# Dear Shareholder

_Source: `DeepSeekOCR_Ardian_pruned_1k/consumer-cyclical-auto-parts/NASDAQ_CAAS_2022/NASDAQ_CAAS_2022.mmd` · pages 2-8_

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Dear Shareholder,

2022 was a challenging year for the Chinese economy as growth slowed to 3.0%, significantly lower than 8.4% growth rate in 2021. Chinese GDP growth started off at a 4.8% increase in the first quarter of 2022, the highest growth of the year, then in a dramatic fashion, dropped to 0.4% growth rate in the second quarter, rebounded to 3.9% in the third quarter, and at last, cooled again to 2.9% in the fourth quarter. Despite the sluggish economic environment and COVID-19 restrictions, we still managed to grow our sales, net profit and cash flow from operations in 2022.

Throughout the year, the COVID-19 impact including lockdowns and travel restrictions, continued to affect supply chains with delayed shipments of certain computer chips and other components, reduced real estate development and construction activities, and stifled consumer spending including automobiles. As a result, total retail sales in China declined by 0.2% and investment in real estate development fell by 10.0% in 2022.

Given these economic conditions, it is not surprising that automobile sales exhibited unusual volatility during the year. According to data from the Chinese Association of Automobile Manufacturers, Chinese automobile sales in the first quarter of 2022 rose by a scant 0.2% year-over-year followed by a sales decrease of 13.3% year-over-year in the second quarter. Third quarter automobile sales rebounded to growth of 29.4% year-over-year but then fell back to a decline of 3.3% year-over-year in the fourth quarter. For 2022, total automobile sales increased by only 3.4% year-over-year. Sales data of passenger vehicles indicated that different segments experienced significant variation in growth in 2022. Sedan sales grew by 11.2% year-over-year and SUV sales rose by 13.5% in 2022. However, MPV sales declined by 11.3% and crossover passenger vehicles sales were 20.3% lower. Sales in the commercial vehicle market fell by 31.9% year-over-year in 2022. Bus sales declined by 19.9% and the much larger truck market suffered a 33.4% drop.

The one and only bright area was the 93.4% year-over-year increase in new energy vehicles sales. Passenger EV sales climbed 94.3% and new energy commercial vehicle sales rose by 78.9%. This EV market growth was timely as we have been expanding our line of electric power steering ("EPS") products. In fact, over the past two years, we have been designing specific EPS systems for a number of clients including Great Wall Motor, Alfa Romeo, and most recently automobile giant BYD Auto, the largest EV producer in China. Other major OEMs also using our EPS systems in their vehicles include JAC, Chery Auto and Fiat Chrysler. As our new energy product line expands, we expect more vehicle models from our current clients and new customers to adopt our EPS technologies.

Our top line grew by 6.3% year-over-year to \(529.6 million in 2022, compared to \)498.0 million in 2021 mainly due to higher EPS product sales. Sales to Chery Automobile increased by 55.1% year-over-year with higher sales of our EPS and hydraulic steering products. In addition, our hydraulic steering sales to other Chinese OEMs rose by 21.7% year-over-year. Our sales to the commercial vehicle market in China, following weak truck and bus sales, declined by 25.8% year-over-year in 2022. Net sales of vehicle steering systems outside China to Chrysler and Ford in North America were approximately the same in 2022, while sales to Fiat in Brazil rose by 54.1% year-over-year to \(39.3 million. Encouragingly, our total net sales of EPS products increased by 35.6% year-over-year or by \)41 million, to \(156.3 million in 2022, which accounted for 29.5% of total sales. EPS sales have become one of the largest and fastest growth contributors to our total sales over the past few years.

Our increased sales were directly related to the success of our research and development ("R&D") and engineering activities. New automobile technologies are becoming a more important factor in new models to improve fuel efficiency, performance and reduce emissions as well as enhanced functions for improved safety, entertainment and communications. Our R&D expenditures increased to approximately \(36.1 million in 2022 from \)28.2 million a year ago. Newly developed products accounted for approximately 29.5% of total sales in 2022. Recognizing our strong capabilities in new product development, BYD Auto selected us to develop and produce new C-EPS, DP-EPS and R-EPS steering designs for all its product series. With these contract awards, we became the first DP-EPS supplier to BYD. Annual volume of DP-EPS is expected to reach an annual volume of approximately 300,000 units. Our DP-EPS, R-EPS and C-EPS steering models are also expected to be used in a wide number of BYD vehicles. Product development using these various EPS steering technologies will also bolster vehicle performance to better serve our current customers and attract new ones.

The promise of Advanced Driver Assistance Systems ("ADAS") is the future of steering with a number of systems being developed around the world. To develop our own ADAS, we created a new proprietary EPS product in 2021, which has been adopted by a number of passenger vehicle OEMs in China. Our enhanced ADAS system automatically

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adapts to changing road conditions, creating a safer and more consistent steering experience. For the commercial vehicle markets, we agreed in early 2022 with SCANIA AB, a world leading provider of transport solutions in more than 100 countries, to develop an eRCB system for their trucks and buses. This proprietary eRCB steering system is the world's first mass-produced fully electric, intelligent power steering system for commercial vehicles. With this proprietary EPS system, our advanced driver-assistance system L4 platform enables vehicles to execute level-4 autonomous driving. We are very excited by the prospects for our ADAS systems as interest continues to grow from many vehicle OEMs.

To further enhance our EPS steering products for vehicle motion control and autonomous driving in the passenger and commercial vehicle markets, we are utilizing additional technologies developed by our Swedish subsidiary, Sentient AB. Sentient already has an established base of global truck OEMs using their steering technologies. Together, our combined technologies provide a more functional and powerful steering solution offering easy updates for further enhancements. Our close relationship with Sentient positions us for further global expansion.

We continued to maintain a strong balance sheet buoyed with net income and strong cash flow from operating activities in 2022. As of December 31, 2022, total cash and cash equivalents, pledged cash and short-term investments were \(171.8 million. This total also reflected \)20.3 million in capital expenditures as well as \(2.5 million spent repurchasing 666,074 common shares in 2022. Total parent company stockholders' equity was \)311.7 million as of December 31, 2022. Net cash flow from operating activities increased significantly to \(48.0 million in 2022 from \)28.3 million in 2021. These cash flows and cash on hand provide the resources to invest in our operations for future growth.

Despite all the challenges in 2022, our business demonstrated strong resilience as we grew our sales, net income and cash flow from operations. Total sales in 2022 increased by 6.3% year-over-year to \(529.6 million with diluted net income per share increasing by 91.7% year-over-year to \)0.69 in 2022. Our gross margin also increased as we sold more products with higher technology content especially our growing EPS product sales.

In addition to our sales in China and North America, we also grew our presence in Europe the last two years as more vehicle OEMs there started to recognize the superior quality of our products, such as our EPS products. We are proud that our EPS products are now installed in the prestigious European brand, Alfa Romeo, for its first luxury plug-in-hybrid SUV model, the Tonale.

Looking forward, new policies in early 2023 lifted COVID restrictions and promoted economic growth which will stimulate vehicle demand over the year as people in China regain their pre-COVID lives. Other policies stimulating new energy vehicle sales will further reduce emissions while making China the largest market for new energy vehicles. We believe that we are well positioned as new energy vehicles are more willing to embrace new steering technologies. We continue to upgrade our legacy products and to broaden the technologies for our growing portfolio of steering products to penetrate the new energy markets.

Sincerely,

Qizhou Wu
CEO & Director