China Yuchai International Ltd (CYD) 2009 Q3 法說會逐字稿

Thank you for standing by and welcome to the third-quarter 2009 China Yuchai International earnings webcast.

There will be a management presentation, followed by a question and answer session.

I would now like to turn the conference over to Mr.

Kevin Theiss of Grayling.

Thank you.

Please go ahead, sir.

Thank you for joining us today and welcome to China Yuchai International Limited's third-quarter 2009 earnings webcast.

My name is Kevin Theiss and I am from Grayling, China Yuchai's external Investor Relations advisor.

Joining us today are the President of China Yuchai, Mr.

Boo Guan Saw, and China Yuchai's Chief Financial Officer, Mr.

Weng Ming Hoh.

For everyone's information, China Yuchai has invited a number of analysts to participate in this earning call via teleconference.

And the proceedings are made public for the benefit of all participants.

Before we begin, I would 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, 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 are based on current expectations or beliefs including, but not limited to statements concerning the Company's operations, financial performance and condition.

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, including those discussed in the Company's reports filed with the Securities and Exchange Commission from time to time.

The Company specifically disclaims any obligation to update the forward looking information in the future.

Mr.

Saw will provide a brief overview and summary of the diesel engine industry and the China Yuchai International business.

And Mr.

Hoh will provide a detailed review of the third-quarter 2009 financial results.

Thereafter, we will conduct a question and answer session.

For the purposes of today's call, the financial results will be presented in renminbi and US dollars.

Translation of amounts from renminbi to US dollars has been made at the rate of CNY6.8233 equals $1, the rate quoted by the People's Bank of China at the close of business on September 30, 2009.

Mr.

Saw, you can now start your presentation.

Thank you, Kevin.

Hi, everyone.

Between July and September 2009 Chinese GDP grew by 8.9% as the economy responded to the economic stimulus measures implemented by the Chinese government beginning from November 2008 and in 2009.

China's fixed assets investment rose by 33.4% in the first three quarters of 2009, according to the Chinese National Bureau of Statistics, which was 6.4 percentage points higher than a year ago.

Much of the Chinese government's $586b stimulus package is for building highways, airports and high speed railways.

In the first half of 2009, commercial vehicle sales were slightly below the year 2008 sales for the same period.

In July 2009, the Chinese government initiated a vehicle replacement policy which provided for direct subsidies of between CNY3,000 to CNY6,000 for vehicles that did not meet current emissions standards or that have been running for between eight to past 12 years.

Following the adoption of this new policy, the sales of commercial vehicles strengthened.

Vehicle sales were higher in the inland markets, in addition to the coastal markets.

And the vehicle sales in the second and third tier cities have been reporting stronger results.

The stimulus measures have improved the economic growth, which is driving vehicle sales, and especially that of trucks and municipal buses.

The economic growth in the developed world economy has also improved, which has had a positive impact on our Chinese exports.

We launched diesel engines compliant with the National IV and National V emissions standards and became the first diesel engine manufacturer in China to produce commercially diesel engines compliant with the National IV and National V emissions standards.

The National IV emissions standard is scheduled to be the new national standard for commercial vehicles beginning 2010.

And some local governments, such as Beijing, have implemented the National IV emissions standard early.

That is in July 2008 before the Summer Olympic Games, and with Shanghai implementing the National IV standard by December 1, 2009.

As the National IV standard becomes progressively adopted across China, we are well positioned to benefit from this change.

We also introduced an electronically controlled hybrid diesel engine with both electric and diesel propulsion systems, utilizing integrated starter/generator technology, which turns the engine off when the vehicle stops and instantaneously starts when the accelerator is pressed, so that fuel is conserved when the engines are idling.

In addition, we have produced natural gas engines applicable to the municipal bus market in China, where low emissions is an important factor in the purchasing process, targeting areas with abundant natural gas supplies, like Chongqing municipality.

