China Yuchai International Ltd (CYD) 2023 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the China Yuchai International First Half 2023 financial results. (Operator Instructions) Please be advised that today's conference is being recorded. I would like now 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 First Half Year ended June 30, 2023, conference call and webcast. Joining us today are Mr. Weng Ming Hoh and Mr. Choon Sen Loo, President and Chief Financial Officer of CYI, respectively. In addition, we 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, 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 condition 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 20S, under the headings Risk Factors, Results of Operations and Business Overview, and in other reports filed with the Securities and Exchange Commission from time to time.

If COVID-19 pandemic is not effectively controlled, our business operations and financial conditions may be materially and adversely affected due to a deteriorating market for automotive sales and economic slowdown in China and abroad, a potential weakening of the financial condition of our customers, potential adverse impact of 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 begin -- will provide a brief overview and summary, then Mr. Loo will provide the financial results for the first half ended June 30, 2023. Thereafter, we will conduct question and answer session. For the purposes of today's call, the 2023 and 2022 first half financial results are unaudited, and they will be presented in RMB and U.S. dollars. The financial information presented is reported using the International Financial Reporting Standards as issued by the International Accounting Standards Board.

Mr. Hoh, please begin your prepared remarks.

Thank you, Kevin. As economy showed signs of recovery in the first half of 2023, but still face challenges from external and internal factors. According to official data, the GDP growth rate for the first half of 2023 was 5.5% year-over-year, with a 6.3% increase in the second quarter compared to 4.5% in the first quarter. However, these figures were influenced by low base effect of the pandemic-induced lockdown initiated in 2020.

The export sector suffered a decline in the first half of the year as high inflation in major markets and geopolitical tensions reduced foreign demand for Chinese goods. The property sector also continues to experience a slowdown as property investments fell by 7.9% year-over-year and property sales dropped by 5.3% in terms of floor space in the first 6 months of 2023.

The real estate market was affected by tight financial conditions and uncertainties over demand. The economic outlook for second half of 2023 remains uncertain as the economic momentum of 2023 has slowed down as overall demand has not met expectations. According to data reported by China Association of Automobile Manufacturers, total industry net sales of commercial vehicles excluding gasoline-powered and electric-powered vehicles, for the first half of 2023 increased by 8.3% year-over-year with truck unit sales up by 6%, and a smaller bus unit sales were up 28.1%.

In this Chinese commercial vehicle environment, our main subsidiary, Guangxi Yuchai Machinery Company Limited, or GYMCL, reported a combined truck and bus engines, engine unit sales decline of 1.5% year-over-year in the first half of 2023. Truck unit sales were 10.4% lower year-on-year with bus engine sales 55.5% higher year-over-year. Increase in bus engine sales were led by 149.8% rise in heavy-duty engine sales, far exceeding the macro segment growth.

Spot market also contributed to the strong bus sales. GYMCL engine sales in the off-road market experienced a unit sales reduction of 13.3% year-over-year in the first half of 2023. Industrial, and marine power generation unit sales increased year-over-year, partially offsetting reduced agricultural unit sales.

New energy product unit sales grew by (inaudible) from a low base to 1,319 units in the first half of 2023. Revenue for the first half of 2023 grew by 7% to RMB 9.2 billion or USD 1.3 billion compared with RMB 8.6 billion in the first one half 2022 and RMB 7.5 billion in second half 2022. Our gross profit increased by 14.1%, outpacing revenue growth to RMB 1.6 billion or USD 214.8 million compared with RMB 1.4 billion in one half 2022. Our gross margin improved to 16.9% in the first half 2023, thanks to more sales of larger engines across many of our diverse and new (inaudible) markets.

Operating profit rose by 34.6% to RMB 387.7 million or USD 53.7 million, and the operating margin increased to 4.2%. For the first half of 2023, basic and diluted earnings per share increased 90.8% to RMB 4.37 or USD 0.60 compared with RMB 2.29 in one half 2022. We invest substantially in research and development to deliver engines and powertrain products that meets the needs of our customers. Our R&D spending, including capitalized costs amounted to RMB 465.2 million or USD 64.4 million or 5.1% of our revenue in the first half of 2023. Our R&D aims to improve the performance and efficiency of our diesel and gas engines. We are also increasing our R&D focus on new products for the emerging new energy market.

