China Yuchai International Ltd (CYD) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to China Yuchai International Limited Second Half and Annual 2020 Financial Results.

(Operator Instructions) I would now like to turn the conference over to Kevin Theiss.

Please go ahead, sir.

Thank you for joining us today, and welcome to China Yuchai International Limited's 2020 Second Half and Fiscal Year Conference Call and Webcast.

Joining us today are Mr. Weng Ming Hoh and Dr. Thomas Phung, President and Chief Financial 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, target, 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 facts are statements that may be deemed forward-looking statements.

These forward-looking statements include, but are not limited to, statements concerning the company's operations and financial performance and conditions and 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 heading Risk Factors, results of operations and business overview and in other reports filed with Securities and Exchange Commission from time to time.

If the COVID-19 pandemic is not effectively controlled, our business operations and financial condition may be materially and adversely affected due to a deteriorating market for automotive sales, an economic slowdown in China and abroad, a potential weakening of the financial condition of our customers, potential adverse impact to our suppliers and supply chain or other factors that we cannot foresee.

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 press 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 second half period for fiscal year ended December 31, 2020.

Thereafter, we will conduct a question-and-answer session.

For the purposes of today's call, the financial results for the second half period and fiscal year ended December 31, 2020, are unaudited, and they will be presented in RMB and U.S. dollars.

All the financial information presented is reported using the International Financial Reporting Standards as issued by the International Accounting Standards Board.

Mr. Hoh will begin your prepared remarks.

Thank you, Kevin.

2020 year started out with despair but ended with strong momentum for China, which was the first country hard hit by COVID-19 pandemic.

This widespread infection caused major disruptions in the Chinese economy, including the large and important automotive industries in China.

Customers, suppliers, workers, service networks and other auto-related occupations were all impacted in the first half of 2020.

Mandatory travel restrictions and lockdowns crippled the Chinese economy.

In the first quarter of 2020, China's GDP declined by 6.8%, the worst year-over-year quarterly decline since 1992.

Despite the economic impact and our lower engine unit sales, we maintained profitability at the end of the first quarter of 2020, with basic and diluted earnings per share of RMB 149.

We maintained a strong financial position with cash and bank balances of RMB 4.8 billion.

Due to the success of lockdowns and travel restrictions, the Chinese government quickly enacted economic growth catalysts which helped the Chinese economy recover its GDP -- sorry, as China's GDP rose by 3.2% in the second quarter of 2020.

In sales of commercial vehicles, excluding gasoline-powered and electric-powered vehicles, increased by 50.5%, led by truck sales increase of 56.1%, according to the CAAM data.

Some of this growth was pent-up demand from the first quarter and some was a response to incentives for when the economic stimulus would bear fruit.

By the fourth quarter of 2020, the Chinese economy was fully recovered, with GDP maintaining at a 6.5% growth rate and 2.3% for the 2020 year.

In the second half of 2020, our sales was 217,238 engine units, an increase of 31.8% compared with the same period in 2019.

Our total truck engine unit sales increased by 43.4%.

This increase was spearheaded by a 64.4% gain in medium-duty truck engine unit, more than double the CAAM reported 30.1% growth in the medium-duty industry truck sales as our market share saw in this segment.

The heavy and light-duty truck engine sales also achieved double-digit growth.

Our total off-road engine sales grew by 51% in the second half of 2020, with strong agricultural engine unit sales and industrial engines also reported double-digit unit growth as well.

These gains in the truck and off-road segments more than offset lower engine unit sales in the bus segment.

Revenue rose by 18.1%, and operating profit grew by 14.5% in the second half of 2020 compared with the second half of 2019.

Our net profit of RMB 243.2 million or USD 37.3 million, was impacted by our share of results of our associates and joint ventures which decreased to a loss of RMB 64.5 million or USD 9.9 million, compared with a profit of RMB 11.7 million in the second half of 2019.

For the 2020 year, our revenue increased by 14.2% to RMB 20.6 billion or USD 3.2 billion or a 14.4% increase in engines sold to 430,320 units.

Our annual truck engine unit sales were up by double digits and off-road unit sales increased by 31.7%, led by a large increase in unit sales due to the agricultural market.

Our annual net profit attributable to China Yuchai's shareholders was RMB 548.9 million or USD 84.1 million compared with RMB 604.9 million in 2019.

Basic and diluted earnings per share were RMB 13.43 or USD 2.06 compared with RMB 14.81 in 2019.

Our annual net profit was also affected by our share of results of associates and JVs which decreased to a loss of RMB 59 million or USD 5 million, compared with a profit of RMB 19 million in 2019.

