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Executives

Kevin Theiss

Benny H. Goh - President and Director

Kok Ho Leong - Chief Financial Officer

Analysts

Jonathan P. Brodsky - Advisory Research, Inc.

China Yuchai International Limited (CYD) Q1 2013 Earnings Call May 13, 2013 8:00 AM ET

Operator

I would like now to turn the conference over to Kevin Theiss. Please go ahead, sir.

Kevin Theiss

Thank you for joining us today, and welcome to China Yuchai International Limited's First Quarter 2013 Conference Call and Webcast. My name is Kevin Theiss, I am with Grayling, China Yuchai's U.S. Investor Relations advisor. Joining us today are Mr. Benny H. Goh and Mr. Kok Ho Leong, President and Chief Financial Officer of CYI, respectively.

Before we begin, I will remind all listeners that throughout this call, we may make statements that may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe, expect, anticipate, project, targets, optimistic, intend, aim, will, or similar expressions are intended to identify forward-looking statements. All statements other than statements of historical fact are statements that may be deemed forward-looking statements. These forward-looking statements are based on current expectations or beliefs, including but not limited to statements concerning the company's operations, financial performance and condition. The company cautions that these statements by their nature involve risk and uncertainties, and actual results may differ materially, depending on a variety of important factors, including those discussed in the company's reports filed with the Securities and Exchange Commission from time to time. The company specifically disclaims any obligation to maintain or update the forward-looking information, whether of the nature contained in this release and conference call or otherwise, in the future.

Mr. Go will provide a brief overview and summary, and then Mr. Leong will review the financial results for the first quarter of 2013. Thereafter, we will conduct a question-and-answer session. For the purposes of today's call, the financial results are unaudited, and they will be presented in RMB and U.S. dollars.

Mr. Go, please start your presentation.

Benny H. Goh

Thank you, Kevin. We are pleased to report that we regained our revenue growth in the first quarter ended March 31, 2013, as revenues increased by 4.4% to RMB 3.84 billion, USD 613.1 million. Our engine sales during the first quarter of 2013 were 130,744 units compared with 131,697 units sold in the same quarter a year ago, which compares favorably against the industry decline of 6.8% in sales of diesel-powered commercial vehicles in the first quarter of 2013 as reported by the China Association of Automobile Manufacturers.

Net earnings attributable to China Yuchai shareholders increased to RMB 173.5 million, USD 27.7 million, or earnings per share of RMB 4.66, USD 0.74, from net earnings of RMB 167.9 million or earnings per share of RMB 4.50 in the first quarter 2012.

Our average sales price has increased approximately 11% between 2009 and 2012. In the first quarter of 2013, our average sales price rose 5.1% to RMB 29,327 compared with the first quarter of 2012. The increase in ASP is a result of our product strategy of providing high-quality, high-performance engines with superior parts and after-sales service.

We continue to dominate the bus market in China. The bus market in China has grown by 43.3% between 2009 and 2012, rising from 354,054 units in 2009 to 407,403 units in 2012 according to the China Association of Automobile Manufacturers. In the first quarter of 2013, total bus unit sales in China increased by 6.3% to 116,338 from 109,431 in the first quarter last year. As the leading supplier of engines to the bus market, this growth trend is to our benefit. Markets in China are ideal for our natural gas engines as school and municipal utility [ph] buses travel locally, allowing easy refueling.

Our main operating subsidiary, Guangxi Yuchai Machinery Company limited, GYMCL, recently sold 298 units of its YC6J gas and electric hybrid engines to the Baoding Bus Company in Hebei Province. The hybrid YC6J medium-duty National 4- and 5-compliant engine utilizes battery-operated motors to significantly reduce fuel consumption and emissions. We are maintaining our leading position in the Chinese automotive market with new advanced natural gas, hybrid and diesel engines such as YC6K, YC6MK and YC6J that meets or exceed the performance, quality and durability requirements of a wide range of bus models combined with our superior service and training. We offer customers diesel, hybrid and natural gas engines for our traditional truck, bus and agricultural markets and new high-horsepower diesel and natural gas engines to further benefit the construction, mining, marine and power-generation markets.

