China Yuchai International Limited's (CYD) Management on Q1 2019 Results - Earnings Call Transcript

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About: China Yuchai International Limited (CYD)
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Earning Call Audio

China Yuchai International Limited (NYSE:CYD) Q1 2019 Results Earnings Conference Call May 10, 2019 8:00 AM ET

Company Participants

Kevin Theiss - Investor Relations

Weng Ming Hoh - President & Director

Thomas Phung - CFO

Kelvin Lai - VP, Operations

Conference Call Participants

William Gregozeski - Greenridge Global

David Raso - Evercore

Operator

Now I would like to 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 2019 conference call and webcast. Joining us today are Mr. Weng Ming Hoh and Dr. Thomas Phung, President and Chief Financial Officer of CYI, respectively. In addition, we also have in attendance Mr. Kelvin Lai, VP of Operations of CYI.

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, confident that, continue to, predict, 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, including, but not limited to, statements concerning the company's operations, financial performance and conditions, are based on current expectations, beliefs and assumptions, which are subject to change at any time. 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, such as government and stock exchange regulations; competition; political, economic and social conditions around the world and in China, including those discussed in the company's Form 20-F under the headings Risk Factors, Results of Operations and Business Overview, and other reports with the Securities and Exchange Commission, from time to time.

All forward-looking statements are applicable only as of the date they are made and the company specifically disclaims any obligation to maintain or update the forward-looking information whether of the nature contained in the release made during today's call or otherwise in the future.

Mr. Hoh will provide a brief overview and summary, and then Dr. Phung will review the financial results for the first quarter ended March 31, 2019. Thereafter, we will conduct a question-and-answer session.

For the purpose of today's call, the financial results for the first quarter ended March 31, 2019, are unaudited, and they will be presented in RMB and U.S. Dollars. All of the financial information presented is reported using International Financial Reporting Standards as issued by the International Accounting Standards Board.

Mr. Hoh, please begin your prepared remarks.

Weng Ming Hoh

Thank you, Kevin. Net revenue for the first quarter of 2019 decreased by 4% year-over-year to RMB4.2 billion or U.S. $618.3 million primarily due to reduced number of units sold. This was moderated by a higher average selling price from a better product mix. China's GDP growth of 6.4% in the first quarter of 2019 was similar to the fourth quarter 2018, but it was less than 6.6% growth in 2018. GDP growth surpassed some expectations as industrial production grew. Our retail sales and property investment exceeded expectations.

According to the data reported by China Association of Automobile Manufacturers in the first quarter of 2019 sales of commercial vehicles excluding gasoline-powered and electric-powered vehicles decreased by 2.4%. Truck sales decreased by almost 1% with heavy-duty truck sales increasing by 0.4%. Medium-duty truck sales declined by double-digit and light-duty truck sales increased by 0.3%. The total number of engines sold by GYMCL in the first quarter of 2019 decreased by 8% to 101,300 units compared with 110,113 units in the same quarter last year. Lower unit sales primarily reflected reduced sales of truck and bus engines, partially offset by higher sales of engines for off-road markets.

GYMCL’s heavy-duty and medium-duty truck engine sales decreased in the first quarter of 2019 which was mitigated by the improvement in light-duty trucks. Diesel and natural gas bus engine sales declined in the first quarter of 2019. GYMCL's off road engine sales rose in the first quarter of 2019 led by sales growth in agriculture equipment markets.

Following the 300 busses were powered exclusively by Yuchai engines that were exported to Saudi Arabia in 2018 another 600 buses propelled by Yuchai engines has been exported in 2019, the largest bus export order of the year so far. Saudi Arabia continues to be an important market for our engines due to the ability to operate in high temperatures and in the harsh wind and sand environment.

