China Yuchai International Ltd (CYD) 2010 Q1 法說會逐字稿

(Audio starts in progress).

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's first quarter 2010 earnings webcast.

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

Joining us today are Mr.

Boo Guan Saw, President and Mr.

Weng Ming Hoh, Chief Financial Officer.

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, 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 China Yuchai's operations, financial performance and condition.

China Yuchai 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 China Yuchai's reports filed with the Securities and Exchange Commission from time to time.

China Yuchai specifically disclaims any obligation to update the forward looking information in the future.

Mr.

Saw will provide a brief overview and summary of the industry and Mr.

Hoh will review the first quarter 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 CNY and US dollars.

Mr.

Saw, please start your presentation.

Thank you Kevin.

We are pleased with the robust increase in unit sales and improved product mix in the first quarter of 2010.

Our focus on developing heavy duty products has positioned us well in the heavy duty truck market in China.

We now offer a wider range and a higher volume of high quality engines ranging from light duty to heavy duty to meet the growing demand for transportation in China.

In the first quarter, the Chinese truck market experienced robust growth, evidenced by a 42% year over year sales growth to reach 714,300 units.

Our top customers, Dongfeng Motors and JAC, once again entered the top 10 sales chart due to their strong sales.

Expanding urban development especially in Tier II and III cities and their growing needs for cargo transportation triggered higher demand for trucks.

The bus market in China demonstrated even stronger growth in the first quarter of 2010.

A total of 89,000 buses were sold in the first quarter, representing a 47% year over year growth and a 105% production to sales ratio.

Noticeably, large coach bus sales increased by 98% to 13,600 units, followed by mid-size bus sales which grew by 51% to reach 15,900 units.

With the arrival of the World Expo in Shanghai, domestic and international tourists are expected to flock into major coastal cities.

During the first quarter of 2010, the Pan Beijing area recorded an encouraging 60% growth in bus sales while the Yangtze River delta area posted a 56% rise.

All information is extracted from the China Association of Automobile Manufacturers, CAAM.

There are a few highlights that I would like to point out.

Our Q1 total revenue increased by 72% year over year, but our unit volume increased by 60% year on year.

This shows that we have shifted towards higher value engines.

Further evidence shows that our gross margin increased to 20.2% in Q1 2010 from 16.5% in Q1 2009.

The total Chinese market for bus and trucks in Q1 2010 increased by 42.9% year over year.

Yuchai's unit sales volume for trucks and buses in Q1 2010 increased by 74.6% year on year to 16,800 -- 168,595 units in Q1 2010 from 96,585 units in Q1 2009.

In response to the rising demand from our original equipment manufacturer customers, we are ramping up our production accordingly.

We started trial operations at a new foundry center located near the Yulin engine plant on March 15, 2010.

Our new foundry center is equipped with many high grade imported machineries and robots in the production lines and is being ramped up to produce cast engine parts such as cylinder blocks and cylinder heads.

At Xiamen Yuchai, we have added another 50,000 engine assembly capacities and the location will enable us to respond faster to our customers' demand.

On the partnership side, I would like to update on the progress in our strategic partnerships with CIMC-Chery, Caterpillar and Geely Automobile.

The Chery-CIMC joint venture has completed various prototype engine tests and production equipment is expected to be installed in the third quarter of 2010.

The remanufacturing joint venture with Caterpillar will be located in Suzhou Industrial Park, Jiangsu Province.

The plan is to establish the remanufacturing operations with rented facilities nearby where we are building the main facilities.

As for the joint venture with Geely Automobile, phase one of our engine development was completed on schedule meeting the emissions and performance requirements and the first generation prototype engine will be completed in Q1 -- Q3 of this year.

Construction of the engine and component plants in both Jining, Shandong Province and Sanli, Zhejiang Province have commenced.

While this has been a strong quarter, it is to be noted that going forward, the diesel engine market in China is likely to be affected by the inventories available in the industry as well as the Chinese government's credit tightening policy to contain inflation.

With that, let me turn the call over to our CFO, Weng Ming Hoh to walk you through our first quarter financial results.

Thank you, Boo Guan.

The financial results being presented herein for FY 2009 and for the first quarter of 2010 have been prepared in conformity with international financial reporting standards as issued by the International Accounting Standards Board, IFRS.

Net revenue for the first quarter of 2010 was CNY5.1b or $742.7m, compared with CNY2.9b or $431.4m in the first quarter of 2009, representing a 72.2% year over year growth.

The total number of diesel engines sold by our main operating subsidiary, Guangxi Yuchai Machinery Company Limited, GYMCL, during the first quarter of 2010 was 195,017 units compared with 121,749 units in the previous year, a 60% unit sales volume increase.

