UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
Or
¨
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
(State or other jurisdiction of incorporation or
organization)
No. 1 Henglong Road, Yu Qiao Development Zone
Shashi District, Jing Zhou City, Hubei Province
The People’s Republic of China
(Address of principal executive offices)
33-0885775
(I.R.S. Employer Identification No.)
434000
(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
Common Stock, $0.0001 par value
Trading symbol
CAAS
Name of each exchange on which registered
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 1934 during
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 filing requirements for
the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging
growth company. See definition of “large accelerated filer,” “accelerated filer, ” “smaller reporting company” and “emerging growth company” in Rule 12b-2
of the Exchange Act.
Large Accelerated Filer
Non-Accelerated Filer
¨
x
Accelerated Filer
Smaller Reporting Company
Emerging Growth Company
¨
x
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued
its audit report. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ¨ No x
The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2020, based upon the price of $2.89
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 $31.8
million.
The Company has 30,851,776 shares of Common Stock outstanding as of March 30, 2021.
DOCUMENTS INCORPORATED BY REFERENCE
None.
2 | Page
CHINA AUTOMOTIVE SYSTEMS, INC.
FORM 10-K
INDEX
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Business.
Risk Factors.
Unresolved Staff Comments.
Properties.
Legal Proceedings.
Mine Safety Disclosures.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Selected Financial Data.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Quantitative and Qualitative Disclosures about Market Risk.
Financial Statements and Supplementary Data.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Controls and Procedures.
Other Information.
Directors, Executive Officers and Corporate Governance.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Certain Relationships and Related Transactions, and Director Independence.
Principal Accounting Fees and Services.
Exhibits, Financial Statement Schedules.
Form 10-K Summary.
Signatures
Financial Statements
Page
5
5
13
29
29
30
31
31
31
32
32
46
47
47
47
49
49
49
53
55
56
56
57
57
59
59
3 | Page
Cautionary Statement
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of
the Securities Exchange Act of 1934. These statements relate to future events or the Company’s future financial performance. The Company has attempted to
identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continues,” “could,” “estimates,” “expects,”
“intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. Such statements are
subject to certain risks and uncertainties, including the matters set forth in this Annual Report or other reports or documents the Company files with the
Securities and Exchange Commission, the “SEC,” from time to time, which could cause actual results or outcomes to differ materially from those projected.
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results,
levels of activity, performance or achievements. Undue reliance should not be placed on these forward-looking statements which speak only as of the date
hereof. The Company’s expectations are as of the date this Form 10-K is filed, and the Company does not intend to update any of the forward-looking
statements after the date this Annual Report on Form 10-K is filed to confirm these statements to actual results, unless required by law.
4 | Page
ITEM 1.
BUSINESS.
COMPANY HISTORY
PART I
China Automotive Systems, Inc., “China Automotive” or the “Company,” was incorporated in the State of Delaware on June 29, 1999. Through its subsidiary,
Great Genesis Holdings Limited, “Genesis,” a corporation organized under the laws of the Hong Kong Special Administrative Region, China, it owns interests
in eight Sino-joint ventures and six wholly-owned subsidiaries in the People’s Republic of China, “China” or the “PRC,” which manufacture power steering
systems and/or related products for different segments of the automobile industry. Genesis also owns interests in a Brazil-based trading company, which
engages mainly in the import and sales of automotive parts in Brazil.
Henglong USA Corporation, “HLUSA,” which was incorporated on January 8, 2007 in Troy, Michigan, is a wholly-owned subsidiary of the Company, and
mainly engages in marketing of automotive parts in North America, and provides after sales service and research and development (“R&D”) support.
Unless the context indicates otherwise, the Company uses the terms “the Company,” “we,” “our” and “us” to refer to China Automotive collectively on a
consolidated basis.
BUSINESS OVERVIEW
The Company is a holding company and has no significant business operations or assets other than its interest in Genesis and HLUSA. Genesis mainly engages
in the manufacture and sale of automotive systems and components through its controlled subsidiaries and the joint ventures, as described below.
Set forth below is an organizational chart as at December 31, 2020.
5 | Page
↓100%
Great Genesis Holdings Limited
↓
↓100%
Hubei
Henglong
Automotive
System Group
Co., Ltd.
"Hubei
Henglong"1
↓
↓100%
Jingzhou
Henglong
Automotive
Parts
Co., Ltd.
↓100%
Shashi
Jiulong
Power
Steering
Gears
Co., Ltd.
↓77.33%
Wuhu
Henglong
Automotive
Steering
System Co.,
Ltd.
↓85%
Wuhan
Jielong
Electric
Power
Steering Co.,
Ltd.
China Automotive Systems, Inc. [NASDAQ:CAAS]
↓100%
Henglong USA Corporation
↓70%
Shenyang
Jinbei
Henglong
Automotive
Steering System
"Shenyang"2
↓51.0%
Hyoseong
(Wuhan)
Motion
Mechatronics
System
Co., Ltd.
↓66.6%
Hubei
Henglong
& KYB
Automobile
Electric
Steering
System
Co., Ltd.
↓62%
Wuhu
Hongrun
New
Material
Co., Ltd.
↓100%
Changchun
Hualong
Automotive
Technology
Co., Ltd.
“Henglong
KYB”13
“Wuhan
“Wuhu
Hyoseong”14
Hongrun”15
“Changchun
Hualong”16
↓70%
Chongqing
Henglong
Hongyan
Automotive
System Co.,
Ltd.
↓95.84%
CAAS
Brazil's
Imports And
Trade In
↓100%
Hubei
Henglong
Group
Shanghai
Automotive Automotive
Parts Ltd.
↓60%
Jingzhou
Qingyan
Intelligent
Automotive
Technology
Research
Institute
Co., Ltd.
Electronics
Research and
Development
Ltd.
“Shanghai
“Jingzhou
Henglong”11 Qingyan”12
"Chongqing
Henglong"7
"Brazil
Henglong"8
"Henglong"3
↓
↓100%
Jingzhou
Henglong
Automotive
Technology
(Testing)
Center
"Testing
Center"9
"Jiulong"4
"Wuhu"5
"Jielong"6
↓
↓85%
Wuhan
Chuguanjie
Automotive
Science and
Technology
Ltd.
"Wuhan
Chuguanjie"10
1. On March 7, 2007, Genesis established Hubei Henglong, formerly known as Jingzhou Hengsheng Automotive System Co., Ltd., its wholly-owned
subsidiary, to engage in the production and sales of automotive steering systems. On July 8, 2012, Hubei Henglong changed its name to Hubei Henglong
Automotive System Group Co., Ltd.
2. Shenyang was established in 2002 and focuses on power steering parts for light duty vehicles.
3. Henglong was established in 1997 and mainly engages in the production of rack and pinion power steering gears for cars and light-duty vehicles.
4.
Jiulong was established in 1993 and mainly engages in the production of integral power steering gears for heavy-duty vehicles.
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 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.
8. On August 21, 2012, Brazil Henglong was established as a Sino-foreign joint venture company by Hubei Henglong and two Brazilian citizens, Ozias Gaia
Da Silva and Ademir Dal’ Evedove. Brazil Henglong engages mainly in the import and sale of automotive parts in Brazil. In May 2017, the Company
obtained an additional 15.84% equity interest in Brazil Henglong for nil consideration. The Company retained its controlling interest in Brazil Henglong
and the acquisition of the non-controlling interest was accounted for as an equity transaction.
6 | Page
9.
In December 2009, Henglong, a subsidiary of Genesis, formed Testing Center, which mainly engages in the research and development of new products.
10. In May 2014, together with Hubei Wanlong, Jielong formed a subsidiary, Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan
Chuguanjie”, which mainly engages in research and development, manufacture and sales of automobile electronic systems and parts. Wuhan Chuguanjie is
located in Wuhan, China.
In May 2020, Wuhan Chuguanjie merged with another subsidiary, Universal Sensor Application Inc., “USAI”, which was established in 2005 and mainly
engages in the production and sales of sensor modules.
11. In January 2015, Hubei Henglong formed Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai
Henglong”, which mainly engages in the design and sale of automotive electronics.
12. In November 2017, Hubei Henglong formed Jingzhou Qingyan Intelligent Automotive Technology Research Institute Co., Ltd., “Jingzhou Qingyan”,
which mainly engages in the research and development of intelligent automotive technology.
13. In August 2018, Hubei Henglong and KYB (China) Investment Co., Ltd. (“KYB”) established Hubei Henglong KYB Automobile Electric Steering System
Co., Ltd. (“Henglong KYB”), which mainly engages in design, manufacture, sales and after-sales service of automobile electronic systems. Hubei
Henglong owns 66.6% of the shares of this entity and has consolidated it since its establishment.
14. In March 2019, Hubei Henglong and Hyoseong Electric Co., Ltd. established Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd. (“Wuhan
Hyoseong”), which mainly engages in the design, manufacture and sales of automotive motors and electromechanical integrated systems. Hubei Henglong
owns 51.0% of the shares of Wuhan Hyoseong and has consolidated it since its establishment.
15. In December 2019, Hubei Henglong formed Wuhu Hongrun New Material Co., Ltd. (“Wuhu Hongrun”), which mainly engages in the development,
manufacturing and sale of high polymer materials. Hubei Henglong owns 62.0% of the shares of Wuhu Hongrun and has consolidated it since its
establishment.
16. In April 2020, Hubei Henglong acquired 100.0% of the equity interests of Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong”,
for total consideration of RMB 1.2 million, equivalent to approximately $0.2 million from an entity controlled by Hanlin Chen. Before the acquisition,
52.1% of the shares of Changchun Hualong were ultimately owned by Hanlin Chen and 47.9% of the shares were owned by third parties. Changchun
Hualong mainly engages in design and R&D of automotive parts.
The Company has business relationships with more than sixty vehicle manufacturers, including Great Wall Motors Company Limited (“Great Wall Motors”),
and FAW Group, two of the five largest automobile manufacturers in China; Shenyang Brilliance Jinbei Co., Ltd, the largest light vehicle manufacturer in
China; Chery Automobile Co., Ltd., the largest state-owned car manufacturer in China, and BYD Auto Co., Ltd. and Zhejiang Geely Automobile Co., Ltd., the
largest privately owned car manufacturers in China. The PRC-based joint ventures of General Motors (GM), Citroen and Fiat Chrysler North America are all
key customers of the Company. Starting in 2008, the Company has supplied power steering gears to the Sino-foreign joint ventures established by GM, Citroen
and Volkswagen in China. The Company has supplied power steering gear to Fiat Chrysler North America since 2009 and to Ford Motor Company since 2016.
7 | Page
INTELLECTUAL PROPERTY RIGHTS
Intellectual Property rights, “IP,” are important in helping the Company maintain its competitive position. Currently, the Company owns IP rights, including
two trademarks covering automobile parts, “HL” and “JL,” and more than eighty-five patents registered in China covering power steering technology. The
Company is in the process of integrating new advanced technologies such as electronic chips in power steering systems into its current production line and is
pursuing aggressive strategies in technology to maintain a competitive edge within the automobile industry. In December 2009, the Company, through
Henglong, formed Testing Center and cooperated with Nanyang Ind. Co. Ltd. and Tsinghua University to engage in the research and development of new
products, such as Electric Power Steering (“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. In January 2015, Hubei Henglong formed Shanghai Henglong, which mainly engages in the
design and sale of automotive electronics, to capture the market opportunities for EPS, which were included in traditional hydraulic power steering products by
many automobile makers. In November 2017, Hubei Henglong formed Jingzhou Qingyan Intelligent Automotive Technology Research Institute Co., Ltd.,
which mainly engages in the research and development of intelligent automotive technology. In August 2018, Hubei Henglong established a non-wholly owned
subsidiary, Hubei Henglong KYB Automobile Electric Steering System Co., Ltd., which mainly engages in design, manufacture, sales and after-sales service of
automobile electronic systems. In March 2019, Hubei Henglong established a non-wholly owned subsidiary, Hyoseong (Wuhan) Motion Mechatronics System
Co., Ltd., which mainly engages in the design, manufacture and sales of automotive motors and electromechanical integrated systems. In December 2019,
Hubei Henglong formed Wuhu Hongrun New Material Co., Ltd. (“Wuhu Hongrun”), which mainly engages in the development, manufacturing and sale of
high polymer materials. In April 2020, Hubei Henglong acquired 100.0% of the equity interests of Changchun Hualong Automotive Technology Co. Ltd.,
“Changchun Hualong”, which mainly engages in design and R&D of automotive parts.
STRATEGIC PLAN
The Company’s short to medium term strategic plan is to focus on both domestic and international market expansion. To achieve this goal and higher
profitability, the Company focuses on brand recognition, quality control, cost efficiency, research and development and strategic acquisitions. Set forth below
are the Company’s programs:
— Brand Recognition. Under the brands of Henglong and Jiulong, the Company offers four separate series of power steering sets and 310 models of
power steering sets, steering columns and steering hoses.
— Quality Control. The Henglong and Jiulong manufacturing facilities obtained the ISO/TS 16949 System Certification in January 2004, a well-
recognized quality control system in the auto industry developed by TUVRheindland of Germany.
— Cost Efficiency. By improving the Company’s production ability and enhancing equipment management, optimizing the process and products
structure, perfecting the supplier system and cutting production cost, the Company’s goal is to achieve a more competitive profit margin.
— Research and Development. The Company established Testing Center for the research and development of products and, by partnering with Nanyang
Ind. Co. Ltd. and Tsinghua University for the development of advanced steering systems, the Company’s objective is to gain increased market share in
China.
— International Expansion. The Company has entered into agreements with several international vehicle manufacturers and auto parts modules suppliers
and carried on preliminary negotiations regarding future development projects.
— Acquisitions. The Company is exploring opportunities to create long-term growth through new ventures or acquisitions of other auto component
manufacturers. The Company will seek acquisition targets that meet the following criteria:
·
·
·
companies that can be easily integrated into product manufacturing and corporate management;
companies that have strong joint venture partners that would become major customers; and
companies involved with power steering systems.
8 | Page
CUSTOMERS
The Company’s five largest customers represented 47.1% of the Company’s total sales for the year ended December 31, 2020. The following table sets forth
information regarding the Company’s five largest customers.
Name of Major Customers
Fiat Chrysler North America
Great Wall Motors
Hubei Hongrun
Beiqi Foton
Dongfeng Auto Group
Total
Percentage of Total
Revenue in 2020
23.6%
7.3%
6.0%
5.9%
4.3%
47.1%
The Company primarily sells its products to the above-mentioned customers, which, except for Hubei Hongrun, are original equipment manufacturing, “OEM”,
customers; it also has excellent relationships with them, including serving as their first-rank supplier and developer for product development for new models.
While the Company intends to continue to focus on retaining and winning this business, it cannot ensure that it will succeed in doing so. It is difficult to keep
doing business with the above mentioned OEM customers as a result of severe price competition and customers’ diversification of their supply base. The
Company’s business would be materially and adversely affected if it loses one or more of these major customers.
SALES AND MARKETING
The Company’s sales and marketing team has 91 sales persons, which are divided into an OEM team, a sales service team and a working group dedicated to
international business. These sales and marketing teams provide a constant interface with the Company’s key customers. They are located in all major vehicle
producing regions to more effectively represent the Company’s customers’ interests within the Company’s organization, to promote their programs and to
coordinate their strategies with the goal of enhancing overall service and satisfaction. The Company’s ability to support its customers is further enhanced by its
broad presence in terms of sales offices, manufacturing facilities, engineering technology centers and joint ventures.
The Company’s sales and marketing organization and activities are designed to create overall awareness and consideration of, and therefore to increase sales of
the Company’s modular systems and components. To achieve that objective, the Company organized delegations to visit the United States, Korea, India and
Japan and has supplied power steering gear to Fiat Chrysler North America. Through these activities, the Company has generated potential business interest as
a strong base for future development.
DISTRIBUTION
The Company’s distribution system covers all of China. The Company has established sales and service offices with certain significant customers to deal with
matters related to such customers in a timely fashion. The Company also established distribution warehouses close to major customers to ensure timely
deliveries. The Company maintains strict control over inventories. Each of these sales and service offices sends back to the Company, through e-mail or fax,
information related to the inventory and customers’ needs. The Company guarantees product delivery in 8 hours for those customers who are located within
200 km from the Company’s distribution warehouses, and 24 hours for customers who are located outside of 200 km from the Company’s distribution
warehouses. Delivery time is a very important competitive factor in terms of customer decision making, together with quality, pricing and long-term
relationships. The Company has two distribution warehouses in the United States, which are located in Michigan and Texas, respectively. The warehouses
deliver parts to customers every day.
9 | Page
EMPLOYEES AND FACILITIES
As of December 31, 2020, the Company employed approximately 4,688 persons, including approximately:
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
1,317 by Henglong (including Testing Center formed by Henglong) ;
885 by Jiulong;
223 by Shenyang;
117 by Wuhu;
286 by Jielong;
82 by Wuhan Chuguanjie;
1,028 by Hubei Henglong;
17 by HLUSA;
146 by Chongqing Henglong;
38 by Brazil Henglong;
8 by Shanghai Henglong;
450 by Henglong KYB;
27 by Wuhan Hyoseong;
30 by Wuhu Hongrun; and
34 by Chuangchun Hualong.
As of December 31, 2020, Henglong, Jiulong, Shenyang, Chongqing, Wuhan Chuguanjie, Hubei Henglong and Wuhu had a manufacturing and administration
area of 111,211 square meters, 39,478 square meters, 35,354 square meters, 57,849 square meters, 53,675 square meters, 277,269 square meters and 83,705
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 to automotive-
related industries. The annual production of one of the Company’s main products, power steering gears, was approximately 7.5 million units and 5.5 million
units in 2020 and 2019, respectively. Although the production process continues to rely heavily on manual labor, the Company has invested substantially in
high-level production machinery to improve capacity and production quality. Approximately $78.7 million was spent over the last three years to purchase
professional-grade equipment and extend workshops.
RAW MATERIALS
The Company purchases various manufactured components and raw materials for use in its manufacturing processes. The principal components and raw
materials the Company purchases include castings, finished sub-components, aluminum, steel, fabricated metal electronic parts and molded plastic parts. The
most important raw material is steel. The Company enters into purchase agreements with local suppliers. The annual purchase plans are determined at the
beginning of the calendar year but are subject to revision every three months as a result of customers’ orders. A purchase order is made according to monthly
production plans. This protects the Company from building up inventory when the orders from customers change.
10 | Page
The Company’s purchases from its ten largest suppliers represented in the aggregate 22.8% of all components and raw materials it purchased for the year ended
December 31, 2020, and none of them provided more than 10% of total purchases.
All components and raw materials are available from numerous sources. The Company has not, in recent years, experienced any significant shortages of
manufactured components or raw materials and normally does not carry inventories of these items in excess of what is reasonably required to meet its
production and shipping schedules.
RESEARCH AND DEVELOPMENT
The Company owns the Testing Center, a Hubei Provincial-Level technical center, which has been approved by the Hubei Economic Commission. The center
has a staff of about 164, including 68 engineers, primarily focusing on steering system R&D, tests, production process improvement and new material and
production methodology application.
In addition, the Company has formed Shanghai Henglong to engage in the design and sale of automotive electronics, including key parts of EPS.
The Company believes that its engineering and technical expertise, together with its emphasis on continuing research and development, allow it to use the latest
technologies, materials and processes to solve problems for its customers and to bring new, innovative products to market. The Company believes that
continued research and development activities, including engineering, are critical to maintaining its pipeline of technologically advanced products. The
Company has aggressively managed costs in other portions of its business in order to increase its total expenditures for research and development activities,
including engineering, at approximately $25.7 million and $28.0 million for the years ended December 31, 2020 and 2019, respectively. In 2020 and 2019, the
sales of such newly developed products accounted for about 14.8% and 19.1%, 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 in
operations, degree of global and local presence, effectiveness of customer service and overall management capability. The power steering system market is
fragmented in China, and the Company has seven major competitors. Of these competitors, two are Sino-foreign joint ventures while the other five are state-
owned. Like many competitive industries, there is pressure on downward selling prices.
The Company’s major competitors, including Shanghai ZF, Nexteer and First Auto FKS, “FKS,” are component suppliers to specific automobile
manufacturers. Shanghai ZF is the joint venture of SAIC and ZF Germany, which is an exclusive supplier to SAIC-Volkswagen and SAIC-GM. FKS is a joint
venture between First Auto Group and Japan’s Koyo Company and its main customer is FAW-Volkswagen Company.
11 | Page
While the Chinese government limits foreign ownership of auto assemblers to 50%, there is no analogous limitation in the automotive components industry.
Thus, opportunities exist for foreign component suppliers to set up factories in China. These overseas competitors employ technology that may be more
advanced and may have existing relationships with global automobile assemblers, but they are generally not as competitive as the Company in China in terms
of production cost and flexibility in meeting client requirements.
CHINESE AUTOMOBILE INDUSTRY
The Company is a supplier of automotive parts and most of its operations are located in China. An increase or decrease in the output and sales of Chinese
vehicles could result in an increase or decrease of the Company’s results of operations. According to the latest statistics from the China Association of
Automobile Manufacturers, “CAAM”, the output and sales volume of passenger vehicles in 2020 was 20.0 million and 20.2 million units respectively, a
decrease of 6.5% and 6.0%, respectively, compared to 2019. The output and sales volume of commercial vehicles in 2020 was 5.2 million and 5.1 million units,
respectively, an increase of 20.0% and 18.7%, respectively, compared to 2019. In 2020, the Company’s sales of steering gears for passenger vehicles decreased
by 7.8% and the sales of steering gears for commercial vehicles increased by 12.1%, compared to 2019 in China.
ENVIRONMENTAL COMPLIANCE
The Company is subject to the requirements of U.S. federal, state, local and non-U.S., including China’s, environmental and occupational safety and health
laws and regulations. These include laws regulating air emissions, water discharge and waste management. The Company has an environmental management
structure designed to facilitate and support its compliance with these requirements globally. Although the Company intends to comply with all such
requirements and regulations, it cannot provide assurance that it is at all times in compliance. The Company has made and will continue to make capital and
other expenditures to comply with environmental requirements, although such expenditures were not material during the past two years. Environmental
requirements are complex, change frequently and have tended to become more stringent over time. Accordingly, the Company cannot assure that environmental
requirements will not change or become more stringent over time or that its eventual environmental cleanup costs and liabilities will not be material.
During the years ended December 31, 2020 and 2019, 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 26, “Segment Reporting” to the consolidated financial
statements in this Report. The following table summarizes the percentage of sales and total assets by major geographic regions:
Geographic region:
China
United States
Other foreign countries
Total consolidated
Net Sales
Year Ended December 31,
2019
2020
Long-term assets
As of December 31,
2020
2019
70.6%
27.5
1.9
100.0%
71.7%
26.8
1.5
100.0%
99.1%
0.5
0.4
100.0%
99.1%
0.5
0.4
100.0%
12 | Page
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-K
and amendments to those reports pursuant to Section 13(a) of the Securities Exchange Act of 1934. The Company makes available free of charge on its web
site (www.caasauto.com) all such reports as soon as reasonably practicable after they are filed.
The SEC maintains an Internet site that contains reports, proxy information and information statements, and other information regarding issuers that file
electronically with the SEC. The address of that website is http://www.sec.gov.
ITEM 1A. RISK FACTORS.
Any investment in the Company’s securities involves a high degree of risk. You should carefully consider the risks described below, together with the
information contained elsewhere in this Annual Report, before you make a decision to invest in the Company. The Company’s business, financial conditions and
results of operations could be materially and adversely affected by many risk factors. Because of these risk factors, actual results might differ significantly from
those projected in any forward-looking statements. Factors that might cause such differences include, among others, the following:
RISKS RELATED TO THE COMPANY’S BUSINESS AND INDUSTRY
The cyclical nature of automotive production and sales could result in a reduction in automotive sales, which could adversely affect the Company’s
business and results of operations.
The Company’s business relies on automotive vehicle production and sales by its customers, which are highly cyclical and depend on general economic
conditions and other factors, including consumer spending and preferences and the price and availability of gasoline. They also can be affected by labor
relations issues, regulatory requirements and other factors. In the last two years, the price of automobiles in China has generally declined. Additionally, the
volume of automotive production in China has fluctuated from year to year, which gives rise to fluctuations in the demand for the Company’s products.
Therefore, any significant economic decline could result in a reduction in automotive production and sales by the Company’s customers and could have a
material adverse effect on the Company’s results of operations. Moreover, if the prices of automobiles keep declining, the selling price of automotive parts also
would decrease, which would result in lower revenues and profitability.
Increasing costs for manufactured components and raw materials may adversely affect the Company’s profitability.
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, steel and resins. Because it may be difficult to pass increased prices for these items on to the
Company’s customers, a significant increase in the prices of the Company’s components and materials could materially increase the Company’s operating costs
and adversely affect its profit margins and profitability.
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Because the Company is a holding company with substantially all of its operations conducted through its subsidiaries, its performance will be affected by
the performance of its subsidiaries.
The Company almost has no operations independent of those of Genesis and its subsidiaries, and the Company’s principal assets are its investments in Genesis
and its subsidiaries and affiliates. As a result, the Company is dependent upon the performance of Genesis and its subsidiaries and will be subject to the
financial, business and other factors affecting Genesis as well as general economic and financial conditions. As substantially all of the Company’s operations
are, and will be, conducted through its subsidiaries, the Company will be dependent on the cash flow of its subsidiaries to meet its obligations.
Because virtually all of the Company’s assets are, and will be, held by operating subsidiaries, the claims of the Company’s stockholders will be structurally
subordinate to all existing and future liabilities, obligations and trade payables of such subsidiaries. In the event of the Company’s bankruptcy, liquidation or
reorganization, its assets and those of its subsidiaries will be available to satisfy the claims of the Company’s stockholders only after all of its and its
subsidiaries’ liabilities and obligations have been paid in full.
With the automobile parts markets being highly competitive and many of the Company’s competitors having greater resources than it does, the Company
may not be able to compete successfully.
The automobile parts industry is a highly competitive business. The Company’s customers consider criteria including:
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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 are becoming
more aggressive in selling parts to other vehicle manufacturers. Depending on the particular product, the number of the Company’s competitors varies
significantly. Many of the Company’s competitors have substantially greater revenues and financial resources than it does, as well as stronger brand names,
consumer recognition, business relationships with vehicle manufacturers, and geographic presence than it has. The Company may not be able to compete
favorably and increased competition may substantially harm its business, business prospects and results of operations.
Internationally, the Company faces different market dynamics and competition. The Company may not be as successful as its competitors in generating
revenues in international markets due to the lack of recognition of its products or other factors. Developing product recognition overseas is expensive and time-
consuming and the Company’s international expansion efforts may be more costly and less profitable than it expects. If the Company is not successful in its
target markets, its sales could decline, its margins could be negatively impacted and it could lose market share, any of which could materially harm the
Company’s business, results of operations and profitability.
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Pricing pressure by automobile manufacturers on their suppliers may adversely affect the Company’s business and results of operations.
Recently, pricing pressure from automobile manufacturers has been prevalent in the automotive parts industry in China. Virtually all vehicle manufacturers
seek price reductions each year. Although the Company has tried to reduce costs and resist price reductions, these reductions have impacted the Company’s
sales and profit margins. If the Company cannot offset continued price reductions through improved operating efficiencies and reduced expenditures, price
reductions will have a material adverse effect on the Company's results of operations.
The Company’s business, revenues and profitability would be materially and adversely affected if it loses any of its large customers.
For the year ended December 31, 2020, approximately 23.6%, 7.3%, 6.0%, 5.9% and 4.3% of the Company’s sales were to Fiat Chrysler North America, Great
Wall Motors, Hubei Hongrun, Beiqi Foton and Dongfeng Auto Group, the Company’s five largest customers in 2020, respectively. In total, these five largest
customers accounted for 47.1% of total sales in 2020. For the year ended December 31, 2019, approximately 22.7%, 9.7%, 6.2%, 4.7% and 4.1% of the
Company’s sales were to Fiat Chrysler North America, Beiqi Foton, Great Wall Motors, Ford Motor Company and Dongfeng Auto Group, the Company’s five
largest customers in 2019, respectively. In total, these five largest customers accounted for 47.4% of total sales in 2019. The loss of, or significant reduction in
purchases by, one or more of these major customers could adversely affect the Company’s business.
The Company may not be able to collect receivables incurred by customers.
The Company currently sells its products on credit and its ability to receive payment for its products depends on the continued creditworthiness of its
customers. Although the Company has long-term relationships with its major customers, the customer base may change if its sales increase because of the
Company’s expanded capacity. If the Company is not able to collect its receivables, its profitability will be adversely affected.
In November 2020, Intermediate People's Court of Shenyang, Liaoning province, China, accepted the bankruptcy reorganization application of one of our
customers. As of December 31, 2020, the Company had accounts and notes receivable with a total amount of $6.4 million due from this customer and its
subsidiaries, which receivables we considered in significant doubt of collectability. As a result, the Company provided full allowance for these receivables.
The Company may be subject to product liability and warranty and recall claims, which may increase the costs of doing business and adversely affect the
Company’s financial condition and liquidity.
The Company may be exposed to product liability and warranty claims if its products actually or allegedly fail to perform as expected or the use of its products
results, or is alleged to result, in bodily injury and/or property damage. The Company started to pay some of its customers’ increased after-sales service
expenses due to consumer rights protection policies of “recall” issued by the Chinese government in 2004, such as the recalling flawed vehicles policy.
Beginning in 2004, automobile manufacturers unilaterally required their suppliers to pay a “3-R Guarantees” service charge for repair, replacement and refund
in an amount of about 2%–6% of the total amount of parts supplied. Accordingly, the Company has experienced and will continue to experience higher after-
sales service expenses. Product liability, warranty and recall costs may have a material adverse effect on the Company’s financial condition.
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On January 3, 2017, Chongqing Changan Automobile Co., Ltd. (“Chongqing Changan”) registered a recall plan with The General Administration of Quality
Supervision, Inspection and Quarantine (“AQSIQ”) pursuant to the “Regulation on the Administration of Recall of Defective Auto Products”. The recall plan
relates to the recall of 108,642 Eulove vehicles manufactured between November 7, 2012 and November 13, 2015. The recall commenced on March 1, 2017.
