CHINA AUTOMOTIVE SYSTEMS INC [CAAS] Filings

10-Q 1 caas-20240630x10q.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2024

Or

☐	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-33123

China Automotive Systems, Inc.

(Exact name of registrant as specified in its charter)


Delaware		33-0885775
(State or other jurisdiction of incorporation or		(I.R.S. Employer Identification No.)
organization)

No. 1 Henglong Road, Yu Qiao Development Zone, Shashi District

Jing Zhou City, Hubei Province, the People’s Republic of China

(Address of principal executive offices)

(86) 716- 412- 7901

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol	Name of each exchange on which registered
Common Stock, $0.0001 par value	CAAS	The Nasdaq Capital Market

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 ☒ 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 ☒ 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 an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol	Name of each exchange on which registered
Common Stock, $0.0001 par value	CAAS	The Nasdaq Capital Market

As of August 13, 2024, the Company had 30,185,702 shares of common stock issued and outstanding.

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CHINA AUTOMOTIVE SYSTEMS, INC.

INDEX


		Page

	Part I — Financial Information	4

Item 1.	Unaudited Financial Statements.	4
	Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income for the Three Months and Six months Ended June 30, 2024 and 2023	4
	Condensed Unaudited Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023	6
	Condensed Unaudited Consolidated Statements of Cash Flows for the Six months Ended June 30, 2024 and 2023	7
	Notes to Condensed Unaudited Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	36
Item 4.	Controls and Procedures.	36

	Part II — Other Information	37

Item 1.	Legal Proceedings.	37
Item 1A.	Risk Factors.	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	37
Item 3.	Defaults Upon Senior Securities.	37
Item 4.	Mine Safety Disclosures.	37
Item 5.	Other Information.	37
Item 6.	Exhibits.	38

Signatures		39

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Cautionary Statement

This Quarterly Report on Form 10-Q 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 Quarterly Report or other reports or documents the Company files with the Securities and Exchange Commission 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-Q is filed, and the Company does not intend to update any of the forward-looking statements after the date this Quarterly Report on Form 10-Q is filed to conform these statements to actual results, unless required by law. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the Securities and Exchange Commission.

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PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS.

China Automotive Systems, Inc. and Subsidiaries

Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income

(In thousands of USD, except share and per share amounts)


	Three Months Ended June 30,
	2024		2023
Net product sales ($13,550 and $13,194 sold to related parties for the three months ended June 30, 2024 and 2023)	$	158,608	$	137,410
Cost of products sold ($7,689 and $7,311 purchased from related parties for the three months ended June 30, 2024 and 2023)		129,306		114,692
Gross profit		29,302		22,718
Gain on other sales		1,720		742
Less: Operating expenses
Selling expenses		4,614		3,794
General and administrative expenses		7,418		5,271
Research and development expenses		8,184		6,606
Total operating expenses		20,216		15,671
Income from operations		10,806		7,789
Other income, net		1,735		1,963
Interest expense		(183)		(276)
Financial (expense)/income, net		(690)		3,963
Income before income tax expenses and equity in earnings of affiliated companies		11,668		13,439
Less: Income taxes		2,108		1,487
Add: Equity in losses of affiliated companies		(805)		(484)
Net income		8,755		11,468
Less: Net income attributable to non-controlling interests		1,608		995
Accretion to redemption value of redeemable non-controlling interests		(7)		(7)
Net income attributable to parent company’s common shareholders	$	7,140	$	10,466
Comprehensive income:
Net income	$	8,755	$	11,468
Other comprehensive income:
Foreign currency translation loss, net of tax		(2,846)		(16,886)
Comprehensive income/(loss)		5,909		(5,418)
Less: Comprehensive income/(loss) attributable to non-controlling interests		1,431		(80)
Accretion to redemption value of redeemable non-controlling interests		(7)		(7)
Comprehensive income/(loss) attributable to parent company	$	4,471	$	(5,345)

Net income attributable to parent company’s common shareholders per share -
Basic	$	0.24	$	0.35
Diluted	$	0.24	$	0.35

Weighted average number of common shares outstanding -
Basic		30,185,702		30,185,702
Diluted		30,185,702		30,189,537

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

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China Automotive Systems, Inc. and Subsidiaries

Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income

(In thousands of USD, except share and per share amounts)


