China Yuchai International Ltd (CYD) 2010 Q4 法說會逐字稿

Good morning. I would like to welcome everyone to CYI's unaudited fourth-quarter and fiscal-year 2010 earnings webcast. (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 fourth-quarter and full-year 2010 financial results earnings webcast. My name is Kevin Theiss and I'm with 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 financial conditions. China Yuchai cautions that these statements, by their nature, involve risk 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.

Investors should note that China Yuchai has not finalized its consolidated financial results for fiscal-year 2010. The financial information presented herein is un-audited and may differ materially from that reflected in China Yuchai's audited financial statements for fiscal-year 2010, to be released when it is available.

Mr. Saw will provide a brief overview and summary of the industry and Mr. Hoh will review the fourth-quarter and full-year 2010 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. Mr. Saw, please start your presentation.

Thank you, Kevin. For the full-year 2010 I'm pleased to report that our net revenues grew 24.7% to CNY16.4b, from CNY13.2b in 2009. Our gross profit margin rose 57.9% to CNY4.0b, from CNY2.6b last year. Operating profit rose by 129.2% to CNY2.0b, from CNY854.3m in 2009.

The total net profit attributable to China Yuchai's shareholders in 2010 increased by 79.9% to CNY1.1b, or earnings per share of CNY30.2 -- CNY30.32, compared with CNY628.3m, or earnings per share of CNY16.86 in 2009, including the one-time write-back from the acquisition of our 100% equity of Yulin Hotel Company.

Our significant margin expansion is mainly attributable to our successful product mix shift to heavy-duty engines. The phase one capacity of our foundry is 45,000 tonnes of casting per year, or 200,000 cylinder blocks per year. We have increased production through improved efficiency, creating higher quality engine blocks and cylinder heads with lower unit cost. Upon the completion of phase two of the foundry expansion we will be significantly more self-reliant in the production of these key components.

Let's take a look at the industry in 2010. In 2010 automotive sales surpassed 18m units for the first time, up 32.4% year over year. Commercial vehicle sales grew to over 4.3m units, or 29.9% year over year. For 2010 the large truck market segment experienced strong growth, estimated to be above 69,000 vehicles, or over 45% year-over-year growth as exports recovered and there was increased demand from public transportation.

With ongoing construction and the need for greater transport of goods, heavy trucks achieve a 59% increase in year-over-year sales to over 1m units. Commercial vehicle growth was especially pronounced in the tier-two and tier- three cities. In 2010 total truck sales reached approximately 3.9m units. For the first time in history heavy-duty truck sales broke the 1m unit mark. In December alone the heavy-duty truck market growth of 21% outperformed the 15% overall truck market growth.

Our total engine sales increased 18% in 2010 year over year and our heavy-duty engine sales in 2010 increased by 65% year over year to 122,000 units. Our sales were 10.2% of the overall heavy-duty engine market for 2010. Our medium-duty engine sales in 2010 increased by 13.3% year over year, to 263,000 units, comprising an approximate 49% market share for medium-duty engines.

I'm also pleased to report that our joint ventures are doing very well. CIMC-Chery joint venture started production of the new heavy-duty YC6K diesel engines in December 2010. The new world-class YC6K diesel, engine which has been certified as meeting National III, IV and V Emissions standards, as well as being compliant with the National 6 Emissions Standard, extends the power range of our heavy-duty engines. The YC6K engine, ranging from 10 liter up to 13 liter, allows us to supply to a different spectrum of vehicle than we could previously.

Our joint venture partners have committed to purchasing our current production to power their high-end, heavy-duty vehicles. Jirui United, a joint venture by Chery and CIMC, is expected to roll out 21 models 600 Series of highly-anticipated commercial vehicles, including a number of world-class, heavy-duty trucks in 2011. During 2011 our plans to double the capacity of our 6L and 6M heavy-duty engines to 120,000 units are on track to meet the growing demand for heavy-duty engines.