According to the supplier, the torque sensor on the upper steering shaft subassembly in the recalled vehicles is subject to abnormal wear after long-term usage,
posing a safety risk in extreme situations. Chongqing Changan implemented a recall to replace the upper steering shaft subassembly in the recalled vehicles
free of charge to mitigate the safety risk. The case closed in 2019.
On January 22, 2017, Jiangxi Changhe Suzuki Automobile Co., Ltd. (“Jiangxi Changhe”) registered a recall plan with AQSIQ pursuant to the “Regulation on
the Administration of Recall of Defective Auto Products”. The recall plan relates to the recall of 44,169 Liana A6 vehicles manufactured between September 7,
2013 and April 28, 2015. The recall commenced on February 24, 2017. According to the supplier, the electronic-assist ECU may malfunction under certain
circumstances, which may lead the steering assist to enter safety protection status, posing a safety risk in extreme situations. Jiangxi Changhe implemented the
recall to conduct a technical upgrade of the ECU in the recalled vehicles free of charge to mitigate the safety risk. The case closed in 2019.
Management has concluded that the defect that led to each of the recalls arose due to the erosion of the contact sensor after long-term use only in vehicles
equipped with first-generation EPS. The Company has taken technical measures to reduce the contact sensor erosion in first-generation EPS. The contact
sensors in current EPS products have been largely replaced by non-contact sensors.
The Company is subject to environmental and safety regulations, which may increase the Company’s compliance costs and may adversely affect its results
of operations.
The Company is subject to the requirements of environmental and occupational safety and health laws and regulations in China. The Company cannot provide
assurance that it has been or will be at all times in full compliance with all of these requirements, or that it will not incur material costs or liabilities in
connection with these requirements. Additionally, these regulations may change in a manner that could have a material adverse effect on the Company’s
business, results of operations and financial condition. The capital requirements and other expenditures that may be necessary to comply with environmental
requirements could increase and become a material expense of doing business.
Non-performance by the Company’s suppliers may adversely affect its operations by delaying delivery or causing delivery failures, which may negatively
affect demand, sales and profitability.
The Company purchases various types of equipment, raw materials and manufactured component parts from its suppliers. The Company would be materially
and adversely affected by the failure of its suppliers to perform as expected. The Company could experience delivery delays or failures caused by production
issues or delivery of non-conforming products if its suppliers fail to perform, and it also faces these risks in the event any of its suppliers becomes insolvent or
bankrupt.
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The Company’s business and growth may suffer if it fails to attract and retain key personnel.
The Company’s ability to operate its business and implement its strategies effectively depends on the efforts of its executive officers and other key employees.
The Company depends on the continued contributions of its senior management and other key personnel. The Company’s future success also depends on its
ability to identify, attract and retain highly skilled technical staff, particularly engineers and other employees with mechanics and electronics expertise, and
managerial, finance and marketing personnel. The Company does not maintain a key person life insurance policy on Mr. Hanlin Chen or Mr. Qizhou Wu. The
loss of the services of any of the Company’s key employees or the failure to attract or retain other qualified personnel could substantially harm the Company’s
business.
The Company’s management controls approximately 63.8% of its outstanding common stock and may have conflicts of interest with the Company’s
minority stockholders.
As of December 31, 2020, members of the Company’s management beneficially own approximately 63.8% of the outstanding shares of the Company’s
common stock. As a result, except for the related party transactions that require approval of the audit committee of the board of directors of the Company, these
majority stockholders have control over decisions to enter into any corporate transaction, which could result in the approval of transactions that might not
maximize overall stockholders’ value. Additionally, these stockholders control the election of members of the Company’s board, have the ability to appoint
new members to the Company’s management team and control the outcome of matters submitted to a vote of the holders of the Company’s common stock. The
interests of these majority stockholders may at times conflict with the interests of the Company’s other stockholders. The Company regularly engages in
transactions with entities controlled by one or more of its officers and directors, including those controlled by Mr. Hanlin Chen, the chairman of the board of
directors of the Company and its controlling stockholder.
There is a limited public float of the Company’s common stock, which can result in the Company’s stock price being volatile and prevent the realization of
a profit on resale of the Company’s common stock or derivative securities.
There is a limited public float of the Company’s common stock. As of December 31, 2020, approximately 36.2% of the Company’s outstanding common stock
is considered part of the public float. The term “public float” refers to shares freely and actively tradable on the NASDAQ Capital Market and not owned by
officers, directors or affiliates, as such term is defined under the Securities Act. As a result of the limited public float and the limited trading volume on some
days, the market price of the Company’s common stock can be volatile, and relatively small changes in the demand for or supply of the Company’s common
stock can have a disproportionate effect on the market price for its common stock. This stock price volatility could prevent a security holder seeking to sell the
Company’s common stock or derivative securities from being able to sell them at or above the price at which the stock or derivative securities were bought, or
at a price which a fully liquid market would report.
The Company is subject to penny stock regulations and restrictions.
The SEC has adopted regulations which generally define so-called “penny stock” as an equity security that has a market price less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to certain exemptions. As of December 31, 2020, the closing price for the Company’s common stock was
$6.24. If the Company’s stock is a “penny stock”, it may become subject to Rule 15g-9 under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), the “Penny Stock Rule.” This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than
established customers and “accredited investors,” generally, individuals with a net worth in excess of $1.0 million or annual incomes exceeding $0.2 million, or
$0.3 million together with their spouses. For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser’s written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell
the Company’s securities and may affect the ability of purchasers to sell any of the Company’s securities in the secondary market.
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For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule
prepared by the SEC relating to the penny stock market. Disclosure also is required to be made about sales commissions payable to both the broker-dealer and
the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for
the penny stock held in the account and information on the limited market in penny stock.
There can be no assurance that the Company’s common stock will qualify for exemption from the Penny Stock Rule. In any event, even if the Company’s
common stock were exempt from the Penny Stock Rule, the Company would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the
authority to restrict any person from participating in a distribution of penny stock if the SEC finds that such a restriction would be in the public interest.
Provisions in the Company’s certificate of incorporation and bylaws and the General Corporation Law of Delaware may discourage a takeover attempt.
Provisions in the Company’s certificate of incorporation and bylaws and the General Corporation Law of Delaware, the state in which it is organized, could
make it difficult for a third party to acquire the Company, even if doing so might be beneficial to the Company’s stockholders. Provisions of the Company’s
certificate of incorporation and bylaws impose various procedural and other requirements, which could make it difficult for stockholders to effect certain
corporate actions and possibly prevent transactions that would maximize stockholders’ value.
Failure to maintain effective internal control over financial reporting could have a material adverse effect on the Company’s business, results of operations
and the trading price of its shares.
The Company is subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, the “SEC,” as required by Section
404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring public companies to include a report of management in its annual report that contains an
assessment by management of the effectiveness of such company’s internal control over financial reporting.
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 that it
has effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for the
Company to produce reliable financial reports and are important to help prevent fraud. Any failure to maintain effective internal control over financial reporting
could result in the loss of investor confidence in the reliability of the Company’s financial statements, which in turn could harm its business and negatively
impact the trading price of its common stock. Furthermore, the Company may need to incur additional costs and use additional management and other
resources in an effort to comply with Section 404 of the Sarbanes-Oxley Act and other requirements going forward.
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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 on
June 26, 2014, it does not anticipate paying any other cash dividends in the foreseeable future. The Company currently intends to retain future earnings, if any,
to finance operations and the expansion of its business. Any future determination to pay cash dividends will be at the discretion of the Company’s board of
directors and will be based upon the Company’s financial condition, operating results, capital requirements, plans for expansion, restrictions imposed by any
financing arrangements and any other factors that the Company’s board of directors deems relevant.
Techniques employed by short sellers may drive down the market price of the Company’s common stock.
Short selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the intention of buying identical
securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the
borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is in the
short seller’s best interests for the price of the stock to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding the
relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a stock short. These
short attacks have, in the past, led to selling of shares in the market.
In the recent past, public companies that have substantially all of their operations in China have been the subject of short selling. Much of the scrutiny and
negative publicity has centered around allegations of a lack of effective internal control over financial reporting resulting in financial and accounting
irregularities and mistakes, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result, many
of these companies are now conducting internal and external investigations into the allegations and, in the interim, are subject to shareholder lawsuits and/or
SEC enforcement actions.
It is not clear what effect such negative publicity would have on the Company, if any. If the Company were to become the subject of any unfavorable
allegations, whether such allegations are proven to be true or untrue, the Company could have to expend a significant amount of resources to investigate such
allegations and/or defend itself. While the Company would strongly defend against any such short seller attacks, the Company may be constrained in the
manner in which it can proceed against the relevant short seller by principles of freedom of speech, applicable state law or issues of commercial confidentiality.
Such a situation could be costly and time-consuming, and could distract the Company’s management from growing the Company. Even if such allegations are
ultimately proven to be groundless, allegations against the Company could severely impact its business operations and stockholders’ equity, and any investment
in the Company’s stock could be greatly reduced or rendered worthless.
The Company’s secured credit facilities contain certain financial covenants that it may not satisfy, which, if not satisfied, could result in the acceleration of
the amounts due under the Company’s secured credit facilities and the limitation of the Company’s ability to borrow additional funds in the future.
The agreements governing the Company’s secured credit facilities subject it to various financial and other restrictive covenants with which the Company must
comply on an ongoing or periodic basis. These covenants include, but are not limited to, restrictions on the utilization of the funds and the maintenance of
certain financial ratios. If the Company violates any of these covenants, the Company’s outstanding debt under the Company’s secured credit facilities could
become immediately due and payable, the Company’s lenders could proceed against any collateral securing such indebtedness and the Company’s ability to
borrow additional funds in the future may be limited. Alternatively, the Company could be forced to refinance or renegotiate the terms and conditions of the
Company’s secured credit facilities, including the interest rates, financial and restrictive covenants and security requirements of the secured credit facilities, on
terms that may be significantly less favorable to the Company.
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Our business operations have been and may continue to be materially and adversely affected by the outbreak of the coronavirus disease (COVID-19).
An outbreak of respiratory illness caused by COVID-19 emerged in Wuhan city, Hubei province, PRC, where the Company’s headquarters is located, in
December 2019 and has been expanding within the PRC and globally. The new strain of COVID-19 is considered to be highly contagious and poses a serious
public health threat. On January 23, 2020, the PRC government announced the lockdown of Wuhan city in an attempt to quarantine the city. Since then, other
measures including travel restrictions have been imposed in other major cities in the PRC and throughout the world in an effort to contain the COVID-19
outbreak. The World Health Organization (the “WHO”) is closely monitoring and evaluating the situation. On March 11, 2020, the WHO declared the outbreak
of COVID-19 a pandemic, expanding its assessment of the threat beyond the global health emergency it had announced in January. As our headquarters are
located in Wuhan, we closed our headquarters effective January 23, 2020 and reopened in late March 2020.
Any outbreak of such epidemic illness or other adverse public health developments in the PRC or elsewhere in the world may materially and adversely affect
the global economy, our markets and our business.
We cannot foresee whether the pandemic of COVID-19 will be effectively contained, nor can we predict the severity and duration of its impact. If the
pandemic of COVID-19 is not effectively and timely controlled, our business operations and financial condition may be materially and adversely affected as a
result of the deteriorating market outlook for automobile sales, the slowdown in regional and national economic growth, weakened liquidity and financial
condition of our customers or other factors that we cannot foresee. Any of these factors and other factors beyond our control could have an adverse effect on
the overall business environment, cause uncertainties in the regions where we conduct business, cause our business to suffer in ways that we cannot predict and
materially and adversely impact our business, financial condition and results of operations.
RISKS RELATED TO DOING BUSINESS IN CHINA AND OTHER COUNTRIES BESIDES THE UNITED STATES
The Company may face a severe operating environment during times of economic recession.
The sales volume of the Company’s core products is largely influenced by the demand for its customers’ end products which are mostly sold in the Chinese
markets. Future economic crises, either within China or without, may lead to a drastic drop in demand for the Company’s products.
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Inflation in China could negatively affect the Company’s profitability and growth.
China’s economy has experienced rapid growth, much of it due to the issuance of debt over the last few years. This debt-fueled economic growth has led to
growth in the money supply, causing rising inflation. If prices for the Company’s products rise at a rate that is insufficient to compensate for the rise in the cost
of production, it may harm the Company’s profitability. In order to control inflation, the Chinese government has imposed controls on bank credit, limits on
loans and other restrictions on economic activities. Such policies have led to a slowing of economic growth. Additional measures could further slow economic
activity in China, which could, in turn, materially increase the Company’s costs while also reducing demand for the Company’s products.
The Chinese government’s macroeconomic policies could have a negative effect on the Company’s business and results of operations.
The Chinese government has implemented various measures from time to time to control the rate of economic growth in the PRC. Some of these measures may
have a negative effect on the Company over the short or long term. Recently, to cope with high inflation and economic imbalances, the Chinese government has
tightened monetary policy and implemented floating exchange rate policy. In addition, in order to alleviate some of the effects of unbalanced growth and social
discontent, the Chinese government has enacted a series of social programs and anti-inflationary measures. These, in turn, have increased the costs on the
financial and manufacturing sectors, without having alleviated the effects of high inflation and economic imbalances. The Chinese government’s
macroeconomic policies, even if effected properly, may significantly slow down China’s economy or cause great social unrest, all of which would have a
negative effect on the Company’s business and results of operations.
The economic, political and social conditions in China could affect the Company’s business.
Most of the Company’s business, assets and operations are located in China. The economy of China differs from the economies of most developed countries in
many respects, including government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. The economy of
China has been transitioning from a planned economy to a more market-oriented economy. Although the Chinese government has implemented measures
emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound
corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the Chinese government.
In addition, the Chinese government continues to play a significant role in regulating industry by imposing industrial policies. It also exercises significant
control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary
policy and providing preferential treatment to particular industries or companies. Therefore, the Chinese government’s involvement in the economy could
adversely affect the Company’s business operations, results of operations and/or financial condition.
Because the Company’s operations are mostly located outside of the United States and are subject to Chinese laws, any change of Chinese laws may
adversely affect its business.
Most of the Company’s operations are in the PRC, which exposes it to risks, such as exchange controls and currency restrictions, currency fluctuations and
devaluations, changes in local economic conditions, changes in Chinese laws and regulations, exposure to possible expropriation or other PRC government
actions, and unsettled political conditions. These factors may have a material adverse effect on the Company’s operations or on its business, results of
operations and financial condition.
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The Company’s international expansion plans subject it to risks inherent in doing business internationally.
The Company’s long-term business strategy relies on the expansion of its international sales outside China by targeting markets, such as the United States and
Brazil. Risks affecting the Company’s international expansion include challenges caused by distance, language and cultural differences, conflicting and
changing laws and regulations, foreign laws, international import and export legislation, trading and investment policies, foreign currency fluctuations, the
burdens of complying with a wide variety of laws and regulations, protectionist laws and business practices that favor local businesses in some countries,
foreign tax consequences, higher costs associated with doing business internationally, restrictions on the export or import of technology, difficulties in staffing
and managing international operations, trade and tariff restrictions, and variations in tariffs, quotas, taxes and other market barriers. These risks could harm the
Company’s international expansion efforts, which could in turn materially and adversely affect its business, operating results and financial condition.
On September 17, 2012, the United States filed a trade case with the World Trade Organization, “WTO,” against the PRC with respect to the PRC
government’s purported provision of subsidies to the automobile and automobile-parts enterprises in the PRC. If the WTO rules against China in this trade case,
the cost of sales of the Company could increase due to the imposition of any tariff and/or the Company’s ability to export products to the United States could be
limited, which could affect the Company’s business and operating results.
In addition, under Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC has adopted additional disclosure requirements
related to the source of certain “conflict minerals” for issuers for which such “conflict minerals” are necessary to the functionality or production of a product
manufactured, or contracted to be manufactured, by that issuer. The metals covered by the rules include tin, tantalum, tungsten and gold, commonly referred to
as “3TG.” If these materials are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, the rules require a
reasonable country of origin inquiry be conducted to determine if an issuer knows, or has reason to believe, that any of the minerals used in the production
process may have originated from the Democratic Republic of the Congo or an adjoining country. In such a case, if an issuer were not able to determine that the
minerals did not originate from a covered country or conclude that there is no reason to believe that the minerals used in the production process may have
originated in a covered country, that issuer could be required to perform supply chain due diligence on members of its supply chain. Global supply chains can
have multiple layers, thus the costs of complying with these new requirements could be substantial. These new requirements may also reduce the number of
suppliers that provide conflict-free metals and may also affect a company’s ability to obtain products in sufficient quantities or at competitive prices. If the
Company was to source such 3TG minerals that are necessary to the functionality or production of a product manufactured, or contracted to be manufactured,
compliance costs with these rules and/or the unavailability of raw materials could have a material adverse effect on the Company’s results of operations.
The Company faces risks associated with currency exchange rate fluctuations; any adverse fluctuation may adversely affect its operating margins.
Although the Company is incorporated in the State of Delaware, in the United States, the majority of its current revenues are in Chinese currency. Conducting
business in currencies other than U.S. dollars subjects the Company to fluctuations in currency exchange rates that could have a negative impact on its reported
operating results. Fluctuations in the value of the U.S. dollar relative to other currencies impact the Company’s revenues, cost of revenues and operating
margins and result in foreign currency translation gains and losses. Historically, the Company has not engaged in exchange rate hedging activities. Although the
Company may implement hedging strategies to mitigate this risk, these strategies may not eliminate its exposure to foreign exchange rate fluctuations and
involve costs and risks of their own, such as ongoing management time and expertise requirements, external costs to implement the strategy and potential
accounting implications.
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If relations between the United States and China worsen, the Company’s stock price may decrease and the Company may have difficulty accessing the U.S.
capital markets.
At various times during recent years, the United States and China have had disagreements over political and economic issues. Controversies may arise in the
future between these two countries. Any political or trade controversies between the United States and China could adversely affect the market price of the
Company’s common stock and its ability to access U.S. capital markets. Political events, international trade disputes and other business interruptions could
harm or disrupt international commerce and the global economy, and could have a material adverse effect on the Company, its customers and its other business
partners.
The Chinese government could change its policies toward private enterprise, which could adversely affect the Company’s business.
The Company’s business is subject to political and economic uncertainties in China and may be adversely affected by China’s political, economic and social
developments. Over the past several years, the Chinese government has pursued economic reform policies including the encouragement of private economic
activity and greater economic decentralization. The Chinese government may not continue to pursue these policies or may alter them to the Company’s
detriment from time to time. Changes in policies, laws and regulations, or in their interpretation or the imposition of confiscatory taxation, restrictions on
currency conversion, restrictions or prohibitions on dividend payments to stockholders, devaluations of currency or the nationalization or other expropriation of
private enterprises could have a material adverse effect on the Company’s business. Nationalization or expropriation could result in the total loss of the
Company’s investment in China.
Government control of currency conversion and future movements in exchange rates may adversely affect the Company’s operations and financial results.
The Company receives most of its revenues in Chinese Renminbi, “RMB”. A portion of such revenues will be converted into other currencies to meet the
Company’s foreign currency obligations. Foreign exchange transactions under the Company’s capital account, including principal payments in respect of
foreign currency-denominated obligations, continue to be subject to significant foreign exchange controls and require the approval of the State Administration
of Foreign Exchange in China. These limitations could affect the Company’s ability to obtain foreign exchange through debt or equity financing, or to obtain
foreign exchange for capital expenditures.
The Chinese government controls its foreign currency reserves through restrictions on imports and conversion of RMB into foreign currency. In July 2005, the
Chinese government has adjusted its exchange rate policy from “Fixed Rate” to “Floating Rate”. From July 2005 to December 2020, the exchange rate between
the RMB and the U.S. dollar appreciated from RMB1.00 to $0.1205 to RMB1.00 to $0.1533. Any significant appreciation of the RMB is likely to decrease the
income of export products and the cash flow of the Company.
23 | Page
Because the Chinese legal system is not fully developed, the Company and its security holders’ legal protections may be limited.
The Chinese legal system is based on written statutes and their interpretation by the Supreme People’s Court. Although the Chinese government introduced
new laws and regulations to modernize its business, securities and tax systems on January 1, 1994, China does not yet possess a comprehensive body of
business law. Because Chinese laws and regulations are relatively new, interpretation, implementation and enforcement of these laws and regulations involve
uncertainties and inconsistencies and it may be difficult to enforce contracts. In addition, as the Chinese legal system develops, changes in such laws and
regulations, their interpretation or their enforcement may have a material adverse effect on the Company’s business operations. Moreover, interpretative case
law does not have the same precedential value in China as in the United States, so legal compliance in China may be more difficult or expensive.
It may be difficult to serve the Company with legal process or enforce judgments against the Company or its management.
Most of the Company’s assets are located in China, nine of its directors and officers are non-residents of the United States, and all or substantial portions of the
assets of such non-residents are located outside the United States. As a result, it may not be possible to effect service of process within the United States upon
such persons to originate an action in the United States. Moreover, there is uncertainty that the courts of China would enforce judgments of U.S. courts against
the Company, its directors or officers based on the civil liability provisions of the securities laws of the United States or any state, or an original action brought
in China based upon the securities laws of the United States or any state.
The Company may be subject to fines and legal sanctions imposed by State Administration of Foreign Exchange, “SAFE”, or other Chinese government
authorities if it or its Chinese directors or employees fail to comply with recent Chinese regulations relating to employee share options or shares granted by
offshore listed companies to Chinese domestic individuals.
On December 25, 2006, the People’s Bank of China, or PBOC, issued the Administration Measures on Individual Foreign Exchange Control, and the
corresponding Implementation Rules were issued by SAFE on January 5, 2007. Both of these regulations became effective on February 1, 2007. According to
these regulations, all foreign exchange matters relating to employee stock holding plans, share option plans or similar plans with Chinese domestic individuals’
participation require approval from the SAFE or its authorized branch. On March 28, 2007, the SAFE issued the Application Procedure of Foreign Exchange
Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed Company, or the Stock Option
Rule. Under the Stock Option Rule, Chinese domestic individuals who are granted share options or shares by an offshore listed company are required, through
a Chinese agent or Chinese subsidiary of the offshore listed company, to register with the SAFE and complete certain other procedures. As the Company is an
offshore listed company, its Chinese domestic directors and employees who may be granted share options or shares shall become subject to the Stock Option
Rule. Under the Stock Option Rule, employees stock holding plans, share option plans or similar plans of offshore listed companies with Chinese domestic
individuals’ participation must be filed with the SAFE. After the Chinese domestic directors or employees exercise their options, they must apply for the
amendment to the registration with the SAFE. As of December 31, 2020, the Company has completed such SAFE registration and other related procedures
according to PRC law. If the Company or its Chinese domestic directors or employees fail to comply with these regulations in the future, the Company or its
Chinese domestic directors or employees may be subject to fines or other legal sanctions imposed by the SAFE or other Chinese government authorities.
24 | Page
Capital outflow policies in China may hamper the Company’s ability to declare and pay dividends to its stockholders.
China has adopted currency and capital transfer regulations. These regulations may require the Company to comply with complex regulations for the movement
of capital. Although the Company’s management believes that it will be in compliance with these regulations, should these regulations or the interpretation of
them by courts or regulatory agencies change, the Company may not be able to pay dividends to its stockholders outside of China. In addition, under current
Chinese law, the Company’s joint-ventures and wholly-owned enterprise in China must retain a reserve equal to 10% of its net income after taxes, not to exceed
50% of its registered capital. Accordingly, this reserve will not be available to be distributed as dividends to the Company’s stockholders. The Company
presently does not intend to pay dividends for the foreseeable future. The Company’s board of directors intends to follow a policy of retaining all of the
Company’s earnings to finance the development and execution of its strategy and the expansion of the Company’s business.
The audit report included in this annual report is prepared by an auditor that is not inspected by the Public Company Accounting Oversight Board and, as
such, you are deprived of the benefits of such inspection.
Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this report, as an auditor of companies that are
traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or the PCAOB, is subject to
laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Since
our auditor is located in China, a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities, our
investors are deprived of the benefits of such inspection.
In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the China Securities
Regulatory Commission, or CSRC, and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and
exchange of audit documents relevant to investigations undertaken by the PCAOB, the CSRC or the PRC Ministry of Finance in the United States and the
PRC, respectively. The PCAOB continues to be in discussions with the CSRC and the PRC Ministry of Finance to permit joint inspections in the PRC of audit
firms that are registered with PCAOB and audit Chinese companies that trade on U.S. exchanges.
On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of
financial statement audits of U.S.-listed companies with significant operations in China.
On April 21, 2020, the SEC and the PCAOB issued another joint statement reiterating the greater risk that disclosures will be insufficient in many emerging
markets, including China, compared to those made by U.S. domestic companies. In discussing the specific issues related to the greater risk, the statement again
highlights the PCAOB’s inability to inspect audit work papers and practices of accounting firms in China, with respect to their audit work of U.S. reporting
companies. However, it remains unclear what further actions, if any, the SEC and the PCAOB will take to address the problem.
Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control
procedures, which may be addressed as part of the inspection process to improve future audit quality. The lack of PCAOB inspections in China prevents the
PCAOB from fully evaluating audits and quality control procedures of our independent registered public accounting firm. As a result, we and our investors 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 our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside
of China that are subject to the PCAOB inspections, which could cause investors and potential investors in our stock to lose confidence in our audit procedures
and reported financial information and the quality of our financial statements.
25 | Page
As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular China's,
in June 2019, a bipartisan group of lawmakers introduced bills in both houses of Congress that would require the SEC to maintain a list of issuers for which the
PCAOB is not able to inspect or investigate an auditor report issued by a foreign public accounting firm. The proposed Ensuring Quality Information and
Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act prescribes increased disclosure requirements for such issuers and, beginning in
2025, the delisting from national securities exchanges of issuers included on the SEC’s list for three consecutive years.
It is unclear if and when this proposed legislation will be enacted. Furthermore, there have been recent media reports on deliberations within the U.S.
government regarding potentially limiting or restricting China-based companies from accessing U.S. capital markets. If any such deliberations were to
materialize, the resulting legislation may have a material and adverse impact on the stock performance of China-based issuers listed in the United States, which
include us.
The Company could be delisted if it is unable to timely meet the PCAOB inspection requirements established by the Holding Foreign Companies
Accountable Act.
On December 18, 2020, the Holding Foreign Companies Accountable Act, or HFCAA, was enacted. In essence, the act requires the SEC to prohibit securities
of any foreign companies from being listed on U.S. securities exchanges or traded “over-the-counter” if a company retains a foreign accounting firm that
cannot be inspected by the PCAOB for three consecutive years, beginning in 2021. Our independent registered public accounting firm is located in and
organized under the laws of the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese
authorities, and therefore our auditors are not currently inspected by the PCAOB.
On March 24, 2021, the SEC adopted interim final amendments, which will become effective 30 days after publication in the Federal Register, relating to the
implementation of certain disclosure and documentation requirements of the HFCAA. The interim final amendments will apply to registrants that the SEC
identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the
PCAOB has determined it is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction. Before any registrant
will be required to comply with the interim final amendments, the SEC must implement a process for identifying such registrants. As of the date of this annual
report, the SEC is seeking public comment on this identification process. Consistent with the HFCAA, the amendments will require any identified registrant to
submit documentation to the SEC establishing that the registrant is not owned or controlled by a government entity in that jurisdiction, and will also require,
among other things, disclosure in the registrant’s annual report regarding the audit arrangements of, and government influence on, such registrant.
The SEC may propose additional rules or guidance that could impact us if our auditor is not subject to PCAOB inspection. For example, on August 6, 2020, the
President's Working Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors from Significant Risks from Chinese
Companies to the then President of the United States. This report recommended that the SEC implement five recommendations to address companies from
jurisdictions that do not provide the PCAOB with sufficient access to fulfil its statutory mandate. Some of the concepts of these recommendations were
implemented with the enactment of the HFCAA. However, some of the recommendations were more stringent than the HFCAA. For example, if a company
was not subject to PCAOB inspection, the report recommended that the transition period before a company would be delisted would end on January 1, 2022.
26 | Page
It is unclear when the SEC will complete its rulemaking, when such rules will become effective and what, if any, of the PWG recommendations will be
adopted. The enactment of the HFCAA and the implications of any additional rulemaking efforts to increase U.S. regulatory access to audit information in
China could cause investor uncertainty for affected SEC registrants, including us, and the market price of our stock could be materially adversely affected.
Additionally, whether the PCAOB will be able to conduct inspections of our auditors in the next three years, or at all, is subject to substantial uncertainty and
depends on a number of factors out of our control. If we are unable to meet the PCAOB inspection requirement in time, we could be delisted from the Nasdaq
Capital Market and our stock will not be permitted for trading “over-the-counter” either. Such a delisting would substantially impair your ability to sell or
purchase our stock when you wish to do so, and the risk and uncertainty associated with delisting would have a negative impact on the price of our stock. Also,
such a delisting would significantly affect our ability to raise capital on terms acceptable to us, or at all, which would have a material adverse impact on our
business, financial condition and prospects.
Proceedings instituted by the SEC against PRC affiliates of the “big four” accounting firms, including our independent registered public accounting firm,
could result in our financial statements being determined to not be in compliance with the requirements of the Exchange Act.
Starting in 2011, the Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, were affected by a
conflict between U.S. and Chinese law. Specifically, for certain U.S.-listed companies operating and audited in mainland China, the SEC and the PCAOB
sought to obtain from the Chinese firms access to their audit work papers and related documents. However, the firms were advised and directed that under
Chinese law, they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China
had to be channeled through the China Securities Regulatory Commission, or the CSRC.
In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley
Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. A first instance trial of the proceedings in July
2013 in the SEC’s internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the firms
including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect pending review by the
Commissioners of the SEC. On February 6, 2015, before a review by the Commissioners had taken place, the firms reached a settlement with the SEC. Under
the settlement, the SEC accepted that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms were to
receive matching Section 106 requests, and were required to abide by a detailed set of procedures with respect to such requests, which in substance required
them to facilitate production via the CSRC. If they failed to meet specified criteria, the SEC retained authority to impose a variety of additional remedial
measures on the firms depending on the nature of the failure.