	Six Months Ended June 30,
	2024		2023
Net product sales ($24,910 and $26,770 sold to related parties for the six months ended June 30, 2024 and 2023)	$	298,002	$	279,653
Cost of products sold ($14,657 and $14,326 purchased from related parties for the six months ended June 30, 2024 and 2023)		244,631		235,317
Gross profit		53,371		44,336
Gain on other sales		2,234		1,395
Less: Operating expenses
Selling expenses		8,687		7,178
General and administrative expenses		12,965		10,024
Research and development expenses		13,496		12,996
Total operating expenses		35,148		30,198
Income from operations		20,457		15,533
Other income, net		4,138		3,465
Interest expense		(441)		(525)
Financial (expense)/income, net		(702)		3,541
Income before income tax expenses and equity in earnings of affiliated companies		23,452		22,014
Less: Income taxes		3,851		2,316
Add: Equity in losses of affiliated companies		(1,582)		(347)
Net income		18,019		19,351
Less: Net income attributable to non-controlling interests		2,597		2,050
Accretion to redemption value of redeemable non-controlling interests		(15)		(15)
Net income attributable to parent company’s common shareholders	$	15,407	$	17,286
Comprehensive income:
Net income	$	18,019	$	19,351
Other comprehensive income:
Foreign currency translation loss, net of tax		(3,194)		(12,332)
Comprehensive income		14,825		7,019
Less: Comprehensive income attributable to non-controlling interests		2,372		1,241
Accretion to redemption value of redeemable non-controlling interests		(15)		(15)
Comprehensive income attributable to parent company	$	12,438	$	5,763

Net income attributable to parent company’s common shareholders per share -
Basic	$	0.51	$	0.57
Diluted	$	0.51	$	0.57

Weighted average number of common shares outstanding -
Basic		30,185,702		30,185,702
Diluted		30,185,702		30,191,309

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

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China Automotive Systems, Inc. and Subsidiaries

Condensed Unaudited Consolidated Balance Sheets

(In thousands of USD unless otherwise indicated)


	June 30, 2024		December 31, 2023
ASSETS
Current assets:
Cash and cash equivalents	$	107,094	$	114,660
Pledged cash		41,291		40,534
Accounts and notes receivable, net - unrelated parties		271,391		261,237
Accounts and notes receivable, net - related parties		16,738		8,169
Inventories		107,438		112,392
Other current assets		26,112		27,083
Total current assets		570,064		564,075
Non-current assets:
Property, plant and equipment, net		100,098		101,359
Land use rights, net		9,044		9,233
Long-term investments		57,360		60,173
Other non-current assets		48,427		31,600
Total assets	$	784,993	$	766,440

LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term loans	$	46,576	$	48,005
Accounts and notes payable-unrelated parties		241,183		240,739
Accounts and notes payable-related parties		12,821		12,839
Accrued expenses and other payables		46,237		44,771
Other current liabilities		33,221		37,385
Total current liabilities		380,038		383,739
Long-term liabilities:
Long-term tax payable		—		8,781
Other non-current liabilities		6,204		5,498
Total liabilities	$	386,242	$	398,018

Commitments and Contingencies (See Note 22)

Mezzanine equity:
Redeemable non-controlling interests		628		613

Stockholders’ equity:
Common stock, $0.0001 par value - Authorized - 80,000,000 shares; Issued – 32,338,302 and 32,338,302 shares as of June 30, 2024 and December 31, 2023, respectively	$	3	$	3
Additional paid-in capital		69,722		63,731
Retained earnings-
Appropriated		12,174		11,851
Unappropriated		299,916		284,832
Accumulated other comprehensive income		(11,227)		(8,258)
Treasury stock – 2,152,600 and 2,152,600 shares as of June 30, 2024 and December 31, 2023, respectively		(7,695)		(7,695)
Total parent company stockholders’ equity		362,893		344,464
Non-controlling interests		35,230		23,345
Total stockholders’ equity		398,123		367,809
Total liabilities, mezzanine equity and stockholders’ equity	$	784,993	$	766,440

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

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China Automotive Systems, Inc. and Subsidiaries

Condensed Unaudited Consolidated Statements of Cash Flows

(In thousands of USD unless otherwise indicated)