Our product diversity allows us to react to changing sales opportunities. Our light-duty engine unit sales increased in the first quarter of 2013 primarily because the Chinese agriculture segment demanded more engines. Our heavy-duty unit sales rose in the first quarter of 2013 compared with a 17.4 industry sales decline in total sales of heavy-duty truck and large bus vehicles using diesel engines in the first quarter of 2013. Our sales increase in the heavy-duty sector reflected higher sales from existing customers as well as orders from new OEM customers.

In the first quarter of 2013, we increased R&D spending by 15.8% to RMB 94.9 million, USD 15.1 million. We have been a domestic leader in emission technology for a number of years, and our new products continue to provide advanced engines to capture market share. For example, the National 4 Emission Standard for diesel engines is to be implemented throughout China on 1st of July 2013. While we had already in 2007 supplied engines compliant with National 4 and 5 emission standards to Beijing Public Transportation Holdings, we are again ahead of the curve with domestic engines capable of meeting the National 4 and 5 Emission Standards.

Additionally, our new high-horsepower diesel and natural gas engines are designed to penetrate the promising marine, power generation, mining and construction markets with heavy-duty engines much larger than we offer in the truck and bus markets. Both the YC6G and 40-liter YC6C models target the marine propulsion, power generators, construction and mining truck markets. The YC6CL is a 54-liter version of the YC6C engine and is expected to be launched this year. The new YC6MJ model is an upgrade over the YC6M engine at 11.7 liters for use in mining, marine and power-generation applications. The YC12VT is a 12-cylinder, 33-liter version of the YC6G engine for use in the power generator, marine and industrial markets, and it is expected to be launched next year, in 2014. Finally, the YC4S engine is a new platform at 3.8 liters for use in highway vehicles and industrial engines.

In 2013, 12 new engines were introduced and are expected to be launched, of which 7 are National 5-compliant natural gas engines, 5 are National 4-compliant diesel engines, with 2 targeting the trucks in industry. These 12 engines will provide our customers with new capabilities as we seek to capture additional market share.

Let me now provide an update of our joint ventures. As the trend is for more sales in the light-duty vehicle space, testing continues on the new 4D20 diesel engine for use in passenger cars and light-duty vehicles at our joint venture with Geely located in Jining, Shandong Province. Tests on the second-generation prototype engine are expected to be completed during the summer of 2013.

The long-term outlook for heavy-duty engines remain attractive. Our CIMC-Chery joint venture is building a suite of diesel and natural gas engines based on a next-generation YC6K engine design. The YC6K engine offers customer strong performance with more emissions. Larger and more powerful engines based on a YC6K design in a 10-, 12- and 13-liter size are being built to address the need for heavier and larger vehicles. These engines complement our existing portfolio of 6L, 6M, 6G and 6MK heavy-duty engines, and our goal is to become one of the largest producers of heavy-duty engines in China.

Our green re-manufacturing joint venture with Caterpillar has begun full operations at its permanent facility in the Suzhou Industrial Park. Their remanufacturing of engines saves raw material and reduces production waste compared with manufacturing a new engine. Our remanufacturing joint venture will leverage our network of over 3,000 service stations, the largest of its network in China, to enable us to extend our reach as wide as possible.

We continue to produce positive operating cash flow to support our investment in new products, research and development and manufacturing capabilities. During the first quarter of 2013, we generated net cash flows from operating activities of RMB 287.8 million, USD 45.9 million, and invested RMB 150.5 million, USD 24 million in property, plant and equipment. In 2012, last year, we generated net cash flows from operating activities of RMB 1.51 billion, USD 241.1 million, and invested RMB 643.5 million, USD 102.6 million, in property , plant and equipment. As we generate cash from our operations, we believe in continually investing in and growing the business.