We continue to develop engines and products for the new energy market that use alternative fuels, improved fuel efficiency and enhanced emission reduction. The development of engines is link alternative fuel is another avenue for development. For instance, we have developed hydrogen by engines that can run a clean and renewable energy. We are also committed to developing our innovative products for the new energy market.

For hybrid systems have been well received among leading Chinese customers, especially the bus coach segment. One of our new products, Yuchai model YCA07N, hybrid engine is powering a 10-meter gas electric hybrid buses in Nanjing, a major city in China. These buses were manufactured by Yutong Group Company, the largest part bus producer in China and one of our key customers. They've ordered more than 1,200 buses equipped with Yuchai's engine. A bus operator in Wuhan, another important city in China has also chosen this Yuchai's hybrid engine for their buses.

Also, the Yuchai's Xin-Lan S06 100-kilowatt P1 parallel hybrid powertrain system (inaudible) by Yuchai Xin-Lan is SANY Group's 12-cubic-meter mixer trucks. SANY Group is a leading global engineering machinery manufacturers. This system details a proprietary control software that optimizes the performance of the engine, electric motor and automated mechanical transmission gearbox, resulting in significant fuel savings.

To make our operations more focused, we continue to restructure our operations in first half 2023. GYMCL has restructured its marine, and power generation businesses to enhance its competitiveness in these markets. GYMCL has established a new subsidiary, Guangxi Yuchai Marine and Power -- sorry, Guangxi Yuchai Marine and [Gentech] Power Company Limited, which has been our GYMCL marine and power generation businesses.

This new operation has incorporated the MTU Series 4000 engine and other related products and services. This move will enable GYMCL to offer a more integrated and comprehensive (inaudible) and power generation solutions to its customers. GYMCL subsidiary Yuchai Xin-Lan, New Energy Power Technology Company Limited has secured new investments totaling RMB 20 million from to new unrelated outside investors in 2023. This new investment accelerates the research and development of new energy technologies and enhances product development. Also, GYMCL incorporated a new subsidiary Guangxi Xing Yun Cloud Technology to focus on developing proprietary cloud-based control systems on and off-road vehicles and machineries.

Xing Yun Cloud will also oversee IT operations and create intelligent networks and processors for [Yuchai] group company. As of June 30, 2023, cash and bank balances were RMB 5.6 billion or USD 777.2 million, and we maintained a strong balance sheet. With our financial strength, the Board of Directors declared a cash dividend of $0.28 for the ordinary share for the year ended December 31, 2022, which was paid on August 7, 2023.

Looking to the second half of 2023, our diverse product portfolio remains a key driver of our growth and profitability, and we continue to upgrade our engine products, which contribute to lower emissions in our customers' vehicle. Customers leverage our technologies to enhance their operational performance with lower cost and participate in building a cleaner environment, low energy -- sorry, low emission powertrain systems. We are also developing innovative sales solutions in our new [NV] products that align with our society's environmental agenda.

With that, I would now like to turn the call over to Choon Sen Loo, our Chief Financial Officer, who will provide more details on the financial results. Choon Sen, you may begin your remarks.

Thank you, Weng Ming. Now let me review our unaudited 6 months results ended June 30, 2023. Revenue was RMB 9.2 billion or USD 1.3 billion compared with RMB 8.6 billion in first half 2022. The total number of engines sold by GYMCL in first half 2023 declined by 8.4% to 165,793 units compared with 180,911 units in the first half 2022. The decrease was mainly due to lower engine sales in the truck and agriculture application markets, partially offset by higher engine sales in the industrial and marine and power generation markets.

According to data reported by the China Association of Automobile Manufacturers in the first half 2023, commercial vehicles unit sales as gasoline power and electric-powered vehicles increased by 8.3% compared to first half 2022 as truck and bus sales increased by 6% and 28.1%, respectively.

