22001122 AANNNNUUAALL RREEPPOORRTT CCHHIINNAA AAUUTTOOMMOOTTIIVVEE SSYYSSTTEEMMSS,, IINNCC.. Based in Hubei Province, People’s Republic of China, CHINA AUTOMOTIVE SYSTEMS, INC. is a leading supplier of power steering components and systems to the Chinese automotive industry and is exporting into the North American market. The company operates through ten Sino-foreign joint ventures in China and three wholly- owned subsidiaries in China and America. o Henglong USA Corporation o Great Genesis Holdings Limited Shenyang Jinbei Henglong Automotive Steering System Co., Ltd. Jingzhou Hengsheng Automotive System Co., Ltd. o Shashi Jiulong Power Steering Co. o Jingzhou Henglong Automotive Parts Co. o Wuhu Henglong Electric Power Steering Co., Ltd. o Wuhan Jielong Steering System Co., Ltd. o Universal Sensor Application, Inc. o Beijing Henglong Automotive System Co., Ltd. o Chongqing Henglong Hongyan Automotive System Co., Ltd. o CAAS Brazil’s Imports And Trade In Automotive Parts Ltd. Jingzhou Henglong Automotive Technology (Testing) Centre DEAR SHAREHOLDERS, We are pleased to report a solid performance in a models at Chrysler, the fastest-growing automotive company in challenging year. Our annual net sales increased by $6.2 million the United States in 2012. As knowledge of our products' to $336.0 million in 2012, compared to $329.8 million in 2011, performance, high quality and cost effectiveness grows, we are though the vehicle sales in China were flat in 2012 as China’s receiving increased interest from outside of China. Additionally, GDP annual growth was only 7.8 percent in 2012 and represented we have established a joint venture in Brazil, South America's the slowest growth in the past 13 years. We continued to increase largest automotive market, as a base to become a supplier to both our penetration in North America. Chrysler has become our local brands and Chinese companies' operations in the region. We largest customer in 2012. We remain the largest steering supplier believe our value-cost proposition is very attractive in the highly to many Chinese vehicle OEMs, and our domestic sales grew as competitive global automotive industry. Chinese-branded vehicles regained market share in 2012. Our market leadership position in China and our growing We adopted additional technical innovations to improve export prospects begin with our research and development our production efficiency to help stabilize our gross margin going excellence. We enhanced our R&D program with more advanced forward. In addition, we continue to control costs and streamline manufacturing and testing equipment, and we created an our operations. As a result, our operating income remained solid incentive program for outstanding innovation. In 2012, R&D and our cash flow conversion remained strong. Net cash flow expenditures increased by 65.5% to $14.9 million which included from operations was $16.2 million for the 2012 year, and at funding to enhance our electric power steering products, which December 31, 2012, working capital was $138.7 million, and we expect will expand rapidly in China. Our Jingzhou Henglong cash and cash equivalents were $87.6 million. Automotive Technology (Test) Center Laboratory recently As our balance sheet become stronger, in 2012, we received the only national accreditation from the China National redeemed all the outstanding convertible notes for a total Accreditation Service among Chinese power steering companies. redemption price of $32.4 million, which includes all principal, We continue to focus on developing high quality and performance accrued and unpaid interest and the make-whole amounts. The products to build our brand reputation and capture market share. redemption reduced our interest expense, provided greater Our products' contributions were acknowledged with a financial flexibility and lowered our diluted weighted average number of awards for 2012. CAAS´s subsidiary, Hubei Henglong, number of common shares outstanding by approximately 3.3 was named as the "National Excellent Supplier of Steering million shares going forward. We used our financial strength to Systems" in China by the China Automotive News, and we support our shareholders with a $5 million stock repurchase plan received the 2012 Chrysler China Regional Excellent Supplier in August of 2012 as we believe our share price does not reflect award, Chrysler's second place award for 2012 in the Global our intrinsic value. Metal Product Supplier category and the Chrysler 2013 Supplier We continue to diversify our markets as we design, of the Year Metallic award. manufacture and sell steering products to a large number of We remain optimistic as the Chinese vehicle market has Chinese commercial and passenger OEMs, supply steering showed signs of improvement from its cyclical low, and the new products into the large Chinese aftermarket, and we have a central government leadership may offer new growth policies to stronger focus on capturing Sino Foreign joint ventures in China. stimulate the economy. We are committed to increasing our We use strategic joint ventures and partnerships such as the market share in China and globally, and to build free cash flow to Shanghai Auto-IVECO Hongyan and Beijing Auto joint ventures enhance shareholder value. where our partners also become our customers and we share the risks. We also supply steering products for vehicles made in Sincerely, China by joint ventures created by General Motors, Volkswagen and Peugeot Citron and we expect to expand this customer list in Qizhou Wu the future. CEO & Director Our strategy is to leverage our leading position in the June 26, 2013 Chinese steering markets to become a tier 1 supplier to the world's top vehicle manufacturers. In North America, we supply the award-winning Jeep® Wrangler and two Dodge RAM® truck CHINHA AUTOMOTIVE SYSTEMS, INC. INDEX CAUTIONARY STATEMENT ........................................................................................................................................................1 PART I ..............................................................................................................................................................................................1 ITEM 1. BUSINESS ................................................................................................................................................................1 ITEM 1A. RISK FACTORS .............................................................................................................................................6 ITEM 1B. UNRESOLVED STAFF COMMENTS ........................................................................................................15 ITEM 2. PROPERTIES ..........................................................................................................................................................15 ITEM 3. LEGAL PROCEEDINGS ........................................................................................................................................15 ITEM 4. MINE SAFETY DISCLOURES ..............................................................................................................................16 PART II ...........................................................................................................................................................................................16 ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. ...........................................................................................................................16 ITEM 6. SELECTED FINANCIAL DATA ............................................................................................................................17 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. .......................................................................................................................................................................17 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK .................................30 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ...........................................................................30 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. ......................................................................................................................................................................31 ITEM 9A. CONTROLS AND PROCEDURES .............................................................................................................31 ITEM 9B. OTHER INFORMATION .............................................................................................................................33 PART III .........................................................................................................................................................................................33 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ...............................................33 ITEM 11. EXECUTIVE COMPENSATION .........................................................................................................................36 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. ...............................................................................................................................................38