China Yuchai 2007 EPS Likely to Exceed $1.50

We recently discovered a credit rating report dated November 15, 2007 about Guangxi Yuchai, the Chinese operating unit of China Yuchai International (CYD). This report, generated by one of the top China-based rating agencies, China Lianhe Credit Rating Co. Ltd, is in Chinese and has not been made available in English. It is a follow-up report on the 650 million RMB short term bonds the company issued in April of 2007. The bonds rated A-1, the highest score of the agency’s rating system. The 14 page report includes detailed financial metrics for the past 3 years. The long term rating of the company is AA. It is continually cited in the report that the financial statements, including the Income statement, Balance Sheet and Cash Flow statement, are based on financial information provided directly by the company.

We translated the income statement and some key points:

click to enlarge

As of September 2007, the total company assets were 8,022,482,000 RMB ($1.10 billion); shareholders' equity was 3,317,570,700 RMB ($442 million).

Here is our simple analysis: The total revenue for the first 9 months of 2007 was comparable to the revenue for the entire year of 2006. Gross margins improved from 18.5% for 2006 to 24% for the first 9 months of 2007. For the first 9 months of 2007, the Net Income already more than doubled from the entire year of 2006. Taking account of the exchange rate of 1 USD = 7.5 RMB, and that CYD owns 76.4% of Guangxi Yuchai, the total number of shares outstanding being 37.3 million, EPS for first 9 months of 2007 was $1.24 from Guangxi Yuchai to CYD. From the SEC filings of CYD, the two Singapore assets held by CYD had little or no impact on the income statement. CYD earnings should be very close to the contribution from Guangxi Yuchai. Based on the company’s announcement of the whole year unit and revenue, it is reasonable to estimate its EPS for 2007 is above $1.50, more than 100% growth from the pre-audited EPS of $0.69 for 2006.

The stock, as of today, has a market cap of approximately $320 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 $220 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 0.17.

CYD stock is significantly undervalued based on its asset value and revenue. This report gave more detail into the company’s profitability, which eliminated the last possible question about the company’s fundamentals.

Disclosure: Author holds a long position in CYD

Comments

[Thorough Re...:]

Here is the link to the report: www.chinabond.com.cn/c...

2008 Feb 29 09:27 AM

[Yael Pipano:]

hey thorough researcher, I guess you're thoroughly Chinese, because your link is in Chinese! What use is it to us, non-Chinese speaking Americans?

2008 Feb 29 08:39 PM

[NotaComplet...:]

Adding an old article on CYD taken for the Motley Fool Web site. It discusses CYD's ownership structure. Has this situation been corrected?
======================...
Chinese Diesel Torture
By Stephen D. Simpson, CFA March 10, 2005

0 Recommendations

When is a value stock not a value stock? How about when you can't understand who's really in charge of the freakin' company!

On the surface, China Yuchai (NYSE: CYD) looks like it should be a slam-dunk stock for those wanting a little China in their portfolio. After all, the underlying business of diesel engines is profitable, growing, cheap, and well-positioned to take advantage of the growth in the Chinese heavy-truck market.

So why, then, does the stock trade for only six times earnings? Why do institutions have virtually no interest in it at all? Why are more than 10% of the company's outstanding shares shorted? Shouldn't this be the next Cummins (NYSE: CMI) or Daimler Chrysler's (NYSE: DCX) Detroit Diesel?

Dig deeper and you begin to see why the stock trades at the level it does. Oh, and get ready for some confusion.

When you buy shares in China Yuchai, you're not exactly buying shares in a Chinese diesel engine maker. What you're buying is shares of a Bermuda company that owns upwards of three-quarters of the stock of a Chinese diesel maker, Yuchai. China Yuchai itself is more than 20% owned by Hong Leong Asia (HLA), and HLA has a "golden share" that allows it to do pretty much whatever it pleases, including controlling the board of directors.

That remaining 25% or so of Yuchai is the sticky part. It's owned by an entity called the State Holding Company, which is basically the Yulin city government -- Yulin is where Yuchai is located. What's more, Yulin, through Coomber Investments, owns almost 25% of China Yuchai.

Got all that?

Wait, there's more.

Even though China Yuchai owns a huge chunk of Yuchai, it's more or less in the position of a nonoperating partner. That is, it doesn't (and, frankly, can't) make any day-to-day decisions about the company or its financial structure, including dividends or capital expenditures.

Recently, this has been a problem. The Chinese management of Yuchai and the management of China Yuchai have not been seeing eye-to-eye on matters. Not only have dividends been withheld from China Yuchai but also Yuchai has attempted to pull stunts such as not permitting board meetings to be held, not implementing board decisions, and even attempting to give a sweetheart loan to another Coomber-controlled company.

When China Yuchai began to complain about these goings-on, the State Holding Company tried to bring the whole thing crashing down by having China Yuchai's ownership stake declared illegal. This is a time-tested practice in China -- if the foreign partner gets a little too big for his britches and doesn't let the locals do what they please, the government tries to pressure him with threats of invalidating the whole shebang.

To its credit, China Yuchai tried to resolve the mess in a July 2003 agreement (called "the July 2003 agreement") whereby both groups essentially pledged to play nice and cooperate. Well, it's been 18 months, and the agreement has yet to be implemented. What's more, the CEO of Yuchai, who is essentially a State Holding Company ally, threatened in December 2004 that the agreement may not be implemented at all. And then in February, Coombers again asserted that China Yuchai was in violation of various Chinese laws and was interfering in Yuchai's operations.

To make matters even more interesting, it appears as though Coombers has been contemplating an increase in its holdings of China Yuchai -- perhaps in an effort to throw off the ownership structure in such a way that HLA would loose its "golden share" and therefore lose control of China Yuchai. But then, you expected that, right?

If anybody has followed this far and doesn't yet have a headache, they're a stronger person than I.

While I really love the inherent idea of China Yuchai -- a growing Chinese maker of diesel engines that trades at a single-digit price-to-earnings ratio -- the reality would give me nightmares if I tried to own this thing. True, the squabbling hasn't really hurt the operations of the underlying company yet, but there's just too much turmoil here for my comfort

2008 Mar 01 11:10 AM

[RealWorld:]

Anyone can discuss how much will the price fall if something like asset restructuring or core asset spin off happen for CYD? I'm really concerned about this high risk.

2008 Mar 08 01:55 AM