Our research and development R&D expenses decreased by 40.1% to RMB71.9 million or U.S. $10.7 million mainly due to the capitalization of development costs for our National VI and Tier 4 engines that met IFRS capitalization criteria. In the first quarter of 2019 the total R&D expenditure including capitalized costs, was RMB119.5 million or U.S. $17.7 million and it represented 2.9% of the net revenue compared with RMB119.9 million, representing a 2.8% of the net revenue in the 2018 first quarter. R&D expenses included our program to enhance the performance and quality of our current National VI and Tier 4 engines for the on and off-road markets.

In addition, we are further developing our technologies to be mindful with [indiscernible] engines meeting the even stricter National VI standards which are expected to be nationally implemented between 2022 and 2023. It is possible that orders will arise for the VI D [ph] standard before national implementation and we want to capture those orders from the early adoption.

We have already introduced a model [indiscernible] by this chain KO8 engine which is the first domestic diesel engine to be certified for the National VI-b emission standards in China. The KO8 model generally [ph] outperformed our coming National VI emission standard. We will gain valuable experience through capturing early orders which can be used to further improve our engine for the next several [indiscernible]. This action is consistent with our long term strategy of being a leader in emission technologies in China.

Our emission control joint venture Eberspaecher Yuchai Exhaust Technology Co. Ltd. Continues progress in developing advance exhaust emission control systems for Chinese commercial vehicles to meet China's National VI standard. We believe the JV emission control system will be critical to adding the necessary technology and quality as well as providing a ready supply to our customers in the future.

We will continue with our strategy of operating a diversified engine portfolio for the truck and bus and off-road markets with heavy, medium and light-duty diesel and natural gas engines. In this way we are positioned to respond to growth opportunities in these market segments. We fortified this commitment by engaging in joint ventures, partnerships and alliances to enhance our technology and our market position to establish the Y&C engine joint venture to produce new advanced heavy-duty engines, the MTU Yuchai Power Company Limited joint venture which in 2018 began commercial production of the MTU series 4000 engine and also the Eberspaecher Yuchai Exhaust Technology Co. who will develop, produce and market new exhaust emission control systems to meet the forthcoming new emission standards.

In January 2019 we signed a strategic partnership with one of the major heavy-duty truck producers in China, Shaanxi Group. Our balance sheet remains strong at the end of the first quarter of 2019. Cash and bank balances were RMB5.2 billion or U.S. $767.8 million and the use of short and long term bank borrowings to RMB1.7 billion or U.S. $253.4 million. Due to the slower growth of the Chinese economy the Central Government has created new and targeted stimulus including tax cut encouraging local governments to spend on infrastructure reducing the government's credit squeeze and increasing the money to fly [ph] in March 2019. We are optimistic these measures will have stabilized China's growth for the future.

With that, I would now like to turn the call over to Dr. Thomas Phung, our Chief Financial Officer who will provide more details on the financial results.

Thomas Phung

Thank you, Weng Ming. Now let me review our first quarter result for 2019. Net revenue for the first quarter of 2019 decreased by 4% to RMB4.2 billion, U.S. $618.3 million compared with RMB4.3 billion in the first quarter of 2018. This decline was mainly due to a lower number of units sold and a change in the product mix due to market conditions which was partly mitigated by higher average selling price. The total number of engines sold by GYMCL in the first quarter of 2019 decreased by 8% to 101,300 units compared with 110,113 units in the same quarter last year.

Lower unit sales primarily reflected lower sales of truck and bus engines, which were partially offset by higher sales of engines for the off-road markets during the first quarter of 2019. According to the data reported by the China Association of Automobile Manufacturers, in the first quarter of 2019, sales of commercial vehicles, excluding gasoline-powered and electric-powered vehicles, decreased by 2.4%. The market was led by a 20.3% decrease in the medium-duty truck sales with continued decline in the bus market.

GYMCL’s overall truck engines sales also declined in the first quarter of 2019, but the light-duty truck sales increased, and the off-road engine sales rose, led by higher engine sales in the agricultural equipments market.

