As it has been almost one year since I have written about China Yuchai International (NYSE:CYD), I believe it prudent to comment for the benefit of all shareholders. Once again, some brief background:
China Yuchai International Limited is a holding company that owns a 76.4% interest in Guangxi Yuchai Machinery Co. Ltd. (“GYMCL”). It is listed on the New York Stock Exchange (since December 1994 – the second Chinese company do to so) under the symbol CYD. The company is currently majority controlled (via a “special golden share”) by Hong Leong Asia LTD (“HLA”) based and publicly listed in Singapore. The Hong Leong Group Singapore was founded in 1941 by the Kwek family and is one of the largest privately controlled business groups in Southeast Asia. For informational purposes, Yuchai was founded in 1951 and became a state-owned enterprise in 1959. In 1989, Yuchai became one of China’s 500 largest industrial enterprises in terms of profitability and tax contribution.
In July 1992, in order to raise funds for expansion, Yuchai became the first state-owned enterprise in the Guangxi Zhuang Autononomous Region to be restructured into a joint stock company. In May 1993, to further finance expansion, Yuchai sold (Foreign) shares and became a Sino-foreign joint stock company. China Yuchai then went public on the New York Stock Exchange in December of 1994. China Yuchai International Limited specializes in light, midsize and heavy-duty diesel truck engines and also sells diesel engines to bus manufacturers, independent truck makers, and automobile manufacturers. Other products include diesel power generators, diesel marine engines, engine parts and lubricating oils. China Yuchai has an excellent reputation among vehicle manufacturers and customers for performance, reliability and customer service. Yuchai’s primary manufacturing facilities are located in Yulin City, Guangxi Zhuang Autonomous Region in Southern China, which is approximately 280 miles west of Hong Kong. Yuchai operates 31 regional sales offices in major geographic regions in China; and with a sales force of approximately 609 persons nationwide, the company provides a comprehensive range of services to its customers, including dispatching engineers to provide on-site assistance to major customers in the resolution of technical problems. Guangxi Yuchai management strongly believes that customer service is an important part of maintaining its market competitiveness and hence Yuchai has a nation-wide network of over 1,150 authorized service stations that provide repair and maintenance services, spare parts, retrofitting services, and training to Yuchai’s customers.
To ensure a consistently high level of service, Yuchai trains the technicians at each of these service stations, while owning and operating over 20 repair training centers. Yuchai promotes its products primarily through television commercials, advertisements in newspapers and industry journals. The Company believes that its promotional works are unusual for an automotive product component company in China, but feel that these efforts lead to greater brand recognition among its customers.
At the end of calendar 2007, Guangxi Yuchai Machinery had a total production capacity of approximately 400,000 units. The Company believes that its current production capacity is adequate to meet expected higher demand and unit sales from customers in the near future arising from the continued government spending on new highways and other infrastructure development projects in the People’s Republic of China.
As of Friday, December 26, 2008 the company’s shares are quoted at US$3.73 on The New York Stock Exchange. Market capitalization is only US$139 million, a PE of 2.1 (forward), a 0.12 price-to-sales ratio (forward), and a book value over $9.00. Here is a quick fundamental picture of the company results the past nine years in US dollars, including the year end fully audited 2006 results:
For the nine months ended September 2008, I am estimating US$1.15 Billion in sales, $67 million in Net income, EPS of approximately $1.60, and shareholders have been made aware over 320,500 units were sold.
As a long term shareholder, it has been extremely infuriating that China Yuchai continues to do very well, but as we all very well know, continues to be run as a private entity, controlled by the Kwek family of Singapore. These financial reporting delays have become intolerable and hence, several shareholders, including myself have decided to write to the Board and demand changes. Each is listed, with their respective shareholdings.
December 26, 2008
An Open Letter to the Board of China Yuchai International Limited
Board of Directors
China Yuchai International Limited
16 Raffles Quay - #26-00
Hong Leong Building
VIA EMAIL & FACSIMILE 011.65.6.221.1172/226.0502
To the Members of the Board:
Shareholders are utterly incensed at this juncture with the continued delays and excuses given by the executive management team based in Singapore, specifically the CEO and CFO - Mr. Teo and Mr. Hoh; and with the inexperience of Company auditors - KPMG Singapore. The Company informed shareholders on October 1, 2008 and November 10, 2008 that “the Company would like to assure its shareholders that its management and staff are in the final stages of finalizing the outstanding financial statements and will release them as soon as they become available.” Almost three (3) months have passed and still the company has not released fully audited 2007 US GAAP financials or nine (9) month interim unaudited financials for 2008. This is offensive, despicable and shareholders hold the Board and the Singapore based executive management team responsible for these delays.