As a leader in meeting the emissions standards, from both a technology and a production capability, we will continue to be very competitive in the medium and heavy duty truck and bus markets where emissions are of growing importance.

Our R&D has also been developing new heavy duty diesel engines for introduction in 2010 to increase our competitiveness in this market segment.

We started construction of a new Research and Development Institute in the high tech development zone at Nanning, the capital of our Guangxi Province in China.

Upon its completion, the R&D Institute will considerably improve our capability for innovation and raise its overall standard of our technology to develop new diesel engines designed to meet the increasingly stringent emissions standards and better fuel economy.

Commercial bus sales are growing and we have over 60% market share of the medium and large bus market.

Our extensive network of 1,500 service centers and their capabilities are critical distinguishing factors in the demanding bus market, where buses experience very heavy use.

Exports are also becoming a more important factor as Chinese buses are attractive in many developing nations.

As recently announced, we have completed phase one of our new diesel engine assembly factory in Xiamen City in Fujian Province, which is now ready for commercial production.

The annual production capacity of this new factory is expected to reach 100,000 units per annum, which will exist to meet growing demand for engine products, as well as shorten the supply chain process and lower production costs.

I will now provide a brief summary of the financial performance of China Yuchai in the third quarter of our 2009.

It was a good third quarter.

Net revenues for third quarter 2009 were CNY3,488.4m compared with CNY3,448m in second quarter of 2009, an increase of 1.2%.

Gross profit was CNY582.2m, or 16.7% of our sales in Q3 2009 compared with CNY480.2m, or 13.9% of sales in Q2 2009, an increase of 21.2%.

Net income was CNY248.6m, or earnings per share of CNY6.67 versus CNY49.6m, or earnings per share of CNY1.33 per share in the last quarter.

This is almost a fivefold increase in the net income compared to Q2 2009.

I will now turn over to our Chief Financial Officer, Mr.

Hoh, to provide the detailed review of the third-quarter 2009 financial results.

Mr.

Hoh, please begin.

Thank you, Boo Guan.

The net revenues for the third quarter of 2009 were CNY3.488b, compared with CNY3.448b in the second quarter of 2009.

The total number of diesel engines sold during the third quarter of 2009 was 114,855 units, compared with 129,932 units in the second quarter.

The increase in net revenues was most primarily related to price improvements across a number of diesel engine models.

For the third quarter of 2009, a breakdown of engine revenues is as follows.

Light duty engines comprised approximately 51.3% of total engine unit sales, with heavy duty engines at 8.7% of engine sales, medium duty at 28.3%, and industrial marine engines generated 11.6% of engine unit sales.

Gross profit was CNY582.2m in the third quarter of 2009, representing a 31.2% increase over the gross profit of CNY480.2m in the second quarter of 2009.

The gross margin was 16.7%, a 2.8% improvement over the gross margin of 13.9% for the second quarter of 2009.

Research and development expenses were CNY72.3m in the third quarter of 2009, versus CNY71.1m in the second quarter of 2009.

As a percentage of revenue, R&D spending was 2.1% of net revenue in both second and third quarters of 2009.

New hybrid diesel engines by natural gas of the LPG engines were introduced as we continued to develop green solutions for specific customers and position ourselves to take a leadership role in the emerging market for hybrid vehicles.

We have also been developing new heavy duty engines for introduction in 2010.

Selling, general and administrative expenses in the third quarter of 2009 were CNY249.5m compared with CNY283.1m in the second quarter of 2009.

SG&A expenses represented 7.2% of third-quarter net revenues, compared with 8.2% of 2009 second-quarter revenues.

SG&A expenses declined, mainly due to lower selling expenses in the third quarter of 2009, in line with a lower number of units sold.

Operating income was CNY260.4m in the third quarter of 2009, a 107% increase over the CNY126m of the second quarter of 2009.

The increase is mainly due to higher gross profit.

The operating margin was 7.5% in 2009 third quarter, compared with 3.7% in the second quarter.

