China Yuchai International (CYD) is a holding company based in Singapore which owns 76% of the largest diesel engine manufacturer (Guangxi Yuchai) in China. The stock currently has a market cap of approximately $290 million. The company also owns two other public investments in Singapore that account for about $100 million. Taking this out of market cap, the Chinese operating company is only trading at $190 million. For 2007, according to the announcement of the Chinese operating unit, the company generated about 10 billion RMB of revenue, an equivalent of about $1.3 billion. The price/sales of the diesel engine maker is only 0.15.
Yuchai has been the number one diesel engine maker in China for almost a decade with above average growth rate. Its dominance of the vehicle diesel engine market in China is supported by its technology advantage, largest sales and service network and highest quality of service. It is the first company in China to achieve Euro III, Euro IV and Euro V emission standard. As of today, it is still the only company offering commercial Euro IV engines. It is also the only Chinese diesel engine maker being able to compete with foreign suppliers in high end bus market. Yuchai has gained market share from Cummins in the high-profile Beijing Olympic bus contract. Yuchai is also the only Chinese company which has a diesel engine solution for passenger cars.
The underperformance of the stock was caused by a long term lack of communication with Wall Street, and a short term issue relating to the audit of the company’s 2005 and 2006 results. CYD is most likely the only company with revenue over one billion dollars trading on NYSE without any sell side coverage. Their change of auditor from KPMG Hong Kong to KPMG Singapore led to a dispute of $22.5 million spread over 2005 and 2006 and delayed their announcement of 2007 financial result. However, it is very likely the situation will improve in the near future, due to mounting pressure from public shareholders. The company retained an IR representative late last year and made the announcement the completion of an independent audit relating to the adjustments to the 2005 and 2006 financials which found no intentional wrong doing on January 22nd.
CYD was the second Chinese IPO in the U.S. Since its IPO in 1994, Yuchai has become the Flagship of the Chinese diesel engine industry. During this period the company’s revenue grew almost 7 times. The stock is trading below the IPO price of 10. The stock did respond to positive operating results back in 2004 and hit a high of $35. From China’s industry statistics and the Guangxi Yuchai’s announcement in Chinese language, it is clear 2007 has been a great year for CYD. Its revenue grew to approximately $1.3 billion, an over 40% growth over 2006. This information is not yet formally released by the management in English. According to CYD’s press release in English, the volume shipment in 2007 was 383,000 up 35% from 285,000 units in 2006, well above the industry growth rate of 25%. The higher mix of heavy engines in addition, should lead to improved operating margin and earnings. Once the company announce their financial result for 2007, it is very likely the stock will respond positively.
Disclosure: Author has a long position in CYD.