	Six months Ended June 30,
	2024		2023
Cash flows from operating activities:
Net income	$	18,019	$	19,351
Adjustments to reconcile net income from operations to net cash provided by operating activities:
Depreciation and amortization		9,868		9,528
Reversal of credit losses		9		(459)
Deferred income taxes		—		237
Equity in losses of affiliated companies		1,582		347
Loss on disposal of property, plant and equipment		773		15
(Increase)/decrease in:
Accounts and notes receivable		(20,451)		(18,323)
Inventories		4,271		8,355
Other current assets		3,654		(904)
Increase/(decrease) in:
Accounts and notes payable		1,994		(10,323)
Accrued expenses and other payables		1,134		(604)
Long-term taxes payable		(7,025)		(5,268)
Other current liabilities		(4,697)		(2,004)
Net cash provided by/(used in) operating activities		9,131		(52)
Cash flows from investing activities:
Increase in demand loans included in other non-current assets		—		(14)
Cash received from disposal of property, plant and equipment sales		607		582
Payments to acquire property, plant and equipment (including $2,839 and $2,022 paid to related parties for the six months ended June 30, 2024 and 2023, respectively)		(10,016)		(5,438)
Payments to acquire intangible assets		(332)		(2,361)
Investments under the equity method		—		(7,729)
Purchase of short-term investments		(40,054)		(40,491)
Proceeds from maturities of short-term investments		20,626		30,822
Cash received from long-term investments		937		583
Net cash used in investing activities		(28,232)		(24,046)
Cash flows from financing activities:
Proceeds from bank loans		47,054		34,280
Repayments of bank loans		(48,384)		(39,836)
Cash received from capital contributions of a non-controlling interest		15,504		—
Net cash provided by/(used in) financing activities		14,174		(5,556)
Effects of exchange rate on cash, cash equivalents and pledged cash		(1,882)		(3,756)
Net decrease in cash, cash equivalents and pledged cash		(6,809)		(33,410)
Cash, cash equivalents and pledged cash at beginning of the period		155,194		158,951
Cash, cash equivalents and pledged cash at end of the period	$	148,385	$	125,541

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

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China Automotive Systems, Inc. and Subsidiaries

Notes to Condensed Unaudited Consolidated Financial Statements

Three Months and Six months Ended June 30, 2024 and 2023

1. Organization and business

China Automotive Systems, Inc., “China Automotive,” was incorporated in the State of Delaware on June 29, 1999 under the name 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 in Hong Kong on January 3, 2003 under the Companies Ordinance in 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 People’s Republic of China, the “PRC,” and Brazil as of June 30, 2024 and December 31, 2023.


	Percentage Interest
	June 30,		December 31,
Name of Entity	2024		2023
Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong” ¹	100.00	%	100.00	%
Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong” ²	100.00	%	100.00	%
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “Shenyang” ³	70.00	%	70.00	%
Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong” ⁴	85.00	%	85.00	%
Wuhu Henglong Automotive Steering System Co., Ltd., “Wuhu” ⁵	100.00	%	100.00	%
Hubei Henglong Automotive System Group Co., Ltd., “Hubei Henglong” ⁶	100.00	%	100.00	%
Jingzhou Henglong Automotive Technology (Testing) Center, “Testing Center” ⁷	100.00	%	100.00	%
Chongqing Henglong Hongyan Automotive System Co., Ltd., “Chongqing Henglong” ⁸	70.00	%	70.00	%
CAAS Brazil’s Imports and Trade In Automotive Parts Ltd., “Brazil Henglong” ⁹	95.84	%	95.84	%
Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie” ¹⁰	85.00	%	85.00	%
Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong” ¹¹	100.00	%	100.00	%
Hubei Henglong & KYB Automobile Electric Steering System Co., Ltd., “Henglong KYB” ¹²	60.00	%	66.60	%
Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd., “Wuhan Hyoseong” ¹³	51.00	%	51.00	%
Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun” ¹⁴	62.00	%	62.00	%
Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong” ¹⁵	100.00	%	100.00	%
Hubei Zhirong Automobile Technology Co., Ltd., “Zhirong” ¹⁶	100.00	%	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.

4.	Jielong was established in 2006 and mainly engages in the production and sales of automotive steering columns.

5.	Wuhu was established in 2006 and mainly engages in the production and sales of automobile steering systems.

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.

