China Yuchai International (CYD) Q1 2014 Results - Earnings Call Transcript

| About: China Yuchai (CYD)

China Yuchai International Limited (NYSE:CYD)

Q1 2014 Earnings Conference Call

May 12, 2014 8:00 AM ET


Kevin Theiss – IR

Weng Ming Hoh – President

Kok Ho Leong – CFO


Mohit Khanna – Value Investment Principles

Kerr Chen – Shah Capital

Nick Jin – JPMorgan

Jeremy Tan – Harvest Global


Ladies and gentlemen, thank you for standing by, and welcome to the China Yuchai International Limited First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions). I must advise you that this conference is being recorded today, Monday, 12 May, 2014.

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

Kevin Theiss

Thank you for joining us today and welcome to China Yuchai International Limited’s First Quarter 2014 Conference Call and Webcast. My name is Kevin Theiss, and I’m with Grayling, China Yuchai’s U.S. Investor Relations adviser. Joining us today are Mr. Weng Ming Hoh; and Mr. Kok Ho Leong, President and Chief Financial Officer of CYI, respectively. In addition, Mr. Kelvin Lai, VP of Operations of CYI, is joining us today also.

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 risks 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 or otherwise in the future.

Mr. Hoh will provide a brief overview and summary and then Mr. Leong will review the financial results for the first quarter ended March 31, 2014. 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. All the financial information presented is reported using International Financial Reporting Standards as issued by the International Accounting Standards Board.

Mr. Hoh, please start your presentation.

Weng Ming Hoh

Thank you, Kevin. We are pleased to report the revenue increase 90.6% to RMB4.6 billion or US$739.7 million compared with RMB3.8 billion for the first quarter of 2013.

In the first quarter of 2014, our engine sales for both on and off-road engines increased by 16.2% compared with 4.4% increase in industry unit sales of commercial vehicles excluding petrol-powered vehicles according to the data from the China Association of Automobile Manufacturers, CAAM.

Industry growth was led by a 20% gain in engine sales of heavy-duty trucks. Our focus has always been to develop durable high-quality engines with advanced technology and performance, by meeting or exceeding our customers’ requirements, be further enhanced the reputation of our products, we remain committed to further developing our market share in the important heavy duty truck sector.

We have expanded our truck engines to include a variety of diesel and natural gas models. All our heavy-duty engines are compliant with the latest emission standards and we have increased production over the past several years to serve our truck and bus customers.

We have upgraded our 6M model engine, with 6K technology through the YC6MK 6-cyclinder engine and development a natural gas in 2012.

Our next generation YC6K 6-cyclinder diesel engine is already complying with National IV and V emission standards, to the capacity of between 10 to 13 liters. A natural gas version of this engine is now available.

With heavy-duty engines requiring more technology improvements, we believe we have an opportunity to increase our market share.

In late April 2014, China’s ministry for industry and information technology, published a directive that sales of National trade vehicle are to seize by December 31 2014. As a result, we believe that the pre-buy effect will continue to generate truck sales especially in the heavy-duty segment for the rest of 2014.

The increasing implementation of truck emission standards across the great number of important cities such as Beijing, Shanghai, Kwangju and Shenzhen, it’s already costing a shift in production towards more National IV engines. It’s one of the leading engine manufacturers of emissions technology in China.

We have had the technology and production capability in 2008 to produce National IV engines on a commercial basis, and we have invested expensively in the research and development to ensure that engines in a portfolio meets the current emission standards.

We have also invested and developed National V emission standard engines as well as prototype engines comply with National VI emission standards. We are well positioned to offer a variety of National IV compliant engines to meet the needs of multiple markets. And the sales of gas engines compliant y with National V emission standards as well.

During the first quarter of 2014, we saw close to 8,800 units of natural gas engines representing a 38.3% increase compared with the first quarter of 2013. Natural gas fuel is less expensive than diesel fuel and natural gas engine emit less pollutants compared with their diesel counterparts, making them ideal for urban use.