27 | Page
Under the terms of the settlement, the underlying proceeding against the four China-based accounting firms was deemed dismissed with prejudice four years
after entry of the settlement. The four-year mark occurred on February 6, 2019. We cannot predict whether the SEC will further challenge the four China-based
accounting firms’ compliance with U.S. law in connection with U.S. regulatory requests for audit work papers or if the results of such a challenge would result
in the SEC imposing penalties such as suspensions. If additional remedial measures are imposed on the Chinese affiliates of the “big four” accounting firms,
including our independent registered public accounting firm, we could be unable to timely file future financial statements in compliance with the requirements
of the Exchange Act.
If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find
another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in
compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of our common stock from the Nasdaq
Capital Market or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our common stock in the
United States.
The non-U.S. activities of our non-U.S. subsidiaries may be subject to U.S. taxation.
The majority of our subsidiaries are based in China and are subject to income taxes in the PRC. These China-based subsidiaries conduct substantially all of our
operations, and generate most of our income in China. The Company is a Delaware corporation and is subject to income tax in the United States. New U.S.
federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22, 2017. The U.S. Tax
Reform significantly modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal corporate income tax rate from 35%
to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating many business deductions; migrating the U.S. to a territorial tax
system with a one-time transition tax on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to
certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign
earnings. Taxpayers may elect to pay the one-time transition tax over eight years, or in a single lump-sum payment.
Certain activities conducted in the PRC or other jurisdictions outside of the U.S. may give rise to U.S. corporate income tax. These taxes would be imposed on
the Company when its subsidiaries that are controlled foreign corporations (“CFCs”) generate income that is subject to Subpart F of the U.S. Internal Revenue
Code, or “Subpart F”. Passive income, such as rents, royalties, interest, dividends, and gain from disposal of our investments is among the types of income
subject to taxation under Subpart F. Any income taxable under Subpart F is taxable in the U.S. at federal corporate income tax rates of up to 21% for taxable
years beginning after December 31, 2017. Subpart F income is taxable to the Company, even if it is not distributed to the Company.
The U.S. Tax Reform also includes provisions for a new tax on global intangible low-taxed income (“GILTI”) effective for tax years of non-U.S. corporations
beginning after December 31, 2017. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of CFCs, subject to
the possible use of foreign tax credits and a deduction equal to 50 percent to offset the income tax liability, subject to some limitations.
28 | Page
Information technology dependency and cyber security vulnerabilities could lead to reduced revenue, liability claims, or competitive harm.
The Company is dependent on information technology systems and infrastructure (“IT systems”) to conduct its business. Our IT systems may be vulnerable to
disruptions from human error, outdated applications, computer viruses, natural disasters, unauthorized access, cyber-attack and other similar disruptions. Any
significant disruption, breakdown, intrusion, interruption or corruption of these systems or data breaches could cause the loss of data or intellectual property,
equipment damage, downtime, and/or safety related issues and could have a material adverse effect on our business. We have, from time to time, experienced
incidents related to our IT systems, and expect that such incidents will continue, including malware and computer virus outbreaks, unauthorized access, systems
failures and disruptions. We have measures and defenses in place against such events, but we may not be able to prevent, immediately detect, or remediate all
instances of such events. A material security breach or disruption of our IT systems could result in theft, unauthorized use, or publication of our intellectual
property and/or confidential business information, harm our competitive position, disrupt our manufacturing, reduce the value of our investment in research and
development and other strategic initiatives, impair our ability to access vendors and suppliers or otherwise adversely affect our business.
Additionally, we believe that utilities and other operators of critical infrastructure that serve our facilities face heightened security risks, including cyber-attack.
In the event of such an attack, disruption in service from our utility providers could disrupt our manufacturing operations which rely on a continuous source of
power (electrical, gas, etc.).
Our business is subject to natural disasters, health epidemics and other catastrophic incidents.
In addition to COVID-19, China has in the past experienced significant natural disasters, including earthquakes, extreme weather conditions, as well as health
scares related to epidemic diseases, and any similar event could materially impact our business in the future. If a disaster or other disruption were to occur in
the future that affects the regions where we operate our business, our operations could be materially and adversely affected due to loss of personnel and damage
to property. Even if we are not directly affected, such a disaster or disruption could affect the operations or financial conditions of our customers, which could
harm our results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not Applicable.
ITEM 2.
PROPERTIES.
The Company’s headquarters are located at No. 1 Henglong Road, Yu Qiao Development Zone, Shashi District, Jing Zhou City Hubei Province, the PRC. Set
forth below are the manufacturing facilities operated by each joint venture. The Company has forty-five to fifty years long-term rights to use the lands and
buildings (in thousands of USD, except for references to area in square meters).
Name of Entity
Product
Total Area
(sq.m.)
Building Area Original Cost of
(sq.m.)
Equipment
Site
Henglong
Jiulong
Shenyang
Chongqing
Jielong (1)
Wuhan Chuguanjie
Henglong KYB (1)
Hubei Henglong
Wuhu
Wuhu Hongrun(1)
Total
Automotive Parts
Power Steering Gear
Automotive Steering Gear
Power Steering Gear
Electric Power Steering
Electric Power Steering
Automotive Steering Gear
Automotive Steering Gear
Automotive Steering Gear
High Polymer Materials
97,818
13,393
39,478
35,354
57,849
-
53,675
-
277,269
83,705
-
658,541
20,226 $
13,707 $
24,734 $
18,041 $
22,812 $
- $
44,054 $
- $
78,833 $
27,288 $
- $
249,695 $
63,819 Jingzhou City, Hubei Province
- Wuhan City, Hubei Province
42,943 Jingzhou City, Hubei Province
Shenyang City, Liaoning
8,558
Province
3,604 Chongqing City
7,231 Jingzhou City, Hubei Province
4,946 Wuhan City, Hubei Province
10,705 Jingzhou City, Hubei Province
93,601 Jingzhou City, Hubei Province
7,610 Wuhu City, Anhui Province
1,087 Wuhu City, Anhui Province
244,104
(1) Jielong, Henglong KYB and Wuhu Hongrun do not own land use rights or buildings by themselves. They rent buildings from Jiulong, Hubei Henglong
and Wuhu, respectively.
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 primarily
engaged in real estate activities, as all of its land rights are used for production purposes.
29 | Page
ITEM 3.
LEGAL PROCEEDINGS.
On January 7, 2019, three purported stockholders of the Company filed a stockholder derivative complaint on behalf of the Company against the Company’s
directors Hanlin Chen, Qizhou Wu and Guangxun Xu and former directors Arthur Wong and Robert Tung in the Delaware Court of Chancery, alleging that
they had (a) breached their fiduciary duties by approving and paying excessive compensation to the non-employee directors of the Company, Arthur Wong,
Guangxun Xu and Robert Tung, and (b) failed to make full and accurate disclosure of all material information with respect to director qualification and director
compensation paid in 2017 in the Company’s annual proxy statement on Schedule 14A filed on October 10, 2018. The directors have engaged their own
counsel to answer this complaint. On April 9, 2019, the Company moved to dismiss the complaint. The motion to dismiss was denied on July 17, 2019. As of
November 2020, the Company reached a settlement to resolve the lawsuit for a sum of $55,998. The Company did not admit any liability in reaching the
settlement. On February 5, 2021, the Court of Chancery conducted a hearing to confirm the settlement of the stockholder derivative action. The Court entered a
Final Order and Judgment approving the settlement. The Court further ordered that the plaintiffs’ application for an award of attorneys’ fees and reimbursement
of litigation expenses be reduced from $100,000 to $30,000. The Court’s Final Order and Judgment is publicly available on the Court of Chancery docket.
Other than as described above, the Company is not a party to any pending or, to the best of the Company’s knowledge, any threatened legal proceedings and no
director, officer or affiliate of the Company, or owner of record of more than five percent of the securities of the Company, or any associate of any such
director, officer or security holder is a party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation.
30 | Page
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
The Company’s common stock is traded on the Nasdaq Capital Market under the symbol “CAAS”.
ISSUER PURCHASES OF EQUITY SECURITIES
On December 18, 2015, the Board of Directors of the Company approved a share repurchase program under which the Company was permitted to repurchase
up to $5.0 million of its common stock from time to time in the open market at prevailing markets prices or in privately negotiated transactional through
December 17, 2016. The repurchase program terminated on December 17, 2016. During the year ended December 31, 2016, under the repurchase program, the
Company repurchased 477,015 shares of the Company’s common stock for cash consideration of $1.9 million on the open market.
On December 5, 2018, the Board of Directors of the Company approved a share repurchase program under which the Company was permitted to repurchase up
to $5.0 million of its common stock from time to time in the open market at prevailing markets prices or in privately negotiated transactions through December
4, 2019. The Company has extended the program to December 4, 2020. During the year ended December 31, 2019, under the repurchase program, the
Company repurchased 452,559 shares of the Company’s common stock for cash consideration of $1.0 million on the open market. During the year ended
December 31, 2020, there were no common stock repurchases under such program.
On August 13, 2020, the Board of Directors of the Company approved a share repurchase program under which the Company is permitted to repurchase up to
$5.0 million of its common stock from time to time in the open market at prevailing market prices not to exceed $3.50 per share through August 12, 2021.
During the year ended December 31, 2020, the Company repurchased 322,269 of the shares that were authorized to be repurchased under the program. There
were no common stock repurchases from January 1, 2021 to the date of this report.
STOCKHOLDERS
The Company’s common shares are issued in registered form. Securities Transfer Corporation in Frisco, Texas is the registrar and transfer agent for the
Company’s common stock. As of December 31, 2020, there were 32,338,302 shares of the Company’s common stock (including 1,486,526 shares of the
Company’s treasury stock) issued and the Company had approximately 57 stockholders of record.
DIVIDENDS
The Company does not anticipate paying any cash dividends in the foreseeable future. The Company currently intends to retain future earnings, if any, to
finance operations and the expansion of its business. Any future determination to pay cash dividends will be at the discretion of the Company’s board of
directors and will be based upon the Company’s financial condition, operating results, capital requirements, plans for expansion, restrictions imposed by any
financing arrangements and any other factors that the Company’s board of directors deems relevant.
31 | Page
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The securities authorized for issuance under equity compensation plans at December 31, 2020 are as follows:
Plan category
Number of securities to be Weighted average Number of securities
remaining available for
future issuance
exercise price of
outstanding options
issued upon exercise of
outstanding options
Equity compensation plans approved by security holders
2,200,000 $
4.79
1,563,650
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 of
Stockholders 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 to June
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 and
other financial information contained elsewhere in this report.
GENERAL OVERVIEW
China Automotive Systems, Inc., including, when the context so requires, its subsidiaries and the subsidiaries’ interests in the Sino-foreign joint ventures
described below, is referred to herein as the “Company.” The Company, through its Sino-foreign joint ventures, engages in the manufacture and sales of
automotive systems and components in the People’s Republic of China, the “PRC,” or “China.” Genesis, a company incorporated on January 3, 2003 under the
Companies Ordinance of Hong Kong as a limited liability company, is a wholly-owned subsidiary of the Company. Henglong USA Corporation, “HLUSA,”
which was incorporated on January 8, 2007 in Troy, Michigan, is a wholly-owned subsidiary of the Company, and mainly engages in marketing of automotive
parts in North America, and provides after sales service and research and development support. Furthermore, the Company owns the following aggregate net
interests in the subsidiaries incorporated in the PRC and Brazil as of December 31, 2020 and 2019.
Name of Entity
Aggregate Net Interest
December 31,
2020
December 31,
2019
Henglong
Jiulong
Shenyang
USAI
Wuhu
Jielong
Hubei Henglong
Testing Center
Chongqing Henglong
Brazil Henglong
Wuhan Chuguanjie
Shanghai Henglong
Jingzhou Qingyan
Henglong KYB
Wuhan Hyoseong
Wuhu Hongrun
Changchun Hualong
100.00%
100.00%
70.00%
-%
77.33%
85.00%
100.00%
100.00%
70.00%
95.84%
85.00%
100.00%
60.00%
66.60%
51.00%
62.00%
100.00%
100.00%
100.00%
70.00%
83.34%
77.33%
85.00%
100.00%
100.00%
70.00%
95.84%
85.00%
100.00%
60.00%
66.60%
51.00%
100.00%
-%
32 | Page
RESULTS OF OPERATIONS
Selected highlights from our operations (in thousands of U.S. dollars):
2020
2019
Change
Change%
$
Net product sales
Cost of products sold
Net gain on other sales
Selling expenses
General and administrative expenses
Research and development expenses
Other income, net
Interest expense
Income taxes
Net (loss)/income
Net loss attributable to non-controlling interest
Net (loss)/income attributable to parent company’s common shareholders
417,636 $
362,295
4,320
14,506
27,581
25,723
2,438
1,592
2,163
(10,271)
(5,300)
(4,980)
431,427 $
368,076
5,067
14,270
19,976
27,986
1,957
3,034
586
8,385
(1,577)
9,962
(13,791)
(5,781)
(747)
236
7,605
(2,263)
481
(1,442)
1,577
(18,656)
(3,723)
(14,942)
-3.2%
-1.6%
-14.7%
1.7%
38.1%
-8.1%
24.6%
-47.5%
269.1%
-222.5%
236.1%
-150.0%
Net Product Sales and Cost of Products Sold
For the years ended December 31, 2020 and 2019, net sales and cost of sales are summarized as follows (figures are in thousands of USD):
Henglong
Jiulong
Shenyang
Wuhu
Hubei Henglong
Henglong KYB
Other Entities
Total segment
Eliminations
Total
Net Product Sales
2020
2019
Change
2020
2019
Change
Net Sales
Cost of sales
$
$
157,715
100,120
14,091
14,280
115,991
52,659
61,202
516,058
(98,422)
417,636
$
164,142
88,469
20,247
20,384
121,719
70,952
64,619
550,532
(119,105)
431,427
(6,427)
11,651
(6,156)
(6,104)
(5,728)
(18,293)
(3,417)
(34,474)
20,683
(13,791)
-3.9% $
13.2
-30.4
-29.9
-4.7
-25.8
-5.3
-6.3
-17.4
-3.2%
$
146,478
91,053
11,946
13,627
92,797
52,691
48,260
456,852
(94,557)
362,295
$
155,667
81,234
16,606
19,259
94,470
67,330
51,690
486,256
(118,180)
368,076
(9,189)
9,819
(4,660)
(5,632)
(1,673)
(14,639)
(3,430)
(29,404)
23,623
(5,781)
-5.9%
12.1
-28.1
-29.2
-1.8
-21.7
-6.6
-6.0
-20.0
-1.6%
Net product sales were $417.6 million for the year ended December 31, 2020, as compared to $431.4 million for the year ended December 31, 2019,
representing a decrease of $13.8 million, or 3.2%.
33 | Page
Net sales of traditional steering products were $355.6 million for the year ended December 31, 2020, compared to $348.9 million for 2019, representing an
increase of $6.7 million, or 1.9%. Net sales of EPS were $62.0 million for the year ended December 31, 2020, compared to $82.5 million for 2019, representing
a decrease of $20.5 million, or 24.8%. As a percentage of net sales, the sales of EPS were 14.8% for the year ended December 31, 2020, compared to 19.1% for
2019.
The decrease in net product sales was due to the effects of two major factors: (i) the decrease in sales volume led to a sales decrease of $0.7 million mainly due
to the decreased demand as a result of COVID-19 and (ii) the decrease in average selling price led to a sales decrease of $14.0 million.
The appreciation of the RMB against the U.S. dollar in 2020 led to a sales increase of $0.9 million.
Further analysis is as follows:
— Henglong mainly engages in providing passenger vehicle steering systems. Net sales for Henglong were $157.7 million for the year ended December 31,
2020, compared with $164.1 million for the year ended December 31, 2019, representing a decrease of $6.4 million, or 3.9%. A decrease in sales volume
led to a sales decrease of $5.2 million, a decrease in selling price led to a sales decrease of $1.5 million, and the effect of foreign currency translation of
the RMB against the U.S. dollar led to a sales increase of $0.3 million.
— Jiulong mainly engages in providing commercial vehicle steering systems. Net sales for Jiulong were $100.1 million for the year ended December 31,
2020, compared with $88.5 million for the year ended December 31, 2019, representing an increase of $11.6 million, or 13.1%. An increase in sales
volume led to a sales increase of $18.3 million, and a decrease in selling price led to a sales decrease of $6.7 million.
— Shenyang mainly engages in providing vehicle steering systems to Shenyang Brilliance Jinbei Automobile Co., LTD., “Jinbei”, one of the major
automotive manufacturers in China. Net sales for Shenyang were $14.1 million for the year ended December 31, 2020, compared with $20.2 million for
the year ended December 31, 2019, representing a decrease of $6.1 million, or 30.2%. A decrease in sales volume led to a sales decrease of $2.3 million,
a decrease in selling price led to a sales decrease of $3.8 million.
— Wuhu mainly engages in providing vehicle steering systems to Chery Automobile Co., Ltd., “Chery”, one of the major automotive manufacturers in
China. Net sales for Wuhu were $14.3 million for the year ended December 31, 2020, compared with $20.4 million for the year ended December 31,
2019, representing a decrease of $6.1 million, or 29.9%. A decrease in sales volume led to a sales decrease of $5.8 million, a decrease in selling price led
to a sales decrease of $0.3 million.
— Hubei Henglong mainly engages in providing vehicle steering systems to Chrysler and Ford. Net sales for Hubei Henglong were $116.0 million for
the year ended December 31, 2020, compared with $121.7 million for the year ended December 31, 2019, representing a decrease of $5.7 million, or
4.7%. A decrease in sales volume led to a sales decrease of $5.3 million, a decrease in selling price led to a sales decrease of $0.8 million, and the effect
of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $0.4 million.
— Henglong KYB mainly engages in providing passenger EPS products. Net sales for Henglong KYB were $52.7 million for the year ended December 31,
2020, compared with $71.0 million for the year ended December 31, 2019, representing a decrease of $18.3 million, or 25.8%. A decrease in sales
volume led to a sales decrease of $17.8 million, a decrease in selling price led to a sales decrease of $0.6 million, and the effect of foreign currency
translation of the RMB against the U.S. dollar led to a sales increase of $0.1 million.
— Net sales for Other Entities were $61.2 million for the year ended December 31, 2020, compared with $64.6 million for the year ended December 31,
2019, representing a decrease of $3.4 million, or 5.3%, mainly contributed by Jielong, which manufactures automobile steering columns for both
Hydraulic Power Steering (“HPS”) and EPS.
34 | Page
Cost of Products Sold
For the year ended December 31, 2020, the cost of sales was $362.3 million, compared with $368.1 million for the year ended December 31, 2019, representing
a decrease of $5.8 million, or 1.6%. The decrease in cost of sales was mainly due to the effect of the following major factors: (i) the decrease in sales volumes
with a cost of sales decrease of $0.2 million; (ii) the decrease in unit cost with a cost of sales decrease of $6.2 million; and (iii) the appreciation of the RMB
against the U.S. dollar with a cost of sales increase of $0.6 million. Further analysis is as follows:
— Cost of sales for Henglong was $146.5 million for the year ended December 31, 2020, compared to $155.7 million for the year ended December 31,
2019, representing a decrease of $9.2 million, or 5.9%. A decrease in sales volumes resulted in a cost of sales decrease of $9.6 million, an increase in unit
material and subcomponents costs led to a cost of sales increase of $0.1 million and the effect of foreign currency translation of the RMB against the U.S.
dollar led to a cost of sales increase of $0.3 million.
— Cost of sales for Jiulong was $91.1 million for the year ended December 31, 2020, compared to $81.2 million for the year ended December 31, 2019,
representing an increase of $9.9 million, or 12.2%.An increase in sales volumes resulted in a cost of sales increase of $17.6 million, and a decrease in
unit material and subcomponents costs led to a cost of sales decrease of $7.7 million.
— Cost of sales for Shenyang was $11.9 million for the year ended December 31, 2020, compared with $16.6 million for the year ended December 31,
2019, representing a decrease of $4.7 million, or 28.3%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of
sales decrease of $3.3 million and a decrease in unit cost resulting in a cost of sales decrease of $1.4 million.
— Cost of sales for Wuhu was $13.6 million for the year ended December 31, 2020, compared to $19.3 million for the year ended December 31, 2019,
representing a decrease of $5.7 million, or 29.5%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales
decrease of $6.2 million and an increase in unit cost resulting in a cost of sales increase of $0.5 million.
— Cost of sales for Hubei Henglong was $92.8 million for the year ended December 31, 2020, compared with $94.5 million for the year ended December
31, 2019, representing a decrease of $1.7 million, or 1.8%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost
of sales decrease of $4.6 million, an increase in unit cost resulting in a cost of sales increase of $2.7 million, and the effect of foreign currency translation
of the RMB against the U.S. dollar resulting in a cost of sales increase of $0.2 million.
— Cost of sales for Henglong KYB was $52.7 million for the year ended December 31, 2020, compared to $67.3 million for the year ended December 31,
2019, representing a decrease of $14.6 million, or 21.7%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost
of sales decrease of $16.6 million, an increase in unit cost resulting in a cost of sales increase of $1.9 million, and the effect of foreign currency
translation of the RMB against the U.S. dollar resulting in a cost of sales increase of $0.1 million.
— Cost of sales for Other Entities was $48.3 million for the year ended December 31, 2020, compared to $51.7 million for the year ended December 31,
2019, representing a decrease of $3.4 million, or 6.6%. The decrease in cost of sales for Other Entities was mainly due to the decrease in cost of sales of
Jielong, primarily due to the decrease in sales.
Gross margin was 13.3% for the year ended December 31, 2020, representing a 1.4% decrease from 14.7% for the year ended December 31, 2019, mainly due
to the decrease in selling price in 2020.
Net Gain on Other Sales
Gain on other sales mainly consisted of rental income, gain on disposal of intangible assets and property, plant and equipment, and R&D revenue. For the year
ended December 31, 2020, gain on other sales amounted to $4.3 million, as compared to $5.1 million for the year ended December 31, 2019, representing a
decrease of $0.8 million, mainly due the decrease in gain on disposal of intangible assets and property, plant and equipment.
35 | Page
Selling Expenses
For the years ended December 31, 2020 and 2019, selling expenses are summarized as follows (figures are in thousands of USD):
Transportation expense
Marketing and office expense
Salaries and wages
Warehousing and inventory handling expenses
Other expense
Total
Year Ended December 31,
2019
2020
Increase/(Decrease)
Percentage
$
$
5,839 $
3,864
2,867
1,790
146
14,506 $
5,773 $
3,555
3,064
1,800
78
14,270 $
66
309
(197)
(10)
68
236
1.1%
8.7%
-6.4%
-0.6%
87.2%
1.6%
Selling expenses were $14.5 million for the year ended December 31, 2020, which was generally consistent with last year.
General and Administrative Expenses
For the years ended December 31, 2020 and 2019, general and administrative expenses are summarized as follows (figures are in thousands of USD):
Salaries and wages
Allowances for credit losses
Office expense
Labor insurance expenses
Depreciation and amortization expense
Listing expenses (1)
Maintenance and repair expenses
Property and other taxes
Other expenses
Total
Year Ended December 31,
2019
2020
Increase/(Decrease)
Percentage
$
$
8,415 $
6,808
3,746
2,037
1,963
1,757
1,207
971
677
27,581 $
8,615 $
(441)
3,097
2,613
1,474
1,838
1,336
1,016
428
19,976 $
(200)
7,249
649
(576)
489
(81)
(129)
(45)
249
7,605
-2.3%
n/a
21.0%
-22.0%
33.2%
-4.4%
-9.7%
-4.4%
58.2%
38.1%
(1)
Listing expenses consisted of the costs associated with legal, accounting and auditing fees for operating a public company.
General and administrative expenses were $27.6 million for the year ended December 31, 2020, as compared to $20.0 million for the year ended December 31,
2019, representing an increase of $7.6 million or 38.0%, which mainly included an increase in provision of allowance for doubtful accounts of $6.4 million as a
result of one of the customers’ application for bankruptcy in November 2020.
Research and Development Expenses
Research and development expenses, “R&D” expenses, were $25.7 million for the year ended December 31, 2020 as compared to $28.0 million for the year
ended December 31, 2019, representing a decrease of $2.3 million, or 8.2%, which was primarily due to cost control on research and development activities
and the temporary suspension of the Company’s operations due to the COVID-19 pandemic.
36 | Page
Other Income, Net
Other income, net was $2.4 million for the year ended December 31, 2020 as compared to $2.0 million for the year ended December 31, 2019, representing an
increase of $0.4 million, or 20.0%, which was primarily due to an increase in the government subsidies recognized in 2020.
Interest Expense
Interest expense was $1.6 million for the year ended December 31, 2020 as compared to $3.0 million for the year ended December 31, 2019, representing a
decrease of $1.4 million, or 46.7%, primarily as a result of decreased loans and lower interest rates.
Financial (Expense)/Income, Net
Financial expense, net was $4.9 million for the year ended December 31, 2020, as compared to financial income, net of $2.5 million for the year ended
December 31, 2019, representing an increase in financial expense of $7.4 million, which was primarily due to an increase in the foreign exchange loss because
of the exchange rate fluctuation.
Income Taxes
Income tax expense was $2.2 million for the year ended December 31, 2020 compared to $0.6 million for the year ended December 31, 2019, representing an
increase in income tax expense of $1.6 million. The increase resulted primarily from the increase in valuation allowance recognized in 2020.
Net Loss Attributable to Non-controlling Interests
The Company recorded a net loss attributable to non-controlling interests of $5.3 million for the year ended December 31, 2020, compared to $1.6 million for
the year ended December 31, 2019, representing an increase of $3.7 million.
Net (Loss)/Income Attributable to Parent Company’s Common Shareholders
Net loss attributable to parent company was $5.0 million for the year ended December 31, 2020, compared to net income attributable to parent company of
$10.0 million for the year ended December 31, 2019, representing a decrease of $15.0 million.
37 | Page
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, 2020, the Company had cash and cash equivalents
and short-term investments of $107.4 million, compared with $82.5 million as of December 31, 2019, an increase of $24.9 million, or 30.2%.
The Company had working capital (current assets less current liabilities) of $121.2 million as of December 31, 2020, compared with $137.4 million as of
December 31, 2019, representing a decrease of $16.2 million, or 11.8%.
Except for the expected distribution of dividends from the Company’s PRC subsidiaries to the Company in order to fund the payment of the one-time transition
tax due to the U.S. Tax Reform, the Company intends to indefinitely reinvest the funds in subsidiaries established in the PRC.
The pandemic of COVID-19 has had material impacts on our cash flow for the year of 2020 with potential continuing impacts on subsequent periods. However,
based on our liquidity assessment, we believe that our current cash position, cash flow from operations and proceeds from our financing activities will be
sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures, for the foreseeable future and for at least 12
months subsequent to the filing of this annual report.
Capital Source
The Company’s capital source is multifaceted, such as bank loans and banks’ acceptance facilities. In financing activities and operating activities, the
Company’s banks require the Company to sign line of credit agreements and repay such facilities within one to two years. On the condition that the Company
can provide adequate mortgage security and has not violated the terms of the line of credit agreement, such facilities can be extended for another one to two
years.
The Company had short-term loans of $44.2 million, and bankers’ acceptance notes payable of $80.2 million as of December 31, 2020.
The Company currently expects to be able to obtain similar bank loans, i.e., RMB loans, and bankers’ acceptance facilities in the future if it can provide
adequate mortgage security following the termination of the above-mentioned agreements, see the table under “Bank Arrangements” below for more
information. If the Company is not able to do so, it will have to refinance such debt as it becomes due or repay that debt to the extent it has cash available from
operations or from the proceeds of additional issuances of capital stock. Due to a depreciation of assets, the value of the mortgages securing the above-
mentioned bank loans and banker's acceptances is expected to be reduced by approximately $16.3 million over the next 12 months. If the Company wishes to
maintain the same amount of bank loans and banker's acceptances in the future, it may be required by the banks to provide additional mortgages of $16.3
million as of the maturity date of such line of credit agreements, see the table under “Bank Arrangements” below for more information. The Company can still
obtain lines of credit with a reduction of $8.6 million, which is 52.9%, the mortgage ratio, of $16.3 million, if it cannot provide additional mortgages. The
Company expects that the reduction in bank loans will not have a material adverse effect on its liquidity.
38 | Page
Bank Facilities
As of December 31, 2020, the principal outstanding under the Company’s credit facilities and lines of credit was as follows (figures are in thousands of USD).
1. Comprehensive credit facilities
Bank
China Everbright Bank (1)
Due
Date
Amount
Available (3)
4,598
Mar 2021
Amount
Used (4)
Assessed
Mortgage
Value (5)
2,509
9,747
2. Comprehensive credit facilities
Shanghai Pudong Development Bank (2) Oct 2021
19,924
10,713
22,544
3. Comprehensive credit facilities
China CITIC Bank (2)
China CITIC Bank (2)
China CITIC Bank
Aug 2022
Aug 2021
Jun 2022
65,135
10,728
2,146
30,888
4,052
2,146
21,834
-
6,759
4. Comprehensive credit facilities
Hubei Bank
Mar 2022
26,054
15,636
71,448
5. Comprehensive credit facilities
Bank of Chongqing
Sep 2021
766
766
2,394
6. Comprehensive credit facilities
Bank of China (2)
Sep 2020
17,778
13,180
7. Comprehensive credit facilities
China Merchants Bank (2)
Oct 2021
22,989
-
-
-
8. Comprehensive credit facilities
Agricultural Bank of China (1)
Mar 2021
1,073
1,073
4,257
9. Comprehensive credit facilities
Total
Huishang Bank
May 2021
$
1,533
172,724 $
-
80,963 $
-
138,983
(1)
(2)
(3)
(4)
(5)
These facilities have expired. The Company is currently in the process of negotiating with these banks to renew the credit facilities.
The comprehensive credit facilities with Shanghai Pudong Development Bank are guaranteed by Henglong in addition to the above pledged assets.
The comprehensive credit facilities with China CITIC Bank are guaranteed by Henglong and Hubei Henglong in addition to the above pledged
assets. The comprehensive credit facilities with Bank of China are guaranteed by Hubei Henglong. The comprehensive credit facilities with China
Merchants Bank are guaranteed by Hubei Henglong.