Also, our new natural gas engine production facility is expected to be completed in the second half of 2013. In 2012, as the leader in natural gas engines, we sold approximately 20,000 natural gas engines, up from 13,000 in 2011. The combination of new natural gas engines and expanded production is expected to generate significant growth over the next few years.

Based on our number of unit sales, we continue to be the leader in the commercial engine business in the first quarter of 2013. With our new and existing portfolio engines, we are now better positioned to defend our dominant market share in the bus markets; capture market share in the truck market when it rebounds; and become a leading supplier to the off-road market as well. We believe our diversification strategy combined with superior R&D and service provides us with a strong competitive advantage.

Now with that, let me now turn the call over to Kok Ho Leong, our CFO, to provide more details on our financial results.

Kok Ho Leong

Thank you, Benny. Let me first walk you through our unaudited first quarter 2013 financial results. And then we can begin the Q&A session.

Net revenue for the first quarter of 2013 was RMB 3.84 billion, USD 613.1 million, compared with RMB 3.68 billion in the first quarter of 2012. The increase in net sales was RMB 161.7 million or 4.4% as compared with the same period in 2012. GYMCL's engine sales during the first quarter of 2013 was 130,744 units compared with 131,697 units in the same quarter a year ago, representing a decrease of 953 units or 0.7%.

Gross profit was RMB 777.3 million, USD 124.0 million, compared with RMB 779.4 million in the first quarter of 2012. Gross margin decreased to 20.2% in the first quarter of 2013 as compared with 21.2% a year ago. In the first quarter of 2013, the lower gross profit and margin were mainly attributable to the shift in sales mix to more light-duty engine sales.

Our income was RMB 20.9 million, USD 3.3 million, a decrease of RMB 5.1 million from RMB 26.0 million in the first quarter of 2012. The decrease was mainly due to foreign exchange revaluation losses in this quarter as compared with foreign exchange gains in the first quarter of 2012.

Research and development, R&D, expenses were RMB 94.9 million, USD 15.1 million, compared with RMB 81.9 million in the first quarter of 2012, an increase of 15.8%. As a percentage of net revenue, R&D spending rose to 2.5% compared with 2.2% in the first quarter of 2012. The increase in R&D expenses was mainly due to the development of new engines as well as continued initiatives to improve engine quality.

Selling, general and administrative, SG&A, expenses were RMB 364.4 million, USD 58.1 million, down from RMB 376.4 million in the first quarter of 2012, a decrease of RMB 12.0 million or 3.2%. SG&A expenses represented 9.5% of first quarter of 2013's net revenue compared with 10.2% in the same quarter a year ago.

Operating profit declined to RMB 338.9 million, USD 54.1 million, from RMB 347.2 million in the first quarter of 2012, mainly due to lower gross profit and higher R&D expenses, partially offset by reduced SG&A expenses. The operating margin was 8.8% compared with 9.4% in the first quarter of 2012.

Finance costs declined to RMB 34.2 million, USD 5.5 million, from RMB 75.4 million in the first quarter of 2012, a decrease of RMB 41.2 million or 54.6%. The decrease was due to less bill discounting and lower interest costs related to RMB 1.0 billion of short-term financing bonds, STFBs, outstanding at a lower interest rate in the first quarter of 2013 compared with outstanding STFBs totaling RMB 1.39 billion issued at a higher interest rate in the first quarter of 2012. The share of joint ventures was a loss of RMB 15.8 million, USD 2.5 million, compared with a loss of RMB 16.7 million in the first quarter of 2012.

In the first quarter of 2013, total net profit attributable to China Yuchai's shareholder was RMB 173.5 million, USD 27.7 million, or earnings per share of RMB 4.66, USD 0.74, compared with RMB 167.9 million or earning per share of RMB 4.50 in the same quarter of 2012.