The stronger growth in revenue was primarily due to the shift of product mix towards heavy and medium duty engines.

Gross profit was CNY1b or $150.2m in the first quarter of 2010, representing a 111% increase over the gross profit of CNY490m or $71.1m in the first quarter of 2009.

The gross margin for the first quarter of 2010 was 20.2%, a 3.7% improvement over the gross margin of 16.5% for the first quarter of 2009.

Since the second half of 2009 we have sold more heavy and medium duty engines which carry higher gross margins.

Research and development expenses were CNY67.3m or $9.9m in the first quarter of 2010 versus CNY57.5m or $8.4m in the first quarter of 2009.

As a percentage of net revenue, R&D spending was 1.3% of net revenue in the first quarter of 2010 compared with 2% in the same quarter last year.

Selling, distribution and administrative expenses in the first quarter of 2010 were CNY507.7m or $74.4m compared with CNY332.1m or $48.7m in the first quarter of 2009.

These expenses represented 10% of first quarter 2010 net revenue compared with 11.3% of first quarter 2009 net revenue.

The expenses declined as a percentage of net revenue mainly due to cost saving measures and improved economies of scale in the first quarter of 2010 compared to the same quarter a year ago.

Operating profit was CNY468.7m or $68.7m in the first quarter of 2010, a 345% increase over CNY105.2m or $15.4m in the first quarter of 2009.

The increase is mainly due to higher gross profit.

The operating margin was 9.2% in the first quarter of 2010 compared with 3.6% in the first quarter of 2009.

Profit for the period attributable to equity holders of the parent -- the term parent as used here refers to China Yuchai -- was CNY271.8m or $39.8m, or earnings per share of CNY7.29 or $1.07 in the first quarter of 2010 compared with CNY207.8m or $30.4m, or earnings per share of CNY5.58 or $0.82 in the first quarter of 2009.

In the first quarter of 2009, there was a one time non-recurring gain of CNY203m or $29.7m from GYMCL's acquisition of 100% equity of Guangxi Yulin Hotel Company Ltd in settlement of past loans, as previously reported.

Excluding the one-time gain, the profit for the period attributable to equity holders of the parent for the first quarter of 2009 would have been CNY52.7m or $7.7m or earnings per share of CNY1.41 or $0.21.

As of March 31, 2010, the Company had cash and cash equivalent of CNY3.7b or $537.6m compared with total short term and long term interest bearing loans and borrowings of CNY954.5m or $139.8m.

Total equity attributable to equity holders of the parent increased to CNY4.3b or $623.7m on March 31, 2010 from CNY4b on December 31, 2009.

The total shares issued and outstanding as of March 31, 2010 were 37,267,673 shares.

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

One moment please.

Your first question comes from David Raso.

Hi David.

Sir, your line is open.

Are you there David?

Sir, your line is open.

Operator, is David on the line?

David, your line is open?

Mr.

Raso?

Would you like us to proceed to the next question?

Okay, yes.

Let's have David in queue for the next question.

Your next question is from Melissa Cook.

Good evening, good morning.

Thank you for having this call.

I wonder if you could talk a little bit more about the government enforcement of emissions rules for truck engines.

And if that is tightening up, what will that do to the competitive environment as far as some of the smaller companies being able to make the right technology?

Thank you.

Melissa, this is Boo Guan Saw.

In terms of the emissions rule, we -- right now what the Chinese government has done is that they have delayed the National IV, which is really equivalent to Euro IV, from January 1, 2010 to July 1, 2010.

But there are Euro IV being implemented in the various big cities.

Say for example, like Beijing, before the Olympics, that is July 2008, they have implemented the National IV.

And Shanghai in December 2009, they implemented again the National IV.

So Guangzhou has also implemented National IV in the coming Asian Games.

So there are various first tier, so to speak, cities have already implemented National IV.

Now in terms of the implementation of the National IV, that's really going to happen in July 1.

So there will be a one year transition for all the vehicles to comply to the National IV.

So getting back to this emissions rules, once the government enforced the rule, there will be one year transition.

And in terms of the various diesel engine industry, definitely there will be a lot of R&D being spent to tighten up the emissions for the diesel engines.

Now there is really this dichotomy in terms of the implementation of this emissions for the engine because some of the diesel engine industry, if they cannot implement it in terms of their industry -- their factory, there will probably be a shakeout.

But if there's a shakeout there's really going to be a loss of jobs.

So that is going to be a little bit of a problem for the Chinese government to have certain diesel engine manufacturers phasing out.