Our remanufacturing joint venture with Caterpillar is also beginning operations in early 2011 for the remanufacturing of diesel engine components. We expect to quickly become the remanufacturing leader in China, which will enable us to take advantage of our over 2,300 service centers across China. The Geely joint venture's 4D20 diesel engine designed for passenger vehicles is currently on a development schedule for 2012 after some initial delays. 20 prototype 4D20 engines have been assembled in a joint venture facility in Jining, Shandong Province. The joint venture is going ahead with a rigorous engine testing, including installing the engines in Geely's vehicles.

Crankshaft manufacturing in [Guangxi] province will be launched in the second quarter of 2011 to supply to the Geely Automotive Company. At [Seeamin] Yuchai we have increased the capacity of our engine assembly to 70,000 engines per year to cater for customers in the eastern part of China.

During 2010 our first 50 diesel engines out of an order for 100 diesel engines, compliant with National 5 Emissions Standard, were put into operation in buses operated in Beijing Public Transportation Holdings Limited. The National 5 compliant diesel engine was independently designed and developed by us. We are the only domestic diesel engine manufacturer supplying Beijing Public Transportation Holdings who, since 2007, has purchased more than 3,000 buses containing our National IV 35K engine. Our National 5 compliant diesel engines demonstrate that our green energy innovations are narrowing the technical gap between domestic- and foreign-produced diesel engines.

In addition, the Ministry of Science and Technology in Guangxi Province has concluded that our commercial vehicle hybrid diesel engine achieved the highest technical standards within China. This commercial vehicle hybrid diesel engine is China's first independently-developed commercial uni-axel ferro hybrid engine.

With this achievement we have attained the industry-leading position for our hybrid engines, matching the performance criteria of the world's top hybrid engines. Our hybrid engine sales are relatively small so far, but as they can reduce fuel consumption by up to 25% to 30% we expect hybrid engines to form a growing part of our sales in the future.

In early March 2011 we announced that our key subsidiary, Guangxi Yuchai Machinery Company Limited, is issuing renminbi-denominated unsecured short-term financing bonds amounting to CNY1.7b in two tranches in China. The first tranche of the bonds amounting to CNY1 and bearing a fixed annual interest rate of 4.59% was issued in March 9, 2011 and will mature on March 9, 2012.

The second tranche of the bonds, with a principal amount of CNY700m, will be issued at a later date subject to market conditions. All the proceeds from the issuing of the bonds are to be used as working capital. As interest rates have been rising the issuing of the bonds will lower our financial risks and costs.

Strategically, in mid 2010 we announced the completion of the sales of 536m shares out of our 550m shares held in Thakral Corporation Limited, TCL, at $0.02 per share through a placement exercise. We have reduced our shareholding in TCL from 34.4% to 12.2% currently. From the sales of our shares in TCL, through the placement exercise and the open market, we received over $44.7m, which was used to pay down our short-term loans.

Although we are changing our focus to building advanced engines for the high-margin, large engine market, we are not reducing our efforts in the light-duty engine market. Our aim in the light-duty engine market is to reduce our product costs and market and sell light-duty engines with a reasonable margin. We may lose a small market share due to the strategic product mix shift to heavy-duty engines in the short term, but will be better positioned for profit expansion in the future.

With that, let me turn the call over to our CFO, Weng Ming Hoh, to walk you through our fourth-quarter and 2010 financial results.

Thank you, Boo Guan. Net revenue for the fourth quarter of 2010 increased 23.6% to CNY4.0b or $606.5m, from CNY3.2b or $490.6m in the fourth quarter of 2009. The total number of diesel engines sold by the Company's main operating subsidiary, Guangxi Yuchai Machinery Company Limited, GYMCL, during the fourth quarter of 2010 was 115,460 units, compared with 101,363 units in the fourth quarter of 2010. The increase in US -- sorry, the increase in unit sales volume and net revenue were mainly due to the ongoing product mix shift and higher demand for heavy-duty engines.