Our extensive experience with natural gas engines has enabled us to dominate the urban vast markets and allow us to a total service truck outgrowth engine market as deals of natural gas gradually expands into more applications.

We continue to build our product portfolio of high quality engines for the marine, construction, agriculture, money and power generation markets. Of the 8 million engines which have been launched in 2014, the YC6G series are the low to market, the new synergy model YC64FA series, targets a hydraulic accelerator markets and the YC6CL engines that’s been launched for the marine and power generation markets.

The remaining new engines are for the heavy-duty truck market, like it is vehicles and a second generation hybrid engines. Combined with the truck new engines into use in 2013, our expanded lines of one engine is setting a highest standard and positioning us for further growth.

The construction of our new dedicated production facility for expanding lines of high hot-powered engines is progressing and we anticipate that phase 1 construction will be completed by the end of 2014.

We maintain a strong financial position at 31, March 2014 as we have produced our debt level and we continue building our production capabilities. Our expanded production facilities are generating cost savings to lower rejection rate increasing economies of scale and six-stigma lean manufacturing processes.

With our growing production efficiency, financial strength, extensive product portfolio and service network in China, we are positioned to further improve our leadership in another market within the industry.

In view of a better performance over 2012, we have today announced a dividend US$1.20 for ordinary share for the financial year 2013, available wholly in cash or in new shares as option of the shareholder.

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

Kok Ho Leong

Thank you, Weng Ming. Good morning and good evening. I will now provide some more details in the first quarter financial performance. Our revenue for the first quarter of 2014 increased 19.6% to RMB12.6 billion, US$736.7 million from RMB3.8 billion in the first quarter of 2013.

The total number of engines sold by GYMCL during the first quarter of 2014 was 151,909 units compared with 130,744 units in the same quarter of 2013, representing an increase of 21,165 units, or 16.2%.

This increased compared favorably with the industry growth of 4.4% in the sales of commercial vehicles, excluding petrol-powered vehicles in the first quarter of 2014, as reported by the China Association of Automobile Manufacturers. This growth was mainly due to more engines sales for trucks and agriculture publications.

Gross profit was RMB788.4 million, US$128.1 million, compared with RMB727.2 million in the first quarter of 2013. Gross margin decreased to 17.3% in the first quarter of 2014 compared with 19.4% a year ago.

In the first quarter of 2014, lower gross margin was mainly attributable to a sheer, to a net profitable build mix. More lower margin units was sold such as tough engines and light-duty engines including for agriculture publications.

Other incomes was RMB29.5 million, US$4.6 million, an increase of RMB8.6 million from RMB20.9 million in the first quarter of 2013. This increase was mainly due to a gain from foreign exchange revaluation.

Research and development, R&D expenses increased by 10.6% to RMB104.9 million US$17.1 million from RMB94.9 million in the first quarter of 2013. The increase was mainly due to development of new engines as well as continued initiatives to improve engine quality.

As a percentage of revenue, R&D spending declined to 2.3% compared with 2.5% in the first quarter of 2013.

Selling, general and administrative, SG&A expenses were RMB366.2 million, US$59.5 million, up from RMB324.3 million in the first quarter of 2013. SG&A expenses represented 8% of the revenue compared with 8.5% in the same quarter a year ago.

Operating profit improved to RMB346.7 million, US$56.4 million from RMB338.9 million in the first quarter of 2013. The operating margin was 7.6% compared with 8.9% in the first quarter of 2013.

Finance costs increased to RMB27.8 million, US$ 6.1 million, from RMB34.2 million in the first quarter of 2013, an increase of RMB3.6 million or 10.5%. Higher finance cost mainly resulted from increased deal discounting at higher interest rates.

The share of joint ventures was a loss of RMB15.2 million, US$2.5 million, compared with the loss of RMB15.8 million during the first quarter of 2013.