So in a way that -- this is going to be a little bit of a time delay as well as how the government is going to reform the diesel engine industry for those diesel manufacturers that is really going to -- that is not going to be able to comply to the emissions standard.

So we are not really sure as to whether there's going to be a shakeout or whether there's really going to be a consolidation or not.

So that is really very difficult to predict in the China environment.

Okay, thank you.

And can I ask about fuel availability for Euro IV?

And also I know that the government has recently put in some price increases for diesel fuel.

And are you seeing any impact on demand?

What it is, is that in terms of the quality of fuel, as I mentioned during my last earnings conference call, the fuel itself there are this oil company that will be able to produce fuel to -- I believe that it's really -- will be about 150 ppm.

That is really in compliance with the National IV.

Now definitely this type of fuel is going to be more expensive and that type of fuel is available in China as we speak.

Then if okay the higher fuel price that is going to be implemented, then obviously our customer is always going to be looking for the more efficient or fuel efficient engines.

Even before -- before even the higher fuel prices has been implemented, the recent fuel prices that has really increased -- the customer has been demanding that we need to produce fuel efficient engine.

And the higher fuel prices give us a lot more pressure as an engine supplier to provide more fuel efficient, higher power engines as well.

So the fuel efficient engine is always a part of our priority to supply to the diesel engine market.

Your next question comes from the line of David Raso.

Hi, can you hear me?

Yes, hi David.

Hi, this is Jeff Morrison standing in for David.

Okay.

Just a quick question.

I work with David.

Just a quick question regarding the back half of the year.

You know first quarter, being up 60% what are you seeing -- in light of the inventory situation, what are you seeing for the back half of 2010 in terms of unit volume or sales?

What it is, is that in general if I were to really look at the back half of the year, I can really talk a little bit in terms of market so that we do not really provide any forecast.

In terms of truck there will be seasonality.

So going into second quarter and third quarter, I think that is really going to be a low season for the truck.

And then for the bus, quarter one, quarter two, generally are slightly higher season.

And they will just move down -- slightly down in terms of the Q3 and Q4.

And then construction industry is really holding steady so far in the market.

And then marine market has been improving since Q1 and we expect that marine market to be improving in Q2 and Q3.

Genset market is also improving because there was really power shortage due to a drought in the south and southwest China.

So in terms of the various dynamics in the industry there will be ups and downs with the various markets.

And since the truck market is really the biggest volume so far, then the Q2, Q3 low season that will really have a smaller volume compared to our great Q1 and last year Q4.

And then in terms of what we see in the market, is that the implementation of this high speed railway in the various cities.

So now customers they have an alternative to take the high speed railway instead of taking intercity buses.

So that might take some of the customers away which means that the bus demand might be impacted.

And then the other positive side will be that the stimulus plan which really has been implemented during the financial crisis last year.

There might not be a new stimulus plan later on this year because of the credit tightening and the various adjustments that the Chinese government is doing.

But this stimulus plan that was really implemented previously, it will help these projects going on and will continue until its completion.

And then for the inventory of OEM it's very difficult to review it right now because it really depends very much on how this market is really going to take hold in terms of the transportation, in terms of the economy.

So there is really this wait and see in terms of how the customer is going to see the economy being operated or being a theme in the market.

So if the economy is really moving up and there's really no slowdown, then probably there'll be some positive sign that the demand will be there for the trucks.

So in summary, there will be positives as well as some negatives.

And then there will also be the seasonality.

That's really important.

So I would really say this, if I were to look at the second quarter, the end of second quarter, will be a better gauge of how good we see towards the second half of the year.

Because right now, there, as I mentioned, there will already be inventory available at the OEMs.

So we don't know how this is really going to play out in the next two months.

Thank you.

Just one more question regarding inflation and the Chinese government's credit tightening policy.

Are you seeing inflation at your level in terms of your raw material costs?

And if so are you able to pass on that pricing to customers?

Good question.

What it is, is that as well in terms of the inflation as you know our raw materials is mainly like iron and steel.

And there is really these price increases since the beginning of the year.

So what we have done is that we believe that the price of this raw material is probably going to likely impact us.

And we estimate that is really going to about 5% for those raw material prices.

Okay.

Thank you very much.

Your next question comes from the line of Evan Fox.

Hi guys.

I just wanted to get back to the government efforts to slow the Chinese economy.

Is there a particular GDP growth rate that you would expect to be maintained throughout the rest of the year?

Well Alan, what it is, is that the government, during the People's Congress which was really held in early March, the government has steadfastly said that they would want to see the GDP growth for China at least 8%.

Okay.

So what it means is that as well they have got to make some various adjustments.

Some of those will be positive and some of those will be negative.