“Amount available” is used for the drawdown of bank loans and issuance of bank notes at the Company’s discretion. If the Company elects to
utilize the facility by issuance of bank notes, additional collateral is requested to be pledged to the bank.
“Amount used” represents the credit facilities used by the Company for the purpose of bank loans or notes payable during the facility contract
period. The loans or notes payable under the credit facilities will remain outstanding regardless of the expiration of the relevant credit facilities
until the separate loans or notes payable expire. The amount used includes bank loans of $36.6 million, notes payable of $43.9 million and letter of
credit of $0.5 million as of December 31, 2020.
In order to obtain lines of credit, the Company needs to pledge certain assets to banks. As of December 31, 2020, the pledged assets included
property, plant and equipment and land use rights with assessed value of $139.0 million.
The Company may request the banks to issue notes payable or bank loans within its credit line using a 365-day revolving line.
39 | Page
The Company renewed its existing short-term loans and borrowed new loans during 2020 at annual interest rates ranging from 2.50% to 5.22%, and the
Company’s loan terms range from 9 months to 23 months. The large spread in interest rates was due to the different lenders (interest rates for government loans
are normally lower than for commercial bank loans). Pursuant to the comprehensive credit line arrangement, the Company pledged and guaranteed:
1. Land use rights and buildings with an assessed value of approximately $71.4 million as security for its revolving comprehensive credit facility with Hubei
Bank.
2. Buildings with an assessed value of approximately $22.6 million as security for its comprehensive credit facility with Shanghai Pudong Development Bank.
3. Land use rights and buildings with an assessed value of approximately $21.8 million as security for its comprehensive credit facility with China CITIC Bank
Wuhan branch.
4. Land use rights and buildings with an assessed value of approximately $6.8 million as security for its revolving comprehensive credit facility with China
CITIC Bank Shenyang Branch.
5. Land use rights and buildings with an assessed value of approximately $9.7 million as security for its comprehensive credit facility with China Everbright
Bank.
6. Buildings with an assessed value of approximately $2.4 million as security for its comprehensive credit facility with Bank of Chongqing.
7. Buildings with an assessed value of approximately $4.3 million as security for its comprehensive credit facility with Agricultural Bank of China.
40 | Page
Cash Requirements
The following table summarizes the Company’s expected cash outflows resulting from financial contracts and commitments. The Company has not included
information on its recurring purchases of materials for use in its manufacturing operations. These amounts are generally consistent from year to year, closely
reflecting the Company’s levels of production, and are not long-term in nature (being less than three months in length).
Payment Due Dates
(in thousands of USD)
Less than 1
More than 5
Total
year
1-3 years
3-5 years
Years
Short-term and long-term loans including
interest payable
Notes payable (1)
Taxes payable and withholding tax liabilities due to U.S. Tax Reform (See Note
21)
Obligation for investment contract (2)
Other contractual purchase commitments,
including service agreements
Total
$
45,320 $
80,173
26,693
2,697
$
45,320
80,173
2,809
2,697
22,287
177,170 $
21,047
152,046
$
$
- $
-
8,078
-
1,240
9,318 $
- $
-
15,806
-
-
15,806 $
-
-
-
-
-
-
(1)
Notes payable do not bear interest.
(2)
In April 2019, Hubei Henglong entered into an agreement with other parties and committed to contribute RMB 5.0 million, equivalent to
approximately $0.7 million, to Jiangsu Intelligent Networking Automotive Innovation Center Co. Ltd., “Jiangsu Intelligent”, representing 19.2% of
Jiangsu Intelligent’s shares. As of December 31, 2020, Hubei Henglong has completed a capital contribution of RMB 3.0 million, equivalent to
approximately $0.4 million. According to the agreement, the remaining capital commitment of RMB 2.0 million, equivalent to approximately $0.3
million, will be paid in 2021.
In November 2019, Hubei Henglong entered into an agreement with other parties and committed to purchase 70% of the shares of Hefei Senye Light
Plastic Technology Co., Ltd. for total consideration of RMB 33.6 million, equivalent to approximately $4.8 million. As of December 31, 2020, Hubei
Henglong has paid the amount of RMB 18.0 million, equivalent to approximately $2.6 million, which was reported in other non-current assets as the
transfer of shares had not been consummated. According to the agreement, the remaining consideration of RMB 15.6 million, equivalent to
approximately $2.4 million, will be paid in 2021.
41 | Page
Short-term and Long-term Loans
The following table summarizes the contract information of short-term and long-term borrowings between the banks, government and the Company as of
December 31, 2020 (figures are in thousands of USD).
Bank
Government
Agricultural Bank of
China (1)
China CITIC Bank (1)
China CITIC Bank (1)
Bank of China
China CITIC Bank
China CITIC Bank
China CITIC Bank
China CITIC Bank
China CITIC Bank
Bank of China
Financial Bureau of
Jingzhou Development
Zone
Financial Bureau of
Jingzhou Development
Zone
China CITIC Bank
China CITIC Bank
Bank of Chongqing
Bank of Chongqing
Bank of Chongqing
Total
Purpose
Working
Capital
Working
Capital
Working
Capital
Working
Capital
Working
Capital
Working
Capital
Working
Capital
Working
Capital
Working
Capital
Working
Capital
Working
Capital
Working
Capital
Working
Capital
Working
Capital
Working
Capital
Working
Capital
Working
Capital
Borrowing
Date
Borrowing
Term
(Months)
Annual
Interest
Rate
Mar 25, 2020
Mar 27, 2020
Mar 27, 2020
Apr 29, 2020
Apr 29, 2020
May 20, 2020
May 29, 2020
Jun 19, 2020
Jun 19, 2020
Jun 28, 2020
Aug 07, 2019
Sep 03, 2019
Sep 03, 2020
Sep 11, 2020
Sep 14, 2020
Sep 28, 2020
Dec 29, 2020
12
12
12
12
12
12
12
12
12
12
23
22
12
12
12
12
9
4.05%
2.50%
2.50%
3.92%
4.35%
4.35%
4.00%
2.50%
2.50%
3.80%
3.80%
3.80%
4.35%
5.22%
4.05%
4.05%
4.05%
(1) These bank loans were repaid between January and March 2021 when they became due.
Date of
Interest
Payment
Pay
monthly
Pay in
arrear
Pay in
arrear
Pay
monthly
Pay
monthly
Pay
monthly
Pay
monthly
Pay in
arrear
Pay in
arrear
Pay
monthly
Pay
annually
Pay
annually
Pay
monthly
Pay
monthly
Pay
monthly
Pay
monthly
Pay
monthly
Due Date
Mar 22, 2021
Mar 26, 2021
Mar 26, 2021
Apr 28, 2021
Apr 29, 2021
May 20, 2021
May 29, 2021
Jun 18, 2021
Jun 18, 2021
Jun 27, 2021
Amount
Payable on
Due Date
1,073
4,332
3,869
6,130
1,533
1,533
1,533
2,749
2,943
7,050
Jun 30, 2021
3,065
Jun 30, 2021
Sep 03, 2021
Sep 11, 2021
Sep 13, 2021
Sep 19, 2021
Sep 19, 2021
4,598
1,533
1,533
76
459
229
$
44,238
42 | Page
The Company must use the loans for the purpose described and repay the principal outstanding on the specified date in the table. If it fails to do so, it will be
charged additional 30% to 100% penalty interest.
The Company had complied with such financial covenants as of December 31, 2020.
Notes Payable
The following table summarizes the contract information of issuing notes payable between the banks and the Company as of December 31, 2020 (figures are in
thousands of USD):
Purpose
Term (Month)
Due Date
Amount Payable on
Due Date
Working Capital (1)
Working Capital (1)
Working Capital (1)
Working Capital
Working Capital
Working Capital
Total
6
6
6
6
6
6
Jan. 2021 $
Feb. 2021
Mar. 2021
Apr. 2021
May 2021
Jun. 2021
$
11,012
9,625
15,976
13,266
14,795
15,499
80,173
(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 may
have an adverse effect on the Company’s liquidity and capital resources. The Company has to deposit a sufficient amount of cash on the due date of notes
payable for payment to the suppliers. If the bank has advanced payment for the Company, it will be charged an additional 50% penalty interest. The Company
complied with such financial covenants as of December 31, 2020, and management believes it will continue to comply with them.
Cash flows
(a) Operating Activities
Net cash provided by operating activities for the year ended December 31, 2020 was $57.4 million, compared with $30.3 million for the year ended December
31, 2019, representing an increase of $27.1 million, which was mainly due to (1) the decrease in net income excluding non-cash items by $7.2 million offset by
(2) the increase in cash inflows from movements of operating assets and liabilities by $34.3 million.
43 | Page
(b) Investing Activities
The Company had net cash of $23.8 million used in investing activities for the year ended December 31, 2020, compared with $27.3 million in 2019,
representing a decrease in cash outflow of $3.5 million, which was mainly due to the net effect of (1) a decrease in the payment to acquire property, plant and
equipment and land use rights by $18.6 million, (2) an increase in purchase of short-term investments and long-term time deposits of $40.5 million, and (3) a
combination of other factors contributed an increase of cash inflows by $25.4 million, including an increase in proceeds from maturities of short-term
investments of $22.1 million, the decrease in government subsidy received for purchase of property, plant and equipment, and the increase in cash received
from the exit of long-term investments.
(c) Financing Activities
During the year ended December 31, 2020, the Company had net cash of $19.8 million used in financing activities, compared to $10.7 million in 2019,
representing an increase in outflow of $9.1 million, which was mainly due to the net effect of (1) a decrease in proceeds from bank loan by $17.3 million, (2) a
decrease in repayment of bank loans by $12.6 million, (3) an increase in payment to broker agents for repurchase of common stock by $1.7 million, and (4) a
decrease in cash received from capital contributions by non-controlling interest holder by $2.8 million.
OFF-BALANCE SHEET ARRANGEMENTS
At December 31, 2020 and 2019, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet
arrangements.
SUBSEQUENT EVENTS
None.
INFLATION AND CURRENCY MATTERS
China’s economy has experienced rapid growth recently, mostly through the issuance of debt. Debt-induced economic growth can lead to growth in the money
supply and rising inflation. If prices for the Company’s products rise at a rate that is insufficient to compensate for the rise in the cost of supplies, it may harm
the Company’s profitability. In order to control inflation, the Chinese government has imposed controls on bank credit, limits on loans for 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 bank would likely slow
economic activity in China which could, in turn, materially increase the Company’s costs and also reduce demand for the Company’s products.
Foreign operations are subject to certain risks inherent in conducting business abroad, including price and currency exchange controls, and fluctuations in the
relative value of currencies. During 2020, the Company mainly supplied products to North America and settled in cash in U.S. dollars. As a result, appreciation
or currency fluctuation of the RMB against the U.S. dollar would increase the cost of export products, and adversely affect the Company’s financial
performance.
In July 2005, the Chinese government adjusted its exchange rate policy from “Fixed Rate” to “Floating Rate.” During December 2019 to December 2020, the
exchange rate between RMB and U.S. dollar appreciated from RMB1.00 to $0.1433 to RMB1.00 to $0.1533. The appreciation of the RMB may continue.
Significant appreciation of the RMB is likely to increase the Company’s income generated from China.
44 | Page
RECENT ACCOUNTING PRONOUNCEMENTS
Information regarding new accounting pronouncements is included in Note 2 to the Consolidated Financial Statements.
SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES
The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amount of revenues and expenses during the reporting
periods. Management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on
various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or
conditions. The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s
consolidated financial statements.
The Company considers an accounting estimate to be critical if:
·
·
it requires the Company to make assumptions about matters that were uncertain at the time it was making the estimate; and
changes in the estimate or different estimates that the Company could have selected would have had a material impact on the Company’s financial
condition or results of operations.
The table below presents information about the nature and rationale for the Company critical accounting estimates:
Balance Sheet
Caption
Critical
Estimate
Item
Warranty
obligations
Accrued
liabilities and
other long-term
liabilities
Valuation of
long- lived
assets and
investments
Property, plant
and equipment,
intangible
assets and other
long-term
assets
Nature of Estimates Required
Assumptions/Approaches
Used
Estimating warranty requires the Company to
forecast the resolution of existing claims and
expected future claims on products sold. OEMs
are increasingly seeking to hold suppliers
responsible for product warranties, which may
impact the Company’s exposure to these costs.
The Company bases its estimate on
historical trends of units sold and
payment amounts, combined with its
current understanding of the status of
existing claims and discussions with its
customers.
Key Factors
·OEM sourcing
·OEM policy decisions
regarding warranty claims
The Company is required, from time-to-time, to
review the recoverability of certain of its assets
based on projections of anticipated future cash
flows, including future profitability assessments
of various product lines.
The Company estimates cash flows
using internal budgets based on recent
sales data, independent automotive
production volume estimates and
customer commitments.
·Future production estimates
·Customer preferences and
decisions
Accounts
receivable
Allowance for
doubtful
accounts
The Company is required, from time to time, to
review the credit of customers and make timely
provision of allowance for doubtful accounts.
The Company estimates the
·Customer credit
collectability of the receivables based
on the future cash flows using
historical experiences.
Inventory
Provision for
inventory
impairment
The Company is required, from time to time, to
The Company estimates cash flows
review the turnover of inventory based on
projections of anticipated future cash flows,
including provision of inventory impairment for
over market price and undesirable inventories.
using internal budgets based on recent
sales data, independent automotive
production volume estimates and
customer commitments.
·Future production estimates
·Customer preferences and
decisions
Deferred
income taxes
Recoverability
of deferred tax
assets
The Company is required to estimate whether
recoverability of its deferred tax assets is more
likely than not based on forecasts of taxable
earnings in the related tax jurisdiction.
The Company uses historical and
projected future operating results,
based upon approved business plans,
including a review of the eligible carry-
forward period, tax planning
opportunities and other relevant
considerations.
·Tax law changes
·Variances in future projected
profitability, including by
taxing entity
45 | Page
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is exposed to market risk from changes in interest rates and foreign currency exchange rates. For purposes of specific risk analysis, the Company
uses sensitivity analysis to determine the effects that market risk exposures may have.
FOREIGN CURRENCY RISK
The Company’s reporting currency is the U.S. dollar and the majority of its revenues will be settled in RMB and U.S. dollars. The Company’s currency
exchange rate risks come primarily from the sales of products to international customers. Most of the Company’s assets are denominated in RMB except for
part of cash and accounts receivable. As a result, the Company is exposed to foreign exchange risk as its revenues and results of operations may be affected by
fluctuations in the exchange rate between the U.S. dollar and the RMB.
The value of the RMB fluctuates and is affected by, among other things, changes in China's political and economic conditions. In addition, the RMB is not
readily convertible into U.S. dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the Bank of China or
other banks authorized to buy and sell foreign currencies at the exchange rate quoted by the People’s Bank of China. The conversion of RMB into foreign
currencies such as the U.S. dollar has been generally based on rates set by the People's Bank of China, which are set daily based on the previous day's interbank
foreign exchange market rates and current exchange rates on the world financial markets. On December 31, 2020 and 2019, the exchange rates of RMB against
U.S. dollar were RMB1.00 to $0.1533 and RMB1.00 to $0.1436, respectively. Any significant future appreciation of the RMB is likely to decrease the
Company’s profits generated from overseas.
In order to mitigate the currency exchange rate risk, the Company and its international customers established a price negotiation mechanism that provides that,
if the currency exchange rate fluctuation is more than 8% since the last price negotiation, the Company and the customers would adjust the prices for future
sales. Normally the adjustment to future sales prices would reflect half of the impact from the change in exchange rate.
CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company does
not require collateral or other security to support client receivables since most of its customers are large, well-established companies. The Company's credit risk
is also mitigated because its customers are all selected enterprises supported by the local government. One customer, Fiat Chrysler North America, accounted
for more than 10% (23.6%) of the Company’s consolidated revenues in 2020. The Company maintains an allowance for doubtful accounts for any potential
credit losses related to its trade receivables. The Company does not use foreign exchange contracts to hedge the risk in receivables denominated in foreign
currencies and the Company does not hold or issue derivative financial instruments for trading or speculative purposes.
46 | Page
INTEREST RATE RISK
The Company’s exposure to changes in interest rates results primarily from its credit facility borrowings. As of December 31, 2020, the Company had nil of
outstanding indebtedness, which is subject to interest rate fluctuations.
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 61.
(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 items
headed “Basic” and “Diluted”):
Net sales
Gross profit
Income/(loss) from operations
Net (loss)/income
Net loss attributable to non-controlling
interest
Net (loss)/income attributable to parent
company’s common shareholders
Net (loss)/income attributable to parent
company’s common shareholders per
share-
Basic
Diluted
$
First
2020
73,555 $
11,152
1,012
(628)
2019
109,193 $
14,045
1,036
1,223
Quarterly Results of Operations
Second
Third
2020
2019
2020
2019
83,184 $ 105,748 $ 114,417 $ 100,542 $
17,317
4,439
4,201
15,185
2,625
2,118
13,575
58
1,513
7,831
(5,192)
(4,240)
Fourth
2019
2020
146,480 $ 115,944
16,804
22,783
(1,914)
(4,027)
843
(6,916)
(600)
(243)
(142)
(332)
(848)
(113)
(3,710)
(889)
(28)
1,466
(4,098)
2,450
2,358
4,314
(3,212)
1,732
$
$
- $
- $
0.05 $
0.05 $
(0.13) $
(0.13) $
0.08 $
0.08 $
0.08 $
0.08 $
0.14 $
0.14 $
(0.10) $
(0.10) $
0.06
0.06
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
The Company’s management, under the supervision and with the participation of its chief executive officer and chief financial officer, Messrs. Wu Qizhou and
Li Jie, respectively, evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2020, the end of the period covered by
this Report. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a
company in the reports, such as this Form 10-K, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure
that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the
company’s management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Based on that evaluation, Messrs. Wu and Li concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2020.
47 | Page
Management’s Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, is a process designed by, or under
the supervision of, the chief executive officer and chief financial officer and effected by the board of directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external reporting purposes
in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:
a.
pertain to the maintenance of records that, in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets;
b.
c.
provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance
with generally accepted accounting principles, and that the Company’s receipts and expenditures are being made only in accordance with appropriate
authorization of the Company’s management and board of directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the consolidated financial statements.
In making its assessment of internal control over financial reporting, management, under the supervision and with the participation of the chief executive
officer and chief financial officer, used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in "Internal
Control—Integrated Framework (2013)."
Management has assessed the effectiveness of internal control over financial reporting as of December 31, 2020 and determined that internal control over
financial reporting was effective as of December 31, 2020.
This report does not include an auditors' report on the effectiveness of internal control over financial reporting due to SEC rules that exempt smaller reporting
companies such as CAAS from providing such a report.
Inherent Limitations on Effectiveness of Controls
A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be
met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their
costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to
error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. Projections of any
evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies or procedures.
48 | Page
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three month ended December 31, 2020 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
PART III
The following table and text set forth the names and ages of all directors and executive officers of the Company as of December 31, 2020. The Board of
Directors is comprised of only one class. All of the directors will serve until the next annual meeting of stockholders and until their successors are elected and
qualified, or until their earlier death, retirement, resignation or removal. Also provided herein are brief descriptions of the business experience of each director
and executive officer during the past five years and an indication of directorships held by each director in other companies subject to the reporting requirements
under the federal securities laws.
Name
Age
Position(s)
Hanlin Chen
Tong Kooi Teo
Guangxun Xu
Heng Henry Lu
Qizhou Wu
Jie Li
Andy Tse
Yijun Xia
Haimian Cai
63
64
70
55
56
51
50
58
57
Chairman of the Board
Director
Director
Director
Chief Executive Officer and Director
Chief Financial Officer
Senior Vice President
Vice President
Vice President
49 | Page
BIOGRAPHIES OF DIRECTORS AND EXECUTIVE OFFICERS
Directors
Hanlin Chen has served as the chairman of the board of directors and an executive officer since March 2003. Since January 2013, Mr. Chen has been a
standing committee member of the Chinese People’s Political Consultative Conference and vice president of Foreign Investors Association of Hubei Province.
From 1993 to 1997, Mr. Chen was the general manager of Shashi Jiulong Power Steering Gears Co., Ltd. Since 1997, he has been the chairman of the Board of
Henglong Automotive Parts, Ltd. Mr. Hanlin Chen is the brother-in-law of the Company’s senior vice president, Mr. Andy Tse.
Qizhou Wu has served as a director since March 2003 and as the chief executive officer of the Company since September 2007. He served as chief operating
officer from 2003 to 2007. He was the executive general manager of Shashi Jiulong Power Steering Gears Co., Ltd. from 1993 to 1999 and the general manager
of Henglong Automotive Parts Co., Ltd. from 1999 to 2002. Mr. Wu graduated from Tsinghua University in Beijing with a Master’s degree in automobile
engineering.
Heng Henry Lu has served as an independent director of the Company since July 2019. He has been an adviser to NBS Group since February 2016. Dr. Lu
was a partner of SVC China from 2012 to 2014 and Chief Representative of William Blair & Company, L.L.C., Shanghai Representative Office from 2006 to
2011. Prior to that, Dr. Lu was with McKinsey & Company advising global and domestic companies on their growth and financial strategies. Dr. Lu received a
Doctor of Philosophy from Columbia University in 1997 and a Master of Business Administration from University of Chicago Business School in 2000.
Tong Kooi Teo has served as an independent director of the Company since July 2019. He is the Chief Executive Officer of DPS Corporate Advisory Company
Limited, Beijing, China, a member of Head International Group, China since March 2018. He is non-executive Chairman of Rubberex Corporation (M) Bhd, a
company listed on the Kuala Lumpur Stock Exchange since September 2020. He is a Non-Executive Director of Guocoland (China) Limited since February
2018. He was the Managing Director of Guoco Investment (China) Ltd., Hong Kong from 2014 to 2018, after serving as the Group Managing Director of
Guocoland (China) Ltd. from 2012 to 2014. Prior to that, Mr. Teo was the Chief Executive Officer (China and Vietnam Operations) of WCT Holdings Bhd,
Malaysia from 2011 to 2012. He was the Chief Executive Officer of Hong Leong Asia Ltd (HLA), which is listed on the Singapore Stock Exchange from 2004
to 2010. From 2003 to 2004, Mr. Teo was the Managing Director of Tasek Corporation Bhd, Malaysia, which is listed on the Kuala Lumpur Stock Exchange.
From 1994 to 2002, Mr. Teo was General Manager of Corporate Banking Division and Chief Operating Officer of Hong Leong Bank Malaysia. From 1989 to
1994, Mr. Teo was with Deutsche Bank Malaysia where his last held position was Head of Corporate Banking.
Guangxun Xu has served as an independent director of the Company since December 2009. He is a member of the nominating and compensation committees,
and the chairman of the audit committee of the Board of Directors. Mr. Xu has been the Chief Representative of NASDAQ in China and a managing director of
the NASDAQ Stock Market International, Asia for over 10 years. With a professional career in the finance field spanning over 30 years, Mr. Xu’s practice
focuses 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-IPO IR compliance and risk control.
50 | Page
Executive Officers
Jie Li has served as the chief financial officer since September 2007. Prior to that position he served as the corporate secretary from December 2004. Prior to
joining the Company in September 2003, Mr. Li was the assistant president of Jingzhou Jiulong Industrial Inc. from 1999 to 2003 and the general manager of
Jingzhou Tianxin Investment Management Co. Ltd. from 2002 to 2003. Mr. Li has a Bachelor's degree from the University of Science and Technology of
China. He also completed his graduate studies in economics and business management at the Hubei Administration Institute.
Andy Tse has served as a senior vice president of the Company since March 2003. He has also served as chairman of the board of Shenyang. He was the vice
GM of Jiulong from 1993 to 1997 and the vice GM of Henglong. Mr. Tse has over 10 years of experience in automotive parts sales and strategic development.
Mr. Tse has an MBA from the China People University. He is brother in-law to Hanlin Chen.
Yijun Xia has served as a vice president of the Company since December 2009. He also served as the general manager of Henglong from April 2005 to
December 2011. Prior to that position he served as the Vice-G.M. of Henglong from December 2002. Mr. Xia graduated from Wuhan University of Water
Transportation Engineering with a bachelor degree in Metal Material and Heat Treatment.
Haimian Cai was an independent director of the Company from September 2003 to December 2009, and also a member of the Company’s Audit,
Compensation and Nominating Committees. Dr. Cai is a technical specialist in the automotive industry. Prior to that, Dr. Cai was a staff engineer in ITT
Automotive Inc. Dr. Cai has written more than fifteen technical papers and co-authored a technical book regarding the Powder Metallurgy industry for
automotive application. Dr. Cai has more than ten patents including pending patents. Dr. Cai holds a B.S. Degree in Automotive Engineering from Tsinghua
University and a M.S. and Ph. D. in manufacturing engineering from Worcester Polytechnic Institute. Since December 2009, Mr. Cai has not served as
independent director and a member of the Company’s Audit Committee, Compensation and Nominating Committees, because he was nominated as vice
president of the Company.
BOARD COMPOSITION AND COMMITTEES
Audit Committee and Independent Directors
The Company has a standing Audit Committee of the Board of Directors established in accordance with Section 3(a)(58)(A) of the Exchange Act, as amended.
The Audit Committee is operated under a written charter. The Audit Committee consists of the following individuals, all of whom the Company considers to be
independent, as defined under the SEC’s rules and regulations and the Nasdaq’s definition of independence: Mr. Tong Kooi Teo, Mr. Guangxun Xu and Mr.
Heng Henry Lu. Mr. Guangxun Xu is the Chairman of the Audit Committee. The Board has determined that Mr. Guangxun Xu is the audit committee financial
expert, as defined in Item 407(d)(5) of Regulation S-K, serving on the Company’s Audit Committee.
Compensation Committee
The Company has a standing Compensation Committee of the Board of Directors. The Compensation Committee is responsible for determining compensation
for the Company’s executive officers. Three of the Company’s independent directors, as defined under the SEC’s rules and regulations and the Nasdaq’s
definition of independence, Mr. Tong Kooi Teo, Mr. Guangxun Xu and Mr. Heng Henry Lu serve on the Compensation Committee. Mr. Tong Kooi Teo is the
Chairman of the Compensation Committee. The Board has determined that all members of the Compensation Committee are independent directors under the
rules of the Nasdaq Stock Market, as applicable. The Compensation Committee administers the Company’s benefit plans, reviews and administers all
compensation arrangements for executive officers, and establishes and reviews general policies relating to the compensation and benefits of the Company’s
officers and employees. The Compensation Committee operates under a written charter that is made available on the Company’s website, www.caasauto.com.
51 | Page
The Company’s Compensation Committee is empowered to review and approve the annual compensation and compensation procedures for the executive
officers of the Company. The primary goals of the Compensation Committee of the Company’s Board of Directors with respect to executive compensation are
to attract and retain the most talented and dedicated executives possible and to align executives’ incentives with stockholder value creation. The Compensation
Committee evaluates individual executive performance with a goal of setting compensation at levels the committee believes are comparable with executives in
other companies of similar size and stage of development operating in similar industry while taking into account the Company’s relative performance and its
strategic goals.
The Company has not retained a compensation consultant to review its policies and procedures with respect to executive compensation. The Company conducts
an annual review of the aggregate level of its executive compensation, as well as the mix of elements used to compensate its executive officers. The Company
compares compensation levels with amounts currently being paid to executives in its industry and most importantly with local practices in China. The
Company is satisfied that its compensation levels are competitive with local conditions.
Nominating Committee
The Company has a standing Nominating Committee of the Board of Directors. Director candidates are nominated by the Nominating Committee. The
Nominating Committee will consider candidates based upon their business and financial experience, personal characteristics, and expertise that are
complementary to the background and experience of other Board members, willingness to devote the required amount of time to carry out the duties and
responsibilities of Board membership, willingness to objectively appraise management performance, and any such other qualifications the Nominating
Committee deems necessary to ascertain the candidates’ ability to serve on the Board. The Nominating Committee will not consider nominee recommendations
from security holders, other than the recommendations received from a security holder or group of security holders that beneficially owned more than 5 percent
of the Company’s outstanding common stock for at least one year as of the date the recommendation is made. Three of the Company’s independent directors, as
defined under the SEC’s rules and regulations and the Nasdaq’s definition of independence, Mr. Tong Kooi Teo, Mr. Guangxun Xu and Mr. Heng Henry Lu,
serve on the Nominating Committee. Mr. Xu is the Chairman of the Nominating Committee.
Stockholder Communications
Stockholders interested in communicating directly with the Board of Directors, or individual directors, may email the Company’s independent director Mr.
Guangxun Xu at guangxunxu@hotmail.com. Mr. Xu will review all such correspondence and will regularly forward to the board of directors of the Company
copies of all such correspondence that deals with the functions of the Board or committees thereof or that he otherwise determines requires their attention.
Directors may at any time review all of the correspondence received that is addressed to members of the board of directors of the Company and request copies
of such correspondence. Concerns relating to accounting, internal controls or auditing matters will immediately be brought to the attention of the Audit
Committee and handled in accordance with procedures established by the Audit Committee with respect to such matters.
52 | Page
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 and Conduct
was filed as an exhibit to the Form 10-K for the year ended December 31, 2009, which was filed with the Securities and Exchange Commission on March 25,
2010.
ITEM 11. EXECUTIVE COMPENSATION.
COMPENSATION DISCUSSION AND ANALYSIS
In 2003, the Board of Directors established a Compensation Committee consisting only of independent Board members, which is responsible for setting the
Company’s policies regarding compensation and benefits and administering the Company’s benefit plans. At the end of fiscal year 2020, the Compensation
Committee consisted of Mr. Tong Kooi Teo, Mr. Guangxun Xu and Mr. Heng Henry Lu. The members of the Compensation Committee approved the amount
and form of compensation paid to executive officers of the Company and set the Company’s compensation policies and procedures during these periods.
The primary goals of the Company’s compensation committee with respect to executive compensation are to attract and retain highly talented and dedicated
executives and to align executives’ incentives with stockholder value creation.
The Compensation Committee will conduct an annual review of the aggregate level of the Company’s executive compensation, as well as the mix of elements
used to compensate the Company’s executive officers. The Company compares compensation levels with amounts currently being paid to executives at similar
companies in the same area and the same industry. Most importantly, the Company compares compensation levels with local practices in China. The Company
believes that its compensation levels are competitive with local conditions.