In the first quarter of 2014, total net profit attributable to China Yuchai’s shareholders was RMB180 million, US$29.3 million, or earnings per share of RMB4.83, US$0.78, compared with RMB173.5 million, or earnings per share of RMB4.66 in the same quarter in 2013.

Let me now go to the balance sheet highlights, at March 31, 2014. Cash and bank balances were RMB2.1 billion, US$347.8 million, compared with RMB3.6 billion at the end of 2013.

Short-term and long-term interest bearing loans were RMB1.9 billion, US$ 314.4 million, compared with RMB2.3 billion at the end of 2013. Inventories were RMB2.6 billion, US$417.8 million, compared with RMB2.3 billion at the end of 2013.

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

Question-and-Answer Session


(Operator Instructions). Your first question comes from the line of Mohit Khanna from Value Investment Principles. Please ask your question.

Mohit Khanna – Value Investment Principles

Hello guys. I had certain questions regarding the outlook, actually you have said that the truck replacement cycle should help you gain the momentum throughout the year, maintain the momentum throughout the year in truck sales. So, could you please specify more on that?

Weng Ming Hoh

Okay. This is Weng Ming here, Mohit. If you look back the history of okay, the diesel engine sales, I think the big year that we had was back in 2010 where thereafter the big stimulus package that was launched by the Chinese government. So, at that time, a lot of engines were sold.

So, typically for a diesel engine like ours, the replacement cycle is about 5 tiers. So, we’re just coming to the end of the five-year period, which ends in 2014-2015. So, that we believe will help us to sustain the sales for this year or the pieces for this year.

In addition, because the government is just and now the endorsement of the National IV engines from 1 January 2015, this next year, we suspect that we expect that there will be still some pre-buying from now to the end of the year, right, simply because the cost of a national trade truck engines is cheaper than the National IV powered engines truck.

Mohit Khanna – Value Investment Principles

Okay, okay, that’s good. And could you please talk about little bit on how is the momentum going in the natural gas engines and what do you see going forward – are more cities like need to adopt your engines?

Weng Ming Hoh

You mean the National IV engines?

Mohit Khanna – Value Investment Principles

Yes, National IV natural gas.

Weng Ming Hoh

Natural gas engaged, I think it’s now while it’s sold in the big cities and in fact it has inched very well. So far this year, in the first quarter of this year, we sold our 8,800 units of natural gas engines. And that counts for about 38% growth compared to the same period last year. We expect the momentum to continue this year to the end of the year, in fact for the full year we expect a very high growth rate for natural gas engines.

Mohit Khanna – Value Investment Principles

Good, good. And I had a question regarding the dividend, so – and congratulations for the dividend increase that’s been very good. So, the difference now going forward would be 1.2 as regular dividend?

Weng Ming Hoh

We do not have developed policy, it depends really on the performance of the company each year and how much cash we need to probably pay for operating OT capital as well as any capital expenditures investments that we may have before the start of the level of dividend to payout. So it will vary from year to year.

Mohit Khanna – Value Investment Principles

So there is no, any proper dividend policy or the payout – target payout ratio that is modeled into.

Weng Ming Hoh

No, we do not have a formal dividend policy, no.

Mohit Khanna – Value Investment Principles

Okay, okay. And another thing, on the balance sheet, as compared to the year-end 2013, cash looks a bit down on – and on the other hand, working capital – in the working capital, receivables has increased and payables has decreased. So all the unfavorable movement for the cash, do you think this is not normal and this should be reversed in the second quarter?

Kok Ho Leong

Leong here, let me answer that question. You are right that our cash balances, has reduced by almost 1.4 billion, cash and bank balance reduced by 1.4 billion. And our trade induced receivable increased correspondingly about 1.5 billion.

Actually, you might look into the overall China money market situation, for the first quarter of 2014 I think it’s known to all in the market that the China money market needs to tighten. And the interest rate that’s actually shut off somewhat in the first quarter, although at the beginning of the second quarter, we have seen the interest rate subsiding a little, okay.