Let me now go to the balance sheet highlights as at March 31, 2013. Cash and bank balances were RMB 3.27 billion, USD 521.3 million, compared with RMB 3.16 billion at the end of 2012. Short- and long-term borrowings were RMB 2.44 billion, USD 388.8 million, compared with RMB 2.45 billion at the end of 2012. Net inventory was RMB 2.36 billion, USD 377.2 million, compared with RMB 2.01 billion at the end of 2012.

With that, operator, we are ready to begin the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions]

Benny H. Goh

Okay, while we're waiting for the first questions. We've got some questions online. The first question, Jerry [ph] is asking about our Jining joint venture in passenger diesels engines. The question reads: When do you expect to begin deliveries of the 4D20 engines to Geely? And also, is the JV with Geely going to produce engines of various sizes, 1 liter, 1.5 liter, 2.0 liter and 2.2 liters? The answer here is this: right now, we are currently in our second prototype, and we expect to complete its trial runs in the fourth quarter of this year. And so we will begin production -- ramping up production beginning of 2014. As to the question of whether we have the requisite different sizes, currently, we -- our main engine is 2.0 liters and can be upgraded to 2.2 liters. And we do have the 4W engine, which is 1.2 and also 1.4 liters as well.

I guess, operator, any questions from the phone?

Operator

[Operator Instructions]

Benny H. Goh

Okay, there's a question about export markets, which asks about what are the engines being sold to total export markets in Vietnam and Peru? For Vietnam market, we are selling primarily buses and trucks. This is also in conjunction with our OEM customers as well. Whereas in Peru, we are going into the bus as our main export products over there.

Operator

And our first question comes from the line of Joel [ph] from Bank of Montreal.

Unknown Analyst

I wondered if -- just 2 areas I wanted to go, to ask about. Can you talk a little bit about the outlook for the off-highway market, growth rates for 2013 and 2014? And any update you can give us on where the industry inventory levels are?

Benny H. Goh

Okay. The off-highway market has obviously been going through a very difficult time last year, and that continued to persist up to this quarter. In fact, we are seeing there as a very tough time. You can see that a lot of the construction being off-road engines are really piling up in the supply chain as well. As for 2013, the general optimism was that a change of government would have stimulated some projects, and that will create this demand for off-road. Unfortunately, that has not taken place yet. And we are all hoping that things will start to pan out towards the second half of the year. But again, we are all very cautious about this whole development. For 2014, we believe that there will be a much better outlook, that things will be much clearer by that time.

Operator

And our next question comes from the line of Jonathan Brodsky from Advisory Research.

Jonathan P. Brodsky - Advisory Research, Inc.

Coming back to the balance sheet. Can you talk a little bit about the receivables? It's been stubbornly high now for quite some time. And can you give us an outlook on that? Are you seeing any issues with collections, time frame, whether or not you're going to move towards factoring as interest rates go up? Just wondering what your perspective is on that. And then I have a follow-up question after that.

Kok Ho Leong

Just to refresh the number: the trade and bills receivables was RMB 7.2 billion as compared to December, RMB 6.6 billion. If you look at these line items, they are consist of 2 items. One is open account, which is the account receivables; and the other one is actually bills receivables. In our balances of RMB 7.2 billion, the large part of it and, I would say, a substantial part of it is actually bills receivables. These are bank instruments that we can use for discounting. So if you say our bills -- trade and bills receivable, why is it so high, one of the reasons is we will not discount any bills. We will discount when we need the funds and also when the interest rates are -- is acceptable. So if you look at our cash balances, we still remain at a very healthy level at RMB 3.3 billion as compared to the year end of RMB 3.2 billion, and that's the reason why you see we do not discount for these bills receivable. So I can say with confidence, our aging in the receivable, very healthy. By comparison, those that are in the long overdue are very small amount.

Benny H. Goh

So in fact, just to add some color to what Kok Ho has said, if you look at the pure accounts receivables, those that are beyond 3 months are actually less than 10%. So I think it's a highly very commendable effort by the team over there. And so what we are seeing here is that all our accounts receivable are all collectible within 3 months.