Other income of CNY111m in the third quarter of 2009 compared with a loss of CNY1.4m for the second quarter of 2009 because of a dividend received from an associate of GYMCL, a gain from the maturity of zero coupon bond -- unsecured non-convertible bonds of HL Global Enterprises Limited, foreign exchange gains and interest income.

Net income was CNY248.6m, or earnings per share of CNY6.67 in the third quarter of 2009 compared with CNY49.6m, or earnings per share of CNY1.33 in the second quarter of 2009.

The net margin for third quarter of 2009 was 7.1% compared with 1.4% in the second quarter of '09.

The increase in the net margin is primarily due to the higher gross profit and a greater contribution from other income in the third quarter.

As of September 30, 2009, a total of 37,267,673 shares were issued and outstanding.

For the nine months ended September 30, 2009, net revenues were CNY9.86b.

Diesel engine sales were 366,536 units during the nine month period ended September 30, 2009.

The gross profit was CNY1.445b, representing a 14.7% gross margin.

Operating income was CNY690.8m, which included a one time write-back of approximately CNY203m in the first quarter of 2009, resulting from GYMCL's acquisition of Guangxi Yulin Hotel Company Limited.

Net income for the nine months ended September 30, 2009 were CNY532m, or earnings per share of CNY14.29.

Excluding the one time gain associated with the acquisition of Guangxi Yulin Hotel Company Limited net income would have been CNY377.5m, or earnings per share of CNY10.13.

As of September 30, 2009, we had cash and cash equivalents of CNY2.7b, compared with CNY693.4m at December 31, 2008.

Working capital was CNY2.05b at September 30, 2009.

Shareholders' equity and other comprehensive income was CNY3.89b, compared with CNY3.43b at December 31, 2008.

In September 2009, we declared a $0.10 per share dividend, US cents, that was paid in October 2009.

And we refinanced a $15m credit facility with CVS Bank.

We have also adopted a strategy to conserve cash to take advantage of a favorable differential interest rate.

We remain optimistic for the remainder of 2009 as the Chinese Association of Automobile Manufacturers has increased its growth projections for 2009 and demand for commercial vehicles has increased over the past two months.

Additionally, the various economic stimulus measures implemented, the subsidies for agricultural vehicles, and higher emissions standards for commercial markets continued to generate demand for new vehicles.

We have noticed that recent statistics indicate that sales have exceeded production in certain commercial vehicle markets in China, such as heavy trucks and light trucks.

Light trucks are especially driven by both the agricultural and infrastructure markets, which are benefiting from the government stimulus and incentive plans, as well as the rising economy.

With that, I've come to the end of my presentation and turn over to the Operator for the Q&A session.

One moment, please, for the questions.

This is Kevin Theiss.

We have a question that has been emailed in by David Raso of ISI Group.

And Mr.

Raso's question was that he had -- he noticed that the governments don't seem to be enforcing the Euro III equivalent engine emissions standards, and how that might impact CUID and also the planning for Euro IV equivalent standards when they come into effect.

Okay.

In terms of the implementation of emissions standards in China, generally, there is really not a whole country's implementation of an emission standard.

For example, Euro III, yes we do see that as really -- okay, our competitors have some implementation in Euro IV and some implementation in Euro III.

But all in all, we do have the products to sell to the market in terms of Euro III and National III and National IV.

The key thing is that if there is really an implementation of this National III emissions standard, there will be more competition, as there are diesel engine manufacturer that will be able to sell the National III emissions standard engines.

Now when it comes to emission -- the National IV emissions standard, so the -- as you know, that the National IV emissions standard for the emissions is stricter and obviously it will have a much higher price.

And there will be less competition for this stringent emissions standard.

So if the National IV emissions standard is implemented throughout, then as we mentioned in our speech earlier on, that we will really stand to gain a good opportunity to be able to sell into the market where the National IV emissions standard has been implemented.