Gross profit was RMB761.3 million, U.S. $113.1 million compared with RMB853.5 million in the first quarter of 2018. Gross margin decreased to 18.3% from 19.7% in the first quarter of 2018. The lower gross profit was mainly due to lower sales volume and a change in product mix in the first quarter of 2019.

Other operating income decreased by 13% to RMB43.9 million, U.S. $6.5 million from RMB50.5 million in the first quarter of 2018. The decrease was mainly due to a lower government grant by RMB5.2 million in the first quarter of 2019.

Research and development (R&D) expenses decreased by 40.1% to RMB71.9 million, U.S. $10.7 million compared with RMB119.9 million in the first quarter of 2018. Lower R&D expenses in the first quarter of 2019 were mainly due to the capitalization of development costs for National VI and Tier 4 engines that met the IFRS capitalization criteria.

In the first quarter of 2019, the R&D capitalization amount was RMB47.6 million, U.S. $7.1 million. R&D expenses continued to reflect development and testing of new engines to meet the higher emission standards and further efforts to enhance engine quality and performance. In the first quarter of 2019, the total R&D expenditure, including capitalized costs, was RMB119.5 million, U.S. $17.7 million and it represented 2.9% of the net revenue. In the first quarter of 2018, the total R&D expenditure was RMB119.9 million, representing a 2.8% of the net revenue.

Selling, general & administrative (SG&A) expenses increased by 4.5% to RMB376.1 million, U.S. $55.9 million compared with RMB359.9 million in the first quarter of 2018. SG&A expenses represented 9% of net revenue compared with 8.3% in the first quarter of 2018. The increase was primarily attributed to higher warranty expenses.

Operating profit was RMB357.3 million, U.S. $53.1 million compared with RMB424.2 million in the first quarter of 2018. The operating margin decreased to 8.6% from 9.8% in the same quarter last year.

Finance costs increased by 12.3% to RMB25.3 million, U.S. $3.8 million compared with RMB22.5 million in the first quarter of 2018. Higher finance costs resulted mainly from a non-recurring government interest expense grant of RMB4.2 million in first quarter of 2018, which was partially offset by lower bills discounting in first quarter of 2019.

Net earnings attributable to China Yuchai’s shareholders was RMB198 million, U.S. $29.4 million compared with RMB242.8 million in the same quarter last year.

Basic and diluted earnings per share were RMB4.85, U.S. $0.72 in the first quarter of 2019, compared with RMB5.94 and RMB5.93 respectively in the same quarter last year.

Basic and diluted earnings per share in the first quarter of 2019 were based on a weighted average of 40,858,290 shares. In the first quarter of 2018, basic earnings per share was based on a weighted average of 40,858,290 shares, and diluted earnings per share was based on a weighted average of 40,916,810 shares.

Balance Sheet Highlights as at March 31, 2019. Cash and bank balances were RMB5.2 billion U.S. $767.8 million compared with RMB6.1 billion at the end of 2018. Trade and bills receivables were RMB8.7 billion, U.S $1.3 billion compared with RMB7.4 billion at the end of 2018. Inventories were RMB3 billion, U.S. $438.2 million compared with RMB2.5 billion at the end of 2018. Trade and bills payables were RMB5.2 billion, U.S. $774.5 million compared with RMB4.6 billion at the end of 2018.

Short- and long-term bank borrowings were RMB1.7 billion U.S. $ 253.4 million compared with RMB2.0 billion at the end of 2018.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We have William Gregozeski of Greenridge Global. Please go ahead.

William Gregozeski

Hi, I have a few questions. Do you guys still expect your long-term gross margin to be in the 19% to 20% range?

Weng Ming Hoh

Well, yes, I think so, because the thing is, this year, because they have what you called the, new National VI implemented in some series, so it will be around there, 19% plus or minus maybe an up half a percentage point.

William Gregozeski

Okay. Speaking of the National VI engines what percent of your unit sales in the quarter were the National VI engines and what - how is the market receiving those engines?