Gross profit increased by 14.1% to RMB 1.6 billion or USD 214.8 million compared with RMB 1.4 billion in first half 2022. Gross margin increased to 16.9% as compared with 15.9% in the first half 2022. The increase in gross profit and gross margin was mainly attributable to margin improvement across most market segments with greater sales of larger engines and contributions from ongoing cost reduction efforts. Other operating income increased by 59.3% to RMB 136.2 million or USD 18.8 million compared with RMB 85.5 million in the first half 2022. The increase was mainly due to higher government grants received and recognized.

Research and development, R&D expenses decreased slightly to RMB 406 million or USD 56.2 million compared with RMB 408.5 million in the first half 2022. The company continues to invest in research and development for on-road engines in the commercial vehicles market and off-road engines as well as new energy products. Total R&D expenditures, including stabilized costs were RMB 465.2 million or USD 64.4 million representing 5.1% of revenue in first half 2023 as compared to RMB 436.9 million or 5.6% of revenue in first half 2022.

Selling, general and administrative, SG&A expenses increased by 19.3% to RMB 894.5 million or USD 123.8 million from RMB 749.6 million in first half 2022. The increase was mainly due to higher provision of personnel and other selling and administrative expenses compared with the same period last year. SG&A expenses represented 9.8% of revenue for first half 2023 compared with 8.7% in first half 2022. Operating profit rose by 34.6% to RMB 387.7 million or USD 53.7 million from RMB 288 million in first half 2022. The operating margin was 4.2% compared with 3.4% in first half 2022.

Finance costs declined by 2.9% to RMB 53.6 million or USD 7.4 million from RMB 55.2 million in first half 2022. The share of financial results of the associates and joint ventures was a profit of RMB 29.6 million or USD 4.1 million compared with a loss of RMB 30.9 million in first half 2022. This improvement was primarily due to higher profits at MTU Yuchai Powered Company Limited and a return to profitability at Y&C Engine Company Limited.

Income tax expense was RMB 110.6 million or USD 15.3 million as compared with RMB 56.5 million in first half 2022. The change was mainly due to the higher taxable income in first half 2023, and adjustment for under-provision in the prior year.

Net profit attributable to equity holders of company was RMB 178.4 million or USD 24.7 million compared with RMB 93.7 million in first half 2022.

Basic and diluted earnings per share were RMB 4.37 on USD 0.60 compared with RMB 2.29 in first half 2022. Basic and diluted earnings per share for first half 2023 and first half 2022 were based on a weighted average of 40,858,290 shares.

Now let me go through our balance sheet highlights as of June 30, 2023. Cash and bank balances were RMB 5.6 billion or USD 777.2 million compared with RMB 4.9 billion at the end of financial year 2022. Trade and bill receivables were RMB 9 billion or USD 1.3 billion compared with RMB 6.8 billion at the end of financial year 2022. Inventories were RMB 4.9 billion or USD 682.4 million compared with RMB 4.9 billion at the end of financial 2022. Trade and bills payables were RMB 8 billion or USD 1.1 billion compared with RMB 6.9 billion at the end of financial year 2022. Short-term and long-term loans and borrowings were RMB 3 billion or USD 419.7 million compared with RMB 2.3 billion at the end of financial year 2022.

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

Thank you. Please note, some 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 session.

(Operator Instructions) I am showing -- we have no questions on the phone line. Please continue.

There's a question on the webcast. Mr. Sing has asked why has CYI decided to amend the corporate documents regarding share repurchase?

Okay. We took the opportunity of the AGM to made a change, so they give an option, and you will provide the company with a greater flexibility to utilized share purchase came in any method that is permissible under the Bermuda Companies Act. And we, of course, have to comply with U.S. Securities Law for this buyback and if there is any plan, we will make announcement to that effect.

Okay. Mr. Hoh, would you please provide your closing comments?

Okay. All right. Thank you all for participating in our conference call. We wish each of you good health, and we look forward to speaking with you again. Goodbye.

This concludes today's conference call. Thank you for participating. You may now disconnect.