Okay.

The next question will come from [Yihi Fan] of CLSA.

Hi.

Can you hear me?

Yes.

Can you speak up a little, please?

Yes, hi.

I just want to ask how are you seeing sales and the orders trending up in early November?

Can you say that again, please?

Hi.

I want to ask how are you seeing sales and order trending in October and November?

What it is, is that -- Mr.

Fan, in terms of the trending, the October has been quite a good month compared to what activity we see in October last year.

And in terms of, again, November, so far the volume that we are really seeing is probably pretty much very similar to what we are really seeing in the earlier part -- or the later part of third quarter.

Now there are various information announcements that comes out, that they said well the stimulus plan is really going to be curtailed.

There is really going to be a curtailing of our fixed asset investment and all that.

I do not really know whether this will really impact us in November or not.

But so far, as to what I see, this trending is pretty much similar to what we see in the quarter three.

Okay.

Do you have any forecast for the 2010 truck sales in China?

No, we generally don't give any guidance.

But what we can really see is the economy has been really working on what the government say.

They wanted to have an 8% GDP growth.

And they are really going to induce growth by a stimulus plan.

Or even private investment is really coming in.

So maybe -- they are really encouraging economic growth.

So we hope that this economic growth will -- bodes well for our diesel engine demand.

So regarding the new Euro IV engines, did you develop the engine technology by yourself or did you work with any other foreign suppliers?

What we do is we do both.

In terms of the National IV, as some of the technical people might know, that it will use -- that is a common reel and we use this high pressure pump and that has got to be outsourced.

And that is really why some of the technology that we know that is really needed to meet -- introduce stringent National IV standards we will engage these foreign suppliers, so to speak.

Not so much of foreign partners.

Okay.

In your October press release, you said that the new R&D center, you expect to attract some international experts --

Mr.

Fan, I'm sorry to really cut you off.

Can I really have somebody to --

Okay, sure.

I'm sorry.

That's fine.

Okay.

We have received a question from Cecile Moller here.

And the question is accounts receivable -- payable at the end of September roughly equals five months of cost of goods sold.

Does CYI subsidy repay interest on all or some of the accounts payable?

The short answer is no, we don't pay interest.

That's why we're holding onto the cash.

We have been able to obtain an extended credit from a supplier.

They have been very supportive of us and without having to provide interest on the accounts payable.

There is a next question that comes from the webcast asking what is your strategy to improve both gross and net margin percentage, as they are low compared to industry standards?

So in this case, there's diesel.

The four cylinder engines generally have a relatively lower margin.

And the higher horsepower, the six cylinder engines, generally do command a higher margin compared to the four cylinder engines.

And also, what we really wanted to do is that we are going to go into the higher horsepower market segment, whereby there is really going to be a demand for our engine.

And then the second thing is that, as I mentioned earlier on, for this National IV engine, if the Chinese government implemented the National IV engine, that would really be a good opportunity for us to be able to command a relatively higher price and a relatively higher margin.

And also the other thing is that on the cost side, we are really working on our cost reduction, internally.

So when we say cost reduction, it is really -- it's the production cost and also those manufacturing costs.

And what we are working on right now is really a fixing up project and also some of this lean manufacturing project that we are working on.

So we really hope that it will really benefit both sides on the sales side as well as on the cost side.

Okay.

The next question is going to come from David Raso of ISI Group.

Mr.

Raso, please state your question.

Hi.

Thank you very much.

I'm trying to get a better understanding of the pricing change that you saw from the second quarter to the third quarter.

First, can you help me understand, of the revenues in the quarter, what percent were not engines, meaning what were parts and service?

I'm trying to get a feel of price per engine for each quarter.

Again, what percent of the revenues were not engines?

This is Weng Ming here.

Now David we do have -- managed to, because of the demand for the engines that we had, especially the light duty engines, we were able to have some price increase then, which went into the first quarter.