The gross profit increased 70.1% to CNY1.3b or $200.7m, from CNY781.2m or $118m in the fourth quarter of 2009. The gross margin was 33.1% in the fourth quarter of 2010 compared with 24% for the fourth quarter of 2009. In the fourth quarter of 2010 the higher gross margin was mainly attributable to a combination of increased sales of more profitable heavy-duty engines and the reversal of inventory reserves due to the consumption and sales of parts that were previously provided.

Other income was CNY44.2m or $6.7m, compared to CNY57.6m or $8.7m in the fourth quarter of 2009. The fourth quarter of 2009 included non-recurring income of CNY23.6m, or $3.6m, relating to the forgiveness of debt under a creditors' liquidation agreement by a subsidiary of HL Global Enterprises Limited.

Research and development, R&D, expenses were CNY78.2m or $11.8m in the fourth quarter of 2010, versus CNY92m or $13.9m in the fourth quarter of 2009, a 15% decline due -- mainly due to lower consultancy fees and capitalization of qualifying R&D costs amounting to CNY13.4m, or $2m. As a percentage of net revenue R&D spending was 1.9% of net revenue in the fourth quarter of 2010 compared with 2.8% in the fourth quarter of 2009.

Selling, general and administrative expenses, SG&A, in the fourth quarter of 2010 were CNY480.9m or $72.6m, a 22.8% rise, from CNY391.6m or $59.1m in the fourth quarter of 2009. As a percentage of net revenue SG&A expenses were 12% in the fourth quarter of 2010 and approximately the same percentage for the same quarter in 2009.

Operating profit climbed 129.2% to CNY814.1m or $122.9m in the fourth quarter of 2010, from CNY355.1m or $53.6m in the fourth quarter of 2009. The increase is mainly due to increased sales and higher gross profit. The operating margin increased to 20.3% in the fourth quarter of 2010 from 10.9% in the fourth quarter of 2009, mainly due to the improvement in gross margin.

In the fourth quarter of 2010 total net profit attributable to China Yuchai's shareholders increased 136.1% to CNY461.7m, or $69.7m, or earnings per share or CNY12.39 or $1.87, compared to CNY195.6m, or $29.5m, or earnings per share of CNY5.25 or $0.79 in the fourth quarter of 2009.

Financial highlights for 2010. Net revenues for 2010 increased 24.7% to CNY16.4b, or $2.5b, from CNY13.2b or $2b in 2009. The total number of diesel engines sold by GYMCL for 2010 was 551,592 units, a 17.9% improvement compared with the 467,899 units sold in 2009. The increase in net revenues was the result of greater volume, especially in the heavy-duty diesel engine sector.

Gross profit in 2010 was -- sorry, gross profit in 2010 rose 57.9% to CNY4b, or $606.9m, from CNY2.6b or $384.4m in 2009. The gross margin was 24.5% versus 19.3% in 2009. The increase in gross profit and gross margin was mainly due to the growth in the sales of more profitable heavy-duty engines and the reversal of inventory reserves due to the consumption and sale of parts that were previously provided.

Other income increased by 33.8% to CNY103.8m, or $15.7m, from CNY77.6m or $11.7m due to exchange gains and higher interest income. Research and development, R&D, expenditures rose by 9% in 2010 to CNY324.1m, or $48.9m, from CNY297.3m or $44.9m in 2009.

While the R&D expense rose in absolute terms, as a percentage of net revenues it was only 2% in 2010 compared with 2.3% in 2009, due to the faster growth in net revenues. This investment is mostly focused on developing low emission and higher fuel efficient engines to meet challenging -- changing market demands and Chinese government's environmental requirements.

Selling, general and administrative expenses, SG&A, rose 25.1% in 2010 to CNY1.8b, or $277.9m, compared with CNY1.5b or $222.2m in 2009. SG&A expenses were 11.2% of net revenues for both 2010 and 2009.