And tightening of the market has resulted in our drawing on to our cash reserved, so that we can minimize the interest cost, that’s why you see, if we look at our interest, our increase in the interest is very modest compared to the volume of our business. So, if you ask me, I think this is a proof that – of our financial strength that we can draw into our cash reserves and the time required.

So as well, you see be a long-term trend in this, well, this is all depending on the market. If the money market is good, we will continue to borrow otherwise we will conserve the money as much as possible and draw on to the results we have. I think that is the basic discipline that we always stick to.

Mohit Khanna – Value Investment Principles

Fair enough, fair enough. And the final question on the gross margins, so, could you just guide us a little bit on what should be the normalized level for the gross margins of the company as now we have natural gas engines coming in and more modules are expected to be launched soon. So, what should be the normal gross margins for the company going forward?

Kok Ho Leong

The gross margin that you see is the composite gross margin. As you know, we sell a variety of engines from light-duty to heavy-duty. And that further complicates by more and more product lines we have. In addition to our traditional diesel-powered engines, we now move on to hybrid, although it’s got the big portion of us. But more and more there would be natural gas engine come into play.

And not only that, the traditional National III engine would be slowly selling lesser and the more National IV engines will be coming into play. It’s difficult for me to give a single-digit guidance on the gross margin, because…

Mohit Khanna – Value Investment Principles

Is there a range, and how do you think this should affect coming in, this should affect going forward the new hybrid engines coming in?

Kok Ho Leong

Yes, going forward, as usual you can see. Our JV margin does move a little bit over the years, if you can go to our trading app, you can see the margin movement. Even at last year, we clocked fairly comfortable margin at 20.5, this quarter is bit on the low side because we happen to sell more to the lower gross margin engine. For example, we sell more to the agricultural engines yes and also, some light more light duties that affect our margins in the mix.

Mohit Khanna – Value Investment Principles

Okay. So those are probably 20%, – 18% to 20% of the gross margin range should be what we should target at going forward?

Kok Ho Leong

While we would not give any forward numbers, the trading app maybe a good guidance for you.

Weng Ming Hoh

Okay, Weng Ming here. Maybe I’ll give you a little bit more guidance. I mean, the reason why we dropped our current level of gross margin of 17% odd is because of the sales mix that we have. We’re selling a lot more – lower level 4-cylinder engines today this quarter. And less I would call the bigger cc engine market particularly in the bus segment.

So going forward, we expect the mix to improve but to what level, I think I’ll guess we haven’t seen but it should be better than what we see this quarter the way we look at it.

Mohit Khanna – Value Investment Principles

Okay, fair enough, guys. Thank you so much.

Weng Ming Hoh



Thank you for your question. (Operator Instructions). Your next question comes from the line of Kerr Chen (ph) from Shah Capital. Please ask your question.

Kerr Chen – Shah Capital

Yes, it looked like you increased your market share as you gross at the higher as the industry. Could you talk about the competition and talk about the consolidation in the China truck and car engine business?

Weng Ming Hoh

No, I wouldn’t comment too much on the industry. But I can say from our own company experience, what we have seen in the first quarter of our sales. Now, during the first quarter, we saw a growth in the heavy-duty truck market the growth was so significant.

The growth was actually carried on from the previous years which we saw quite fabulous growth there. This year, we have also seen quite good growth in the agriculture segment of our business, okay. This is where the bulk of our growth came from.

Now the other segments like the marine also registered some growth but the industrial segment of our business has actually not done so well this quarter. And overall bus market segment has not grown as much as we had anticipated. In fact, certain part of the bus market has essentially registered a decline for the first quarter compared to the last year.

Now, going forward, how this will affect our industry, I would say, we believe that the heavy duty segment would continue to grow this year, largely because of the pre-buy we believe we’ll continue to see some growth in the heavy duty segment. And recent government incentives on the agriculture machinery will also help to sustain the part of tech support of our business.

Kerr Chen – Shah Capital

Okay. And the Cummings, what were positive on their China on their recent earning call, do you feel the same way going forward?

