On April 30, 2007, I wrote an open letter to the Board of China Yuchai International Limited (NYSE:CYD). The full letter follows:
April 30, 2007
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
To the Members of the Board:
Threshold Capital Corp manages accounts that have been shareholders in China Yuchai International Limited (“CYI”) since November 2005 and cumulatively hold less than 1% of the company’s outstanding shares. As a long-term shareholder of CYI, I am intrigued by its future prospects as The People’s Republic of China continues to grow its Gross Domestic Product greater than the rest of the globe. However, at this juncture, I decisively believe shareholders have been ignored by current executive management in communicating and updating investors on current business conditions, on the company’s relationship with its chief operating subsidiary, Guangxi Yuchai Machinery Co., and maximizing shareholder value. The company’s stock continues to underperform, shareholder concerns remain unanswered, all the while the company’s controlling shareholder, Hong Leong Asia of Singapore enjoys price appreciation of its own stock, and the collection of millions in management fees from CYI.
I believe the current view taken by executive management towards its shareholders is unacceptable and it must improve dramatically. I urge the Board of China Yuchai International Limited and its senior executives to embark on the following actions:
1. Immediately establish an Investor Relations Department at its primary operating subsidiary, Guangxi Yuchai Machinery Co. This office should be made available for all investor inquiries, be qualified to discuss current business conditions, including the stated goals of the diesel engine business by Yuchai Group’s Chairman, Mr. Yan Ping, be well versed with relevant New York Stock Exchange and Sarbanes-Oxley rules and regulations, and implement quarterly and year end earnings conference calls.
2. Institute an immediate cancellation of the “golden/special” share. The company’s Chief Financial Officer, Mr. Philip ting Sii Tien, was quoted in The Business Times Singapore on October 3, 2006 stating, “long-term fundamentals remain intact” and “at HLA’s major subsidiary – CYI, China’s largest independent manufacturer of diesel engines – previous issues are past and gone.” I am aware that the “golden/special” share structure was necessary for its past relationship with the former Chairman of Guangxi Yuchai Machinery Co., Mr. Wang Jianming. At this present time, it is clearly evident that the relationship between the company and Guangxi Yuchai Machinery Co., and its Chairman, Mr. Yan Ping can be classified as excellent and outstanding and hence the “golden/special” share structure is no longer needed. Furthermore, I question management’s decision to grant and release this interview to benefit Hong Leong Asia and not disseminate it to CYI shareholders.
3. Provide an update on the company’s strategic “new business strategy” first announced back in February 2005. Currently, the company owns a 36.6% stake in Thakral and 45.4% stake in HLG Enterprises costing $US 50.0 million and $US 81.2 million respectively. Make available to shareholders names of the exclusive brands Thakral distributes on the China mainland and any relevant corporate developments that CYI is undertaking to return this company to growth and profitability. For HLG Enterprises, present the names and locations of their hotel properties in China, Vietnam, and Malaysia. Also, provide an explanation for the 50% rise in Thakral’s stock price and 109% rise in HLG stock since the beginning of April 2007.
4. Present a comprehensive update to the company’s Reorganization Agreement announced in April 2005. As we rapidly approach the deadline for the Agreement (June 1, 2007 for the repayment of the Yuchai Marketing & Logistics Co. loan and June 30, 2007 for the Reorganization), investors have patiently waited over two years for this to be completed. Detail for shareholders how Singapore based management is working diligently with its Chinese partners to complete the Reorganization. If CYI management believes that this Reorganization is not going to be completed by the deadline, describe to shareholders how each management team will work together to better improve CYI’s top and bottom lines. Specifically, how is Singapore based management assisting their primary operating subsidiary in exploring strategic acquisition opportunities, potential cost cutting, and prospective Joint Venture technical partners. If CYI management is concerned about finding additional China prospects to include in the CYI “stub” after the Reorganization is complete I, once again, would recommend management consider rolling up Hong Leong Asia’s other China businesses into the CYI “stub”. This potential publicly traded company, generating well over $US 700 million in revenue, would then include stakes in “Newco” (the newly spun-off Guangxi Yuchai Machinery Co., operated by Mr. Yan Ping and his management team), cash, 36.6% stake in Thakral, 45.4% stake in HLG Enterprises, 90% equity interest in Xinfei (a leading China manufacturer of refrigerators, freezers, and air conditioners), Rex Industrial Packaging, GPac (Eco-Friendly shipping pallets), and the Building Materials Unit (granite, ready-mixed concrete, and cement).
As China’s economic expansion continues into 2007, I believe CYI executive management must capitalize on this growth potential. CYI management and its Board of Directors must work in closer cooperation with Mr. Yan Ping, the Chairman of Yuchai Group in order to accomplish the goals of the overall company. Since Mr. Yan Ping’s appointment in October 2005, he has made enormous progress at Yuchai. According to their website, (www.yuchai.com), he has implemented Sarbanes-Oxley reforms, international corporate governance and accounting practices. He has allowed more transparency into Yuchai’s businesses by leading the above developments and streamlining the Yuchai corporate structure. Also, under his leadership in 2006, Yuchai Group was recognized as a top brand in the Chinese 500 Machinery Company rankings. In July 2006, Yuchai moved up 12 slots in this brand ranking from number 37 to number 25. Mr. Yan Ping has also led the way for Yuchai in its environmentally friendly policies in adopting and investing in Euro III and Euro IV standards for Yuchai’s diesel engines. I also believe that Mr. Yan Ping has some strategic plans for Yuchai Group, namely, making a strategic acquisition in northeast China (Hebei, Shandong, or Jiangsu provinces) where Yuchai would be better able to serve its northern customers and capture greater market share.
To date, I am unaware of any developments undertaken by either the Board or executive management of CYI to demonstrate they are diligently acting as a value added partner for their main operating subsidiary, Guangxi Yuchai Machinery Co. or enhancing shareholder value. As CYI contributes approximately 50% of the overall revenue for Yuchai Group AND Hong Leong Asia, improved efforts are required by current CYI management to show their firm commitment to their Chinese partners and CYI shareholders.
If Singapore based executive management in CYI elects not take up the above shareholder matters, then Threshold Capital Corp implores the Board of Directors to consider selling Hong Leong Asia’s entire stake in CYI to a strategic financial partner/institution or put the entire company up for auction. Given the company’s current exceptionally compelling valuation, I emphatically believe several global buyout firms would be very intrigued in owning a 76.4% interest in Guangxi Yuchai Machinery Co., a subsidiary of Yuchai Group, now a top 25 Industrial and Machinery brand in The People’s Republic of China.
Threshold Capital Corp considers the above issues paramount to all shareholders of China Yuchai International Limited and these should be addressed immediately. I believe that 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.
I welcome the opportunity for extended discussions with the Board of Directors and senior management team in regards to the above strategies and I look forward to the upcoming first quarter of 2007 report.
Peter A Delgado II
Threshold Capital Corp