For the 2020 year, R&D expenses increased by 27.3% to RMB 626.5 million or USD 96 million as we continue to further develop our portfolio of new engines compliant with China's next emission standards, the National VI for on-road and Tier 4 for off-road applications and to improve engine performance and quality.

In 2020, the total R&D expenditure, including capitalized cost, was RMB 1.2 billion or USD 177.4 million, representing 5.6% of the net revenue.

The National VI emission standards is significantly more stringent compared with the current National V standard, and it's one part of the Chinese government's campaign to improve the environment.

We saw National VI engines during 2020 year, and with the National VIa Emission Standards to be nationally mandated in 2021, we are ready with a complete portfolio of National VI diesel and natural gas engines.

A major part of our product strategy is to be among the first to introduce engines that may also pass upcoming new emission standards to better serve current clients and attract new customers as well.

In the marine space, we introduced a new lightweight high-powered engine designed to replace imported engines in the yacht class.

Also our YCA05175-S500 engine passed the European Stage V emission standard test, and this engine -- diesel engine can now be marketed in the European Union for other application.

Yuchai's long history of providing high-quality, high-performance advanced engines has attracted many of the leading automotive OEMs in China as well as customers -- as well as creating opportunities for strategic alliances and joint ventures.

In addition to the current joint ventures with YC engines, Eberspaecher Yuchai Exhaust and MTU Yuchai, we entered a new strategic alliance in 2020 with Sany Truck, which will, among other potential applications, further increase our presence in the heavy duty truck.

We look forward to improving contributions from these joint operations in the future as well as exploring the potential for new alliances.

At December 21, 2020, we maintain our financial strength with cash and bank balances of RMB 6.4 billion or USD 988.1 million after a higher R&D spending, paying cash dividends and investing RMB 1.7 billion more in inventories.

The higher inventory consisted of increased amount of National V engines for an expected prebuy of these engines before the National VI emission standards are nationally mandated, and we have increased or purchased materials and components for National VI engine production as a standard approach.

We rebounded strongly in the second half of 2020 from the issues caused by the COVID-19 pandemic.

We entered 2020 with momentum and strong product lines to meet the challenges of the upcoming national rollout of National VIa emission standards.

In addition, foreign markets should generate higher demand in 2021 as their economies improve.

As always, we continue to focus on maintaining our financial strength to provide the resources to enhance shareholder value.

With that, I will turn to Thomas to go over the financials.

Thank you, Weng Ming.

Now let me review our second half results for 2020.

Revenue for the second half of 2020 increased by 18.1% to RMB 10.6 billion, USD 1.6 billion, compared to RMB 9.0 billion in the second half of 2019.

The total number of engines sold by GYMCL during the second half of 2020 was 217,138 units, an increase of 31.8% compared with 146,789 units in the second half of 2019.

The increase was mainly due to higher engines unit sales in the truck market where total unit sales to the high -- heavy and medium-duty truck market segment more than offset the overall unit sales decline in the bus engine segment.

The off-road market also achieved significant sales -- unit sales growth in the second half of 2020 compared with the second half of 2019.

According to data reported by the China Association of Automobile Manufacturers, CAAM, in the second half of 2020, commercial vehicle unit sales, excluding sales of gasoline-powered and electric-powered vehicles, increased by 35.4% compared with second half of 2019 as unit sales of bus declined by 4.6%, while truck unit sales rose by 43.4%.

GYMCL engine unit sales to the on-road commercial vehicle market increased by 23.5% with truck unit sales raising by 43.4%, matching the trucks market's growth.

GYMCL engine unit sales to the off-road market increased by 51.0% compared with second half of 2019.

The company's higher off-road engines unit sales were led by a strong growth in the agriculture segment in the second half of 2020 compared with the second half of 2019.

Gross profit increased by 4.9% to RMB 1.7 billion, USD 262.3 million, compared with RMB 1.6 billion in the second half of 2019.

Gross margin was 16.1% compared with 18.1% in the second half of 2019, mainly due to change in the sales mix and higher material costs.

Other operating income increased by 39.6% to RMB 273.3 million, USD 41.9 million, compared with RMB 195.7 million in the second half of 2019.

The increase was mainly due to higher government grant in the second half of 2020 compared with the second half of 2019.

Research and development, R&D expenses, were RMB 413.5 million, USD 63.5 million, compared with RMB 309.8 million in the second half 2019.

The company continued to further develop its new National VI and Tier 4 engine for the on- and off-road market.