Jonathan P. Brodsky - Advisory Research, Inc.

Is the, as a follow-up -- 2 follow-up questions. One is, in looking at the increase in inventories, that's the first time I think we've seen an uptick in inventories in a couple of quarters. Is that a good indication on where you think things are going over the next few months?

Benny H. Goh

Yes, that's right. In fact, we are seeing some pull from the OEM customers. And that's why we are stocking up some of our inventories. But by and large, our inventories in the whole system do not exceed more than 30 days, so the uptick is still relatively small.

Jonathan P. Brodsky - Advisory Research, Inc.

And finally, as it relates to the high-end engines, I've heard some talk about some of the European players coming into the market with very, very high-end quality engines. Can you talk about that in terms of competitiveness and what you're seeing?

Benny H. Goh

I think, by and large, the foreign players see China as a very attractive market. And it's no secret that they have always wanted to enter this very highly lucrative market. But given the current situation today, as you can see, there is obviously overcapacity, and the demand for high-end engines is still relatively low. It will be a bit of a challenge for these guys to come in immediately. I will see them as probably trying do some partnership with a local player, if anything.

Operator

And our next question comes from the line of Povet Khana [ph] from Value Investment Principals.

Unknown Analyst

I had a question regarding the natural gas engines. Are you guys seeing more traction in other cities going forward? And what are the real margins on heavy-duty natural gas engines as compared to the diesel engines?

Benny H. Goh

Well, natural gas engines to us presents the major attraction of -- for the whole suite of business that we have. We see a great demand, especially in the buses and also in the heavy-duty segments. And by and large, our natural gas engines today are commanding the premium margins that we command today. And that has actually helped us a lot in our average selling price.

Unknown Analyst

Great, great. And can you give a mix of approximately how many natural gas engines that you guys sold in this current quarter?

Benny H. Goh

This quarter, we sold 6,000 of our natural gas engines, which are actually almost 50% higher than last year, the same time frame.

Operator

[Operator Instructions] The next question comes from the line of Joel Piece [ph] from Bank of Montréal.

Unknown Analyst

I just wanted to ask one follow-up. Can you talk about the enforcement of the emission standards starting in July? Do you think that that's something that's going to be enforced? Or is it going to be very difficult for the government to enforce those new emission standards?

Benny H. Goh

Yes. In fact, there's quite a lot of speculation whether this is going to be shifted [ph] or not. And now this whole National 4 regulation is stimulated by 2 major departments of the government. One is the EPA, and the other is by the Ministry of Industrial Information Technology. But quite obviously, from the environmental angle, this is a very important initiative. And 1st of July will be actually a [ph] go ahead. Now what has got impact is that the diesel availability within the whole market is still not all the way through. And so what we are anticipating is that the enforcement of the National 4 may not be total across the whole of China. So what I mean is that, basically, in the Tier 1 and Tier 2 cities, it will be strictly enforced, but for the other parts of China, that may be less regulated. So we expect probably around a 6-year -- a 6-month time frame before total enforcement is put in place.

Kok Ho Leong

Okay, there's a question from Neil [ph]. The question reads: when will the dividend be announced? Okay, as of to date, we have not made any announcement. As usual, when it's formal, we will make the announcement. If you look at our 20-F, we did mention that our main operating company, that is GYMCL, the factory in Guangxi, they have approved the dividend from our operating entity to us. That's much I can update to you at the moment.

Benny H. Goh

Another question over here that asks about how many marine engines are sold in the first quarter. The marine engines we sold this first quarter is about 1,500 this time around. Actually, last year, we saw a huge demand for marine engines. And this year, we continue to see the same trend.

Operator, any more questions on the phone?

Operator

No. We have now reached the end of our Q&A session, then. I will turn the call back over to Mr. Goh.

Benny H. Goh

Okay. Thank you all for participating in our First Quarter 2013 Conference Call. And we look forward to speaking with you again. Goodbye.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may all disconnect.

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