconsisted 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 beenrepaid 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, 2014 and 2013, the loans to related parties were comprised of the following: For the Year Ended December 31, 2014 2013 Henglong Real Estate (1) $- $18,309 Hubei Wiselink (2) - 3,253 Xiamen Joylon (2) - 943 Juilong Machine (3) - 399 Total $- $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 theCompany, collectively own 59.2% 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 was a non-controlling interest shareholder that owned 20% and 19% of the equity interests of Henglong and Jiulong, subsidiaries of theCompany, respectively, until September 26, 2014. 79Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. The Company has no ongoing commitments for the loans to related parties. The Company's related parties, such as Jingzhou Derun and Wuhan Dida, pledged certain land use rights and buildings as security for the Company’scomprehensive credit facility. As of March 26, 2015, the date the Company issued the financial statements, Hanlin Chen, Chairman, owns 55.6% of the common stock of the Company andhas the effective power to control the vote on substantially all significant matters without the approval of other stockholders. 30. Commitments and Contingencies a.Legal proceedings 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 oraffiliate 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 orsecurity holder is a party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation. b. Commitments In addition to bank loans, notes payables and the related interest, the following table summarizes the Company’s noncancelable commitments and havinginitial terms in excess of one year as of December 31, 2014 (figures are in thousands of USD): Payment Obligations by Period 2015 2016 2017 2018 Thereafter Total Obligations for investment contracts (1) $1,634 $3,269 $2,451 $- $- $7,354 Obligations for purchasing and service 6,981 205 - - - 7,186 Total $8,615 $3,474 $2,451 $- $- $14,540 (1)On September 22, 2014, Hubei Henglong entered into an agreement with seven other parties to establish the Venture Fund, under which HubeiHenglong has committed to make investments of 17.9% or RMB50.0 million (equivalent to approximately $8.2 million) into the Venture Fund inthree installments. On October 20, 2014, Hubei Henglong made its first capital contribution of RMB5.0 million (equivalent to approximately $0.8million). The remaining capital commitment of RMB45.0 million (equivalent to approximately $7.4 million) will be paid upon capital callsreceived from the Venture Fund. 31. Off-Balance Sheet Arrangements At December 31, 2014 and 2013, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheetarrangements. 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 thedisaggregated financial results for the product sectors have been prepared using a management approach, which is consistent with the basis and manner inwhich management internally disaggregates financial information for the purposes of assisting them in making internal operating decisions. Generally, theCompany evaluates performance based on stand-alone product sector operating income and accounts for inter segment sales and transfers as if the sales ortransfers were to third parties, at current market prices. As of December 31, 2014, the Company had 12 product sectors, five of which were principal profit makers and were reported as separate sectors and engagedin the production and sales of power steering (Henglong, Jiulong, Shenyang, Wuhu and Hubei Henglong), and one holding company (Genesis). The otherseven sectors were engaged in the production and sale of sensor modular (USAI), column (Jielong), provision of after sales and R&D services (HLUSA),production and sale of power steering (Chongqing Henglong), trade (Brazil Henglong), commercial vehicle repacking and sales (Fujian Qiaolong), andmanufacture and sales of automobile electronic systems and parts (Wuhan Chuguanjie). Since the revenues, net income and net assets of these seven sectorscollectively are less than 10% of consolidated revenues, net income and net assets, respectively, in the consolidated financial statements, the Companyincorporated these seven sectors into “Other Sectors.” 80Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. As of December 31, 2013, the Company had 10 product sectors, five of which were principal profit makers and were reported as separate sectors and engagedin the production and sales of power steering (Henglong, Jiulong, Shenyang, Wuhu and Hubei Henglong), and one holding company (Genesis). The otherfive sectors were engaged in the production and sale of sensor modular (USAI), EPS (Jielong), provision of after sales and R&D services (HLUSA), productionand sale of power steering (Chongqing Henglong) and trade (Brazil Henglong). Since the revenues, net income and net assets of these five sectorscollectively are less than 10% of consolidated revenues, net income and net assets, respectively, in the consolidated financial statements, the Companyincorporated these five sectors into “Other Sectors.” The Company’s product sector information from continuing operations is as follows (figures are in thousands of USD): Net Sales Net Income Year Ended December 31, Year Ended December 31, 2014 2013 2014 2013 Henglong $293,866 $260,636 $30,593 $25,686 Jiulong 77,281 77,691 958 2,141 Shenyang 41,873 41,536 2,271 1,796 Wuhu 26,799 26,333 1,185 223 Hubei Henglong 56,653 48,087 45,748(1) 8,871(1)Other Sectors 43,189 36,444 2,005 1,087 Total Segments 539,661 490,727 82,760 39,804 Corporate - - (2,950) (2,035)Eliminations (72,888) (75,569) (40,216) (4,704)Total consolidated $466,773 415,158 $39,594 $33,065 (1)$40.4 million and $5.2 million included in the respective balances of $45.7 million and $8.9 million were income from investment in