Operating profit rose 129.2% in 2010 to CNY2b, or $295.7m, from CNY854.3m or $129m in 2009. The increase was mainly due to the growth in unit sales, net revenues and gross profit, combined with more stringent expense control measures. The operating profit margin grew to 11.9% in 2010 from 6.5% in 2009.

Finance costs in 2010 increased 68.3% to CNY130.4m, or $19.7m, from CNY77.5m or $11.7m in 2009. The higher interest expense was due to the raising of interest rates charged in China during the year which resulted in the increase in the cost of bills discounting and borrowings.

In 2009 the Company reported a one-time non-recurring gain of approximately CNY203m, or $30.6m, arising from GYMCL's acquisition of the 100% equity of Guangxi Yulin Hotel Company Limited, Yulin Hotel Company, to resolve past loans by GYMCL, worth an aggregate principal amount of CNY205m, as previously disclosed.

Total profit attributable to China Yuchai shareholders in 2010 increased by 79.9% to CNY1.1b, or $170.6m, from CNY628.3m or $94.9m in 2009. Earnings per share for 2010 increased to CNY30.32 or $4.58, from CNY16.86 or $2.55 in 2009. The increase in net income was mainly due to the higher net revenues and unit sales, higher other income and stringent expense control.

As at December 31, 2010 cash and cash equivalent was CNY4.1b or $613.2m, compared with CNY3.7b at the end of 2009. Trade and bills receivable was CNY4.3b or $648.4m, compared with CNY2.5b at the end of 2009. Net inventory was CNY2.6b or $394.5m, compared with CNY2.1b last year.

Trade payables increased to CNY5.8b or $869.6m, from CNY4.7b at the end of 2009. Short-term and long-term borrowings decreased from CNY1.1b at the end of 2009 to CNY625.4m, or $94.4m, at the end of December 2010.

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

(Operator Instructions). Your first question comes from the line of Alex Potter of Piper Jaffray.

Hi, guys. Congratulations; a very good quarter. I guess I'll start by asking the most obvious question here. Your gross margins were clearly very high in the quarter. I was wondering if you could quantify the size of the benefit you got from the inventory write-back? And then, after backing that out, are these higher gross margins, are they the new normal for you, or were there other events that happened in Q4 that, in addition to the inventory write-back, that drove such a high gross margin that we shouldn't expect going forward? Thanks.

Okay, hi, this is Weng Ming here. Now in Q4 we had a reverse about CNY91m for inventory reserves, okay? Now compared to last year, last year we set aside about CNY133m of inventory so that counts of a bit of the change from last year to this year in terms of the gross margin change.

Okay. So if you back that out it looks like you still had a very, very high gross margin, something like -- it looks like 700 basis points or so more in terms of gross margin than you had last quarter. What I'm trying to get an understanding of was, in addition to that inventory write-back that you had in the quarter, were there other events that happened in the quarter, one-time in nature events, like mix shift or something that we shouldn't expect going forward? Or is this new gross margin level something that we can expect from CYI from now on?

Okay. [Now you need to stop there]. You're referring to this year versus last year, right?

Yes, well, I guess compared to anything.

Right. You're right that if you add the two together, the CNY91m and last year's provision, [what I call] $150m, I think, the impact on the gross margin as a percentage is quite large. It works out to about five to six percentage points.

Okay, right. So in the quarter the gross margin including the write-back was something in the 30-some percent range, right?

It was 33%, yes.

Yes, 33%. Now if you take that out and get a non-GAAP gross margin you'd be looking at something like 30% gross margin, after you take the write-back out, if I'm calculating this correctly.

No. I think -- no, if you take it out it's about -- it comes to 27% -- 26%, 27%.

Okay, okay, so 27%. That's still quite high in comparison to the historical norm for --

Yes. Sorry, let me cut that in. What it is is that, if you talk about just one time, this inventory write-back is one time. But the other things that -- which we hope that is really not a one time, it is really those margin shift that really give us the uplift in terms of the gross profit margin.