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7.	In December 2009, Henglong, a subsidiary of Genesis, formed Testing Center, which mainly engages in the research and development of new products.

8.	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.

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.

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.

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 sales of automotive electronics.

12.

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. In March 2024, KYB obtained an additional 6.6% equity interest in Henglong KYB for total consideration of RMB 110.0 million, equivalent to approximately $15.5 million. The Company retained its controlling interest in Henglong KYB.

13.

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.

14.	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.

15.

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.

16.	In June 2023, Hubei Henglong contributed certain equipment and intangible assets to Hubei Zhirong Automobile Technology Co., Ltd., “Zhirong”, representing 100% of Zhirong’s paid-up capital. Zhirong mainly engages in inspection and testing of automotive products.

The Company has business relationships with more than sixty vehicle manufacturers, including BYD Auto Co., Ltd., Zhejiang Geely Automobile Co., Ltd., and Chery Automobile Co., Ltd., three of the largest privately owned car manufacturers in China, Chongqing Changan Automobile Co., Ltd., the largest state-owned car manufacturers in China, SAIC Motor Co., Ltd., FAW Group and others. All of them are our key customers. For overseas customers, the Company has supplied power steering gear to Stellantis N.V. since 2009 and to Ford Motor Company since 2016.

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2. Basis of presentation and significant accounting policies

(a)

Basis of Presentation

Basis of Presentation – The accompanying condensed unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. The details of subsidiaries are disclosed in Note 1. Significant inter-company balances and transactions have been eliminated upon consolidation. The condensed unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions in Regulation S-X. Accordingly they do not include all of the information and footnotes required by such accounting principles for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

The accompanying interim condensed consolidated financial statements are unaudited, but in the opinion of the Company’s management, contain all necessary adjustments, which include normal recurring adjustments, for a fair statement of the results of operations, financial position and cash flows for the interim periods presented.

The condensed consolidated balance sheet as of December 31, 2023 is derived from the Company’s audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

The results of operations for the three months and six months ended June 30, 2024 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2024.

Estimation - The preparation of financial statements in conformity with U.S. GAAP 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. Actual results could differ from those estimates.

Foreign Currencies - China Automotive and HLUSA maintain their books and records in United States Dollars, “USD,” their functional currency. The Company’s subsidiaries based in the PRC and Genesis maintain their books and records in Renminbi, “RMB,” their functional currency. The Company’s subsidiary based in Brazil maintains its books and records in Brazilian real, “BRL,” its functional currency. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 830, 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.

(b)	Recent Accounting Pronouncements

No accounting standards newly issued during the three months ended June 30, 2024 had a material impact on the Company’s financial statements or disclosures.

(c)	Significant Accounting Policies

There have been no updates to the significant accounting policies set forth in the notes to the consolidated financial statements for the year ended December 31, 2023.

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3. Accounts and notes receivable, net

The Company’s accounts and notes receivable, net as of June 30, 2024 and December 31, 2023 are summarized as follows (figures are in thousands of USD):


	June 30, 2024		December 31, 2023
Accounts receivable - unrelated parties	$	167,685	$	164,231
Notes receivable - unrelated parties ⁽¹⁾		117,434		112,605
Total accounts and notes receivable - unrelated parties		285,119		276,836
Less: allowance for credit losses - unrelated parties		(13,728)		(15,599)
Accounts and notes receivable, net - unrelated parties		271,391		261,237
Accounts receivable - related parties		18,231		9,573
Less: allowance for credit losses - related parties		(1,493)		(1,404)
Accounts receivable, net - related parties		16,738		8,169
Accounts and notes receivable, net	$	288,129	$	269,406

(1)	Notes receivable represent accounts receivable in the form of bills of exchange for which acceptances are guaranteed and settlements are handled by banks.

As of June 30, 2024 and December 31, 2023, the Company pledged its notes receivable with amounts of $0.3 million and $11.5 million, respectively, as collateral for banks to endorse the payment of the Company’s notes payable to the noteholders upon maturity (See Note 8).

As of June 30, 2024 and December 31, 2023, the Company pledged its accounts receivable with amounts of $0.4 million and $0.5 million, respectively, as collateral for banks to obtain the long-term loans.

Provision for doubtful accounts and notes receivable, as provided in the unaudited consolidated statements of operations, amounted to $0.2 million for the three months ended June 30, 2024.