In the second half of 2020, the total number of -- the total R&D expenditure, including capitalized cost, was RMB 754.6 million, USD 115.6 million, and it represents 7.1% of revenue compared with 6.3% in the second half of 2019.

Selling, general administrative SG&A expenses were RMB 1.0 billion, USD 153.7 million, representing 9.4% of revenue compared with RMB 1.0 billion, representing 11.4 million -- 11.4% of revenue in the second half of 2019.

Operating profit increased by 14.5% to RMB 568.8 million, USD 87.2 million, from RMB 496.6 million in the second half of 2019.

The operating margin was 5.4% compared with 5.5% in the second half of 2019.

Finance costs increased by 18.7% to RMB 88.0 million, USD 13.5 million, from RMB 74.2 million in the second half of 2019.

Higher finance costs mainly result from higher loan amount compared with second half of 2019.

The share of financial results of the joint venture decreased by a loss of RMB 64.5 million, USD 9.9 million, compared with a profit of RMB 11.7 million in the second half of 2019.

Net profit attributed to China Yuchai shareholder decreased by 6.4% to RMB 243.2 million, USD 37.3 million compared with RMB 259.9 million in the second half of 2019.

Basic diluted earnings per share decreased by 6.4% to RMB 5.95, USD 0.91, compared with RMB 6.36 in the second half of 2019.

Basic and diluted earnings per share in the second half of 2020 and the second half of 2019 were based on -- with the average of 14,858,290 shares.

Now I will go over the fiscal year 2020 results.

Revenue was RMB 20.6 billion, USD 3.2 billion compared with RMB 18.0 billion in the fiscal year 2019.

The total number of engines sold by GYMCL in the fiscal year of 2020 increased by 14.4% to 430,320 units compared with 376,146 units in the fiscal year 2019.

The increase was mainly due to higher engine sales in the heavy- and medium-duty trucks markets and the off-road segment, particularly agriculture engine, which more than offset the unit sales decline in the bus segment.

Gross profit increased by 2.7% to RMB 3.2 billion, USD 488.8 million, compared with RMB 3.1 billion in the fiscal year 2019.

Gross margin decreased to 15.5% compared with 17.2% in the fiscal year 2019.

The decline in gross margin was mainly attributable to the change in the sales mix and the higher material cost.

Other operating income increased by 12% to RMB 378.9 million, USD 58.1 million compared with RMB 338.5 million in fiscal year 2019.

The increase was mainly due to higher government grant compared with fiscal year 2019.

R&D expenses increased by 27.3% to RMB 626.5 million, USD 96.0 million compared with RMB 492.2 million in the with fiscal year 2019.

The company continued with its initiative to develop new engine compliant with China next emission standard, National IV -- sorry, National VI and Tier 4 and to improve engine performance and qualities.

In fiscal year 2020, the total R&D expenditure, including capitalized cost, was RMB 1.2 billion, USD 177.4 million, representing 5.6% of revenue compared with 4.8% in fiscal year 2019.

SG&A expenses were RMB 1.8 billion, USD 269.7 million, representing 8.6% of revenue compared with RMB 1.8 billion, representing 10.0% of the revenue in fiscal year 2019.

Operating profits increased by 3.1% to RMB 1.2 billion, USD 181.2 million from RMB 1.1 billion in the fiscal year 2019.

The operating margin was 7.4 -- sorry, the operating margin was 5.7% compared with 6.4% in fiscal year 2019.

Finance costs increased by 14.7% to RMB 151.2 million, USD 23.2 million, from RMB 31.8 million in the fiscal year 2019.

Higher finance costs mainly result from an increase in loan amount compared to fiscal year in 2019.

The share of financial result of a joint venture decreased to a loss of RMB 59.0 million, USD 9.0 million compared with a profit of RMB 19.0 million in fiscal year 2019.

Net profit attributed to China Yuchai shareholder was RMB 548.9 million, USD 84.1 million, compared with RMB 604.9 million in fiscal year 2019.

Basic and diluted earnings per share were RMB 13.43 USD 2.06 compared with RMB 14.81 in fiscal year 2019.

Basic and diluted earnings per share for fiscal year 2020 and fiscal year 2019 were based on -- with a average of 40,585,290 shares.

Now let me walk you through our balance sheet highlights as of December 31, 2020.

Cash and bank balance were RMB 6.4 billion, USD 988.1 million, compared with RMB 6.4 billion at the end of fiscal year 2019.