And one of the things that they have so far done the credit tightening so that there wouldn't be this inflation.

So but they still want to maintain an 8% GDP growth.

Okay, great.

And can you tell me the gross margins on the various engines, on the heavy duty versus the medium duty and versus the light duty.

Obviously the heavy duty had the highest margin, but can you give me a little bit more color.

Well what it is, is that well it could be -- I can really generally mention about this margin.

In terms of the four cylinder -- generally we're putting four cylinder and six cylinder.

And six cylinder will be the medium and heavy duty part of it.

So in terms of the four cylinders engine, generally we are really getting our margins in the mid teens.

And for the six cylinder, which is really the medium duty and the heavy duty, we get a better margin which is really in the low 20s and high 20s.

So there's really a range of that.

In terms of what you really see in the Q1, we have sold almost 60% of our six cylinder, which means that a high proportion of our engine sales goes to the medium and heavy duty.

Then this is why our gross margin overall has improved from 16.5% to 20.2% because 16.5%, which is really last year Q1, 2009 we have got almost the reverse.

About 40% of this is really medium and heavy duty and then 60% are the four cylinder, which is really the light duty.

So I would really say as well the mix is important, but we are getting better margin, as we mentioned.

Low 20s, high 20s and then the teens, mid teens for the four cylinders.

Hi.

This is Weng Ming here.

I've got a few questions from the audience which we'll take.

One of them is from Curtis Sullivan.

Now Curtis has asked a couple of questions.

One is what's our tax rate for 2010 and 2011.

The tax rate for 2010 and 2011 will be -- for the main operating company is 15%.

But for the other companies, the smaller companies, it will be 25% which is the standard tax rate for China.

Now he also asked what will be the dollar CapEx in 2010 and the use of our cash.

Now as you know, we have quite a high level of cash at the moment, but we will be using a fair amount of cash in terms of CapEx expenditure.

For this year we are expecting that we'll be spending close to CNY700m of capital expenditure to get the various projects, as we announced in the past few months, up and going.

In particular, the foundries and a few projects up north where we are planning to manufacture some passenger cars engine.

And, of course, the (inaudible) up and going.

Okay.

Now we also have a question here from Theo Muller asking about the Yulin Hotel, whether or not we're making a profit at the moment.

Now unfortunately for Yulin Hotel we're still making a very small loss.

A loss in the vicinity of about CNY2m in the first quarter of [2003].

This is very small.

It's just about breakeven.

Unfortunately for us there's first cycle of depreciation in there because of the buildings that we acquired as a result of the settlement of the loan.

If we were to remove the depreciation and amortization from the accounts, Yulin Hotels actually showing a positive cash flow.

Okay.

We'll continue on some of the questions that was really asked through the email.

One question that was asked was can you provide an update on R&D and new products like hybrids, gas, electronics and mixture engines.

Also Euro IV and V engine production capacities.

So what I can tell you is we have hybrid right now.

And there are about probably just over 20 of those hybrids right now running in China.

And there will really be more coming.

And then in terms of the product is ready.

And we will be able to really sell them.

And as for gas, I would assume we are talking about natural gas as well as LPG.

LPG is liquid petroleum gas.

So we do have those engines.

And on the natural gas, compressed natural gas engines, those we are selling in China as well as in Thailand where there is really quite a sizeable volume of this compressed natural gas running in Bangkok.

For the LPG we have sold almost 930 engines to Guangzhou Municipal and all these meets Euro IV or National IV standards.

In terms of electronics, I don't know.

Electronics means -- I would really say that generally electronics are just those that really are implemented for the National III onwards because for National III emission standards, we do require electronics control.

So I would assume that this is already implemented because the current emissions regulations require National III emission standard for China.

I don't know what mixture engines are.

So I'm not really going to be able to explain that.

And as for Euro IV, Euro V engines, we are ready and we do produce Euro IV and Euro V engines.

So far we have sold 1,700 of Euro IV and Euro V engines.

And these engines are mainly sold to first tier city, as I mentioned.

That is really Beijing, Shanghai, Guangzhou.

So in terms of the availability, the capacity, we do have the capacity to be able to really do that.

It's just -- if you visit the Yulin engine plant what it does is that those that are National III, National IV, National V, they can run in the line, except that those components will be available to be installed in there.

And then the testing we do have the test cell.

Not all the test cells, but we do have test cells to test those National IV and National V engines to those standards.

The next question is really the strategies that you are implementing to improve both gross and operating margin at GYMC which is really Guangxi Yuchai Machinery Company.

What it is, is that we are really looking at a couple of things.

One is that definitely if there's an opportunity we'll increase the price.