Elements of Compensation
The Company’s executive compensation consists of the following elements:
Base Salary
In determining the amount of base salaries for our named executive officers (“Named Executive Officers”), the Compensation Committee strives to establish
base salaries that are similar to those paid by other companies to executives in similar positions and with similar responsibilities. Base salaries are adjusted
from time to time to realign salaries with market levels after considering individual responsibilities, performance and experience. The Compensation
Committee established a salary structure to determine base salaries and is responsible for initially setting executive officer compensation in employment
arrangements with each individual. The base salary amounts are intended to reflect the Company’s philosophy that the base salary should attract experienced
individuals who will contribute to the success of the Company’s business goals and represent cash compensation that is commensurate with the compensation
of individuals at similarly situated companies.
53 | Page
The Company’s Board of Directors and Compensation Committee have approved the current salaries for executives: RMB 2.5 million (equivalent to
approximately $0.38 million) for the Chairman, RMB 1.6 million (equivalent to approximately $0.25 million) for the CEO and RMB 1.0 million (equivalent to
approximately $0.15 million) individually for other officers in 2020.
Performance Bonus
The Company did not have any performance bonus plan in 2020.
Stock Option Awards
The stock options plan proposed by management, which aims to incentivize and retain core employees, to meet employees’ benefits, the Company’s long term
operating goals and stockholder benefits, was approved at the Annual Meeting of Stockholders held on June 28, 2005, and extended for ten years at the Annual
Meeting of Stockholders held on September 16, 2014. The maximum common shares available for issuance under the plan is 2,200,000. The term of the plan
was extended to June 27, 2025.
There were no stock options granted to management in 2020.
Other Compensation
Other than the base salary for the Company’s Named Executive Officers, the performance bonus and the stock option awards referred to above, the Company
does not have any other benefits and perquisites for its Named Executive Officers. However, the Compensation Committee in its discretion may provide
benefits and perquisites to these executive officers if it deems advisable to do so.
54 | Page
Compensation Tables
Executive Officers
The compensation that Named Executive Officers received for their services for fiscal years 2020 and 2019 were as follows (figures are in thousands of USD):
Name and principal position
Hanlin Chen (Chairman)
Qizhou Wu (CEO)
Jie Li (CFO)
Haimian Cai (Vice President)
Year
2020
2019
2020
2019
2020
2019
2020
2019
$
$
$
$
$
$
$
$
Salary (1)
Bonus (2)
330 $
312 $
220 $
208 $
132 $
125 $
337 $
327 $
Option Awards (3)
- $
- $
- $
- $
Total
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
- $
330
312
220
208
132
125
337
327
(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.
Compensation for Directors
Based on the number of the board of directors’ service years, workload and performance, the Company decides on their pay. The management believes that the
pay for the members of the Board of Directors was appropriate as of December 31, 2020. The compensation that directors received for serving on the Board of
Directors for fiscal year 2020 was as follows (figures are in thousands of USD):
Tong Kooi Teo
Guangxun Xu
Heng Henry Lu
Name
Fees earned or paid in cash Option awards (1)
$
$
$
- $
- $
- $
30 $
59 $
30 $
Total
30
59
30
(1)
Other than the cash payment based on the number of a director’s service years, workload and performance, the Company grants option awards to each
director every year. In accordance with ASC Topic 718, the cost of the above mentioned stock options issued to directors was measured on the grant
date based on their fair value. The fair value is determined using the Black-Scholes option pricing model and certain assumptions. The Company did
not grant option awards to its directors in 2020.
The cost of the above-mentioned compensation paid to directors was measured based on investment, operating, technology, and consulting services they
provided. All other directors did not receive compensation for their service on the Board of Directors.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
As used in this section, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, as consisting of sole or shared voting power, including the power to vote or direct the vote, and/or sole or shared investment power, including the
power to dispose of or direct the disposition of, with respect to the security through any contract, arrangement, understanding, relationship or otherwise, subject
to community property laws where applicable. The percentage ownership is based on 30,851,776 shares of common stock outstanding at December 31, 2020
(exclusive of 1,486,526 shares of treasury stock).
55 | Page
Name/Title
Total Number of Shares Percentage Ownership
Hanlin Chen, Chairman (1)
Li Ping Xie (1)
Wiselink Holdings Limited, “Wiselink” (1)
Qizhou Wu, CEO and Director
Guangxun Xu, Director
Tong Kooi Teo, Director
Heng Henry Lu, Director
Haimian Cai, VP
Jie Li, CFO (2)
Tse Andy, Sr. VP
Yijun Xia, VP
All Directors and Executive Officers (9 persons)
17,849,014
17,849,014
17,849,014
1,325,136
-
-
-
-
91,031
400,204
17,200
19,682,585
57.85%
57.85%
57.85%
4.30%
-%
-%
-%
-%
0.30%
1.30%
0.06%
63.80%
(1) These 17,849,014 shares of common stock include: (i) 13,322,547 shares of common stock beneficially owned by Mr. Hanlin Chen; (ii) 1,502,925 shares
of common stock beneficially owned by Ms. Liping Xie, Mr. Hanlin Chen’s wife; and (iii) 3,023,542 shares of common stock beneficially owned by
Wiselink, a company controlled by Mr. Hanlin Chen.
(2) Includes 50,000 shares held as nominee for Jingzhou Jiulong Machinery and Electronic Manufacturing Co., Ltd. On October 13, 2014, the Company
issued 4,078,000 of its common shares in a private placement to nominee holders of Jingzhou Jiulong Machinery and Electronic Manufacturing Co., Ltd.
for the acquisition of the 19.0% and 20.0% equity interest in Jiulong and Henglong held by Jingzhou Jiulong Machinery and Electronic Manufacturing
Co., Ltd., respectively. All of the nominee holders of Jingzhou Jiulong Machinery and Electronic Manufacturing Co., Ltd. are unrelated 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 Related
Transactions) and Note 24 (Related Party Transactions) to the consolidated financial statements in this Report.
The Company’s Audit Committee’s charter provides that one of its responsibilities is to review and approve related party transactions defined as those
transactions required to be disclosed under Item 404 of Regulation S-K of the rules and regulations under the Exchange Act. The Company has a formal written
set of policies and procedures for the review, approval or ratification of related party transactions. Where a related party transaction is identified, the Audit
Committee reviews and, where appropriate, approves the transaction based on whether it believes that the transaction is at arm’s length and contains terms that
are no less favorable than what the Company could have obtained from an unaffiliated third party.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following table sets forth the aggregate fees for professional audit services rendered by PricewaterhouseCoopers for the audit of the Company’s annual
financial statements and other services provided in the fiscal years 2020 and 2019. The Audit Committee has approved the following fees (figures are in
thousands of USD):
Audit Fees
AUDIT COMMITTEE’S PRE-APPROVAL POLICY
Fiscal Year Ended
2020
2019
$
638 $
670
During the fiscal years ended December 31, 2020 and 2019, the Audit Committee of the Board of Directors adopted policies and procedures for the pre-
approval of all audit and non-audit services to be provided by the Company’s independent auditor and for the prohibition of certain services from being
provided by the independent auditor. The Company may not engage the Company’s independent auditor to render any audit or non-audit service unless the
service is approved in advance by the Audit Committee or the engagement to render the service is entered into pursuant to the Audit Committee’s pre-approval
policies and procedures. On an annual basis, the Audit Committee may pre-approve services that are expected to be provided to the Company by the
independent auditor during the fiscal year. At the time such pre-approval is granted, the Audit Committee specifies the pre-approved services and establishes a
monetary limit with respect to each particular pre-approved service, which limit may not be exceeded without obtaining further pre-approval under the policy.
For any pre-approval, the Audit Committee considers whether such services are consistent with the rules of the Securities and Exchange Commission on
auditor independence.
56 | Page
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a)(1) FINANCIAL STATEMENTS
PART IV
1. Report of Independent Registered Public Accounting Firm, PricewaterhouseCoopers Zhong Tian LLP
2. Consolidated Balance Sheets as of December 31, 2020 and 2019
3. Consolidated Statements of Income or Loss for the years ended December 31, 2020 and 2019
4. Consolidated Statements of Comprehensive Income or Loss for the years ended December 31, 2020 and 2019
5. Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2020 and 2019
6. Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019
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 are
incorporated by reference.
Exhibit
Number
Description
3.1(i)
Certificate of Incorporation (incorporated by reference to Exhibit 3(i) to the Company's Form 10-SB filed on August 27, 2001)
3.1.1(i)
Certificate of Amendment of Certificate of Incorporation, filed May 19, 2003 (incorporated by reference to Exhibit 4.1.1 to the Company’s
Registration Statement on Form S-3 (File No. 333-133331) filed on April 17, 2006)
3.1(ii)
Bylaws (incorporated by reference to Exhibit 3(ii) to the Company's Form 10-SB filed on August 27, 2001)
4.1
Description of the Company’s Securities*
10.1
Joint-venture Agreement, dated March 31, 2006, as amended on May 2, 2006, between Great Genesis Holdings Limited and Wuhu Chery
Technology Co., Ltd. (incorporated by reference to Exhibit 10.8 to the Company’s Form 10-Q Quarterly Report filed on May 10, 2006)
10.2
10.3
Translation of the Equity Transfer Agreement dated March 31, 2008 in English (incorporated by reference to exhibit 99.1 to the Company’s Form 8-
K filed on April 2, 2008) Translation of the Equity Transfer Agreement dated March 31, 2008 in English (incorporated by reference to Exhibit 99.1
of the Company’s Form 8-K filed on April 2, 2008)
English Translation of the Sino-Foreign Equity Joint Venture Contract dated January 24, 2010 between Great Genesis Holdings Limited and Beijing
Hainachuan Auto Parts Co., Ltd. (incorporated by reference to Exhibit 10.21 to the Company’s Form 10-K for the year ended December 31, 2010
filed on March 25, 2010)
57 | Page
10.4
10.5
Stock Exchange Agreement dated August 11, 2014 by and among Jingzhou City Jiulong Machinery Electricity Manufacturing Co., Ltd., China
Automotive Systems, Inc. and Hubei Henglong Automotive System Group Co., Ltd. (incorporated by reference to Exhibit 10.2 to the Company’s
Form 10-Q Quarterly Report filed on August 13, 2014)
English translation of Joint Venture Contract, dated as of April 27, 2018, by and between Hubei Henglong Automotive System Group Co., Ltd. and
KYB (China) Investment Co., Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 27,
2018)
21
Schedule of Subsidiaries (incorporated by reference to Note 1 of the consolidated financial statements of the Company in this Annual Report 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, 2020, filed on
March 30, 2021, formatted in Extensible Business Reporting Language (XBRL):
(i)
(ii)
Consolidated Balance Sheets;
Consolidated Statements of Income or Loss;
(iii)
Consolidated Statements of Comprehensive Income or Loss;
(iv)
Consolidated Statements of Changes in Stockholders’ Equity;
(v)
Consolidated Statements of Cash Flows; and
(vi)
Related notes.
*
Filed herewith.
58 | Page
ITEM 16.
FORM 10-K SUMMARY
Not Applicable.
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 its
behalf by the undersigned, thereunto duly authorized.
Dated: March 30, 2021
/s/ Qizhou Wu
CHINA AUTOMOTIVE SYSTEMS, INC.
Name: Qizhou Wu
Title: Chief Executive Officer and President
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
and agent, 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 the
same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all
that 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 and in
the capacities and on the dates indicated.
Dated: March 30, 2021
Dated: March 30, 2021
Dated: March 30, 2021
Dated: March 30, 2021
Name:
Title:
Name:
Title:
Name:
Title:
Name:
Title:
/s/ Hanlin Chen
Hanlin Chen
Chairman and Director
/s/ Qizhou Wu
Qizhou Wu
Chief Executive Officer, President and Director
(Principal Executive Officer)
/s/ Jie Li
Jie Li
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
/s/ Tong Kooi Teo
Tong Kooi Teo
Director
59 | Page
Dated: March 30, 2021
Dated: March 30, 2021
Name:
Title:
Name:
Title:
/s/ Guangxun Xu
Guangxun Xu
Director
/s/ Heng Henry Lu
Heng Henry Lu
Director
60 | Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO BOARD OF DIRECTORS AND STOCKHOLDERS OF
CHINA AUTOMOTIVE SYSTEMS, INC.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of China Automotive Systems, Inc. and its subsidiaries (the “Company”) as of December 31,
2020 and 2019, and the related consolidated statements of income or loss, of comprehensive income or loss, of changes in stockholders’ equity and of cash
flows for the years then ended, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its
operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principles
As discussed in Notes 2 and 3 to the consolidated financial statements, the Company changed the manner in which it accounts for current expected credit losses
on certain financial instruments in 2020.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or
fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we
are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
61 | Page
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated
or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements
and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our
opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of unlisted investments of limited partnerships
As described in Notes 2 and 8 to the consolidated financial statements, as of December 31, 2020, the Company’s long-term investments include investments in
limited partnerships with an aggregated amount of $42.4 million which are accounted for using equity method. These limited partnerships are venture capital
funds. They accounted for their investments in private companies at fair value classified under Level 3 in the fair value hierarchy (the “Level 3 Investments”).
The fair value of the Level 3 Investments were determined using valuation techniques based on market approach or income approach with unobservable inputs,
which required significant judgment made by management with respect to the assumptions and estimates for revenue growth rate, discount rate, price-to-
earnings ratio, price-to-book ratio, lack of marketability discounts, and expected volatility. Such fair value of Level 3 Investments was reflected in the equity in
earnings of affiliated companies of the consolidated statements of income or loss and the carrying amount of the Company’s long-term investments under the
equity method accounting.
The principal considerations for our determination that performing procedures relating to the valuation of unlisted investments of limited partnerships is a
critical audit matter are (i) there was significant judgment made by management to determine the fair value of these investments using valuation techniques
with unobservable inputs, which in turn led to a high degree of auditor judgment and subjectivity in designing and applying procedures relating to evaluating
the reasonableness of management’s significant assumptions and estimates; and (ii) the audit effort involved the use of professionals with specialized skill and
knowledge in evaluating certain audit evidence.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated
financial statements. These procedures included testing the effectiveness of controls relating to management’s determination of the fair values of the Level 3
Investments, including controls over the Company’s development of the significant assumptions and estimates related to the fair value measurements. These
procedures also included, among others, reading the investment agreements, testing management’s process for determining the fair value measurements of the
Level 3 Investments, evaluating the appropriateness of the valuation models, testing the completeness, accuracy, and relevance of underlying data used, and
evaluating the reasonableness of significant assumptions and estimates used by management, including the revenue growth rate, discount rate, price-to-earnings
ratio, price-to-book ratio, lack of marketability discounts and expected volatility. Evaluating management’s assumptions and estimates for the revenue growth
rate involved considering the past performance of the investees’ businesses, as well as economic and industry forecasts. Professionals with specialized skill and
knowledge were used to assist in evaluating the appropriateness of the Company’s valuation approach and the reasonableness of management’s assumptions
and estimates for the discount rate, price-to-earnings ratio, price-to-book ratio, lack of marketability discounts and expected volatility.
/s/ PricewaterhouseCoopers Zhong Tian LLP
Shanghai, the People’s Republic of China
March 30, 2021
We have served as the Company's auditor since 2010.
63 | Page
China Automotive Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands of USD, except share and per share amounts)
$
ASSETS
Current assets:
Cash and cash equivalents
Pledged cash
Short-term investments
Accounts and notes receivable, net - unrelated parties (Allowance for credit losses of $9,853 and $2,379, respectively)
Accounts and notes receivable, net - related parties (Allowance for credit losses of $1 and nil, respectively)
Advance payments and others, net - unrelated parties (Allowance for credit losses of $58 and $73, respectively)
Advance payments and others - related parties
Inventories
Total current assets
Non-current assets:
Property, plant and equipment, net
Land use rights, net
Intangible assets, net
Operating lease assets
Long-term time deposits
Other receivables, net (Allowance for credit losses of $58 and $89, respectively)
Advance payment for property, plant and equipment - unrelated parties
Advance payment for property, plant and equipment - related parties
Long-term investments
Deferred tax assets
Other non-current assets
Total assets
$
$
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Bank and government loans
Accounts and notes payable - unrelated parties
Accounts and notes payable - related parties
Customer deposits
Accrued payroll and related costs
Accrued expenses and other payables
Accrued pension costs
Taxes payable
Operating lease liabilities - current portion
Amounts due to shareholders/directors
Advances payable (current portion)
Total current liabilities
Long-term liabilities:
Long-term government loan
Advances payable
Operating lease liabilities - non-current portion
Other long-term payable
Deferred tax liabilities
Long-term taxes payable
Total liabilities
Commitments and Contingencies (Note 25)
Mezzanine equity:
Redeemable non-controlling interests
Stockholders’ Equity
Common stock, $0.0001 par value - Authorized - 80,000,000 shares Issued - 32,338,302 and 32,338,302 shares at
December 31, 2020 and 2019, respectively
Additional paid-in capital
Retained earnings-
Appropriated
December 31,
2020
2019
97,248 $
30,813
10,139
216,519
17,621
14,471
522
88,325
475,658
141,004
10,774
1,730
257
4,688
179
3,615
3,284
49,766
13,846
2,759
707,560 $
44,238 $
212,522
12,730
1,482
10,213
55,607
3,192
13,149
122
344
885
354,484
-
3,722
149
1,126
4,280
23,884
76,715
29,688
5,832
211,841
21,164
11,855
1,287
82,931
441,313
140,481
10,346
1,352
376
-
307
6,157
2,311
39,642
15,291
2,580
660,156
46,636
180,175
6,492
1,303
8,400
45,341
3,161
11,493
116
309
353
303,779
7,167
3,486
271
4,948
4,253
26,693
387,645
350,597
523
-
3
64,273
3
64,466
11,303
11,265
Unappropriated
Accumulated other comprehensive income/(loss)
Treasury stock - 1,486,526 and 1,164,257 shares at December 31, 2020 and 2019, respectively
Total parent company stockholders’ equity
Non-controlling interests
Total stockholders’ equity
Total liabilities, mezzanine equity and stockholders’ equity
215,491
17,413
(5,261)
303,222
16,170
319,392
707,560 $
$
The accompanying notes are an integral part of these consolidated financial statements.
221,298
(3,462)
(4,261)
289,309
20,250
309,559
660,156
64 | Page
China Automotive Systems, Inc. and Subsidiaries
Consolidated Statements of Income or Loss
(In thousands of USD, except share and per share amounts)
Net product sales ($53,222 and $50,740 sold to related parties for the years ended December 31, 2020 and
2019)
Cost of products sold ($23,879 and $23,814 purchased from related parties for the years ended December
31, 2020 and 2019)
Gross profit
Net gain on other sales
Operating expenses:
Selling expenses
General and administrative expenses
Research and development expenses
Total operating expenses
Operating (loss)/income
Other income, net
Interest expense
Financial (expense)/income, net
(Loss)/income before income tax expenses and equity in earnings of affiliated companies
Less: Income taxes
Add: Equity in earnings of affiliated companies
Net (loss)/income
Net loss attributable to non-controlling interest
Accretion to redemption value of redeemable non-controlling interests
Net (loss)/income attributable to parent company’s common shareholders
Net (loss)/income attributable to parent company’s common shareholders per share -
Basic
Diluted
Weighted average number of common shares outstanding -
Basic
Diluted
Year Ended December 31,
2020
2019
$
417,636 $
362,295
55,341
4,320
14,506
27,581
25,723
67,810
(8,149)
2,438
(1,592)
(4,897)
(12,200)
2,163
4,092
(10,271)
(5,300)
(9)
(4,980)
(0.16) $
(0.16) $
$
$
431,427
368,076
63,351
5,067
14,270
19,976
27,986
62,232
6,186
1,957
(3,034)
2,456
7,565
586
1,406
8,385
(1,577)
-
9,962
0.32
0.32
31,077,196
31,077,196
31,456,828
31,458,926
The accompanying notes are an integral part of these consolidated financial statements.
65 | Page
China Automotive Systems, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income or Loss
(In thousands of USD unless otherwise indicated)
Net (loss)/income
Other comprehensive loss:
Foreign currency translation gain/(loss)
Comprehensive income
Comprehensive loss attributable to non-controlling interest
Comprehensive income attributable to parent company
Year Ended December 31,
2019
2020
(10,271)
8,385
22,386
12,115
(3,780)
15,895 $
(5,736)
2,649
(1,997)
4,646
$
The accompanying notes are an integral part of these consolidated financial statements.
66 | Page
China Automotive Systems, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(In thousands of USD, except share and per share amounts)
Common Stock
Balance at January 1, 2020 and 2019 - 32,338,302 and 32,338,302 shares, respectively
Balance at December 31, 2020 and 2019 - 32,338,302 and 32,338,302 shares, respectively
Additional Paid-in Capital
Balance at January 1
Acquisition of the non-controlling interest in USAI
Acquisition of the non-controlling interest in Changchun Hualong
Deemed distribution to shareholders
Balance at December 31
Retained Earnings - Appropriated
Balance at January 1
Appropriation of retained earnings
Balance at December 31
Unappropriated
Balance at January 1
Net (loss)/income attributable to parent company
Accretion of redeemable non-controlling interests
Cumulative effect of accounting change - credit loss
Appropriation of retained earnings
Balance at December 31
Accumulated Other Comprehensive (Loss)/Income
Balance at January 1
Net foreign currency translation adjustment attributable to parent company
Balance at December 31
Treasury Stock
Balance at January 1, 2020 and 2019 - 1,164,257 and 711,698 shares, respectively
Repurchase of common stock in 2020 and 2019 - 322,269 shares and 452,559 shares, respectively
Balance at December 31, 2020 and 2019 - 1,486,526 and 1,164,257 shares, respectively
Total parent company stockholders’ equity
Non-controlling Interest
Balance at January 1
Net foreign currency translation adjustment attributable to non-controlling interest
Net loss attributable to non-controlling interest
Cumulative effect of accounting change - credit loss
Acquisition of the non-controlling interest in USAI
Acquisition of the non-controlling interest in Changchun Hualong
Contribution by non-controlling shareholder of Wuhu Hongrun
Contribution by non-controlling shareholder of Wuhan Hyoseong
Dividends declared to non-controlling interest holders of non-wholly owned subsidiaries
Balance at December 31
Total stockholders' equity
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
2020
2019
3 $
3 $
64,466 $
(29)
(76)
(88)
64,273 $
11,265 $
38
11,303 $
221,298 $
(4,971)
(9)
(789)
(38)
215,491 $
(3,462) $
20,875
17,413 $
(4,261) $
(1,000)
(5,261) $
3
3
64,466
-
-
-
64,466
11,104
161
11,265
211,497
9,962
-
-
(161)
221,298
1,855
(5,317)
(3,462)
(2,953)
(1,308)
(4,261)
303,222 $
289,309
20,250 $
1,511
(5,300)
(102)
29
(5)
217
-
(430)
16,170 $
19,037
(419)
(1,577)
-
-
-
-
3,542
(333)
20,250
319,392 $
309,559
67 | Page
China Automotive Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands of USD unless otherwise indicated)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Deferred income taxes
Allowance for credit losses
Equity in net earnings of affiliates
Loss/(gain) on disposal of fixed assets
Government subsidy reclassified from government loans
(Increase)/decrease in:
Accounts and notes receivable
Advance payments and others
Inventories
Increase/(decrease) in:
Accounts and notes payable
Customer deposits
Accrued payroll and related costs
Accrued expenses and other payables
Accrued pension costs
Taxes payable
Advances payable
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of short-term investments and long-term time deposits
Proceeds from maturities of short-term investments
Decrease in demand loans and employee housing loans included in other receivables
Loan to a related party
Cash received from property, plant and equipment sales
Government subsidy received for purchase of property, plant and equipment
Cash paid to acquire property, plant and equipment and land use rights (including $2,668 and $5,238 paid to related
parties for the years ended December 31, 2020 and 2019, respectively)
Cash paid to acquire intangible assets
Cash received from long-term investment
Investment under equity method
Cash prepaid for acquisition of a subsidiary
Net cash used in by investing activities
Cash flows from financing activities:
Proceeds from bank and government loans
Repayment of bank loans
Payment to broker agents for repurchase of common stock
Repayments of the borrowing for sale and leaseback transaction
Deemed distribution to shareholders
Acquisition of non-controlling interest
Dividends paid to the non-controlling interest holders of non-wholly owned subsidiaries
Cash received from capital contributions by non-controlling interest holder
Net cash used in financing activities
Cash and cash equivalents affected by foreign currency
Net increase/(decrease) in cash and cash equivalents
Cash, cash equivalents and pledged cash at beginning of year
Cash, cash equivalents and pledged cash at end of year
$
The accompanying notes are an integral part of these consolidated financial statements.
Year Ended December 31,
2019
2020
$
(10,271) $
8,385
22,057
2,205
6,238
(4,092)
129
287
7,295
1,176
(109)
27,248
93
1,239
7,069
(166)
(3,474)
502
57,426
(60,055)
53,393
165
(151)
1,495
-
(15,825)
(741)
3,322
(5,360)
-
(23,757)
39,813
(53,046)
(2,990)
(4,163)
(88)
(81)
-
722
(19,833)
7,822
21,658
106,403
128,061 $
17,852
16
(441)
(1,406)
(632)
-
21,044
4,733
3,992
(22,138)
561
1,115
(1,353)
(96)
(1,326)
-
30,306
(19,647)
31,268
1,504
-
1,561
1,898
(34,409)
(1,505)
579
(6,018)
(2,560)
(27,329)
57,101
(65,576)
(1,308)
(4,164)
-
-
(333)
3,542
(10,738)
(1,813)
(9,574)
115,977
106,403
68 | Page
China Automotive Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(In thousands of USD unless otherwise indicated)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest
Cash paid for income taxes
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Non-cash investing activities:
Property, plant and equipment recorded during the year which previously were advance payments
Accounts payable for acquiring property, plant and equipment
Accounts receivable in exchange for short-term investments
Property, plant and equipment and inventories used for investment in an associated company
Year Ended December 31,
2019
2020
$
$
2,751 $
3,229 $
3,390
4,607
Year Ended December 31,
2019
2020
$
$
$
$
11,838 $
2,024 $
223 $
- $
13,964
782
-
492
The accompanying notes are an integral part of these consolidated financial statements
69 | Page
China Automotive Systems, Inc. and Subsidiaries
Notes 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, is referred to herein as the “Company.” The Company is primarily engaged in the
manufacture and sale of automotive systems and components, as described below.
Great Genesis Holdings Limited, a company incorporated on January 3, 2003 under the Companies Ordinance of Hong Kong as a limited liability company,
“Genesis,” is a wholly-owned subsidiary of the Company.
Henglong USA Corporation, “HLUSA,” which was incorporated on January 8, 2007 in Troy, Michigan, is a wholly-owned subsidiary of the Company, and
mainly engages in marketing of automotive parts in North America, and provides after-sales service and research and development (“R&D”) support.
The Company owns interests in the following subsidiaries incorporated in the PRC and Brazil as of December 31, 2020 and 2019.
Percentage Interest
December 31,
2020
December 31,
2019
Name of Entity
Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong” 1
Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong” 2
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “Shenyang” 3
Universal Sensor Application Inc., “USAI” 4
Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong” 5
Wuhu Henglong Automotive Steering System Co., Ltd., “Wuhu” 6
Hubei Henglong Automotive System Group Co., Ltd., “Hubei Henglong” 7
Jingzhou Henglong Automotive Technology (Testing) Center, “Testing Center” 8
Chongqing Henglong Hongyan Automotive System Co., Ltd., “Chongqing Henglong” 9
CAAS Brazil’s Imports and Trade In Automotive Parts Ltd., “Brazil Henglong” 10
Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie” 11
Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong” 12
Jingzhou Qingyan Intelligent Automotive Technology Research Institute Co., Ltd., “Jingzhou Qingyan” 13
Hubei Henglong & KYB Automobile Electric Steering System Co., Ltd., “Henglong KYB” 14
Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd., “Wuhan Hyoseong” 15
Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun” 16
Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong” 17
100.00%
100.00%
70.00%
-
85.00%
77.33%
100.00%
100.00%
70.00%
95.84%
85.00%
100.00%
60.00%
66.60%
51.00%
62.00%
100.00%
1.
Jiulong was established in 1993 and mainly engages in the production of integral power steering gears for heavy-duty vehicles.
2. Henglong was established in 1997 and mainly engages in the production of rack and pinion power steering gears for cars and light duty vehicles.
3. Shenyang was established in 2002 and focuses on power steering parts for light duty vehicles.
100.00%
100.00%
70.00%
83.34%
85.00%
77.33%
100.00%
100.00%
70.00%
95.84%
85.00%
100.00%
60.00%
66.60%
51.00%
100.00%
-
70 | Page
4. USAI was established in 2005 and mainly engages in the production and sales of sensor modules. It was merged with Wuhan Chuguanjie in May 2020.
5.
Jielong was established in 2006 and mainly engages in the production and sales of automobile steering columns.
6. Wuhu was established in 2006 and mainly engages in the production and sales of automobile steering systems.
7. On March 7, 2007, Genesis established Hubei Henglong, formerly known as Jingzhou Hengsheng Automotive System Co., Ltd., its wholly-owned
subsidiary, to engage in the production and sales of automotive steering systems. On July 8, 2012, Hubei Henglong changed its name to Hubei Henglong
Automotive System Group Co., Ltd.
8.
In December 2009, Henglong, a subsidiary of Genesis, formed the Testing Center, which mainly engages in the research and development of new products.
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, Ozias Gaia
Da Silva and Ademir Dal’ Evedove. Brazil Henglong engages mainly in the import and sales of automotive parts in Brazil. In May 2017, the Company
obtained an additional 15.84% equity interest in Brazil Henglong for nil consideration. The Company retained its controlling interest in Brazil Henglong
and the acquisition of the non-controlling interest was accounted for as an equity transaction.
11. In May 2014, together with Hubei Wanlong, Jielong formed a subsidiary, Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan
Chuguanjie”, which mainly engages in research and development, manufacture and sales of automobile electronic systems and parts. Wuhan Chuguanjie is
located in Wuhan, China.
12. In January 2015, Hubei Henglong formed Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai
Henglong”, which mainly engages in the design and sale of automotive electronics.
