Rachel Levine - Investor Relations Qizhou Wu - Chief Executive Officer Jie Li - Chief Financial Officer

Good day everyone and welcome to today’s program. At this time, all participants are in a listen-only mode. [Operator Instructions] It is now my pleasure to turn the conference over to Ms. Rachel Levine. You may begin.

Thank you. Thank you everyone for joining us today. Welcome to China Automotive Systems Third Quarter 2015 Conference Call. My name is Rachel Levine, and I’m representing China Automotives US Investor Relations Advisor. Joining us today are Mr. Qizhou Wu, Chief Executive Officer; Mr. Jie Li, Chief Financial Officer; and [Mr. Tin Yau], Financial Manager of China Automotive Systems. They will be available to answer questions later in the conference call with the assistance of translation. Before we begin, I will remind all listeners that throughout this call, we may make statements that may contain forward-looking statements. Forward-looking statements represent the company’s estimates and assumptions only as of the date of this call. As a result, the company’s actual results could differ materially from those contained in these forward-looking statements due to a number of factors including those described under the heading Risk Factors in the company’s Form 10-K Annual Report for the year ended December 31, 2014 as filed with the Securities and Exchange Commission on March 26, 2015, and in documents filed by the company from time to time with the Securities and Exchange Commission. The company expressly disclaims any duty to provide updates to any forward looking statements made in this call whether as a result of new information, future events or otherwise. On this call, I will provide a brief overview and summary of financial results for the third quarter and nine-month periods of 2015. And then I will turn the call over to management to conduct a question-and-answer session. The following 2015 third quarter and nine-month results are unaudited numbers; results are reported under US GAAP. For the purposes of our call today, I’ll review the financial results in US dollars. First, let’s review the dynamics of the automobile industry and China Automotive’s market position…

[Operator Instructions] We’ll take our first question from [Don Cooper].

I was wondering if management would characterize the automotive market in China with respect to the level of inventory, specifically, [indiscernible] held in inventory relative to more normal market.

[Foreign Language] So the third quarter, we saw a reduction on the inventory in China and mainly due to the cut back on the production, so OEM sees a weakness in demand side, so this cut back – a total reduction and so that helped to eliminate some of the inventory. And fourth quarter is typically a strong quarter. And so everyone is now building off their inventory as we’re heading towards a high seasonal auto sales. On top of that, we have government subsidies coming in play to incentivize consumer to buy small vehicles.

[Operator Instructions] We will take our next question from [Robert Polivic].

I had a couple of questions, actually. The reduction in margins for the quarter, was that related to a change in currency or price reductions in contracts to the car manufacturers? That’s my first question.

[Foreign Language] So to answer your question, the margin decline on a year-over-year basis is not related to the currency change. It’s mainly due to the utilization, production utilization rate. In the third quarter, as you know, the industry – the sector is very weak. So our production utilization rate is at 70%. At such a low rate, utilization rate, our fixed cost was normally 6% to 7% of total cost of goods sold. And so we’ll not be able to [spread them into new products]. That being said, gross margin was down by about 1 percentage point. And also on the cost side, the raw material price also [indiscernible] due to the weak sector, the steel sector. So we took advantage of it. So it’s a bit on cost, raw material cost. But net-net, [indiscernible].

My next question has to do with sales for the fourth quarter, I assume if you’re saying that sales year-over-year should be flat, the fourth quarter should be very strong, like somewhere around $150 million. And if that’s the case, with this government tax incentive, should we see some reasonable growth heading into 2016 with the reduction in sales tax for vehicles that qualify?

[Foreign Language] So as you already saw after the incentives by the Chinese government, October month’s encouraging increase of 15% on the passenger vehicle sector on a year-over-year basis. Now, looking to 2016, I think bulk of those demand will return in 2016. We are seeing probably 5% to 8% conservatively, 5% to 8% increase. And that’s mainly driven by two factors. One is directly tied into this, reduction on purchase tax on smaller vehicle, engine size of 1.6 liter or below. And the other is the economy. As you probably read, the Chinese government has placed a greater emphasis on the economy to moving from old type of manufacturing [indiscernible] economy to more – or consumer oriented economy. And that alone will see not more policy will come in to help to revitalize the economy. And that being said, the auto is probably – auto is the second largest industry in China. Number one is the real estate. The auto industry after all these years of growth, we’re still seeing a relatively smaller penetration in terms of consumer in China. And so per 1,000 population, we still have less than 10% vehicles, which is substantially lower than global ownership level. And not to mention the Chinese consumer now has higher savings and has already experienced the lifestyle change through some of their new purchases of such vehicles. And so this could be – a number of factors will come in to help with the growth of the auto sector in 2016.

I did have one other question and it just has to do with competitive – or competition, I should say, setting up factories in China, I guess some steering manufacturers from the US, I guess, Europe and Japan probably to sell to related companies that they have relationships with. How is that competitively affecting China Automotive, you’re still in a very good position to gain share from global auto manufacturers and in the pressure increasing in China with regard to competition from these new plants or I don’t know if there are that many that have set up or plant is set up in China?

[Foreign Language] So the competitive landscape has not changed much in the last, I would say, 10 years, or been competing with those peers whether they’re from Japan, Europe or US in China. However, we still command the larger market share in China. And two of the main reasons are driving this to continue to be the leader. One is we provide the best value. When we compete with a competitor’s product, if we have a similar quality, our price is better. When we are competing with their – on the same price, we offer better quality. So either way, we have an advantage over our competitors. And second reason is our after sales services that are being a local player, being established in China for over 20 years and we are the best service provider. So we’re very confident and that’s one of our selling point that we’ll continue to capitalize on that. [Foreign Language] In the past, we’ve been very strong in the domestic branch, whether [indiscernible]. We are the first group of supplier to support them and we play a vital role in their transformation to become a large player in China and globally. We will continue that relationship to expand with those OEMs domestically, but also we will also start to increase our penetration into the Sino-foreign joint ventures. As you know, there are a number of Sino-foreign joint ventures in China. So want to leverage our competitive advantage to increase our orders from them. And globally, since we already have a quite strong track record in Detroit working with Chrysler and we look forward to expand that relationship and through our other OEM players in the global market. So we think we’re very well positioned. And not to mention we have already planned and built our facility in Brazil and that’s in the testing stage. And so in 2016 we’ll start mass production.

And we have no additional questions at this time.

Thank you everyone for participating in the China Automotive Systems third quarter 2015 financial results conference call. We look forward to speaking with you next quarter and wish you all a good day or evening.

This does conclude today’s program. You may now disconnect at any time.