Shareholders hereby call upon the Board of the Company and demand the following issues be addressed and implemented immediately:
1. An urgent re-thinking of the audit function. Specifically, it has become evident that KPMG Singapore does not have the US GAAP expertise to continue as the Company’s auditor. Shareholders are mindful that KPMG Singapore is HLA’s auditor and that they are located in the same office complex. Shareholders question whether this change, back in December 2006, was in the best interests of CYI shareholders or HLA’s. CYI’s audit business should be put out for competitive bid to a firm that has the required knowledge and experience in US GAAP; including incentives for outperforming NYSE and SEC filing deadlines.
2. In conjunction with the above, establish a clear timeframe as to when the Company will return to timely NYSE and SEC reporting and explicitly when will the “LF (Late Filer)” designation be removed from the Company by The New York Stock Exchange. It is shameful that China Yuchai International Limited was the second ever Chinese company to list on a U.S. based financial exchange and now has become an embarrassment.
3. A new CFO – once again – a new individual is required – someone who is very knowledgeable with US GAAP reporting standards, and one who can be domiciled at Yuchai in Yulin. This CFO must actively get engaged in the business – visiting customers, suppliers, work closely with Mr. Yan Ping’s executive team, etc.
4. Investment stakes in Thakral and HLG. Management entered these “strategic” investments over 3 years ago and all they have accomplished is increased the liabilities of CYI shareholders. These non-performing investments are now dramatically below their purchase prices and shareholders still have not been informed by executive management as to how these stakes will benefit CYI shareholders. SHAREHOLDERS DO NOT WISH TO BE IN THESE BUSINESSES! If HLA is so enthusiastic on their prospects, then without delay transfer their equity (and their liabilities) in their entirety to HLA. For the record, shareholders have seen the latest Thakral news announcement – where they approved their change of focus to infrastructure/real estate development and require a massive raise of equity and debt to reach this goal.
5. Shareholders aspire to see Mr. Yan Ping more involved with US shareholders – what is his vision for the company in 2009 (challenging economic environment)? And in the next 3-5 years? Also, how is the Joint Venture with Geely progressing? It goes without question that Mr. Yan Ping and his team has done an outstanding job the past three (3) years in their management and operations at Guangxi Yuchai Machinery Co. It may be the opportune time to give them the opportunity to receive full management control.
6. Provide shareholders with a prospective schedule of an Executive Management visit to the US. Particularly, how does the Company intend to increase its communication with all shareholders? Shareholders would greatly appreciate a Company sponsored on-site visit to Yulin to observe and realize the compelling opportunity presented by China Yuchai International Limited.
7. Make available the date of the next Annual General Meeting.
As the Kwek family and its appointees have controlled the company for approximately 14 years (with shares still below the original US$ 10.0 IPO price), shareholders have become very troubled with its management and oversight in recent years. The Company has been managed as a “private entity” not for the benefit of China Yuchai International shareholders, but clearly only for the advantage of Hong Leong Asia shareholders. CYI shareholders are aware that during the timeframe of its delayed financials, Hong Leong Asia continued to consolidate CYI’s financials into its own reports without delay. This is neither just nor ethical. The Board should be reminded that they have a fiduciary responsibility to act and perform in the best interest of all shareholders.
In closing, if the Kwek family and HLA are uninterested in implementing the above initiatives in the best interest of all CYI shareholders, the specific shareholders listed below are willing to offer to purchase HLA’s twenty-two percent stake (22%) in China Yuchai International Limited at a significant premium to the current closing price on The New York Stock Exchange ($US 3.73). The long term shareholders below intend to hold their newly acquired shares until the Company’s next Annual Meeting and consider the above issues paramount to all shareholders of China Yuchai International Limited. The strategic alternatives outlined above offer shareholders the best prospects of maximizing value on their investment; value that cannot be realized by the current course of action of CYI executive management and its Board.
I view China Yuchai as “The Cummins Engine” of The People’s Republic of China, with an outstanding brand name and exceptional reputation for reliability and service. I also firmly believe that the recently announced stimulus plan by Beijing – US$586 Billion, will not only greatly benefit the country as a whole, but for companies such as China Yuchai as well.
I believe that the shareholders designated in the latest correspondence to the Board of the Company are not alone in their views on the current situation. Too much time has passed for the results to be produced and all shareholders continue to receive are endless excuses. Hong Leong Asia, led by the Kwek family, in conjunction with CYI’s Board have had over fourteen (14) years to enhance shareholder value and they have failed definitively. Hong Leong Asia’s expertise is in finance, real estate, hotel management, and other hospitality services. The time has arrived for them to dispose of their stake in CYI and concentrate on what they know – and that is NOT the diesel engine business in China. Presently, it is NOW time to bestow full management control of the Company to Mr. Yan Ping and his management team in Yulin.
Disclosure: Peter A Delgado II is the Principal and owner of Threshold Capital Corp, a state Registered Investment Adviser in the State of New Jersey. Threshold Capital Corp and its clients currently hold a position in China Yuchai International, Limited and plan on holding that position through the Company’s Annual meeting. The above commentary represents the opinions of Peter A Delgado II and Threshold Capital Corp and in no way constitutes a solicitation of business or investment advice. It is intended solely for informational and entertainment purposes of the reader and the author.