And the next thing is really to reduce the cost.

The cost which will help us in our gross and operating margin.

So in a way that could when we -- you have already seen what I mentioned about the foundry.

Those foundries, that was in partial operation.

But once it's really implemented we do see there will really be cost reduction because this foundry it is really quite an efficient operation.

And in terms of the electric power usage, so they are very efficient because in the foundry, if people are familiar with the engine manufacturing, the foundry requires a lot of power.

So in terms of how this foundry is being operated, we believe that there is really going to be cost reduction opportunities.

And the final production volume will be 220,000 bulks per day running two shifts.

So we do see that eventually there's really going to be good or substantial cost reduction for us manufacturing the engine.

And then the next thing is that we are also working on how do we make sure that we efficiently do the purchasing.

As you know, the raw material price keep on increasing.

So we are working with our suppliers to make sure that they have this cost reduction plans implemented.

So that those cost reductions can pass on to us, maybe not 100%, but it should really have this cost passed on to us so that we can have a lower price from the supply as well.

And then the other project that we are working on is the lean Six Sigma implementations.

Currently we have our staff, operating staffs, working on a list of 45 projects that is really Six Sigma.

So we hope that will help us to further reduce those production inefficiencies in the plant.

And then we are also working on those medium and heavy duty engine capacity so that we will have a better mix.

So in terms of better mix, then we'll have a better margin.

So these are really some of the key things that we are working on.

And then we also really look at the opportunity whereby for the four cylinder we really wanted to lower down the cost.

So we are actually working on -- in fact we are doing some brainstorming last week in terms of how do we reduce the cost of production for the four cylinder engines.

So we are working through those.

And hopefully we can see good improvement in terms of gross and operating margins.

The next question, I don't know how to answer that.

The question was asked is that how do you think you need to do to bridge the huge gap between CYD valuations and global Chinese machinery peers.

In terms of shares and stock market, it can go up and down.

And I do not have any control in terms of what those share prices are.

But what I can tell you is that my job is to make great products and also to take care of our customers.

And we hope that if we manufacture, if we produce a great product and taking care of our customer, I believe that all those results will take care of itself.

Well maybe I should really take a call from the audience.

Your next question comes from Melissa Cook.

Thanks for taking another question from me.

I just -- I wanted to go back to this issue of credit tightening and expectations for 8% GDP growth.

What is your opinion of whether the government is over-corrected in the property market?

And whether, from where we sit looking at the headline numbers, if the property tightening is really as big a deal as it seems from overseas.

And then on the inflation question, in terms of costs could you address wage inflation.

And are you raising wages at this point?

Thank you.

In terms of the property speculation, Melissa, I am really not sure that is what I'm really expert in terms of looking at the property market.

So I would not comment on that.

But in terms of the Chinese economy, the Chinese government has really come out strongly to say that they want to maintain at least an 8% GDP growth year over year.

So what it does is as well they are -- like this credit tightening policy, that will also impact -- in fact it is really used to curtail those inflation, but it will also impact some of the work that we are doing.

Say, for example, like if there are those transportation company, or those company that need to buy truck on a loan they are probably going to find it very difficult to get this loan.

So what I believe, and maybe this is really done on a case by case basis, when they do the credit tightening they probably have it across the board.

So everybody is really going to be impacted.

And the key thing is as well if there are really some genuine loan and all that, they will probably look at it from a case by case.

Now you might ask as well there are so many cases, how are they really going to do that?

So it is really going to be very difficult for, say for example, like a -- on individual cases, they might be able to release some based on what they really see in terms of, not speculating in, say for example, some of the things that is really non-productive.

So if there is really, say for example, like you are genuinely doing production, or you are just going to implement something that will really hire people to do manufacturing something, they will probably look at it from that standpoint.

So I believe that in terms of the government credit tightening policy.

They will probably be able to release some.

They might really not be able to release everything in terms of their credit tightening.

And in terms of wage inflation what it is, is that in Yulin city which is really, don't know for some of those who hasn't been to Yulin city, there it is about 230 to 250 kilometers east of Nanjing.

So Nanjing is really about one hour flight from Guangzhou to Nanjing.

So what it is, is that that is really a city which is really a small city rather than a big city like Guangzhou.

So in terms of the wage inflation and all that, that is really not very, very significant.

So what we will be able to maintain those wage with a nominal increase for the employees.

So that is really good for Yuchai.

We have now reached the end of our Q&A session and I will turn the call back.

Mr.

Saw.

Thank you to all for participating in our first quarter 2010 earnings webcast.

We thank you for your questions as well.

We look forward to speaking with you again and I wish you all a very good day.

Thank you.