Weng Ming Hoh

Okay, there’s so much right now because the – emission standard hasn’t been really implemented. I think, it will be gradually implemented in the second half of this year. We have done some prototypes which we sent out to the OEMs. So far the reception is actually quite good.

William Gregozeski

Okay, alright. Was the implementations coming up some of the old engines, coming up the market, the belt [ph] on the road and things like that, when can we start expecting to see unit sales growth on a year-over-year basis?

Weng Ming Hoh

In terms of National VI?

William Gregozeski

Just all of your engines.

Weng Ming Hoh

Oh well, I mean this year we are, so far this year first quarter we sold 100,000 units right? So, I mean the better roads that won't have an impact, it’s mostly on the what we call, export market so to see the other countries. And when I think, the - we call the [indiscernible] up I think we would probably would see some gradual increase. Don’t expect to see a bug huge jump you know.

William Gregozeski

Okay. What about your unit sales growth in general, when can we expect to see your whole company unit sales start increasing year-over-year?

Weng Ming Hoh

This is a tough question there, so we actually don’t provide any, what you call, guidance as a policy, but I think, we would expect to see some growth in the second quarter I would say, but I think for the full year we are not prepared to say too much yet at this point.

William Gregozeski

Okay. In regards to your R&D, what do you expect the percent of sales or the absolute amount to be when combining expense and capitalize going forward?

Weng Ming Hoh

We would normally expect about 3 percentage point of sales.

William Gregozeski

Okay. And that's on the expanse and capitalized combined?

Weng Ming Hoh

Yes, yes.

William Gregozeski

Okay.

Weng Ming Hoh

Now, this year will be…

William Gregozeski

In the 20th

Weng Ming Hoh

This year will be a bit unusual because of the net T4 [ph] emission upgrade that’s going to be implemented next year and starting from this year. So probably it will be a bit more this year.

William Gregozeski

Okay. The 20 F you guys, there was a mention about you are developing an EV bus powertrain can you talk a little more about that and when that might be ready for sale?

Kelvin Lai

Well, this is Kelvin. We actually, we had something the development work more on the EV powertrain and including the hybrid and also the whole EV powertrain as well. So, we are in the beginning stage and then this is still an early adoption and at this stage and then we are in a position and sourcing the suppliers and also we'll be doing the integration at this stage and also, we also had some trial for [indiscernible] and then saw some end user in the local cities and then for trial at this stage.

William Gregozeski

Okay, so if you are doing customer trials it’s relatively developed? I mean is this something we could see for sale next year?

Weng Ming Hoh

We have done some integration for the electric vehicle, the EV busses okay? And we have sold some systems so far this year, not a lot but we sold some, to some of the provincial cities.

William Gregozeski

Okay. What - I mean when – because obviously you guys are getting really hurt on the bus market, when might this be ready to start taking some of that market share?

Weng Ming Hoh

I don’t think you'll see very much this year.

William Gregozeski

Okay. All right and any idea when the dividend might be announced?

Weng Ming Hoh

We’ll let you know, we can’t say so much right now.

William Gregozeski

Okay, alright. That’s all I have. Thank you very much.

Weng Ming Hoh

Okay.

Operator

Thank you. Our next question comes from the line of David Raso of Evercore. Please go ahead.

David Raso

Hi, thank you. I was curious, your comments about the government assistance and helping some markets, can you give a little more color on which verticals, which particular type of projects or so forth, you can give us a little more color on regarding where do you see the help and maybe where the help feels the most significant when you even look out to 2020 or beyond?

Weng Ming Hoh

Help on the southern segment you say? No there are some incentives for EV, it should be - already in place and I think that developed gradually [indiscernible] now. On and off you'll see some incentives I think like for example in the past you’ve seen some agriculture equipment, but I think that there was, other than those I think that, that’s not many that we are actually aware of that is especially targeting for the industry.

David Raso

Or are there any particular infrastructure projects or to what you were describing some of the Ag equipment subsidies, just trying to understand which are the verticals the product category type of project that you’re seeing the most help?