Now also, during the third quarter, the mix -- the sales mix has also improved slightly.

We were able to sell a little bit more of the higher value engines compared to the second quarter.

So that has an overall price improvement in the margins for the third quarter.

Well how about this?

You were helpful enough to give us, in the third quarter, what percent of the engines were light, heavy, medium and industrial marine.

Do you have those percentages in the second quarter?

Well the -- no because I don't have a breakdown for second quarter with me.

But the third quarter, the sales mixes will change a bit, but it's not going to be too substantial.

I read out the sales mix for the third quarter earlier in my presentation as well.

If I take the revenues as is and I just assume they're all engines, no parts, no service, it shows the price per engine went up 14.5% sequentially.

And I'm trying to figure out how much is just mix because correct me if I'm wrong, but I can't believe that the pricing went up that much sequentially.

So you must have a very nice mix developing.

But I'd like to know how much is mix and how much is actual pricing.

We don't have the breakdown here right now.

But it's a combination of both the mix and price increase that has resulted in a better margin.

If you look, it is all our margin increased by about 2 percentage points compared to the second quarter, although the overall sales price has gone up.

Now as the sales price increases, so you are likely to be selling more higher value, higher priced engines in the third quarter.

I have another question related to the comment that was made about -- it was either your products being exported or the engine you're selling to a customer who then exports his product.

Which products are you seeing an improvement in exports?

Well generally, the engine that we really sell, it is on the six cylinder and it is, again, National IV and all that.

Generally, it has to get a little bit of higher price.

And I am not really sure about this, the export that has a general higher price.

But generally, if people would like to export it, especially to a country that requires stringent emissions, they will really buy it from us and we can really sell it at a higher price.

But again in terms of the mix, I would not be able to really tell you.

Is it construction equipment?

Generally, it's construction.

There's really the trucks and there is really the bus as well.

So this year, bus has been really down.

But in general, we really sell about 15,000 to 20,000 units overseas.

And one last question, your factor --

Hello?

I think he's been -- we lost him for a second.

Okay.

There is a question from the webcast.

Let me read it out for the audience.

Good morning, gentlemen.

Congratulations on a stellar third quarter.

Could you explain why the Company chose to build its additional facility in Xiamen?

Why did the Company choose this location versus say somewhere up north, near Beijing or Shanghai?

Why is the Xiamen location so important?

Thank you.

What it is, is the location of this Xiamen facility is because that in Xiamen, it is somewhere in the eastern part of China.

There are OEMs in there.

So the OEM is located in the Xiamen kingdom.

There is Xiamen Construction.

And then there is really this power generation plant that can purchase engines from us.

And besides that, there is also this logistic that it's really convenient for us to be able to supply engines within the eastern part of China, as well as to be able to really have again a port whereby we can really conveniently export outside of China.

And then there is the second question.

Why did the Company choose the location versus somewhere else up north, near Beijing and Shanghai?

So I have really answered the question.

But in terms of Beijing and Shanghai, we believe that no doubt there is a very nice location over there.

I think that the cost over there is really also high.

So I would say that Xiamen is a good strategic location for us in terms of the manufacturing and near to the OEMs.

That's all.

I hope that answered your questions.

Okay.

I believe we have another question from the web.

People are asking for an update on the Geely diesel engine business.

Okay.

Well what it is, is that for those are learning about China Yuchai and also learning about our business, what we have done is that well the Geely and Yuchai has discussed discussion getting into a joint venture whereby we are going to produce, jointly produce, a 2.0 liter engine, diesel engine that is used for passenger cars, like a taxi, for these small cars.

So right now, the current status of this Geely, the diesel car engine business is that we have done some prototype of the 4D20.

That's the model number 4D20 engine.

And it has really been quite successful.

So what we're really going to do is that while there are really various stages in terms of prototype testing.

So we are going to -- then the next step, in terms of getting prototype testing.

And for this engine business, we still need to really get our processing in terms of documentation, to get a government approval, in terms of get the joint venture as well.

