In my search for international value plays, I came across 3 interesting Chinese companies - China Yuchai International (CYD), China Education (CEDU) and Skypeople Fruit Juice (SPU). All 3 companies offer a potential low-cost way to get exposure to different areas of the vast Chinese economy.
We're going to take a look at China Yuchai International in this article, the other 2 will follow soon in a separate note.
Note: In the discussion below I've taken the view that numbers and operating structure for CYD are a good enough representation of the way its business is run and the health of its business in general.
TTM Revenues: $2.1bn
China Yuchai International is a Bermuda-based investment company, which, through its subsidiaries, manufactures and sells diesel and natural gas engines in China. The company provides engines for light, medium, and heavy-duty highway vehicles. It also sells generator sets for marine and industrial applications.
Why is it interesting from a long-term perspective?
i) Intrinsic valuation
A conservative intrinsic valuation indicates that shares are trading at a discount with a good amount of margin of safety.
5 Year Revenue CAGR -1%; (That's negative one percent, declining revenue growth forecast)
5yr Operating Margins 9%;
You can see my valuation details for CYD here --
ii) Single digit price ratios
Price/Book ratio < 1, Price/Earnings ~ 6, EV/EBITDA < 1 reflects a market sentiment that doesn't really have any growth expectations for the business. Low ratios are a good buying signal for a market leader in a growing economy.
iii) A good China infrastructure type play in the long term
CYD builds automotive engines and their end-markets have shown signs of fatigue and increased competition. However, if you are generally long-term bullish on China, this company could be a good way to get exposure at an attractive price point. As more roads are built and towns and cities are connected, as the level of commerce increases their end-markets will increase as well.
iv) Stock price
2012 stock returns were 26%, though in the last 3 months the stock has dropped almost the same amount. I see this as an overreaction to ho-hum short-term business prospects.
- 2012 was not a good year for Yuchai (over a 10% drop in Revenues) and 2013 is expected to be no better. Long-term prospects for this company are hard to forecast as the market undergoes structural changes -- a slow but steady shift from diesel to natural gas in some engine categories, stronger regulation (especially given rising environmental concerns in China), more Chinese/Foreign joint-ventures bringing in advanced technology know-how etc. Some of these factors like the shift to natural gas could very well be a source of competitive advantage for CYD.
- CYD has a rather obfuscated holding structure, which is not really retail shareholder friendly. Hong Leong Asia a Singapore based investment conglomerate controls the Bermuda based entity, China Yuchai International (CYD, the company which we discuss here) which in turn owns ~ 75% of Yuchai the 'engine company'. Additionally Hong Leong Asia - CYD's parent also has stakes in consumer electronics, green technology unit and building materials. Yuchai the diesel engine manufacturer contributes to about 50% of Hong Leong's revenues and over 97% of CYD's revenues. As a retail investor you need to recognize the share-holding structure and the fact that your interests as a shareholder will not always be aligned with the various controlling entities.
- While CYD's major holding is Yuchai, it also has holdings in a real-estate group HLGE (a 49% stake) and a consumer electronics group TCL (10% stake). HLGE contributes about $5 million USD to the top line and has been losing about $4 million USD per year for the last 3 years. HLGE does not seem to be significant to CYD's operations but nevertheless it is a drag on operations and management focus needs to be recognized. TCL is held as available for sale.
- 20% of Yuchai's sales come from the DongFeng Group - a large state run automotive group that also happens to be in the business of making diesel engines. Management has commented that the autonomous structure of DongFeng means that they don't see any immediate risks to this revenue stream.
- Low valuation ratios do not by themselves justify a buy signal, since these ratios (P/E, P/book, EV/EBITDA) have been low before and CYD's stock returns have not always been positively co-related with low ratios in the past.
- Negative operating cash in 2011 - mainly due to A/R increase caused by reduced bill discounting. Waiting on the full year statements for 2012.
- Full quarterly statements for CYD not available to assess the health of the business on a periodic basis.
Despite the concerns outlined above, CYD is on my shortlist of stocks to track. With a new government in place in China, the effect of new policies and infrastructure style related investments would begin to have material impact on businesses starting the middle of this year and beyond. For CYD specifically I am waiting to see an uptick in engine shipments in Q2 and review their 2012 consolidated report (when released) before deciding to hit that buy order.