Weng Ming Hoh

Well, I can’t comment on Cummings, our competitor. What we think happened earlier is that we do expect the heavy-duty truck market to continue to grow this year. And the agriculture segment to grow this year. So, we think that from our own angle we will see growth in these segments of our business.

We will take questions from the – the question is what is gas engine sales outlook for the rest of 2014?

Okay, it kind of say how the industry is going to end up this year but right now we expect the growth to be quite significant this year compared to last year. So far this year, the first quarter we have grown 38%, so for the rest of the year we would still expect a significant growth if not a little bit – it could be a little bit less, it could be a little bit more. So, it would still be a very significant growth for us this year.

Okay, another question is, are you planning to have your Investor Day in Q2 or Q3?

Okay, we have not decided on the current timing yet on the Investor Day, once we have decided and have a plan for it, we will inform those people who are interested that time.


(Operator Instructions). Your next question comes from the line of Nick Jin from JP Morgan. Please ask your question.

Nick Jin – JPMorgan

Hi guys, thanks for taking my questions. Three questions from me. First, what is the percentage of truck engines sold during first quarter this year that is coming from China for compliant engines, and how does it compare to the ratio in 2013?

My second question is that you guys mentioned that a replacement demand for trucks is going to be strong for the rest of the year, plus increasing pre-buying demand head off the enforcement of China for emission standard. So overall speaking, what’s the overall growth rate that you are looking for the – at the industry level for heavy-duty trucks?

The third question, I think someone probably asked, but can you just comment a little bit on the – on how truck makers affect in vertical integration will impact on the independent engine producers like us? Thanks.

Weng Ming Hoh

Okay, let me, I got two of the questions you’ve mentioned, I got two. One is the industrial growth the demand here asked about earlier, okay. The industrial – from the statistics that we have seen, the industry actually grew by about 20% in heavy-duty trucks, okay. So, now, there is still a quite significant growth.

Now, how it’s going to end up this year, what growth rate it’s going to end up this year, honestly you have to guess. But from my point of view, I think that the growth is going to continue, especially because of the enforcement of actually for spenders by the beginning of next year. That would still drive some pre-buying activity for the second half of this year.

Now, although the government has implemented the National IV standards from 1 July last year, not all cities have enforced, even up to today, although there are quite a number of cities that enforcing these standards there are still many cities who has not enforced these standards. So it would still continue to have the impact in driving these sales of the heavy-duty trucks this year I think.

The other one, the other question on vertical integration, yes, there are some OEMs who are now thinking of building their own engine plant but I think from our point of view, we would continue to be an independent engine manufacturer. We believe that this is probably a very strong competitive advantage for ourselves, simply because we do not compete with our customers, okay. So, that in itself is – it’s a very strong competitive age compared to our customer, our competitors, right.

Nick Jin – JPMorgan

Okay, thanks.


Thank you for your question. Your next question comes from the line of Jeremy Tan from Harvest Global. Please ask your question.

Jeremy Tan – Harvest Global

Hi, thanks for taking the question. Could you comment a little bit on the competition of your products and also in the market? Second question is, I think the nationwide implementation of this National IV engine would be by January 2015, so do you think that given that you’re saying that most cities have not enforced this standard, do you think that there would be acceleration going into 2015? Thank you.

Weng Ming Hoh

Okay, thank you. I’m afraid, we do not comment on our competitors and their planning, I think this is – it’s very difficult to actually talk about it in the conference call. Now, as far as National IV enforcement, from 1 January 2015, I actually think that it will continue to drive the – what I call the sale of the heavy-duty truck especially this year. And I think that the growth will still be quite significant especially because the cost of new trucks is so much more than the national trade engine front.


Thank you for your question. There are no further questions at this time. I would now like to hand the conference back to Mr. Kevin Theiss. Please continue.

Kevin Theiss

Thank you all for participating in our 2014 first quarter conference call. We look forward speaking with you again. Good bye and have a good day.

Weng Ming Hoh

Thank you all.


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

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