13. In November 2017, Hubei Henglong formed Jingzhou Qingyan Intelligent Automotive Technology Research Institute Co., Ltd., “Jingzhou Qingyan”,
which mainly engages in the research and development of intelligent automotive technology.
14. In August 2018, Hubei Henglong and KYB (China) Investment Co., Ltd. (“KYB”) established Hubei Henglong KYB Automobile Electric Steering System
Co., Ltd. (“Henglong KYB”), which mainly engages in design, manufacture, sales and after-sales service of automobile electronic systems. Hubei
Henglong owns 66.6% of the shares of this entity and has consolidated it since its establishment.
15. In March 2019, Hubei Henglong and Hyoseong Electric Co., Ltd. established Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd. (“Wuhan
Hyoseong”), which mainly engages in the design, manufacture and sales of automotive motors and electromechanical integrated systems. Hubei Henglong
owns 51.0% of the shares of Wuhan Hyoseong and has consolidated it since its establishment.
16. In December 2019, Hubei Henglong formed Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun”, which mainly engages in the development,
manufacturing and sale of high polymer materials. Hubei Henglong owns 62.0% of the shares of Wuhu Hongrun and has consolidated it since its
establishment.
17. In April 2020, Hubei Henglong acquired 100.0% of the equity interests of Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong”,
for total consideration of RMB 1.2 million, equivalent to approximately $0.2 million from an entity controlled by Hanlin Chen. Before the acquisition,
52.1% of the shares of Changchun Hualong were ultimately owned by Hanlin Chen and 47.9% of the shares were owned by third parties. Changchun
Hualong mainly engages in design and R&D of automotive parts.
71 | Page
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation - For the years ended December 31, 2020 and 2019, the consolidated financial statements include the accounts of the Company and its
subsidiaries, which are described in Note 1. Significant inter-company balances and transactions have been eliminated upon consolidation. The consolidated
financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America.
Shenyang was formed in 2002, with 70% owned and controlled by the Company, and 30% owned by Shenyang Automotive Industry Investment Corporation,
“JB Investment.” The highest authority of Shenyang is its board of directors, which is comprised of seven directors, four of whom, 57%, are appointed by the
Company, and three of whom, 43%, are appointed by JB Investment. As for day-to-day operating matters, approval by more than two-thirds of the members of
such board of directors, 67%, is required. The chairman of such board of directors is appointed by the Company. In March 2003, the Company and Jinbei
entered into an act-in-concert agreement, under which the directors appointed by Jinbei agree to act in concert with the directors appointed by the Company. As
a result, the Company obtained control of Shenyang in March 2003. The general manager of Shenyang is appointed by the Company.
Jielong was formed in April 2006. As at December 31, 2020, 85% of Jielong was owned by the Company, and 15% of Jielong was owned by Hubei Wanlong.
The highest authority of Jielong is its board of directors, which is comprised of three directors, two of whom, 67%, are appointed by the Company, and one of
whom, 33%, is appointed by Hubei Wanlong. As for day-to-day operating matters, approval by at least two-thirds of the members of such board of directors is
required. 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.” The
highest authority of Wuhu is its board of directors, which is comprised of five directors, three of whom, 60%, are appointed by the Company, and two of whom,
40%, are appointed by Chery Technology. As for day-to-day operating matters, approval by at least two-thirds of the members of such board of directors is
required. The directors of the Company and Chery Technology executed an “Act in Concert” agreement, resulting in the Company having voting control in
Wuhu. The chairman of such board of directors is appointed by the Company. The general manager of Wuhu is appointed by the Company.
Chongqing Henglong was formed in 2012, with 70% owned by the Company and 30% owned by SAIC-IVECO. The highest authority of the Chongqing
Henglong is its board of directors, which is comprised of five directors, three of whom, 60%, are appointed by the Company, and two of whom, 40%, are
appointed by SAIC-IVECO. As for day-to-day operating matters, approval by at least two-thirds of the members of such board of directors is required. In
February 2012, the Company and SAIC-IVECO entered into an “Act in Concert” agreement. According to the agreement, the directors appointed by SAIC-
IVECO agreed to execute the “Act in Concert” agreement with the directors designated by the Company, resulting in the Company having voting control of
Chongqing Henglong. The chairman of such board of directors and the general manager of Chongqing Henglong are both appointed by the Company.
Brazil Henglong was formed in 2012, with 80% owned by the Company and 20% owned by Mr. Ozias Gaia Da Silva and Mr. Ademir Dal’ Evedove. In May
2017, the Company obtained an additional 15.84% equity interest in Brazil Henglong for nil consideration. The Company retained its controlling interest in
Brazil Henglong and the acquisition of the non-controlling interest was accounted for as an equity transaction. After the acquisition, the Company owns
95.84% of Brazil Henglong’s shares. The highest authority of Brazil Henglong is its board of directors. In making operational decision, approval by voting
rights representing at least 3/4 of the capital, 75%, is required and 95.84% of voting rights were owned by the Company. The chairman of such board of
directors is appointed by the Company. The general manager is Mr. Ozias Gaia Da Silva.
72 | Page
Wuhan Chuguanjie was formed in 2014, with 85% owned by the Company and 15% owned by Hubei Wanlong. The highest authority of Wuhan Chuguanjie is
its board of directors, which is comprised of three directors, two of whom, 67%, are appointed by the Company, and one of whom, 33%, is appointed by Hubei
Wanlong. As for day-to-day operating matters, approval by at least two-thirds of the members of such board of directors is required. Both of the chairman of
such board of directors and the general manager of Chuguanjie are appointed by the Company.
Jingzhou Qingyan was formed in 2017, with 60% owned by the Company and 40% owned by the other two parties. Hubei Honglong owns 60% of the shares
of Jingzhou Qingyan and the remaining shares were owned by the other two parties. The highest authority of Jingzhou Qingyan is its board of directors, which
is comprised of five directors, three of whom are appointed by the Company, and two of whom were appointed by the other two parties. As for day-to-day
operating matters, approval by at least three-fifths of the members of such board of directors is required. Both of the chairman of the board of directors and the
general manager are appointed by the Company.
Henglong KYB was formed in 2018, with 66.60% owned by the Company and 33.40% owned by KYB. The highest authority of Henglong KYB is its board of
directors, which is comprised of five directors, three of whom are appointed by the Company, and two of whom are appointed by KYB. As for day-to-day
operating matters, approval by at least three-fifths of the members of such board of directors is required. The chairman of such board of directors is appointed
by the Company and the general manager is appointed by KYB.
Wuhan Hyoseong was formed in 2019, with 51% owned by the Company and 49% owned by Hyoseong. The highest authority of Wuhan Hyoseong is its board
of directors, which is comprised of five directors, three of whom are appointed by the Company, and two of whom are appointed by Hyoseong. As for day-to-
day operating matters, approval by at least three-fifths of the members of such board of directors is required. The chairman of such board of directors is
appointed by the Company and the vice chairman is appointed by Wuhan Hyoseong.
Wuhu Hongrun was formed in 2019, with 62% owned by the Company and 38% owned by the other two parties. The highest authority of Wuhu Hongrun is its
board of directors, which is comprised of five directors. The directors are elected by the general meeting of shareholders. As for day-to-day operating matters,
approval by at least three-fifths of the members of such board of directors is required. The chairman and the general management are appointed by the board of
directors.
Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities
at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. The Company is of the opinion that the
significant estimates related to valuation of long term assets and investment, the realizable value of accounts receivable and inventories, the accrual of warranty
obligations and the recoverability of deferred tax assets. Actual results could differ from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents include all highly-liquid investments with an original maturity of three months or less at the date of
purchase.
73 | Page
Pledged Cash - Pledged as collateral for the Company's notes payable and restricted to use. The Company regularly pays some of its suppliers by bank notes.
The Company has to deposit a cash deposit, equivalent to 30%-100% of the face value of the relevant bank note, in order to obtain the bank note.
Short-term Investments - Short-term investments are comprised of time deposits with original terms of three months to one year and wealth management
financial products maturing within one year. The carrying values of time deposits approximate fair value because of their short-term maturities. The interest
earned is recognized in the consolidated statements of income or loss over the contractual term of the deposits. The wealth management financial products are
measured at fair value and classified as Level 3 within the fair value measurement hierarchy. Changes in the fair value are reflected in other income in the
consolidated statements of income or loss.
Current Expected Credit Losses - In 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments” (“ASC Topic 326”), which amends previously issued guidance regarding the impairment of financial instruments by creating
an impairment model that is based on expected losses rather than incurred losses. The Company adopted this ASC Topic 326 and several associated ASUs on
January 1, 2020 using a modified retrospective approach with a cumulative effect recorded as reduction of beginning retained earnings with amount of $0.8
million. As of January 1, 2020, the Company’s accounts and notes receivable, advance payments and other receivables are within the scope of ASC Topic 326.
The Company has identified the relevant risk characteristics of its customers and the related receivables, advance payments, and other receivables which
include type of the products the Company provides, nature of the customers or a combination of these characteristics. Receivables with similar risk
characteristics have been grouped into pools. For each pool, the Company considers the historical credit loss experience, current economic conditions,
supportable forecasts of future economic conditions, and any recoveries in assessing the lifetime expected credit losses. Other key factors that influence the
expected credit loss analysis include customer demographics, payment terms offered in the normal course of business to customers, and industry-specific
factors that could impact the Company’s receivables. Additionally, external data and macroeconomic factors are also considered.
For the year ended December 31, 2020, the Company recorded $6.3 million expected credit loss expense in general and administrative expenses. As of
December 31, 2020, the expected credit loss provision for the current and non-current assets were $9.4 million and $0.1 million, respectively.
Inventories - Inventories are stated at the lower of cost and net realizable value. Cost is calculated on the moving-average basis and includes all costs to acquire
and other costs to bring the inventories to their present location and condition. The Company evaluates the net realizable value of its inventories on a regular
basis and records a provision for loss to reduce the computed moving-average cost if it exceeds the net realizable value.
Advance Payments - These amounts represent advances to acquire various assets to be utilized in the future in the Company’s normal business operations, such
as machine equipment, raw materials and technology. Such amounts are paid according to their respective contract terms. Advance payment for machinery and
equipment is classified as advance payment for property, plant and equipment in the consolidated balance sheet and advance payment of raw materials and
technology are classified as advance payments and others in the consolidated balance sheet.
74 | Page
Property, Plant and Equipment – Property, plant and equipment are stated at cost. Major renewals and improvements are capitalized; minor replacements and
maintenance and repairs are charged to operations. Depreciation is calculated on the straight-line method over the estimated useful lives of the respective assets
as follows:
Category
Buildings
Machinery and equipment
Electronic equipment
Motor vehicles
Estimated Useful Life (Years)
25
6
4
8
Land use rights – Land use rights represent acquisition costs to purchase land use rights from the PRC government, which are evidenced by property
certificates. The periods of these purchased land use rights are either 45 years or 50 years. The Company classifies land use rights as long-term assets on the
balance sheet and cash outflows related to acquisition of land use rights as investing activities.
Land use rights are carried at cost less accumulated amortization and impairment losses, if any. Amortization is computed using the straight-line method over
the term specified in the land use right certificate for 45 years or 50 years, as applicable. Amortization expenses of land use rights were $0.2 million and $0.2
million for the years ended December 31, 2020 and 2019, respectively.
As of December 31, 2020 and 2019, the Company had pledged land use rights with a net book value of approximately $5.7 million and $5.5 million,
respectively, as security for its comprehensive credit facilities with banks in China.
Construction in Progress – Construction in progress, which represents buildings under construction and plant and equipment pending installation, are stated at
cost. Cost includes construction and acquisitions, and interest charges arising from borrowings used to finance assets during the period of construction or
installation and testing. No provision for depreciation is made on assets under construction until such time as the relevant assets are completed and ready for
their intended commercial use.
Gains or losses on disposal of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the
relevant asset, and are recognized in the consolidated statements of income or loss on the date of disposal.
Interest Costs Capitalized - Interest costs incurred in connection with borrowings for the acquisition, construction or installation of property, plant and
equipment are capitalized and depreciated as part of the asset’s total cost when the respective asset is placed into service. Interest costs capitalized for the years
ended December 31, 2020 and 2019, were $0.9 million and $0.7 million, respectively.
Intangible Assets - Intangible assets, representing patents and technical know-how acquired, are stated at cost less accumulated amortization and impairment
losses. Amortization is calculated on the straight-line method over the estimated useful life of 5 to 15 years.
Long-Lived Assets - The Company has adopted the provisions of ASC Topic 360, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Property,
plant and equipment and definite life intangible assets are reviewed periodically for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable. If required, an impairment loss is recognized as the difference between the carrying value and the fair
value of the assets.
75 | Page
In assessing long-lived assets for impairment, management considered the Company’s product line portfolio, customers and related commercial agreements,
and other factors in grouping assets and liabilities at the lowest level for which identifiable cash flows are largely independent. The Company considers
projected future undiscounted cash flows, trends and other factors in its assessment of whether impairment conditions exist. Whilst the Company believes that
its estimates of future cash flows are reasonable, different assumptions regarding such factors as future automotive production volumes, customer pricing,
economics and productivity and cost saving initiatives, could significantly affect its estimates. In determining fair value of long-lived assets, management uses
appraisals, management estimates or discounted cash flow calculations.
Long-term Investments – The Company’s long-term investments include investments in corporations and investments in limited partnerships. Investments in
corporations which the Company has the ability to exert significant influence are accounted for using the equity method. Investments in limited partnerships
which the Company has more than virtually no influence are accounted for using the equity method. The limited partnerships accounted for its investments at
fair value that were classified under Level 1 for their investees whose shares were listed and actively traded on stock exchange, or Level 3 for the investees that
were private companies, in the fair value hierarchy. The fair value of the limited partnerships’ Level 3 investments were determined using valuation techniques
based on market approach or income approach with unobservable inputs, which required significant judgment made by management with respect to the
assumptions and estimates for revenue growth rate, discount rate, price-to-earnings ratio, price-to-book ratio, lack of marketability discounts, and expected
volatility. Such fair value of the limited partnerships’ Level 3 investments was reflected in the equity in earnings of affiliated companies of the consolidated
statements of income or loss and the carrying amount of the Company’s long-term investments under the equity method accounting.
The Company continually reviews its investment to determine whether a decline in fair value below the carrying value is other than temporary. The primary
factors the Company considers in its determination are the length of time that the fair value of the investment is below the Company’s carrying value and the
financial condition, operating performance and near term prospects of the investee. In addition, the Company considers the reason for the decline in fair value,
including general market conditions, industry-specific or investee-specific reasons, changes in valuation subsequent to the balance sheet date and the
Company’s intent and ability to hold the investment for a period of time sufficient to allow for a recovery in fair value. If the decline in fair value is deemed to
be other than temporary, the carrying value of the security is written down to fair value. There were no impairment losses for its long-term investment in the
years ended December 31, 2020 and 2019.
Revenue Recognition - The Company has adopted ASC Topic 606 “Revenue from Contracts with Customers”. Products sales to customers are made pursuant to
master agreements entered into between the Company and its customers that provide for transfer of both title and risk of loss upon the Company’s delivery to
the location specified in the contracts. The Company’s sales arrangements generally do not contain variable considerations and are short-term in nature. A
period of credit term is granted to the customers after the delivery and before making payment. The Company recognizes revenue at a point in time based on
management’s evaluation of when the customer obtains control of the products. Revenue is recognized when all performance obligations under the terms of a
contract with the customer are satisfied and control of the product has been transferred to the customer. Sales of goods do not include multiple product and/or
service elements.
Revenue is measured as the amount of consideration management expects the Company to receive in exchange for transferring goods pursuant to the contracts.
Value-added tax that the Company collects concurrent with revenue-producing activities is excluded from revenue. Incidental contract costs that are not
material in the context of the delivery of goods and services are recognized as expense.
76 | Page
At the time revenue is recognized, allowances are recorded, with the related reduction to revenue, for estimated price discounts based upon historical
experience and related terms of customer arrangements. Where the Company has offered product warranties, the Company also establishes liabilities for
estimated warranty costs based upon historical experience and specific warranty provisions. Warranty liabilities are adjusted when experience indicates the
expected outcome will differ from initial estimates of the liability.
The Company accounts for shipping and handling fees as a fulfillment cost since control of the products is usually transferred to the customer after the delivery.
Revenue Disaggregation
Revenue disaggregation under the segment reporting standard is measured on the same basis as under the revenue standard. Management has concluded that the
disaggregation level is the same under both the revenue standard and the segment reporting standard, and does not repeat the disaggregation of revenue under
both standards.
Contract Assets and Liabilities
Contract assets, such as costs to obtain or fulfill contracts, are an insignificant component of the Company’s revenue recognition process. The majority of the
Company’s cost of fulfillment as a manufacturer of products is classified as inventory, fixed assets and intangible assets, which are accounted for under the
respective guidance for those asset types. Other costs of contract fulfillment are immaterial due to the nature of the Company’s products and their respective
manufacturing processes.
Contract liabilities are mainly customer deposits.
Customer Deposits
As of December 31, 2020 and 2019, the Company has customer deposits of $1.5 million and $1.3 million, respectively. During the year ended December 31,
2020, $3.1 million was received and $2.9 million (including $1.3 million from the beginning balance of customer deposits) was recognized as net product sales
revenue. During the year ended December 31, 2019, $2.0 million was received and $1.5 million (including $0.8 million from the beginning balance of customer
deposits) was recognized as net product sales revenue. Customer deposits represent non-refundable cash deposits for customers to secure rights to an amount of
products produced by the Company under supply agreements. When the products are shipped to customers, the Company will recognize revenue and bill the
customers to reduce the amount of the customer deposit liability.
Practical Expedient and Exemptions
The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
77 | Page
The Company does not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract
inception, that the period between when the Company transfers promised goods to the customers and when the customers pay for the goods will be less than
one year.
Government Subsidies - The Company’s PRC based subsidiaries received government subsidies according to related policy from local government. For the
subsidies for which the Chinese government has specified their purpose, such as product development and renewal of production facilities, the Company
recorded specific purpose subsidies as advances payable when received. Upon government acceptance of the related project development or assets acquisition,
the specific purpose subsidies are recognized to reduce related R&D expenses or cost of acquired assets. The Company recognized the subsidies that do not
have specific purpose as other income upon receipt.
Sales Taxes - The Company is subject to value added tax, “VAT.” The applicable VAT tax rate is 13% for products sold in the PRC. Products exported overseas
are exempted from VAT. The amount of VAT liability is determined by applying the applicable tax rate to the invoiced amount of goods sold less VAT paid on
purchases made with the relevant supporting invoices. VAT is collected from customers by the Company on behalf of the PRC tax authorities and is therefore
not charged to the consolidated statements of income or loss.
Uncertain Tax Positions - In order to assess uncertain tax positions, the Company applies a more likely than not threshold and a two-step approach for tax
position measurement and financial statement recognition. For the two-step approach, the first step is to evaluate the tax position for recognition by determining
if the weight of available evidence indicates that it is more likely than not that the position will be sustained, including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. As of
December 31, 2020 and 2019, 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 warranties
were based on, among other things, historical experience, product changes, material expenses, service and transportation expenses arising from the
manufactured product. Estimates will be adjusted on the basis of actual claims and circumstances.
For the years ended December 31, 2020 and 2019, the warranties activities were as follows (figures are in thousands of USD):
Balance at the beginning of year
Additions during the year
Settlement within the year
Foreign currency translation loss/(gain)
Balance at end of year
Year Ended December 31,
2019
2020
32,907 $
17,801
(16,859)
2,366
36,215 $
31,085
18,991
(16,670)
(499)
32,907
$
$
Pension - Most of the operations and employees of the Company are located in China. The Company records pension costs and various employment benefits in
accordance with the relevant Chinese social security laws, which is approximately at a total of 30% and 34% of base salary for the years ended December 31,
2020 and 2019, respectively. Base salary levels are the average salary determined by the local governments. For employees in overseas countries (mainly U.S.
and Brazil), the Company records pension costs and various employment benefits in accordance with the relevant overseas social security regulations, which is
approximately at a total of 26% and 28% of base salary for the years ended December 31, 2020 and 2019, respectively.
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Concentration of Credit Risk - Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of trade
accounts receivable.
In 2020, the Company’s five largest customers accounted for 47.1% of the Company’s consolidated sales, with one customer accounting for more than 10% of
consolidated sales (i.e., 23.6% of consolidated sales, which comprised a total of $98.5 million in sales included in the Hubei Henglong segment (Note 26)).
In 2019, the Company’s five largest customers accounted for 47.4% of the Company’s consolidated sales, with one customer accounting for more than 10% of
consolidated sales (i.e., 22.7% of consolidated sales, which comprised a total of $97.8 million in sales included in the Hubei Henglong segment (Note 26)).
At December 31, 2020 and 2019, approximately 9.4% and 6.2% of accounts receivable were from trade transactions with the aforementioned customer
(accounting for more than 10% of consolidated sales).
The Company performs ongoing credit evaluations with respect to the financial condition of its debtors, but does not require collateral. It records a provision
for doubtful accounts to cover probable credit losses. Management reviews and adjusts this allowance periodically based on historical experience, current
economic conditions, supportable forecasts of future economic conditions and other factors for evaluation of the collectability of outstanding accounts
receivable.
Income Taxes - Current income taxes are provided on the basis of net income for financial reporting purposes, adjusted for income and expense items which are
not assessable or deductible for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions. Deferred income taxes are provided
using the balance sheet liability method. Under this method, deferred income taxes are recognized for the tax consequences of significant temporary differences
by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing
assets and liabilities. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. The effect on deferred taxes of a
change in tax rates is recognized in income in the period enacted. A valuation allowance is provided to reduce the amount of deferred tax assets if it is
considered unlikely that some portion of, or all of, the deferred tax assets will not be realized. The Company applies ASC 740, “Income Taxes”, which clarifies
the accounting for uncertainty in income taxes recognized in the Company’s consolidated financial statements and prescribes a more likely than not threshold
for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition
of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with
tax positions, accounting for income taxes in interim periods, and income tax disclosures.
If the amount of the Company’s taxable income or income tax liability is a determinant of the amount of a grant, the grant is treated as a reduction of the
income tax provision in the year the grant is realized.
Gain on other sales - Gain on other sales mainly consists of rental income, gain on disposal of intangible assets and property, plant and equipment and technical
services revenue.
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Research and Development Costs - Research and development costs are expensed as incurred.
Advertising, Shipping and Handling Costs – Advertising, shipping and handling costs are expensed as incurred and recorded in selling expenses. Shipping and
handling costs relating to sales of $5.8 million and $5.8 million were included in selling expenses for the years ended December 31, 2020 and 2019,
respectively.
Leases - The Company adopted ASU 2016-02, Leases, and other related ASUs (collectively, “ASC 842”) on January 1, 2019, using the modified retrospective
method of adoption. The Company elected the transition method, which allows entities to initially apply the requirements of ASC 842 by recognizing a
cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As a result of electing this transition method, prior periods
have not been restated. There is no material impact on the balance of retained earnings, right of use assets or associated lease liabilities as of January 1, 2019 as
a result of the adoption of ASC 842. The Company elected the package of practical expedients permitted under the transition guidance within ASC 842, which
includes not reassessing lease classification of existing leases. The Company did not elect the hindsight practical expedient. The Company determines if an
arrangement is a lease upon inception. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of
time in exchange for consideration. The right to control the use of an asset includes the right to obtain substantially all of the economic benefits of the
underlying asset and the right to direct how and for what purpose the asset is used. The Company’s major plants and buildings are self-owned and limited
temporary small offices were rented. For leases with a term of 12 months or less, the Company makes an accounting policy election by class of underlying
asset not to recognize lease assets and lease liabilities. The Company recognizes lease expenses for such leases on a straight-line basis over the lease term.
Operating lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The discount rate
used to calculate present value is the Company’s incremental borrowing rate or, if available, the rate implicit in the lease. The Company determines the
incremental borrowing rate for each lease based primarily on the lease term and the economic environment of the applicable country or region. The discount
rate used by the Company for its operating lease was 4.49%. As of December 31, 2020, the weighted average remaining lease term was 2 years. The Company
did not have finance lease arrangements as of December 31, 2020.
Income Per Share - Basic income per share is computed by dividing net income attributable to ordinary shareholders by the weighted average number of
ordinary shares outstanding during the period using the two-class method. Under the two-class method, net income is allocated between ordinary shares and
other participating securities, including convertible note holders, if any, based on their participating rights. Diluted income per share is calculated by dividing
net income attributable to ordinary shareholders, as adjusted for the effects on income of participating securities as if they were dilutive ordinary shares, if any,
by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the period. Ordinary equivalent shares consist of
ordinary shares issuable upon the conversion of the convertible notes using the if-converted method, and shares issuable upon the exercise of stock options and
warrants for the purchase of ordinary shares using the treasury stock method. Ordinary equivalent shares are not included in the denominator of the diluted
earnings per share calculation when inclusion of such shares would be antidilutive.
Comprehensive Income – ASC Topic 220 establishes standards for the reporting and display of comprehensive income, its components and accumulated
balances in a full set of general purpose financial statements. ASC Topic 220 defines comprehensive income to include all changes in equity except those
resulting from investments by owners and distributions to owners, including adjustments to minimum pension liabilities, accumulated foreign currency
translation, and unrealized gains or losses on marketable securities.
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Fair Value Measurements – For purposes of fair value measurements, the Company applies the applicable provisions of ASC 820 “Fair Value Measurements
and Disclosures.” Accordingly, fair value for the Company’s financial accounting and reporting purposes represents the estimated price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the designated measurement date. With an objective to
increase consistency and comparability in fair value measurements and related disclosures, the Financial Accounting Standard Board established the fair value
hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels.
Level 1 Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the
measurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and
volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and shall be
used to measure fair value whenever available. As at December 31, 2020 and 2019, the Company did not have any fair value assets and liabilities classified as
Level 1. As at December 31, 2020 and 2019, marketable securities with amounts of $0.2 million and nil, respectively, were classified as Level 1.
Level 2 Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or
liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. As at December 31, 2020
and 2019, the Company did not have any fair value assets and liabilities classified as Level 2.
Level 3 Inputs are unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not
available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. However, the fair value
measurement objective remains the same, that is, an exit price from the perspective of a market participant that holds the asset or owes the liability. Therefore,
unobservable inputs shall reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or
liability (including assumptions about risk). As at December 31, 2020 and 2019, wealth management financial products with amounts of $9.9 million and $5.8
million, respectively, were classified as Level 3.
The Company’s financial instruments consist principally of cash and cash equivalents, pledged cash, time deposits, accounts and notes receivable, accounts and
notes payable, advance payment or payable, other receivable or payable, accrued expenses and bank loans. As of December 31, 2020 and 2019, the respective
carrying values of all financial instruments approximated fair value because any changes in fair value, after considering the discount rate, are immaterial.
Segment Reporting - Based on the criteria established by ASC 280 “Segment Reporting,” the Company currently operates and manages its business by product
sectors and each of them is a reportable segment. The Company’s chief operating decision-maker (“CODM”) is the chief executive officer. The CODM reviews
operating results to make decisions about allocating resources for the Company and assessing performance of its segments. Since most of the revenue generated
of the Company and assets held by the Company are in PRC while others are generated and held in other countries, information by geographic region is also
presented.
Stock-Based Compensation - The Company may issue stock options to employees and stock options or warrants to non-employees in non-capital raising
transactions for services and for financing costs. The Company has adopted ASC Topic 718, “Accounting for Stock-Based Compensation,” which establishes a
fair value based method of accounting for stock-based compensation plans. In accordance with ASC Topic 718, the cost of stock options and warrants issued to
employees and non-employees is measured on the grant date based on the fair value. The fair value is determined using the Black-Scholes option pricing
model. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive the benefit, which is
generally the vesting period.
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Foreign Currencies - China Automotive, the parent company, and HLUSA maintain their books and records in United States Dollars, “USD,” which is their
functional currency. The Company’s subsidiaries based in the PRC and Genesis maintain their books and records in Renminbi, “RMB,” which is their
functional currency. The Company’s subsidiary based in Brazil maintains its books and records in Brazilian reais, “BRL,” which is its functional currency. In
accordance with ASC Topic 830, “FASB Accounting Standards Codification”, foreign currency transactions denominated in currencies other than the functional
currency are remeasured into the functional currency at the rate of exchange prevailing at the balance sheet date for monetary items. Nonmonetary items are
remeasured at historical rates. Income and expenses are remeasured at the rate in effect on the transaction dates. Transaction gains and losses, if any, are
included in the determination of net income for the period.
In translating the financial statements of the Company’s China and Brazil subsidiaries and Genesis from their functional currency into the Company's reporting
currency of United States dollars, balance sheet accounts are translated using the closing exchange rate in effect at the balance sheet date and income and
expense accounts are translated using an average exchange rate prevailing during the reporting period. Adjustments resulting from the translation, if any, are
included in cumulative other comprehensive income (loss) in stockholders’ equity.