Provision for doubtful accounts and notes receivable, as provided in the unaudited consolidated statements of operations, amounted to $0.1 million for the six months ended June 30, 2024.

Provision for doubtful accounts and notes receivable, as reversed in the unaudited consolidated statements of operations, amounted to $0.2 million and $0.5 million for the three and six months ended June 30,2023.

During the three months ended June 30, 2024, the Company’s five largest customers accounted for 50.4% of its consolidated net product sales, with two customers accounting for more than 10% of consolidated net product sales, i.e., 17.5% and 14.9%. During the six months ended June 30, 2024, the Company’s five largest customers accounted for 49.0% of its consolidated net product sales, with two customers accounting for more than 10% of consolidated net product sales, i.e., 16.7% and 13.1%. As of June 30, 2024, approximately 5.1% and 10.3% of accounts receivable were from trade transactions with aforementioned customers.

During the three months ended June 30, 2023, the Company’s five largest customers accounted for 39.7% of its consolidated net product sales, with one customer individually accounting for more than 10% of consolidated net product sales, i.e., 17.4%. During the six months ended June 30, 2023, the Company’s five largest customers accounted for 41.7% of its consolidated net product sales, with one customer accounting for more than 10% of consolidated net product sales, i.e., 20.0%. As of June 30, 2023, approximately 5.1% of accounts receivable were from trade transactions with the aforementioned customer.

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4. Inventories

The Company’s inventories as of June 30, 2024 and December 31, 2023 consisted of the following (figures are in thousands of USD):


	June 30, 2024		December 31, 2023
Raw materials	$	19,501	$	28,505
Work in progress		17,695		17,123
Finished goods		61,867		62,760
Cost of R&D service		8,375		4,004
Total	$	107,438	$	112,392

The Company recorded $4.1 million and $3.7 million of inventory write-down to cost of products sold for the three months ended June 30, 2024 and 2023, respectively, and $5.9 million and $4.9 million for the six months ended June 30, 2024 and 2023, respectively.

5. Long-term investments

The Company’s long-term investments as of June 30, 2024 and December 31, 2023, are summarized as follows (figures are in thousands of USD):


	June 30, 2024		December 31, 2023
Chongqing Venture Fund	$	12,630	$	13,158
Hubei Venture Fund		12,074		12,217
Suzhou Qingshan		8,326		8,409
Suzhou Venture Fund		2,309		3,387
Suzhou Mingzhi ⁽¹⁾		1,254		1,261
Sentient AB		19,546		20,417
Henglong Tianyu		742		793
Jiangsu Intelligent		479		531
Total	$	57,360	$	60,173

(1)

In June 2023, Hubei Henglong entered into an agreement with other parties to establish a limited partnership, Suzhou Mingzhi Intelligent Manufacturing Industry Investment Fund L.P., “Suzhou Mingzhi”. As of June 30, 2024, Hubei Henglong has paid RMB 9.0 million, equivalent to approximately $1.2 million, representing 19.74% of Suzhou Mingzhi’s equity. As a limited partner, Hubei Henglong has more than virtually no influence over Suzhou Mingzhi’s operating and financial policies. The investment is accounted for using the equity method.

The condensed financial information of the Company’s significant equity investee for the three and six months ended June 30, 2024 and 2023, Chongqing Venture Fund, is summarized as follows (figures are in thousands of USD):


	Three Months Ended June 30,				Six months Ended June 30,
	2024		2023		2024		2023
Revenue	$	—	$	—	$	—	$	—
Gross profit		—		—		—		—
Gain from continuing operations		(1,163)		(1,286)		(2,987)		1,387
Net gain	$	(1,163)		(1,286)	$	(2,987)		1,387

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6. Property, plant and equipment, net

The Company’s property, plant and equipment, net as of June 30, 2024 and December 31, 2023 are summarized as follows (figures are in thousands of USD):


	June 30, 2024		December 31, 2023
Costs:
Machinery and equipment	$	245,337	$	241,761
Buildings		63,222		64,390
Electronic equipment		5,864		5,804
Motor vehicles		4,558		4,587
Construction in progress		11,595		11,821
Total amount of property, plant and equipment		330,576		328,363
Less: Accumulated depreciation ⁽¹⁾		(229,589)		(226,436)
Less: Impairment		(889)		(568)
Total amount of property, plant and equipment, net ⁽²⁾	$	100,098	$	101,359

(1)	Depreciation charges were $4.3 million and $4.3 million for the three months ended June 30, 2024 and 2023, respectively, and $9.0 million and $8.8 million for the six months ended June 30, 2024 and 2023, respectively.