The next question also comes from the website.

And that is, please discuss the strategy to improve competitiveness in heavy duty engines.

Okay.

What we have is that currently, we have the 10 liter product and there will really be more of this product that is really in the pipeline and that's really going to come on-stream.

The key thing is, if you really look at it, the current percentage that we have, we have about 8% of the total engine volume that we are really selling in Q3.

So there is really still some way to go in terms of launching more of these heavy duty engines.

And obviously, in terms of our heavy duty engine, there still could be some completion.

But what I am really seeing is that as well, our volume has increased.

But we would like to introduce more products.

And then we will be able to compete with the current diesel engine manufacturers that is in that market segment.

So in a way -- in a good way, where we see this heavy duty engine market, we see that the market is also expanding and that there is still room for us and opportunity for us to be a significant market player in times to come.

And we need to really launch our product quick enough.

The next question that comes from the website it says, congratulations on a great quarter.

When will Yuchai be visiting the US to tell Wall Street your story?

Good question.

Well what we have mentioned, I believe at some of this General Meeting was that we are going to have regular earnings teleconference, like this time.

This is really the very first time.

And then we will be also having road shows.

And the road shows that we are planning right now is probably going to be early next year that we are going to be in the US.

And we'd love to meet with the investor and really tell them about the good story about China Yuchai and what they are really doing in China and also expanding worldwide.

The next question that I will take also from the website is that Yuchai Group signed a license agreement with Wartsila on diesel marine engines.

How will it benefit CYD?

Yuchai Group is the group that is probably having an equity shareholding in [Guangxi Yuchai], which is really the diesel manufacturing facility.

So Yuchai Group is like a holding company.

Then they have a joint venture with Wartsila.

And Wartsila -- I'm sure that there's some people over here -- over the webcast, who know Wartsila.

Wartsila is a medium speed, high horsepower engine manufacturer.

And the engine they are using is mainly heavy oil, unlike diesel fuel.

So what they have -- the market generally they serve is really in the marine, the big ocean liner -- the big ships -- the cargo carrier, and also power generation.

So for them, they will not really be in our market segment.

So we do not really see any synergy at all in between Wartsila joint venture with Yuchai Group and CYI or Guangxi Yuchai.

All right.

We have another question regarding -- this is also from the website, regarding capital expenditures in 2010 and use of cash resources.

Let me briefly talk about it.

We will not really discuss about the CapEx plan for 2010.

At least we would like to be able to really manage that.

But again, for the use of cash efficiently and balance sheet, we will look at opportunities that is really within our core business.

And if there is really great opportunity for us to expand and grow our business, we will make sure that we invest in tools, businesses that really helps us to grow and to be very competitive.

Say, for example, like we will definitely want to invest in research and development and also introduce emission standards.

And that is really important for us, to be able to stay in front of the group, especially in the field of gas emissions.

Okay.

I believe at this time that we can take one more question.

I'm reading from the webcast, as well.

It says where will you plan to sell HL Global Enterprise and Thakral?

For those -- that's also a background history whereby HL Global Enterprise is really hospitality, hotel and these services group.

And then Thakral is basically an electronics distribution service/sales group.

So that was really the initial part of our diversification plan.

And both are not really losing money but they are not really making money.

But as you know, that we would like to stay very much near to our core business.

If we get -- the price is right, we will sell it.

With the final question answered, I will turn the webcast over to Mr.

Saw for concluding remarks.

Mr.

Saw, you may begin.

I would like to thank everyone for taking the time to participate in our third-quarter 2009 earnings webcast.

And we have received numerous emails on our business.

And I thank you for taking the time to write to us, providing information about the diesel engine business.

Unfortunately, as we will not be able to respond to all your questions on this earnings website, please write to Grayling if you have further questions.

And we look forward to speaking with you next quarter.

And I wish you all a good day.

Thank you very much.

Thank you.