Certain Relationships and Related Transactions
The following are the related parties of the Company. The Company or the major shareholders of the Company directly or indirectly have interests in these
related parties:
Jingzhou Henglong Fulida Textile Co., Ltd., “ Fulida ”
Jingzhou Derun Agricultural S&T Development Co., Ltd., “ Jingzhou Derun ”
Jingzhou Tongying Alloys Materials Co., Ltd., “ Jingzhou Tongying ”
Shanghai Tianxiang Automotive Parts Co., Ltd., “ Shanghai Tianxiang ”
Shanghai Jinjie Industrial & Trading Co., Ltd., “ Shanghai Jinjie ”
Jiangling Tongchuang Machining Co., Ltd., “ Jiangling Tongchuang ”
Shanghai Hongxi Investment Inc, “ Hongxi ”
·
· Xiamen Joylon Co., Ltd., “ Xiamen Joylon ”
·
·
·
·
· Hubei Wiselink Equipment Manufacturing Co., Ltd., “ Hubei Wiselink ”
·
·
· 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 ”
·
· Honghu Changrun Automotive Parts Co., Ltd., “ Honghu Changrun ”
Jingzhou Henglong Real Estate Co., Ltd., “ Henglong Real Estate ”
·
· Xiamen Joylon Automotive Parts Co., Ltd., “Xiamen Automotive Parts ”
·
· Wuhan Tongkai Automobile Motor Co., Ltd., “ Wuhan Tongkai ”
Jingzhou Natural Astaxanthin Inc, “Jingzhou Astaxanthin”
·
· Hubei Asta Biotech Inc., “Hubei Asta”
·
·
Shanghai Yifu Automotive Electronics Technology Co., Ltd., “Shanghai Yifu”
Suzhou Qingyan Venture Capital Fund L.P., “Suzhou Qingyan”
Jingzhou Jiulong Machinery and Electronic Trading Co., Ltd., “ Jiulong Machinery ”
Beijing Hainachuan HengLong Automotive Steering System Co., Ltd., “ Beijing Henglong ”
82 | Page
Chongqing Qingyan Venture Capital Fund L.P., “Chongqing Qingyan”
Chongqing Jinghua Automotive Intelligent Manufacturing Technology Research Co., Ltd., “Chongqing Jinghua”
·
·
· Hubei Hongrun Intelligent System Co.,Ltd., “Hubei Hongrun”
Jingzhou WiseDawn Electric Car Co., Ltd., “Jingzhou WiseDawn”
·
· Hubei Zhirong Automobile Technology Co., Ltd., “Hubei Zhirong”
· Hubei Tongrun Automotive Parts Industry Development Co., Ltd., “Hubei Tongrun”
· Hubei Qingyan Venture Capital Fund L.P, “Hubei Qingyan”
· Hubei Henglongtianyu Pipe system Co.,Ltd., “Henglong Tianyu”
· Wuhan Ewinlink Intelligent System Co., Ltd., “Ewinlink”
· Hubei HLTW Automotive Lightweight Co.,Ltd., “Hubei HLTW”
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 granted them credit of three to four months. These
transactions were consummated under similar terms as the Company's other customers.
Materials Purchased from Related Parties – The Company purchased materials from related parties at fair market prices, and also received from them credit of
three to four months. 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 parties at
fair market prices, or reasonable cost-plus pricing if fair market prices are not available. The Company sometimes was required to pay in advance based on the
purchase agreement, because equipment manufacturing and technology development normally requires a long period. These transactions are consummated
under similar terms as the Company's other suppliers’.
Short-term Loans Extended to Related Parties - The Company provides short-term loans to related parties and assists the borrowing entities in addressing
certain cash flow needs. In general, the Company charges interest by referencing to the prevailing borrowing interest rates published by PBOC.
Recent Accounting Pronouncements
In August 2018, the FASB released ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for
Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements on fair value measurements. The provisions of ASU 2018-13 are to be applied
using a prospective or retrospective approach, depending on the amendment, and are effective for interim periods and fiscal years beginning after October 1,
2020, with early adoption permitted. The adoption of this guidance will not have a material impact on the Company's consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU provides an
exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. This
update also (1) requires an entity to recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any
incremental amount incurred as a non-income-based tax, (2) requires an entity to evaluate when a step-up in the tax basis of goodwill should be considered part
of the business combination in which goodwill was originally recognized for accounting purposes and when it should be considered a separate transaction, and
(3) requires that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that
includes the enactment date. The standard is effective for the Company for fiscal years beginning after December 15, 2020, with early adoption permitted. The
adoption of this guidance will not have a material impact on the Company's consolidated financial statements.
83 | Page
In January 2020, the FASB issued Accounting Standards Update No. 2020-01, Investments— Equity Securities (Topic 321), Investments—Equity Method and
Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The
amendments clarified that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the
purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The
amendments also clarified that for the purpose of applying paragraph 815-10-15-141(a) an entity should not consider whether, upon the settlement of the
forward contract or exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under the
equity method in Topic 323 or the fair value option in accordance with the financial instruments guidance in Topic 825. An entity also would evaluate the
remaining characteristics in paragraph 815-10-15-141 to determine the accounting for those forward contracts and purchased options. For public business
entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The
standard is effective for the Company for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating
the impact.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial
Reporting”, which provides optional expedients and exceptions for applying U.S. GAAP on contract modifications and hedge accounting to contracts, hedging
relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform, if certain
criteria are met. These optional expedients and exceptions provided in ASU 2020-04 are effective for the Company as of March 12, 2020 through December
31, 2022. The Company is currently evaluating the impact.
3. Accounts and Notes Receivable
The Company’s accounts receivable at December 31, 2020 and 2019, are summarized as follows (figures are in thousands of USD):
Accounts receivable - unrelated parties
Notes receivable - unrelated parties (1)
Total accounts and notes receivable - unrelated parties
Less: allowance for doubtful accounts - unrelated parties
Accounts and notes receivable, net - unrelated parties
Accounts and notes receivable - related parties
Less: allowance for doubtful accounts - related parties
Accounts and notes receivable, net - related parties
Accounts and notes receivable, net
December 31,
2020
2019
141,018 $
85,354
226,372
(9,853)
216,519
17,622
(1)
17,621
234,140 $
141,423
72,797
214,220
(2,379)
211,841
21,164
-
21,164
233,005
$
$
(1) Notes receivable represents accounts receivable in the form of bills of exchange whose acceptances and settlements are handled by banks.
As of December 31, 2020 and 2019, the Company pledged its notes receivable in amounts of $8.2 million and $9.7 million, respectively, as collateral for the
government loans (See Note 10).
As of December 31, 2020 and 2019, the Company pledged its accounts and notes receivable in amounts of $5.5 million and $7.4 million, respectively, as
collateral for banks to endorse the payment of the Company’s notes payable to the noteholder upon maturity (See Note 11).
84 | Page
The activity in the Company’s allowance for doubtful accounts of accounts receivable during the years ended December 31, 2020 and 2019, is summarized as
follows (figures are in thousands of USD):
Balance at beginning of year
Cumulative effect of the adoption of ASC Topic 326
Amounts provided for during the year (1)
Amounts reversed of collection during the year
Foreign currency translation
Balance at end of year
Year Ended December 31,
2019
2020
2,379 $
1,049
6,278
(94)
242
9,854 $
1,993
-
586
(167)
(33)
2,379
$
$
(1) In November 2020, Intermediate People's Court of Shenyang, Liaoning province, China accepted the bankruptcy reorganization application of one of the
Company’s customers. As of December 31, 2020, the Company had accounts and notes receivable with a total amount of $6.4 million due from this
customer and its subsidiaries, which receivables the Company considered in significant doubt of collectability. As a result, the Company provided full
allowance for these receivables.
4. Advance Payments and Others
The Company’s advance payments and others as of December 31, 2020 and 2019, consisted of the following:
Prepayments for purchase of raw materials
Input VAT
Prepayment for share repurchase program
Prepaid income tax
Employee advances
Others
Total advance payments and others
Less: Allowance for doubtful accounts
Advance payments and others, net
5. Inventories
Year Ended December 31,
2019
2020
5,993 $
4,233
2,138
1,486
564
637
15,051
(58)
14,993 $
4,283
5,554
148
1,588
944
698
13,215
(73)
13,142
$
$
The Company’s inventories at December 31, 2020 and 2019, consisted of the following (figures are in thousands of USD):
Raw materials
Work in process
Finished goods
Balance at end of year
December 31,
2020
2019
$
$
24,367 $
10,098
53,860
88,325 $
21,464
9,469
51,998
82,931
The Company recorded $5.0 million and $3.9 million of inventory write-down to cost of product sold for the years ended December 31, 2020 and 2019,
respectively.
85 | Page
6. Property, Plant and Equipment
The Company’s property, plant and equipment at December 31, 2020 and 2019, are summarized as follows (figures are in thousands of USD):
Costs:
Buildings
Machinery and equipment
Electronic equipment
Motor vehicles
Construction in progress
Less: Accumulated depreciation
Balance at end of year
December 31,
2020
2019
$
$
61,035 $
233,273
6,491
5,064
20,813
326,676
(185,672)
141,004 $
51,771
199,592
5,799
5,229
33,063
295,454
(154,973)
140,481
Depreciation charges for the years ended December 31, 2020 and 2019, were $21.4 million and $17.5 million, respectively.
As of December 31, 2020 and 2019, the Company pledged property, plant and equipment with net book value of approximately $66.1 million and $50.9
million, respectively, as security for its comprehensive credit facilities with banks in China.
7. Intangible Assets
The Company’s intangible assets at December 31, 2020 and 2019, are summarized as follows (figures are in thousands of USD):
Costs:
Patent technology
Management software license
Total intangible assets - at cost
Less: Accumulated amortization
Balance at end of year, net
December 31,
2020
2019
$
$
2,215 $
3,564
5,779
(4,049)
1,730 $
2,040
2,639
4,679
(3,327)
1,352
Amortization expenses were $0.5 million and $0.3 million for the years ended December 31, 2020 and 2019, respectively.
Amortization expenses
$
508 $
467
$
425 $
179 $
65
86 | Page
2021
Estimated Amortization Expenses
2023
2024
2022
2025
8. Long-term Investments
The Company’s long-term investments at December 31, 2020 and 2019, are summarized as follows (figures are in thousands of USD):
Limited Partnerships:
Chongqing Venture Fund (1)
Hubei Venture Fund (2)
Suzhou Venture Fund (3)
Subtotal - Investments in limited partnerships
Corporations:
Beijing Henglong (4)
Henglong Tianyu (5)
Chongqing Jinghua (6)
Jiangsu Intelligent (7)
Subtotal - Investments in corporations
Total
December 31,
2020
2019
$
$
20,230 $
14,473
7,740
42,443
5,241
1,070
599
413
7,323
49,766 $
15,085
8,730
9,141
32,956
4,630
1,122
523
411
6,686
39,642
87 | Page
(1) In May 2016, Hubei Henglong entered into an agreement with other parties to establish a limited partnership, the “Chongqing Venture Fund”. As of
December 31, 2020, Hubei Henglong has made investments of RMB 100.0 million, equivalent to approximately $14.5 million, representing 18.5% of
Chongqing Venture Fund’s equity. As a limited partner, Hubei Henglong has more than virtually no influence over Chongqing Venture Fund’s
operating and financial policies. The investment is accounted for using the equity method. During the year ended December 31, 2020, Chongqing
Venture Fund made distributions that were proportional to each owner’s allocated share of the fund, pursuant to which Hubei Henglong received RMB
12.3 million, equivalent to approximately $1.9 million, recorded as a reduction of the investment’s carrying value. As of December 31, 2020 and 2019,
the Company had $20.2 million and $15.1 million, respectively, of net equity in Chongqing Venture Fund.
(2) In March 2018, Hubei Henglong entered into an agreement with other parties to establish a limited partnership, the “Hubei Venture Fund”. As of
December 31, 2020, Hubei Henglong has made investments of RMB 98.5 million, equivalent to approximately $15.1 million, representing 32.8% of
Hubei Venture Fund’s equity. As a limited partner, Hubei Henglong has more than virtually no influence over the Hubei Venture Fund’s operating and
financial policies. The investment is accounted for using the equity method. During the year ended December 31, 2020, the Company made equity
investments of RMB 37.7 million, equivalent to approximately $5.4 million, in the Hubei Venture Fund. As of December 31, 2020 and 2019, the
Company had $14.5 million and $8.7 million, respectively, of net equity in the Hubei Venture Fund.
(3) In September 2014, Hubei Henglong entered into an agreement with other parties to establish a limited partnership, the “Suzhou Venture Fund”. Hubei
Henglong has made investments of RMB 50.0 million, equivalent to approximately $7.6 million, representing 12.5% of the Suzhou Venture Fund’s
equity. As a limited partner, Hubei Henglong has more than virtually no influence over the Suzhou Venture Fund’s operating and financial policies.
The investment is accounted for using the equity method. During the year ended December 31, 2020, the Suzhou Venture Fund made distributions that
were proportional to each owner’s allocated share of the fund, pursuant to which Hubei Henglong received RMB 9.8 million, equivalent to
approximately $1.5 million, recorded as a reduction of the investment’s carrying value. As of December 31, 2020 and 2019, the Company had $7.7
million and $9.1 million, respectively, of net equity in the Suzhou Venture Fund.
(4) In January 2010, the Company invested $3.1 million to establish a joint venture company, Beijing Henglong, with Beijing Hainachuan Automotive
Parts Co., Ltd., “Hainachuan”. The Company owns 50% equity in Beijing Henglong and can exercise significant influence over Beijing Henglong’s
operating and financial policies. The investment is accounted for using the equity method. As of December 31, 2020 and 2019, the Company had $5.2
million and $4.6 million, respectively, of net equity in Beijing Henglong.
(5) In June 2019, the Company invested RMB 8.0 million, equivalent to approximately $1.2 million, to establish an associate company, “Henglong
Tianyu”, with Jingzhou Tianyu Auto Parts Co., Ltd. The Company owns 40% of the equity in Henglong Tianyu, and can exercise significant influence
over Henglong Tianyu’s operating and financial policies. The investment is accounted for using the equity method. As of December 31, 2020 and
2019, the Company had $1.1 million and $1.1 million, respectively, of net equity in Henglong Tianyu.
88 | Page
(6) In October 2016, Hubei Henglong invested RMB 3.0 million, equivalent to approximately $0.5 million, to establish an associate company, Chongqing
Jinghua Automotive Intelligent Manufacturing Technology Research Co., Ltd., “Chongqing Jinghua”, with five other parties. The Company owns
18.8% of the equity in Chongqing Jinghua and can exercise significant influence over Chongqing Jinghua’s operating and financial policies. The
investment is accounted for using the equity method. As of December 31, 2020 and 2019, the Company had $0.6 million and $0.5 million,
respectively, of net equity in Chongqing Jinghua.
(7) In April 2019, Hubei Henglong entered into an agreement with other parties and committed to contribute RMB 5.0 million, equivalent to
approximately $0.7 million, to Jiangsu Intelligent Networking Automotive Innovation Center Co. Ltd., “Jiangsu Intelligent”, representing 19.2% of
Jiangsu Intelligent’s equity. Hubei Henglong can exercise significant influence over Jiangsu Intelligent’s operational and financial policies. The
investment is accounted for using the equity method. As of December 31, 2020, Hubei Henglong has made a capital contribution of RMB 3.0 million,
equivalent to approximately $0.4 million. As of December 31, 2020 and 2019, the Company had $0.4 million and $0.4 million, respectively, of net
equity in Jiangsu Intelligent.
The Company’s consolidated statements of income or loss and comprehensive income included equity in earnings of affiliated companies of $4.1 million and
$1.4 million for the years ended December 31, 2020 and 2019, respectively.
The Company summarizes the condensed financial information of the Company’s equity method investments as a group below (figures are in thousands of
USD):
Revenue
Gross profit
Income from continuing operations
Net income
9. Deferred Income Tax Assets and Liabilities
December 31,
2020
2019
$
$
59,912 $
30,134
28,012
28,968 $
51,399
7,732
4,218
5,576
The components of deferred tax assets and liabilities at December 31, 2020 and 2019, were as follows (figures are in thousands of USD):
Losses carryforward (U.S.) (1)
Losses carryforward (Non-U.S.) (1)
Product warranties and other reserves
Property, plant and equipment
Share-based compensation
Bonus accrual
Other accruals
Deductible temporary difference related to revenue recognition
Others
Total deferred tax assets
Less: Valuation allowance (1) (2)
Total deferred tax assets, net of valuation allowance
Deferred withholding tax for dividend distribution from PRC subsidiaries (Note 21)
Other taxable temporary differences
Total deferred tax liabilities
December 31,
2020
2019
$
$
2,727 $
12,491
7,930
5,246
18
567
1,453
1,551
2,350
34,333
(18,155)
16,178
4,280
2,332
6,612 $
2,816
8,702
5,907
4,589
62
150
1,547
1,476
2,250
27,499
(10,630)
16,869
4,253
1,578
5,831
89 | Page
(1) The net operating loss carry-forwards for the U.S. entity for income tax purposes are available to reduce future years' taxable income. These carry-
forwards will not expire if not utilized, and the Company may carry the losses forward indefinitely. Net operating losses for China entities can be carried
forward for 5 years to offset taxable income except for entities that qualify as a High & New Technology Enterprise, for which the net operating loss can
be carried forward for 10 years. However, as of December 31, 2020, valuation allowance was $18.2 million, including $2.7 million allowance for the
Company’s deferred tax assets in the United States and $15.5 million allowance for the Company’s non-U.S. deferred tax assets primarily in China. Based
on the Company’s current operations, management believes that all deferred tax assets in the United States and certain deferred tax assets in non-U.S.
regions are not likely to be realized in the future.
(2) As of December 31, 2020, the Company had net operating tax loss carry-forwards amounting to $15.5 million which will expire from 2021 to 2030 if not
used. Pursuant to a public announcement issued by the PRC State Administration of Taxation in August 2018, net operating losses of entities not qualified
as “High & New Technology Enterprise” will expire between 2021 and 2025 if not utilized and those of entities qualified as “High & New Technology
Enterprise” will expire in 2030.
The deferred tax assets and liabilities are classified in the consolidated balance sheets as follows (figures are in thousands of USD):
Deferred tax assets
Deferred tax liabilities
December 31,
2020
2019
$
13,846 $
4,280
15,291
4,253
The activity in the Company’s valuation allowance for deferred tax assets during the years ended December 31, 2020 and 2019, are summarized as follows
(figures are in thousands of USD):
Balance at beginning of year
Amounts provided for during the year
Amounts used during the year
Foreign currency translation
Balance at end of year
10. Bank and Government Loans
Loans consist of the following as of December 31, 2020 and 2019 (figures are in thousands of USD):
Short-term bank loans (1)
Short-term government loan (2)
Current portion of long-term government loan (3) (4)
Subtotal
Long-term government loan (3)
Less: Current portion of long-term government loan (3) (4)
Subtotal
Total bank and government loans
$
$
$
$
Year Ended December 31,
2019
2020
10,630 $
7,172
(183)
536
18,155 $
7,642
3,287
(227)
(72)
10,630
December 31,
2020
2019
36,575 $
-
7,663
44,238
7,663
(7,663)
-
44,238 $
44,199
2,150
287
46,636
7,454
(287)
7,167
53,803
90 | Page
(1) The Company entered into credit facility agreements with various banks, which were secured by property, plant and equipment and land use rights of the
Company. The total credit facility amount was $172.7 million and $182.7 million, respectively, as of December 31, 2020 and 2019. As of December 31,
2020 and 2019, the Company has drawn down loans with an aggregate amount of $36.6 million and $44.2 million, respectively. The weighted average
interest rate was 3.7% and 4.2%, respectively.
(2) On December 26, 2019, the Company borrowed from the local government a loan of RMB 15.0 million, equivalent to approximately $2.2 million, with an
interest rate of 3.48% per annum, which was due for repayment on December 25, 2020. Henglong pledged RMB 15.8 million, equivalent to approximately
$2.3 million, of notes receivable as collateral for the local government loan (See Note 3). The government loan was repaid on December 25, 2020.
(3) On August 7 and September 3, 2019, the Company borrowed from the local government loans of RMB 20.0 million and RMB 30.0 million, equivalent to
approximately $3.1 million and $4.6 million, respectively. These loans are due for repayment on June 30, 2021 and have an interest rate of 3.80% per
annum. As of December 31, 2020 and 2019, Henglong pledged RMB 53.5 million, equivalent to approximately $8.2 million, and RMB 51.9 million,
equivalent to $7.4 million, of notes receivable as collateral for the local government loans (See Note 3).
(4) On November 13, 2017, the Company borrowed from the local government a loan of RMB 2.0 million, equivalent to approximately $0.3 million, with an
interest rate of 4.75% per annum, which was due for repayment on November 12, 2020.
In January 2020, the Company received a notice from the government that the loan was reclassified as government subsidy. As a result, repayment of this
loan was no longer required. The Company reduced the loan balance and recorded it as other income in the consolidated statements of operations for the
year ended December 31, 2020.
The Company must use the loans for the purpose specified in the borrowing agreement. If it fails to do so, it may be charged penalty interest or triggered early
repayment. The Company complied with such financial covenants as of December 31, 2020.
11. Accounts and Notes Payable
The Company’s accounts and notes payable at December 31, 2020 and 2019, are summarized as follows (figures are in thousands of USD):
Accounts payable - unrelated parties
Notes payable - unrelated parties (1)
Accounts and notes payable - unrelated parties
Accounts and notes payable - related parties
Balance at end of year
December 31,
2020
2019
132,349 $
80,173
212,522
12,730
225,252 $
110,246
69,929
180,175
6,492
186,667
$
$
(1) Notes payable represent payables in the form of notes issued by the bank. As of December 31, 2020 and 2019, the Company has pledged cash of $30.8
million and $29.7 million, respectively. As of December 31, 2020 and 2019, the Company has pledged accounts and notes receivable of $5.5 million and
$7.4 million, respectively, as collateral for banks to endorse the payment of the Company’s notes payable to the noteholder upon maturity The Company
entered into credit facility agreements with various banks, which were secured by property, plant and equipment and land use rights of the Company. As of
December 31, 2020 and 2019, the Company has used $43.9 million and $37.8 million, respectively, for issuing bank notes.
91 | Page
12. Accrued Expenses and Other Payables
The Company’s accrued expenses and other payables at December 31, 2020 and 2019, are summarized as follows (figures are in thousands of USD):
Accrued expenses
Warranty reserves (See Note 2)
Payables for overseas transportation and custom clearance
Dividends payable to holders of non-controlling interests
Current portion of other long-term payable (See Note 14)
Accrued interest
Other payables
Balance at end of year
13. Taxes Payable
December 31,
2020
2019
8,627 $
36,215
3,278
460
4,131
646
2,250
55,607 $
6,306
32,907
564
-
3,593
104
1,867
45,341
$
$
The Company’s taxes payable at December 31, 2020 and 2019, are summarized as follows (figures are in thousands of USD):
Value-added tax payable
Tariffs payable
Long-term taxes payable - current portion (1)
Income tax payable
Other tax payable (1)
Short-term taxes payable
Long-term taxes payable
Less: Long-term taxes payable - current portion (1)
Long-term taxes payable (1)
December 31,
2020
2019
5,078 $
3,870
2,809
133
1,259
13,149 $
4,357
3,630
2,810
160
536
11,493
December 31,
2020
2019
26,693 $
(2,809)
23,884 $
29,503
(2,810)
26,693
$
$
$
$
(1) A one-time transition tax of $35.6 million was recognized in the three months ended December 31, 2017 that represented management’s estimate of the
amount of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of previously deferred earnings of
certain non-U.S. subsidiaries of the Company mandated by the U.S. Tax Reform. The Company elected to pay the one-time transition tax over eight years
commencing in April 2018. During the years ended December 31, 2020 and 2019, $2.8 million and $2.8 million, respectively, were paid by the Company.
See Note 21 for more details about the U.S. Tax Reform.
14. Other Long-term Payable
On January 31, 2018, the Company entered into an equipment sales agreement with a third party (the “buyer-lessor”) and simultaneously entered into a four-
year contract to lease back the equipment from the buyer-lessor. The carrying value of the equipment was $13.1 million and the sales price was $14.3 million.
Pursuant to the terms of the contract, the Company is required to pay to the buyer-lessor lease payments over 4 years with a quarterly lease payment of
approximately $1.0 million and is entitled to obtain the ownership of this equipment at a nominal price upon the expiration of the lease. The Company is of the
view that the transaction does not qualify as a sale. Therefore, the transaction was accounted for as a financing transaction by the Company. As of December
31, 2020 and 2019, $4.1 million and $3.6 million, respectively, was recognized as other payable (See Note 12); and $1.1 million and $4.9 million, respectively,
was recognized as other long-term payable to the buyer-lessor. For the years ended December 31, 2020 and 2019, the Company recorded $0.5 million and $0.8
million, respectively, of interest expense related to the lease back transaction.
92 | Page
15. Redeemable non-controlling interests
In September 2020, one of the Company’s subsidiaries issued shares to Hubei Venture Fund amounting to $0.7 million. The shares will be transferred to the
Company and the other shareholder of the subsidiary on pro rata basis at the holder’s option if the subsidiary fails to complete a qualified IPO in a pre-agreed
period of time after their issuance with a transfer price of par plus 6% per year. $0.5 million of the shares are subject to purchase by the Company and are
therefore accounted for as redeemable non-controlling interests in mezzanine equity and are accreted to the redemption value over the period starting from the
issuance date.
For the year ended December 31, 2020, the Company recognized accretion of $0.009 million to the redemption value of the shares over the period starting from
the issuance date with a corresponding reduction to retained earnings.
16. Stock Options
The stock option plan was approved at the Annual Meeting of Stockholders held on June 28, 2005, and extended to June 27, 2025 at the Annual Meeting of
Stockholders held on September 16, 2014. The maximum common shares available for issuance under this plan is 2,200,000. The stock incentive plan provides
for the issuance, to the Company’s officers, directors, management and employees who served over three years or have given outstanding performance, of
options to purchase shares of the Company’s common stock. The Company has issued 636,350 stock options under this plan as of December 31, 2020.
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 on
NASDAQ one day before 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
December 2008, which became exercisable on a ratable basis over the vesting period (3 years), the options were exercisable immediately on the grant dates.
Stock options will be settled in shares of the Company’s common stock upon exercise and are recorded in the Company’s consolidated balance sheets under the
caption “Additional paid-in capital.” As of December 31, 2020, the Company has sufficient unissued registered common stock for settlement of the stock
incentive plan mentioned above.
The fair value of stock options was determined at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option model requires
management to make various estimates and assumptions, including expected term, expected volatility, risk-free rate, and dividend yield. The expected term
represents the period of time that stock-based compensation awards granted are expected to be outstanding and is estimated based on considerations including
the vesting period, contractual term and anticipated employee exercise patterns. Expected volatility is based on the historical volatility of the Company’s stock.
The risk-free rate is based on the U.S. Treasury yield curve in relation to the contractual life of stock-based compensation instruments. The dividend yield
assumption is based on historical patterns and future expectations for the Company dividends.
No stock options were granted in 2020 and 2019.
93 | Page
The activities of stock options are summarized as follows, including granted, exercised and forfeited.
Outstanding - January 1, 2019
Expired
Outstanding - December 31, 2019
Expired
Outstanding - December 31, 2020
Weighted-
Average
Shares
Weighted-Average Contractual
Exercise Price Term (years)
135,000 $
(105,000)
30,000 $
(7,500)
22,500 $
5.66
5.85
4.99
5.58
4.79
5
5
5
5
5
The following is a summary of the range of exercise prices for stock options that are outstanding and exercisable at December 31, 2020:
Range of Exercise Prices
$2.00 - $10.00
Outstanding Stock Weighted Average Weighted Average Number of Stock
Remaining Life Exercise Price Options Exercisable
22,500
22,500
1.82 $
Options
4.79
As of December 31, 2020 and 2019, the total intrinsic value of the Company’s stock options that were exercisable both were nil.
During the years ended December 31, 2020 and 2019, no stock options were exercised.
During the years ended December 31, 2020 and 2019, no stock options were granted.
17. Retained Earnings
Pursuant to the relevant PRC laws, the profits distribution of the Company’s subsidiaries, which are based on their PRC statutory financial statements, are
available for distribution in the form of cash dividends after these subsidiaries have paid all relevant PRC tax liabilities, provided for losses in previous years,
and made appropriations to statutory surplus at 10% of their respective after-tax profits each year. When the statutory surplus reserve reaches 50% of the
registered capital of a company, no additional reserve is required. For the years ended December 31, 2020 and 2019, the subsidiaries in China appropriated
statutory reserves of $0.04 million and $0.2 million, respectively.
18. Treasury Stock
Treasury stock represents shares repurchased by the Company that are no longer outstanding and are held by the Company. Treasury stock is accounted for
under the cost method. On December 5, 2018, the Board of Directors of the Company approved a share repurchase program under which the Company was
permitted to repurchase up to $5.0 million of its common stock from time to time in the open market at prevailing market prices not to exceed $4.00 per share
through December 4, 2019. The Board of Directors of the Company approved the extension of such program to December 4, 2020. On August 13, 2020, the
Board of Directors of the Company approved a share repurchase program under which the Company is permitted to repurchase up to $5.0 million of its
common stock from time to time in the open market at prevailing market prices not to exceed $3.50 per share through August 12, 2021. For the years ended
December 31, 2020 and 2019, the Company repurchased 322,269 and 452,559 shares of the Company for aggregate cash consideration of $1.0 million and $1.3
million, respectively, on the open market.
94 | Page
The repurchased shares are not cancelled and are presented as “treasury stock” on the balance sheet.
19. Other Income, Net
During the years ended December 31, 2020 and 2019, the Company recorded other income which is summarized as follows (figures are in thousands of USD):
Government subsidy
Penalties income
Charity donation
Investment income
Total other income, net
20. Financial (Expense)/Income, net
Year Ended December 31,
2019
2020
$
$
2,820 $
140
(1,136)
614
2,438 $
2,094
449
(717)
131
1,957
During the years ended December 31, 2020 and 2019, the Company recorded financial income which is summarized as follows (figures are in thousands of
USD):
Interest income
Foreign exchange (loss)/gain, net
Bank fees
Total financial (expense)/income, net
21. Income Taxes
PRC Corporate Income Tax
Year Ended December 31,
2019
2020
$
$
1,662 $
(6,284)
(275)
(4,897) $
2,087
752
(383)
2,456
The Company’s subsidiaries registered in the PRC are subject to national and local income taxes within the PRC at the applicable tax rate of 25% on the taxable
income as reported in their PRC statutory financial statements in accordance with the relevant income tax laws applicable to foreign invested enterprise, unless
preferential tax treatment is granted by local tax authorities. If the enterprise meets certain preferential terms according to the China income tax law, such as
assessment as a “High & New Technology Enterprise” by the government, then, the enterprise will be subject to enterprise income tax at a rate of 15%.
Pursuant to the New China Income Tax Law and the Implementing Rules, “New CIT”, which became effective as of January 1, 2008, dividends generated after
January 1, 2008 and payable by a foreign-invested enterprise to its foreign investors will be subject to a 10% withholding tax if the foreign investors are
considered as non-resident enterprises without any establishment or place within China or if the dividends payable have no connection with the establishment
or place of the foreign investors within China, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a
different withholding arrangement.