What I can tell you is that in terms of the product mix, so normally what we do is that we look at -- so all the proportion between four-cylinder, which is really the small engine, versus the bigger engine, which is really the six-cylinder. So that shift in 2010 -- or there was an increase of almost eight percentage points in terms of get six-cylinder, which is really the higher engine, and that gives us an improve in terms of margin.

I would take it that that six-cylinder engine that are there because of higher volume and also here of higher price, it gives us again an increase in terms of average pricing of 9.9%. That is really what it will help us to lift up the gross profit margin and, at the same time, our revenue in terms of the full-year 2010 compared to 2009 it is an increase of 28%. So, all in all, if you look at the focus that I have mentioned during my speech, is that the medium-and heavy- duty, which is really the six-cylinder engine, if we really sell more of that it will help us in terms of revenue and it will bring us more gross profit margin.

Okay. And what you're saying is that's sustainable in nature. So historically if you had gross margins of 21%, 22%, 23%, now, in this quarter, after backing out the write-back you're in the high 20% range. And, hopefully, if this mix shift continues these higher gross margins are something that you're hoping to sustain, not something that you expect to be one-time in nature in Q4.

That is correct and then there is really a couple of things that we are also working on. One is that we are very focused in the automotive market and right now if -- we are looking at the product line. We are launching the 16-liter 6C and then another one which is 14 liter, which is 6C. That is basically focusing on the power generation and marine market. So that will also give us a lift in terms of revenue as well as gross profit and margin growth.

And then internally we're looking at how do we reduce cost. Say, for example, in terms of the work that we are doing, especially on the new foundry, we see that there is going to be a reduction in terms of material in the casting because this new foundry is very efficient and then it also have less defect rate and also is -- the electricity usage is very efficient. So we are really looking at -- the work that we are doing in terms of the internal operations we're trying to reduce costs as well.

So the other side of the point is that you probably heard that as well in terms of material or better pricing, or because of inflation or all that, there's always the cost pressure on the raw materials. That is really the flipside of the things that we're trying to reduce cost, improve our revenue, improve our gross profit margin. And then there is really the other side, which is really the raw material cost pressure.

Okay, fair enough. That's very helpful.

I was also wondering if you could give your updated overall market commentary for 2011. Obviously, 2010 was a really big year for the commercial vehicle market, for the heavy-duty truck market. What's your updated view for growth in 2011 and which sub-segments of the truck market do you think will outperform?

A few key pointers. One is that you probably have heard that there are really inventory gap in the market. And I have heard as well there is less inventory, 6,000 to 7,000 engines or trucks, all the way up to 330,000. Do you believe it or not? [There are] trucks in the inventory. So again when we were having this meeting in February, which is really after the Chinese New Year, so our people are going out to the market to understand what is going on with the market in terms of [get the] inventory, in terms of [get the] demand.

So there is this -- the general consensus is that last year it was really a fantastic year in the first quarter in terms of heavy-duty truck. Everybody was really happy with the volume. This year it's a little bit subdued and then if there is less of inventory in the market then, obviously, that is going to be a more positive side on our sales. But again I'm really working on -- with our sales guys to understand what is really the inventory in the market. If there is really less of inventory that is really good news for us. So that is one of those.

And then the other thing is that, as you know, inflation, which is really partly due to the high oil prices, partly due to the high fixed asset investment and then the high interest rate, all this is causing this credit tightening and is also having people to think about how to use alternative means of transportation to reduce the cost of fuel, so there are all these dynamics in terms of the 2011 outlook.

So if I were to look at this, the positive thing about the whole market is that the Chinese government still want to maintain 7% of GDP and now I'm already hearing that it can go up to 9%. So they are really the positive dynamics in terms of economy growth in China, but there is also the inflation pressure as well as the inventory in the market. So, on balance, if we would really go through the first quarter well, I think that we will do quite well in terms of sales for the whole year.

Okay. You think it's fair -- historically, I know that the truck market in China -- commercial vehicle market in China has typically outpaced GDP at least by a couple of hundred basis points. Do you think that that historical norm will hold going forward?