(2)	As of June 30, 2024 and December 31, 2023, the Company pledged property, plant and equipment and land use rights with net book value of approximately $16.6 million and $43.3 million, respectively, as security for its comprehensive credit facilities with banks in China.

7. Loans

Loans consist of the following as of June 30, 2024 and December 31, 2023 (figures are in thousands of USD):


	June 30, 2024		December 31, 2023
Short-term bank loans	$	46,576	$	48,005
Long-term bank loans		1,025		1,221
Total	$	47,601	$	49,226

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 $200.7 million and $195.8 million, respectively, as of June 30, 2024 and December 31, 2023. As of June 30, 2024 and December 31, 2023, the Company has drawn down loans under these facilities with an aggregate amount of $47.6 million and $49.2 million, respectively. The weighted average interest rate was 2.7% and 2.6% per annum, for the three months ending June 30, 2024 and the year ended December 31, 2023, respectively.

The Company must use the loans for the purpose as prescribed in the loan contracts. If the Company fails to do so, it will be charged penalty interest and/or trigger early repayment. The Company complied with such financial covenants during the three months ended June 30, 2024.

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8. Accounts and notes payable

The Company’s accounts and notes payable as of June 30, 2024 and December 31, 2023 are summarized as follows (figures are in thousands of USD):


	June 30, 2024		December 31, 2023
Accounts payable - unrelated parties	$	149,290	$	147,712
Notes payable - unrelated parties ⁽¹⁾		91,893		93,027
Accounts and notes payable - unrelated parties		241,183		240,739
Accounts and notes payable - related parties		12,821		12,839
Total	$	254,004	$	253,578

(1)

Notes payable represent payables in the form of notes issued by the bank. As of June 30, 2024 and December 31, 2023, the Company has pledged cash of $41.3 million and $39.3 million, respectively. As of June 30, 2024 and December 31, 2023, the Company has pledged notes receivable of $0.3 million and $11.5 million, respectively, as collateral for banks to endorse the payment of the Company’s notes payable to the noteholders 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 June 30, 2024 and December 31, 2023, the Company has used credit facilities for issue of bank notes with amount of $44.5 million and $47.4 million.

9. Accrued expenses and other payables

The Company’s accrued expenses and other payables as of June 30, 2024 and December 31, 2023 are summarized as follows (figures are in thousands of USD):


	June 30, 2024		December 31, 2023
Accrued expenses	$	11,204	$	10,464
Warranty reserves ⁽¹⁾		32,910		30,440
Payables for overseas transportation and custom clearance		—		400
Dividends payable to holders of non-controlling interests		421		424
Other payables		1,702		3,043
Balance at end of year/period	$	46,237	$	44,771

(1)

The Company provides for the estimated cost of product warranties when the products are sold. Such estimates of product warranties are based on, among other things, historical experience, product changes, material expenses, services and transportation expenses arising from the manufactured products. Estimates will be adjusted on the basis of actual claims and circumstances.

For the three and six months ended June 30, 2024 and 2023, the warranties activities were as follows (figures are in thousands of USD):


	Three Months Ended June 30,				Six months Ended June 30,
	2024		2023		2024		2023
Balance at beginning of the period	$	31,665	$	34,032	$	30,440	$	32,435
Additions during the period		4,996		4,817		8,859		9,428
Settlement within the period		(3,606)		(3,185)		(6,193)		(6,633)
Foreign currency translation gain		(145)		(1,716)		(196)		(1,282)
Balance at end of the period	$	32,910	$	33,948	$	32,910	$	33,948

