China Yuchai International (NYSE:CYD)
China Yuchai International’s (CYD) share price increased from under 20 to just over 30 in 2010. EPS increased substantially over the past five years while sales increased just over 20% per year. The growth was not entirely even--2007 showed outsized improvements, 2005 produced some negative numbers.
Free cash flow analysis (NYSE:FCF) suggests a fair value today of over a $100 a share if revenue can be expected to increase by at least 10% a year over the next five years. Some analysts project earnings for 2010 of $2.76 and $3.54 for 2011, a 28% increase year-over-year. Others suggest the $3.54 number will be largely achieved in 2010. Even so, in fairness, there is very little analyst coverage of this stock, which may help explain the potential opportunity in share price. There may be room for some additional appreciation if institutional holders or other buyers confirm the FCF projection of fair value.
At $30.70 a share, the TTM P/E is 6.99 versus an average P/E for CYD’s industry group over 27. Assuming earnings of $2.76, the industry P/E suggests a market price just above $74 in 2010 and $95+ by the end of 2011.
One of the negative factors for CYD, mentioned by the analysts, is that the current quarter EPS growth is less than the prior quarter growth. On the other hand, the prior quarter grew over 1,000% and the current quarter only grew 250%. It’s the right problem to have.
CYD trades below book value and appears to be a reasonable target for additional analysis by value investors. CYD is a relatively small company with $1.9B in sales and a market cap of $1.1B. It pays a $.25 dividend with a payout ratio of 10.3% so there is room for considerable future dividend growth. The current ratio is 7.9x and there is little usage of debt despite robust growth.
The question for CYD becomes more one of competitive positioning rather than value. Their valuation is rock solid, so far, though RINO has taught everyone that Chinese small caps require more than the ordinary level of scrutiny. Their strategy of continuing to move upstream and develop larger trucks with more insourced components and hybrid diesel/electric motors appears to be working. CYD will eventually compete against major international players aggressively pursuing the burgeoning Chinese construction and transportation market. Despite the central government’s efforts to cool down the Chinese economy, there is every sign near term growth will remain strong and the transformation of this largely agricultural economy into an industrial power will require massive amounts of material, money, and trucks. The story for CYD is powerful, if they have the competitive muscle to continue taking share once they are large enough to compete with the major players. At present they represent themselves as owning the largest market share in China. CYD has established joint ventures with Caterpillar and others, which should create both a learning opportunity and the potential opening for future acquisitions.
From a value investor perspective the increase in stock price throughout 2010 gives some reason to consider CYD carefully before jumping in at a peak, however, unless they stumble, the valuation upside appears interesting.Disclosure: Long CYD.