Trade and bill receivables were RMB 8.1 billion, USD 1.2 billion, compared with RMB 7.8 billion at the end of fiscal year 2019.

Inventory were RMB -- sorry, inventory were RMB 4.5 billion, USD 685.3 million, compared with RMB 2.8 billion at the end of fiscal year 2019.

Trade and bill payable were RMB 7.5 billion, USD 1.1 billion compared with RMB 6.2 billion at the end of fiscal year 2019.

Short and long-term bank borrowing were RMB 2.2 billion, USD 341.8 million compared with RMB 2.1 billion at the end of fiscal year 2019.

I will now turn the call over to Kevin for the comments before we begin our Q&A.

Thank you.

Please note that due to the COVID-19, the officers of China Yuchai are remotely calling into the conference call.

This may result in a slight delay in providing answers to some questions.

We apologize for any inconvenience, and thank you for your patience.

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

(Operator Instructions) We have the first question from the line of William Gregozeski from Greenridge Global.

Could you talk about what your expectations are for the current year in terms of volumes, the unit volume sales?

And also the mix of that?

Well we don't provide a forecast or guidance, William, but what we're seeing in the first 2 months of this year seems to be quite positive.

The order number seems -- it's much better than what we had in the last year 2. So we believe the first quarter will still be quite good for us.

But one of the reasons for that is probably because of the implementation nationwide for the National VI emission standard.

So that will be implemented on the first of July 2021.

So that could have sort of resulted in some pre-buy effects that's causing some -- the higher order numbers that we're seeing now in the -- in January and February.

Okay.

In terms of product mix, I mean do you think that it's going to be somewhat similar to last year?

Or I guess I'm trying to get towards the gross margin.

It was down quite a bit in 2020.

And if there's things you can do to get that up this year?

Right.

I think this last year, year 2020, we saw some pretty good growth in our agricultural segment.

That, unfortunately, has a slightly lower margin compared to the truck segment.

So we will still expect the agriculture segment to grow next year in the year 2021.

Now with the truck segment that's already very high, I mean, especially for the heavy-, medium-duty truck in 2020, we don't see too much more growth in there.

We might we see some decline, I think, for the whole year in there.

Okay.

Okay.

So we should probably expect lower gross margins for 2021 compared to 2020?

More or less, what we have in 2020, I think should go forward to 2021.

As we sell more National VI, we expect that to improve as well the margin.

I don't see -- I don't expect to see too much of deterioration there any further.

Okay.

Can you talk about -- the R&D, obviously, you're spending a lot more now than you have in the past.

Can you talk about where all that money is going towards?

Well, it's going -- in fact, for the new -- this National VI engine, we have actually gone and developed whole new platforms.

So that has picked up quite a fair bit of R&D money, especially in the last 3 years.

The bulk of it especially took place in 2021 -- sorry, 2020.

Now with the National VI now implemented as of -- the products are ready.

So we do not expect it to grow further.

In fact, we expect it to be less compared to the previous 2020.

Okay.

All right.

Great.

And then last question is, what was the loss from the JVs from?

Okay.

That's from our units up north.

The 2 things are there.

One is the -- in fact, the -- what I call the cost of -- I call them precious metals, like platinum, rhodium and palladium.

They have been -- they've shot through the roof, right, in the last couple of years, too.

So that's one of the cost of materials that has impacted that unit.

And also, one of the gas engine products that we had there, we ran into some problems, so there was some repetition costs there that the cost -- that should be behind us for 2021.

We have the next question from the line of Don Espey from Shah Capital.

Approximately what percent of the RMB 1.2 billion R&D spend was spent on new energy vehicles, including transmission and green hydrogen initiatives?

The bulk of it is actually spent on the National VI and Tier 4 development in the last 3 years.

So the reason why the bulk of it is on this is because the National VI standards is going to be implemented nationwide by July 1, right?

This was VIa.

VIb would be 2 years later, and Tier 4 is scheduled to be implemented in 2020 -- sorry, 2022.

Now -- so the bulk of this has gone in there.

So we will expect a certain amount of spend on the new energy side of things, but it would not be as high as the other 2. I would say it's less than 20%, perhaps about there.

20%?

Yes, or less.

Yes.

(Operator Instructions)

We have now reached the end of our Q&A session, and I will turn the call back over to Mr. Hoh.

Thank you all for participating in our conference call.

We wish each of you good health, and please be safe during this crisis.

We look forward to speaking with you again.

Goodbye.

Thank you.

Ladies and gentlemen, that does conclude your conference for today.

Thank you for participating.

You may all disconnect now.

Thank you.