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10. Fair value measurement

The Company has entered into foreign exchange forward contracts with a local bank to reduce the exposure of significant changes in exchange rates between RMB and USD. Authoritative guidance requires companies to recognize all of the derivative financial instruments as either assets or liabilities at fair value in the consolidated balance sheets based upon quoted market prices for comparable instruments. The Company’s forward contracts have not met the criteria for hedge accounting within authoritative guidance. Therefore, the foreign exchange forward contracts have been recorded at fair value, with the gain or loss on these transactions recorded in the consolidated statements of operations within “other income, net” in the period in which they occur. These foreign exchange forward contracts will mature within 12 months. The Company used a discounted cash-flow methodology to measure fair value, which requires inputs such as interest yield curves and foreign exchange rates. The significant inputs used in the aforementioned model can be corroborated with market observable data and therefore the fair value measurements are classified as level 2. Typically, any losses or gains on the forward exchange contracts are offset by re-measurement losses or gains on the underlying balances denominated in non-functional currencies. The Company’s foreign currency exchange contracts are an over-the-counter instrument. These foreign exchange forward contracts have terminated as of December 31, 2023. The Company recorded loss from change in fair value of foreign exchange forward contracts of nil and $0.1 million during the six months ended June 30, 2024 and 2023.

11. Redeemable non-controlling interests

In September 2020, one of the Company’s subsidiaries issued shares to Hubei Venture Fund amounting to RMB 5.0 million, equivalent to approximately $0.7 million translated at spot rate of transaction date. The shares will be transferred to the Company and the other shareholder of the subsidiary on a 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 6.0% per year. As of June 30, 2024, $0.6 million of the shares are subject to purchase by the Company and are therefore accounted for as redeemable non-controlling interests in mezzanine equity.

For the three and six months ended June 30, 2024, the Company recognized accretion of $0.007 million and $0.015 million, respectively, to the redemption value of the shares over the period starting from the issuance date with a corresponding reduction to retained earnings.

For the three and six months ended June 30, 2023, the Company recognized accretion of $0.007 million and $0.015 million, respectively, to the redemption value of the shares over the period starting from the issuance date with a corresponding reduction to retained earnings.

12. Additional paid-in capital

The Company’s positions in respect of the amounts of additional paid-in capital for the three and six months ended June 30, 2024 and 2023, are summarized as follows (figures are in thousands of USD):


	Three Months Ended June 30,				Six months Ended June 30,
	2024		2023		2024		2023
Balance at beginning of the period	$	69,722	$	63,731	$	63,731	$	63,731
Contribution by the non-controlling interest of Henglong KYB		—		—		5,991		—
Balance at end of the period	$	69,722	$	63,731	$	69,722	$	63,731

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13. Retained earnings

Appropriated

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 three months ended June 30, 2024 and 2023, no statutory reserve was appropriated by the subsidiaries in China.For the six months ended June 30, 2024 and 2023, a subsidiary in China appropriated statutory reserve $0.3 million and nil, respectively.

The Company’s activities in respect of the amounts of appropriated retained earnings for the three and six months ended June 30, 2024 and 2023, are summarized as follows (figures are in thousands of USD):


	Three Months Ended June 30,				Six months Ended June 30,
	2024		2023		2024		2023
Balance at beginning of the period	$	12,174	$	11,851	$	11,851	$	11,851
Appropriation of retained earnings		—		—		323		—
Balance at end of the period	$	12,174	$	11,851	$	12,174	$	11,851

Unappropriated

The Company’s activities in respect of the amounts of the unappropriated retained earnings for the three and six months ended June 30, 2024 and 2023, are summarized as follows (figures are in thousands of USD):


	Three Months Ended June 30,				Six months Ended June 30,
	2024		2023		2024		2023
Balance at beginning of the period	$	292,776	$	253,994	$	284,832	$	247,174
Net income attributable to parent company		7,147		10,473		15,422		17,301
Accretion of redeemable non-controlling interests		(7)		(7)		(15)		(15)
Appropriation of retained earnings		—		—		(323)		—
Balance at end of the period	$	299,916	$	264,460	$	299,916	$	264,460

14. Accumulated other comprehensive income

The Company’s activities in respect of the amounts of accumulated other comprehensive income for the three and six months ended June 30, 2024 and 2023, are summarized as follows (figures are in thousands of USD):


	Three Months Ended June 30,				Six months Ended June 30,
	2024		2023		2024		2023
Balance at beginning of the period	$	(8,558)	$	875	$	(8,258)	$	(3,413)
Foreign currency translation adjustment attributable to parent company		(2,669)		(15,811)		(2,969)		(11,523)
Balance at end of the period	$	(11,227)	$	(14,936)	$	(