Weng Ming Hoh

Well now, it is the electric vehicles, right now. Other than that I think…

David Raso

So, there’s no particular - from transportation to water ways, to whatever may it be that you’re seeing any particular assistance that appears to be government driven in project activities down the off-highway side?

Weng Ming Hoh

Not yet. Normally, there will be some for agriculture generally but, let’s see, yes but let's see [indiscernible]. So I think…

David Raso

And on…

Weng Ming Hoh

Yes?

David Raso

Sorry, go ahead.

Weng Ming Hoh

No I – we have not – we are not aware of any significant one right now.

David Raso

And when it comes to credit availability, what have you seen by way of impact from some of the looser monetary policy that we began to see toward the end of last year, how has that manifested itself in customer activity or maybe it hasn’t?

Weng Ming Hoh

I mean, that would have affected, I mean the, housing market for example and then I think it somewhat it is increasing some infrastructure pending in the light of [indiscernible] that’s still ongoing right now.

David Raso

I’m just trying to figure the off-highway strength or at least better than feared [ph] how would you summarize why that has occurred year-to-date? Or maybe this was an outlook that you already had for off-highway and you did expect it to be up?

Weng Ming Hoh

Okay, let me put it another way, I think in the case of agriculture I think I’m not sure where it [indiscernible] here I’m sorry, there the whole market generally is quite flat right now, right? And we don’t think that's sort of decline, but just sort of flat for the market, but we have been doing quite well and outplaying in the agriculture market right now because we were able to get into sort of new segments like for example in the rice harvester. So, that has helped us mitigate our losses in other segments like when the subway [indiscernible] market. So in the case of for industrial engines which I think you may be alluding to, there is just some broker growth there and it is driven a lot of it by some increase in the infrastructure spending, also probably families driven by the increased liquidity under the common [indiscernible] introduced in the early part of this year.

David Raso

Okay, I'm just trying to size up how much has the government helped the market this year and it sounds like you don’t necessarily have the ability to connect the dots on a particular vertical, a particular level of increased liquidity where it's obvious. In general the market for off-highway has been probably a little better than most people feared three or four months ago and I was just trying to figure out can you help us pinpoint a little bit where has the pleasant surprise have come from. But it doesn’t sound like you've been surprised by your off-highway engines being up year-to-date?

Weng Ming Hoh

Yes, it probably came from, large case came from agriculture and which is from a new segment that we got [indiscernible] into.

David Raso

Okay, thank you very much.

Weng Ming Hoh

Okay.

Operator

Thank you. [Operator Instructions]

Kevin Theiss

Okay, I think we have one question from a web question from [indiscernible]. The question is what is the cash flow in Q1. I believe he is – the question is whether we generate positive cash flow. The answer is no. We're having negative cash flow in Q1 which is pretty seasonal, so that's the answer.

Weng Ming Hoh

Let me add to that, usually in our industry the first quarter and second quarter are probably the strongest quarters and now the first half is obviously usually better than second half. So during the first half you generally have to build up certain inventory and of course in building up inventory you will use cash right. And we will try to collect them back in the second half and towards the end of the year. That's why compared if you look at our open [indiscernible] good position is actually the [indiscernible] of refill that's outstanding actually that it will reflect that much. Usually it does [indiscernible] relative to mix. So, that is a trial for seasonality that we have been seeing and experiencing in the past few years or number of years.

There is a question again on the web, does the trade war concern you? Yes if it leads to slowdown in just January [indiscernible] you would concern me and just by the January comp is down you would definitely affect our business.

Operator

Thank you. We have now reached the end of our Q&A session and I'll turn the call back over to Mr. Hoh.

Weng Ming Hoh

All right, thank you for joining us this conference call, we look forward to speaking with you again next quarter. Thank you.

Operator

Thank you. Ladies and gentlemen that does conclude the conference for today and thank you for participating. You may all disconnect.