Henglong in 2014and 2013, respectively, which have been eliminated at the consolidation level. Inventories Total Assets Year Ended December 31, Year Ended December 31, 2014 2013 2014 2013 Henglong $24,716 $21,451 $310,013 $315,309 Jiulong 12,660 12,186 74,994 74,997 Shenyang 3,826 2,994 46,982 43,358 Wuhu 3,116 2,958 24,725 25,528 Hubei Henglong 12,171 12,054 224,495 138,674 Other Sectors 11,106 3,807 74,181 44,743 Total Segments 67,595 55,450 755,390 642,609 Corporate - - 186,054 157,158 Eliminations (3,176) (4,058) (312,283) (234,160)Total consolidated $64,419 51,392 $629,161 565,607 81Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Depreciation and Amortization Capital Expenditures Year Ended December 31, Year Ended December 31, 2014 2013 2014 2013 Henglong $6,732 $5,460 $7,555 $8,073 Jiulong 4,258 4,546 2,176 673 Shenyang 728 723 152 451 Wuhu 644 605 864 759 Hubei Henglong 2,328 2,104 6,207 4,239 Other Sectors 1,561 1,384 8,757 1,043 Total Segments 16,251 14,822 25,711 15,238 Corporate 21 21 425 - Eliminations (749) (256) (2,929) (367)Total consolidated $15,523 $14,587 $23,207 $14,871 Financial information segregated by geographic region is as follows (figures are in thousands of USD): Net Sales (1) Long-term assets Year Ended December 31, As of December 31 2014 2013 2014 2013 Geographic region: United States $57,888 $50,281 $851 $841 China 408,493 363,901 100,747 89,818 Other foreign countries 392 976 42 13 Total consolidated $466,773 $415,158 $101,640(2) $90,672(2) (1)Revenue is attributed to each country based on location of customers. (2)Pursuant to ASC 280-10-50-41, the non-current deferred tax assets of $4.9 million and $4.5 million were excluded from long-term assets as of December31, 2014 and 2013, respectively. 82Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. EXHIBIT INDEX Exhibit Number Description 3.1(i) Certificate of Incorporation (incorporated by reference from the filing on Form 10KSB File No. 000-33123) 3.1(ii) Bylaws (incorporated by reference from the Form 10KSB for the year ended December 31, 2002) 10.5 Joint-venture Agreement, dated March 31, 2006, as amended on May 2, 2006, between Great Genesis Holdings Limited and WuhuChery Technology Co., Ltd. (incorporated by reference to the exhibit 10.8 to the Company’s Form 10-Q Quarterly Report on May 10,2006) 10.20 Translation of the Equity Transfer Agreement dated March 31, 2008 in English (incorporated by reference to exhibit 99.1 of theCompany’s Form 8-K filed on April 2, 2008) 10.21 English Translation of the Sino-Foreign Equity Joint Venture Contract dated January 24, 2010 between Great Genesis HoldingsLimited and Beijing Hainachuan Auto Parts Co., Ltd. (incorporated by reference to the Company’s Form 10-K for the year endedDecember 31, 2009 filed on March 25, 2010) 21 Schedule of Subsidiaries (incorporated by reference to Note 1 of the consolidated financial statements of the Company in this AnnualReport on Form 10-K) 23.1 Consent of PricewaterhouseCoopers Zhong Tian LLP* 31.1 Rule 13a-14(a) Certification* 31.2 Rule 13a-14(a) Certification* 32.1 Section 1350 Certification* 32.2 Section 1350 Certification* 101* The following materials from the China Automotive Systems, Inc. Annual Report on Form 10-K for the year ended December 31,2014, filed on March 26, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Changes in Stockholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Related Notes. *Filed herewith. 83Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No.333-126959) of China Automotive Systems, Inc. of ourreport dated March 26, 2015 relating to the consolidated financial statements and the effectiveness of internal control over financial reporting, which appearsin this Form 10-K. /s/ PricewaterhouseCoopers Zhong Tian LLP PricewaterhouseCoopers Zhong Tian LLP Shanghai, People’s Republic of China March 26, 2015 Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit 31.1 RULE 13a-14(a) CERTIFICATION FOR FORM 10-K (CEO) I, Qizhou Wu, certify that: 1.I have reviewed this annual report on Form 10-K of China Automotive Systems, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrols over financial reporting. Date: March 26, 2015By:/s/ Qizhou Wu Qizhou Wu Chief Executive Officer Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit 31.2 RULE 13a-14(a) CERTIFICATION FOR FORM 10-K (CFO) I, Jie Li, certify that: 1.I have reviewed this annual report on Form 10-K of China Automotive Systems, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrols over financial reporting. Date: March 26, 2015By:/s/ Jie Li Jie Li Chief Financial Officer Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit 32.1 SECTION 1350 CERTIFICATION (CEO) CHINA AUTOMOTIVE SYSTEMS, INC. CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of China Automotive Systems, Inc., the “Company,” on Form 10-K for the year ended December 31, 2014, as filed withthe Securities and Exchange Commission on the date hereof, the “Report,” I, Qizhou Wu, Chief Executive Officer, Chairman and President of the Company,certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. Date: March 26, 2015By:/s/ Qizhou Wu Qizhou Wu Chief Executive Officer Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit 32.2 SECTION 1350 CERTIFICATION (CFO) CHINA AUTOMOTIVE SYSTEMS, INC. CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of China Automotive Systems, Inc., the “Company,” on Form 10-K for the year ended December 31, 2014, as filed withthe Securities and Exchange Commission on the date hereof, the “Report,” I, Jie Li, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. Date: March 26, 2015By:/s/ Jie Li Jie Li Chief Financial Officer Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.Source: CHINA AUTOMOTIVE SYSTEMS INC, 10-K, March 26, 2015Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.

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