95 | Page
Genesis, the Company’s wholly-owned subsidiary and the direct holder of the equity interests in the Company’s subsidiaries in China, is incorporated in Hong
Kong. According to the Mainland China and Hong Kong Taxation Arrangement, dividends paid by a foreign-invested enterprise in China to its direct holding
company in Hong Kong would be subject to withholding tax at a rate of 10% if Genesis could not obtain the Hong Kong tax resident certificate from the Hong
Kong Inland Revenue Department. If Genesis obtains the Hong Kong tax resident certificate, owns directly at least 25% of the shares of the foreign invested
enterprise and is qualified as the beneficial owner, it could benefit from a lower rate of 5%.
According to PRC tax regulation, the Company should withhold income taxes for the profits distributed from the PRC subsidiaries to Genesis, the subsidiaries’
holding company incorporated in Hong Kong. For the profits that the PRC subsidiaries intended to distribute to Genesis, the Company accrues the withholding
income tax as deferred tax liabilities. As of December 31, 2020 and 2019, the Company has recognized deferred tax liabilities of $4.3 million and $4.3 million
for the undistributed profits of $43.1 million and $42.9 million, respectively, which are expected to be distributed to Genesis in the future. The Company
intended to re-invest the remaining undistributed profits generated from the PRC subsidiaries in those subsidiaries indefinitely. As of December 31, 2020 and
2019, the Company still has undistributed earnings of approximately $333.8 million and $309.5 million, respectively, from investment in the PRC subsidiaries
that are considered indefinitely reinvested. Had the undistributed earnings been distributed to Genesis and not indefinitely reinvested, the tax provision as of
December 31, 2020 and 2019, of approximately $33.4 million and $30.9 million, respectively, would have been recorded. Such undistributed profits will be
reinvested in Genesis and not further distributed to the parent company incorporated in the United States going forward.
In 2017, Henglong, Jiulong, Hubei Henglong and Wuhu were granted the title of “High & New Technology Enterprise”, and based on the PRC income tax law,
they were subject to enterprise income tax at a rate of 15% from 2017 to 2019. The Companies passed the reassessment of “High & New Technology
Enterprise” in 2020. Therefore, they are subject to enterprise income tax at a rate of 15% from 2020 to 2022.
In 2019, Shenyang and Jielong were granted the title of “High & New Technology Enterprise”, and based on the PRC income tax law, they are subject to
enterprise income tax at a rate of 15% from 2019 to 2021.
In 2017, Chuguanjie was granted the title of “High & New Technology Enterprise” and, based on the PRC income tax law, it is subject to enterprise income tax
at a rate of 15% from 2017 to 2019. It passed the reassessment of “High & New Technology Enterprise” in 2020. Therefore, it is subject to enterprise income
tax at a rate of 15% from 2020 to 2022.
In 2018, Chongqing was granted the title of “High & New Technology Enterprise” and, based on the PRC income tax law, it is subject to enterprise income tax
at a rate of 15% from 2018 to 2020. The Company estimated the applied tax rate in 2021 to be 15% as it is probable that it will pass the re-assessment in 2021
and continue to qualify as “High & New Technology Enterprise”.
According to the New CIT, Shanghai Henglong, Testing Center, Henglong KYB, Wuhan Hyoseong, Changchun Hualong and Wuhu Hongrun are subject to
income tax at a rate of 25%.
96 | Page
Brazil Corporate Income Tax
Based on Brazilian income tax laws, Brazil Henglong is subject to income tax at a uniform rate of 15%, and a resident legal person is subject to additional tax
at a rate of 10% for the part of taxable income over BRL 0.24 million, equivalent to approximately $0.05 million. The Company had no assessable income in
Brazil for the years ended December 31, 2020 and 2019.
Hong Kong Corporate Income Tax
The profits tax rate of Hong Kong is 16.5%. No provision for Hong Kong tax is made as Genesis is an investment holding company, and had no assessable
income in Hong Kong for the years ended December 31, 2020 and 2019.
U.S. Corporate Income Tax
The Company is a Delaware corporation that is subject to U.S. corporate income tax on its taxable income at a rate of up to 21% for taxable years beginning
after December 31, 2017 and U.S. corporate income tax on its taxable income of up to 35% for prior tax years. Recent U.S. federal tax legislation, commonly
referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22, 2017. The U.S. Tax Reform significantly modified the
U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal corporate income tax rate from 35% to 21% for taxable years beginning
after December 31, 2017; limiting and/or eliminating many business deductions; migrating the U.S. to a territorial tax system with a one-time transition tax on
a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating
U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings. Taxpayers may elect to pay the one-
time transition tax over eight years, or in a single lump sum.
The U.S. Tax Reform also includes provisions for a new tax on GILTI effective for tax years of foreign corporations beginning after December 31, 2017. The
GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of controlled foreign corporations (“CFCs”), subject to the
possible use of foreign tax credits and a deduction equal to 50 percent to offset the income tax liability, subject to some limitations.
To the extent that portions of the Company’s U.S. taxable income, such as Subpart F income or GILTI, are determined to be from sources outside of the U.S.,
subject to certain limitations, the Company may be able to claim foreign tax credits to offset its U.S. income tax liabilities. If dividends that the Company
receives from its subsidiaries are determined to be from sources outside of the U.S., subject to certain limitations, the Company will generally not be required to
pay U.S. corporate income tax on those dividends. Any liabilities for U.S. corporate income tax will be accrued in the Company’s consolidated statements of
comprehensive income and estimated tax payments will be made when required by U.S. law.
One-Time Transition Tax Related to U.S. Tax Reform
In 2017, the Company recognized a one-time transition tax of $35.6 million that represented management’s estimate of the amount of U.S. corporate income
tax based on the deemed repatriation to the United States of the Company’s share of previously deferred earnings of certain non-U.S. subsidiaries of the
Company mandated by the U.S. Tax Reform. The Company elected to pay the one-time transition tax over eight years commencing in April 2018. According to
the 2017 U.S. federal income tax return of the Company filed in October 2018, the one-time transition tax was updated to $35.1 million. The Company made a
true-up adjustment of $0.5 million in 2018.
97 | Page
The provision for income taxes was calculated as follows (figures are in thousands of USD):
Tax rate
Income before income taxes
Income tax at federal statutory tax rate
Tax benefit of super deduction of R&D expense (1)
Effect of differences in foreign tax rate
Change in provision on valuation allowance for deferred income tax - U.S.
Change in provision on valuation allowance for deferred income tax - Non-U.S.
Other differences
Total income tax expense
Year Ended December 31,
2019
2020
$
$
21%
(12,200) $
(2,562)
(3,605)
555
(133)
7,659
249
2,163
$
21%
7,565
1,589
(3,688)
(572)
(275)
3,261
271
586
(1) According to a policy promulgated by the State Tax Bureau of the PRC and effective from 2008 onwards, enterprises engaged in research and development
activities are entitled to claim an additional tax deduction amounting to 50% of their research and development expenses in determining their taxable
income for the year. The additional tax deduction amount of the research and development expenses has been increased from 50% to 75%, effective from
2018, according to a new tax incentives policy promulgated by the State Tax Bureau of the PRC in September 2018. The research and development
expenses of the Company are subject to a 75% super-deduction for the income tax.
The combined effects of the income tax exemption and reduction available to the Company are as follows (figures are in thousands of USD unless otherwise
indicated):
Tax holiday effect
Basic net income per share effect
Diluted net income per share effect
Year Ended December 31,
2019
2020
$
(555) $
(0.02)
(0.02)
572
0.02
0.02
The Company is subject to examination in the United States and China. The Company's tax years for 2016 through 2020 are still open for examination in
China. The Company's tax years for 2011 through 2020 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, 2020 and 2019.
22. (Loss)/ Income Per Share
Basic net income per share is computed using the weighted average number of the common shares outstanding during the year.
For diluted income per share, the Company uses the treasury stock method for options, assuming the issuance of common shares, if dilutive, resulting from the
exercise of options.
98 | Page
The calculations of basic and diluted income per share attributable to the parent company were (figures are in thousands of USD):
Numerator:
Net (loss)/income attributable to the parent company’s common shareholders - Basic and Diluted
Denominator:
Weighted average ordinary shares outstanding - Basic
Dilutive effects of stock options
Denominator for dilutive income per share - Diluted
Net (loss)/income per share attributable to the parent company’s common shareholders
Basic
Diluted
Year Ended December 31,
2019
2020
$
(4,980)
9,962
31,077,196
-
31,077,196
31,456,828
2,098
31,458,926
(0.16)
(0.16)
0.32
0.32
For the year ended December 31, 2020, assumed conversion of the stock options has not been reflected in the dilutive calculation pursuant to ASC 260,
“Earnings Per Share,” due to the anti-dilutive effect as a result of the Company’s net loss. The effects of all outstanding share options with common share
equivalents of 1,256 shares have been excluded from the calculation of the diluted loss per share for the year ended December 31, 2020 due to their anti-
dilutive effect.
For the year ended December 31, 2019, the exercise prices for 22,500 shares of outstanding stock options were above the weighted average market price of the
Company’s common stock during the year ended December 31, 2019, and these stock options were excluded from the calculation of the diluted income per
share for the year ended December 31, 2019.
23. Significant Concentrations
A significant portion of the Company’s business is conducted in China where the currency is the RMB. Regulations in China permit foreign owned entities to
freely convert the RMB into foreign currency for transactions that fall under the "current account", which includes trade related receipts and payments, interest
and dividends. Accordingly, the Company’s Chinese subsidiaries may use RMB to purchase foreign exchange for settlement of such "current account"
transactions without pre-approval.
China Automotive, the parent company, may depend on Genesis and HLUSA dividend payments, which are generated from their subsidiaries in China, “China-
based Subsidiaries,” after they receive payments from the China-based Subsidiaries. Regulations in the PRC currently permit payment of dividends of a PRC
company only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Under PRC law China-based
Subsidiaries are required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year to their general reserves until the
cumulative amount reaches 50% of their paid-in capital. These reserves are not distributable as cash dividends, or as loans or advances. These foreign-invested
enterprises may also allocate a portion of their after-tax profits, at the discretion of their boards of directors, to their staff welfare and bonus funds. Any
amounts so allocated may not be distributed and, accordingly, would not be available for distribution to Genesis and HLUSA.
99 | Page
The PRC government also imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currencies out of
China, the China-based Subsidiaries may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currencies.
If China Automotive is unable to receive dividend payments from its subsidiaries and China-based subsidiaries, China Automotive may be unable to effectively
finance its operations or pay dividends on its shares.
Transactions other than those that fall under the "current account" and that involve conversion of RMB into foreign currency are classified as "capital account"
transactions; examples of "capital account" transactions include repatriations of investment by or loans to foreign owners, or direct equity investments in a
foreign entity by a China domiciled entity. "Capital account" transactions require prior approval from China's State Administration of Foreign Exchange, or
SAFE, or its provincial branch to convert a remittance into a foreign currency, such as U.S. Dollars, and transmit the foreign currency outside of China.
This system could be changed at any time and any such change may affect the ability of the Company or its subsidiaries in China to repatriate capital or profits,
if any, outside China. Furthermore, SAFE has a significant degree of administrative discretion in implementing the laws and has used this discretion to limit
convertibility of current account payments out of China. Whether as a result of a deterioration in the Chinese balance of payments, a shift in the Chinese
macroeconomic prospects or any number of other reasons, China could impose additional restrictions on capital remittances abroad. As a result of these and
other restrictions under the laws and regulations of the People's Republic of China, or the PRC, the Company’s China subsidiaries are restricted in their ability
to transfer a portion of their net assets to the parent. The Company has no assurance that the relevant Chinese governmental authorities in the future will not
limit further or eliminate the ability of the Company’s Chinese subsidiaries to purchase foreign currencies and transfer such funds to the Company to meet its
liquidity or other business needs. Any inability to access funds in China, if and when needed for use by the Company outside of China, could have a material
and adverse effect on the Company’s liquidity and its business.
24. Related Party Transactions
Related party transactions during the years ended December 31, 2020 and 2019, are as shown below (figures are in thousands of USD):
Merchandise Sold to Related Parties
Hubei Hongrun
Beijing Henglong
Xiamen Automotive Parts
Other related parties
Total
Rental Income Obtained from Related Parties
Wuhan Tongkai
Jingzhou Tongying
Hubei Hongrun
Hubei ASTA
Other related parties
Total
$
$
$
$
Year Ended December 31,
2019
2020
24,792 $
24,672
3,274
484
53,222 $
4,021
41,762
4,337
620
50,740
Year Ended December 31,
2019
2020
193 $
101
100
21
8
423 $
166
173
-
40
4
383
100 | Page
Materials Sold to Related Parties
Jiangling Tongchuang
Jingzhou Tongying
Honghu Changrun
Jingzhou Yude
Hubei Hongrun
Beijing Henglong
Other related parties
Total
Materials Purchased from Related Parties
Jingzhou Tongying
Jiangling Tongchuang
Wuhan Tongkai
Honghu Changrun
Hubei Wiselink
Other related parties
Total
Technology and Services Provided by Related Parties (recorded in R&D Expenses)
Jingzhou Derun
Other related parties
Total
Property, Plant and Equipment Purchased from Related Parties
Hubei Wiselink
Ewinlink
Honghu Changrun
Total
Loan transaction to a related party
Related party loan
Year Ended December 31,
2019
2020
483 $
426
362
306
180
1
5
1,763 $
18
566
577
313
-
39
135
1,648
Year Ended December 31,
2019
2020
8,677 $
6,943
5,791
1,868
328
272
23,879 $
7,496
7,039
6,782
1,751
424
322
23,814
Year Ended December 31,
2019
2020
26 $
-
26 $
27
1
28
Year Ended December 31,
2019
2020
1,371 $
499
59
1,929 $
5,238
1,052
-
6,290
$
$
$
$
$
$
$
$
Year Ended December 31,
2019
2020
$
151 $
-
As of December 31, 2020 and 2019, accounts receivable, accounts payable and advance payments between the Company and related parties are as shown
below (figures are in thousands of USD):
101 | Page
Accounts and Notes Receivable from Related Parties
Beijing Henglong
Hubei Hongrun
Xiamen Automotive Parts
Jingzhou Yude
Xiamen Joylon
Other related parties
Total accounts and notes receivable - related parties
Less: allowance for doubtful accounts - related parties
Accounts and notes receivable, net - related parties
Accounts and Notes Payable to Related Parties
Wuhan Tongkai
Hubei Wiselink
Jingzhou Tongying
Henglong Tianyu
Honghu Changrun
Jiangling Tongchuang
Other related parties
Total
Advance Payments for Property, Plant and Equipment to Related Parties
Hubei Wiselink
Henglong Real Estate
Total
Other Advance Payments and Others to Related Parties
Honghu Changrun
Hongxi
Hubei ASTA
Hubei Hongrun
Ewinlink
Henglong Tianyu
Wuhan Tongkai
Other related parties
Total
December 31,
2020
2019
9,630 $
4,054
1,565
1,283
870
220
17,622
(1)
17,621 $
14,743
1,786
1,957
1,450
1,110
118
21,164
-
21,164
December 31,
2020
2019
4,523 $
2,779
2,628
1,673
609
506
12
12,730 $
1,586
1,538
1,672
782
208
661
45
6,492
December 31,
2020
2019
2,187 $
1,097
3,284 $
1,283
1,028
2,311
December 31,
2020
2019
238 $
153
80
19
9
2
1
20
522 $
662
-
53
68
160
139
69
65
1,216
$
$
$
$
$
$
$
$
As of March 30, 2021, the date the Company issued the financial statements, Hanlin Chen, Chairman, owns 57.9% of the common stock of the Company and
has the effective power to control the vote on substantially all significant matters without the approval of other stockholders.
102 | Page
25. Commitments and Contingencies
a. Legal proceedings
On January 7, 2019, three purported stockholders of the Company filed a stockholder derivative complaint on behalf of the Company against the Company’s
directors Hanlin Chen, Qizhou Wu and Guangxun Xu and former directors Arthur Wong and Robert Tung in the Delaware Court of Chancery, alleging that
they had (a) breached their fiduciary duties by approving and paying excessive compensation to the non-employee directors of the Company, Arthur Wong,
Guangxun Xu and Robert Tung, and (b) failed to make full and accurate disclosure of all material information with respect to director qualification and director
compensation paid in 2017 in the Company’s annual proxy statement on Schedule 14A filed on October 10, 2018. The directors have engaged their own
counsel to answer this complaint. On April 9, 2019, the Company moved to dismiss the complaint. The motion to dismiss was denied on July 17, 2019. As of
November 2020, the Company reached a settlement to resolve the lawsuit for a sum of $55,998. The Company did not admit any liability in reaching the
settlement. On February 5, 2021, the Court of Chancery conducted a hearing to confirm the settlement of the stockholder derivative action. The Court entered a
Final Order and Judgment approving the settlement. The Court further ordered that the plaintiffs’ application for an award of attorneys’ fees and reimbursement
of litigation expenses be reduced from $100,000 to $30,000.
Other than as described above, the Company is not a party to any pending or, to the best of the Company’s knowledge, any threatened legal proceedings; and no
director, officer or affiliate of the Company, or owner of record of more than five percent of the securities of the Company, or any associate of any such
director, officer or security holder is a party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation.
b. Commitments
In addition to bank loans, notes payables and the related interest, the following table summarizes the Company’s non-cancelable commitments and
contingencies as of December 31, 2020 (figures are in thousands of USD):
Obligations for investment contracts (1)
Obligations for purchasing and services
Total
2021
2,697 $
21,047
23,744 $
$
$
Payment Obligations by Period
2023
Thereafter
2022
- $
1,240
1,240 $
- $
-
- $
- $
-
- $
Total
2,697
22,287
24,984
(1)
In April 2019, Hubei Henglong entered into an agreement with other parties and committed to contribute RMB 5.0 million, equivalent to approximately
$0.7 million, to Jiangsu Intelligent Networking Automotive Innovation Center Co. Ltd., “Jiangsu Intelligent”, representing 19.2% of Jiangsu Intelligent’s
shares. As of December 31, 2020, Hubei Henglong has completed a capital contribution of RMB 3.0 million, equivalent to approximately $0.4 million.
According to the agreement, the remaining capital commitment of RMB 2.0 million, equivalent to approximately $0.3 million, will be paid in 2021.
In November 2019, Hubei Henglong entered into an agreement with other parties and committed to purchase 70% of the shares of Hefei Senye Light
Plastic Technology Co., Ltd. for total consideration of RMB 33.6 million, equivalent to approximately $4.8 million. As of December 31, 2020, Hubei
Henglong has paid the amount of RMB 18.0 million, equivalent to approximately $2.6 million, which was reported in other non-current assets as the
transfer of shares had not been consummated. According to the agreement, of the remaining consideration of RMB 15.6 million, equivalent to
approximately $2.4 million, will be paid in 2021.
103 | Page
26. Segment Reporting
The accounting policies of the product sectors are the same as those described in the summary of significant accounting policies except that the disaggregated
financial results for the product sectors have been prepared using a management approach, which is consistent with the basis and manner in which management
internally disaggregates financial information for the purposes of assisting them in making internal operating decisions. Generally, the Company evaluates
performance based on stand-alone product sector operating income and accounts for inter segment sales and transfers as if the sales or transfers were to third
parties, at current market prices.
As of December 31, 2020, the Company had 15 product sectors, six of which were principal profit makers and were reported as separate sectors and engaged in
the production and sales of power steering (Henglong, Jiulong, Shenyang, Wuhu, Henglong KYB and Hubei Henglong), and one holding company (Genesis).
The other nine sectors were engaged in the development, manufacturing and sale of high polymer materials (Wuhu Hongrun), R&D services (Changchun
Hualong), automobile steering columns (Jielong), provision of after-sales and R&D services (HLUSA), production and sale of power steering (Chongqing
Henglong), trade (Brazil Henglong), manufacture and sales of automobile electronic systems and parts (Wuhan Chuguanjie), research and development of
intelligent automotive technology (Jingzhou Qingyan) and manufacture and sales of automotive motors and electromechanical integrated systems (Wuhan
Hyoseong).
As of December 31, 2019, the Company had 15 product sectors, six of which were principal profit makers and were reported as separate sectors and engaged in
the production and sales of power steering (Henglong, Jiulong, Shenyang, Wuhu, Henglong KYB and Hubei Henglong), and one holding company (Genesis).
The other nine sectors were engaged in the production and sale of sensor modular (USAI), R&D services (Changchun Hualong), automobile steering columns
(Jielong), provision of after sales and R&D services (HLUSA), production and sale of power steering (Chongqing Henglong), trade (Brazil Henglong),
manufacture and sales of automobile electronic systems and parts (Wuhan Chuguanjie), research and development of intelligent automotive technology
(Jingzhou Qingyan) and sales of automotive motors and electromechanical integrated systems (Wuhan Hyoseong).
The Company’s product sector information is as follows (figures are in thousands of USD):
Henglong
Jiulong
Shenyang
Wuhu
Hubei Henglong
Henglong KYB
Other Entities
Total Segments
Corporate
Eliminations
Total consolidated
Net Sales
Year Ended December 31,
2019
2020
Net Income (Loss)
Year Ended December 31,
2019
2020
$
$
157,715 $
100,120
14,091
14,280
115,991
52,659
61,202
516,058
-
(98,422)
417,636
164,142 $
88,469
20,247
20,384
121,719
70,952
64,619
550,532
-
(119,105)
431,427 $
(576) $
995
(6,985)
(800)
9,836
(6,668)
(1,928)
(6,126)
(2,693)
(1,452)
(10,271) $
3,058
694
1,104
(1,059)
8,801
(5,306)
3,588
10,880
(2,262)
(233)
8,385
104 | Page
Henglong
Jiulong
Shenyang
Wuhu
Hubei Henglong
Henglong KYB
Other Entities
Total Segments
Corporate
Eliminations
Total consolidated
Henglong
Jiulong
Shenyang
Wuhu
Hubei Henglong
Henglong KYB
Other Entities
Total Segments
Corporate
Eliminations
Total consolidated
Depreciation and Amortization
Year Ended December 31,
2019
2020
Capital Expenditures
Year Ended December 31,
2019
2020
$
$
3,814 $
2,980
652
556
10,067
1,368
2,578
22,015
42
-
22,057 $
3,620 $
2,916
605
670
7,794
720
1,475
17,800
52
-
17,852 $
3,019 $
1,898
188
87
2,412
4,017
6,872
18,493
-
(1,927)
16,566 $
15,500
1,663
627
1,506
20,376
3,695
4,172
47,539
-
(694)
46,845
Total Assets
December 31,
2020
2019
265,982 $
90,161
25,827
20,055
415,296
63,871
91,999
973,191
71,880
(337,511)
707,560 $
278,266
82,506
34,275
22,394
349,172
59,865
80,080
906,558
75,185
(321,587)
660,156
$
$
Financial information segregated by geographic region is as follows (figures are in thousands of USD):
Geographic region:
China
United States
Other foreign countries
Total consolidated
Net Sales (1)
Year Ended December 31,
2019
2020
Long-term assets
December 31,
2020
2019
$
$
294,739 $
114,889
8,008
417,636 $
309,212 $
115,810
6,405
431,427 $
$
165,043
771
746
166,560(2) $
161,075
756
727
162,558(2)
(1) Revenue is attributed to each country based on location of customers.
(2) Pursuant to ASC 280-10-50-41, the deferred tax assets of $13.7 million and $15.3 million and the intangible assets, net of $1.7 million and $1.4 million
were excluded from long-term assets as of December 31, 2020 and 2019, respectively.
Exhibit
Number
EXHIBIT INDEX
Description
3.1(i)
Certificate of Incorporation (incorporated by reference to Exhibit 3(i) to the Company's Form 10-SB filed on August 27, 2001)
3.1.1(i)
Certificate of Amendment of Certificate of Incorporation, filed May 19, 2003 (incorporated by reference to Exhibit 4.1.1 to the Company’s
Registration Statement on Form S-3 (File No. 333-133331) filed on April 17, 2006)
3.1(ii)
Bylaws (incorporated by reference to Exhibit 3(ii) to the Company's Form 10-SB filed on August 27, 2001)
105 | Page
4.1
10.1
10.2
10.3
10.4
10.5
23.1
31.1
31.2
32.1
32.2
Description of the Company’s Securities*
Joint-venture Agreement, dated March 31, 2006, as amended on May 2, 2006, between Great Genesis Holdings Limited and Wuhu Chery
Technology Co., Ltd. (incorporated by reference to Exhibit 10.8 to the Company’s Form 10-Q Quarterly Report filed on May 10, 2006)
Translation of the Equity Transfer Agreement dated March 31, 2008 in English (incorporated by reference to Exhibit 99.1 to the Company’s
Form 8-K filed on April 2, 2008)
English Translation of the Sino-Foreign Equity Joint Venture Contract dated January 24, 2010 between Great Genesis Holdings Limited and
Beijing Hainachuan Auto Parts Co., Ltd. (incorporated by reference to Exhibit 10.21 to the Company’s Form 10-K for the year ended
December 31, 2009 filed on March 25, 2010)
Stock Exchange Agreement dated August 11, 2014 by and among Jingzhou City Jiulong Machinery Electricity Manufacturing Co., Ltd.,
China Automotive Systems, Inc. and Hubei Henglong Automotive System Group Co., Ltd. (incorporated by reference to Exhibit 10.2 to the
Company’s Form 10-Q Quarterly Report filed on August 13, 2014)
English translation of Joint Venture Contract, dated as of April 27, 2018, by and between Hubei Henglong Automotive System Group Co.,
Ltd. and KYB (China) Investment Co., Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on
April 27, 2018)
Consent of PricewaterhouseCoopers Zhong Tian LLP*
Rule 13a-14(a) Certification*
Rule 13a-14(a) Certification*
Section 1350 Certification*
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, 2020, filed
on March 30, 2021, formatted in Extensible Business Reporting Language (XBRL):
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Consolidated Balance Sheets;
Consolidated Statements of Income or Loss;
Consolidated Statements of Comprehensive Income or Loss;
Consolidated Statements of Changes in Stockholders’ Equity;
Consolidated Statements of Cash Flows; and
Related Notes.
*
Filed herewith.
106 | Page
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
DESCRIPTION OF COMMON STOCK
Exhibit 4.1
We are authorized to issue 80,000,000 shares of common stock of $0.0001 par value per share. As of March 30, 2021, there were 32,338,302 shares of
our common stock (including 1,486,526 shares of treasury stock) issued.
General
The holders of common stock are entitled to one vote per share on all matters submitted to a vote of stockholders, including the election of directors.
There is no right to cumulate votes in the election of directors. The holders of common stock are entitled to any dividends that may be declared by the board of
directors out of funds legally available therefore subject to the prior rights of holders of preferred stock and any contractual restrictions we have against the
payment of dividends on common stock. In the event of our liquidation or dissolution, holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preferences of any outstanding shares of preferred stock (if any). Holders of common stock have no
preemptive rights and have no right to convert their common stock into any other securities. All of the outstanding shares of common stock are fully paid and
non-assessable.
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 of the close of business on June 26, 2014. The Company does not anticipate paying any other cash dividends in the foreseeable future. The Company
currently intends to retain future earnings, if any, to finance operations and the expansion of its business. Any future determination to pay cash dividends will
be at the discretion of the Company’s board of directors and will be based upon the Company’s financial condition, operating results, capital requirements,
plans for expansion, restrictions imposed by any financing arrangements and any other factors that the Company’s board of directors deems relevant.
Transfer Agent
The transfer agent and registrar for our common stock is Securities Transfer Corporation.
Listing
Our common stock is listed on the NASDAQ Capital Market under the symbol “CAAS.”
Delaware Anti-Takeover Law
We are subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, this section prohibits a publicly held Delaware
corporation from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction in which the
person becomes an interested stockholder, unless:
·
·
·
before the date on which the stockholder became an interested stockholder, the corporation’s board of directors approved either the business
combination or the transaction in which the person became an interested stockholder;
the stockholder acquires more than 85% of the outstanding voting stock of the corporation, excluding shares held by directors who are officers or
held in certain employee stock plans, upon consummation of the transaction in which the stockholder becomes an interested stockholder; or
the business combination is approved by the board of directors and by two-thirds of the outstanding voting stock of the corporation that is not held
by the interested stockholder, at a meeting of the stockholders held on or after the date of the business combination.
Section 203 defines “business combination” to include:
·
·
·
·
any merger or consolidation involving the corporation and the interested stockholder;
any sale, transfer, pledge or other disposition of 10% or more of our assets involving the interested stockholder;
in general, any transaction that results in the issuance or transfer by us of any of our stock to the interested stockholder; or
the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation’s board of directors to grant, indemnity to
directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for
expenses incurred) arising under the Securities Act. There are no specific provisions relating to indemnification of directors and officers in our certificate of
incorporation or bylaws.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-252825) and Form S-8 (No. 333-126959) of China
Automotive Systems, Inc. of our report dated March 30, 2021 relating to the financial statements, which appears in this Form 10-K.
Exhibit 23.1
/s/ PricewaterhouseCoopers Zhong Tian LLP
Shanghai, the People’s Republic of China
March 30, 2021
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 the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial 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 in
Exchange 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 our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others 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 our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness 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 most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely 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 the
registrant’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 are
reasonably 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 internal
controls over financial reporting.
Date: March 30, 2021
By:
/s/ Qizhou Wu
Qizhou Wu
Chief Executive Officer
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 the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial 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 in
Exchange 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 our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others 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 our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness 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 most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely 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 the
registrant’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 are
reasonably 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 internal
controls over financial reporting.
Date: March 30, 2021
By: /s/ Jie Li
Jie Li
Chief Financial Officer
Exhibit 32.1
SECTION 1350 CERTIFICATION (CEO)
CHINA AUTOMOTIVE SYSTEMS, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 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, 2020, as filed with
the Securities and Exchange Commission on the date hereof, the “Report,” I, Qizhou Wu, Chief Executive Officer 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 the Company.
Date: March 30, 2021
By: /s/ Qizhou Wu
Qizhou Wu
Chief Executive Officer
Exhibit 32.2
SECTION 1350 CERTIFICATION (CFO)
CHINA AUTOMOTIVE SYSTEMS, INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 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, 2020, as filed with
the 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 the Company.
Date: March 30, 2021
By: /s/ Jie Li
Jie Li
Chief Financial Officer