China Yuchai's Accounting Error: Shareholders Deserve An Explanation

| About: China Yuchai (CYD)

The news of Friday, August 3, 2007 came as a shock, and of course extreme disappointment. As investors, we must now wait even longer for the fully independent audit for 2006. As a result, I have yet again, written a letter to the Company expressing my indignation and displeasure with current executive senior management of CYI and now also, its Board of Directors due to these “potential accounting errors.” You may view my latest open letter to the Board of China Yuchai International, Limited here (.pdf). I have also sent this letter (.pdf) to the New York Stock Exchange and The Securities and Exchange Commission.

Investors should be interested in viewing the news of Hong Leong Asia for August 3, 2007. You may view it here.

Quoting from HLA’s release, “the potential accounting errors at Guangxi Yuchai Machinery Company Limited (a subsidiary of CYI), for financial years ended 31 December 2005 and 31 December 2006, the potential financial impact to the Group is estimated to be approximately S$4.6 million reduction to the operating retained earnings, accounting for approximately 1% of the shareholders’ equity at 31 December 2005 and 31 December 2006. Depending on the results of the independent inquiry, the accounting entries may have to be reversed, which will result in a decrease in the Group’s share of CYI’s profits of S$4.6 million for 2005 and/or 2006, thus necessitating an adjustment to be made in the Company’s financial statements in the future.”

So what is S$4.6 million in US$? Approximately $3.02 million. Will this be the potential restatement amount for US based CYI shareholders? Investors are already aware that fiscal 2005 was abysmal (due to the loan write-off and lower margins) and for fiscal 2006 (unaudited results released February 27, 2007) CYI earned US$ 25.5 million/US$0.69. I guess we will see the differences between Singapore and US GAAP when the results are released. And by the way, Hong Leong Asia will be announcing its results for the second quarter and half year ended 30 June 2007 on Tuesday, August 14, 2007.

As I state in my shareholder activist letter dated Monday, August 6, 2007, “whether or not these “potential accounting errors” of approximately Rmb 168 million (but impacting only US$ 3.027 million for Hong Leong Asia’s retained earnings for the fiscal years ended December 31, 2005 and December 31, 2006) by the Company’s subsidiary, were policies enacted by the leadership of the previous Chinese chairman, Mr. Wang Jianming, it is difficult to comprehend why these possible oversights occurred provided that CYI has had financial personnel at Yuchai headquarters for years.” Especially after the positive press Hong Leong Asia has received recently in an article (.pdf) that I was also interviewed for.

In conclusion, we as shareholders deserve an explanation from both CYI executive management and its Board of Directors for this oversight. I would strongly recommend that current shareholders, whether you be an individual or an institution, to replicate my efforts, for the benefit of all shareholders. I, for one, will no longer tolerate current CYI executive management and its Board to destroy one of the premier machinery brand names in The People’s Republic of China.

Disclosure: 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.

Disclaimer: Peter A Delgado II is the Principal and owner of Threshold Capital Corp, a state Registered Investment Adviser in the State of New Jersey. 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.

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