I believe that is so, because what I see is that if there's economy growth definitely people are going to use trucks, use buses, because trucks are useful for transportation and there's going to be a development. As you know, as well, there's going to be construction equipment needed but there's really going to be more transportation, infrastructure is going to be developed, so what you are saying is true.

Okay, very good. I'll jump back in the queue, guys. Thanks a lot.

Thanks, Alex.

Your next question comes from the line of Gerwin Ho of Citigroup.

Hi, good morning. Congratulations on the strong results. I've two more macro questions to consult your opinion. First of all, the heavy-duty truck market, what's the view in terms of growth rate this year? I think, as you mentioned, there's some talk to inventory on the heavy-duty truck side and I think, more recently, from the people we've spoken to, I think the view is probably less -- of a lower growth rate probably versus the beginning of this year. And there's even talk of potentially negative growth this year. So I just wanted to consult with your view on the heavy-duty truck market growth rate this year.

And, secondly, in terms of China IV or Euro IV emission standard, at this moment it's been announced that it will come to fruition on January 1 of 2012, so what is our feeling on the impact to the truck market ahead of this deadline? Will we see the pre-buying that we saw in the first half of 2008? And also there is some talk that perhaps this deadline may not be as firm as perceived, so have we heard anything about this deadline and whether there's a possibility of it being delayed if other factors are affecting the truck market? Thank you very much.

Thanks, Gerwin. Okay, to talk about the heavy-duty truck market growth, what we are really seeing is (inaudible). Last year, as I mentioned in my report, that it has exceeded 1m units, so I would guess that from the heavy-duty truck market it is really going to be very, very tough to achieve 1m this year. And again, if you look at what I mentioned in our market share, our market share in the heavy-duty truck market is quite small; 10.5%. So what we will be thinking of is that in terms of whether this market (inaudible) [is baked] the growth will be faster, but we will really dig in while we have customers and we have engineered our engines into a few of our key customers.

So when we look at the truck market, even if there is really going to be some reduction, we will really dig in and we will be expand on market share. So that is really where I feel positive about what we are really doing in terms of be able to work with the OEMs, engineer our engines into the trucks. So if I were to look at the growth, I'm looking at more towards more market share for Yuchai.

So the second question on the Euro IV, your statement on January 12 the launch of National IV, launch in terms of 2012 I believe that that is what [they said] to the market as well. At first, it was supposed to be beginning of 2010, so they move it to the beginning of 2012. So what, in China, is that -- I don't believe that the impact is going to be that great in terms of the truck market on a pre-buy.

The reason is because, sometimes when the day comes near, the Chinese government might delay it so they always have this wait and see. So what I believe is that it's not so much of a pre-buy but if there's going to be a deadline on January 12, and if the government implements the emissions standards of National IV beginning of 2012, I believe that after that date there will probably be a spike in terms of the purchase; that's what I believe.

So in the deadline itself people have been looking at as well they have really moved, this is probably the third time. So there is also the question about fuel as well, because the fuel needs to be National IV emissions, so I believe that is about 50ppm in terms of sulfur content. So that fuel needs to come in with -- like clean diesel, so there is really going to be a lot of work done between now and the beginning of 2012.

For my understanding, what's the cost or price difference between a China III engine and a China IV engine?

What it is is that, the China IV engine, it will probably have an SCR; there is really going to be this SCR. And also most of the National IV will have a common rail system. So National III they might and they might not have the common rail. So National IV definitely they're going to have a common rail and they're going to have a SCR system.

(Inaudible) at Yuchai we have the China IV engines ready.

Yes. And to tell you that's what we would prefer to have the National IV implemented earlier because we have the product.

Your next question comes from the line of Jeff Morrison of the ISI Group.

Hi, good morning. Just a first question on the pricing; did you mention earlier that you put through a 9.9% price increase?

Yes, Jeff.

Okay. Was that an across-the-board price increase for all products, or was there a range?

That is really a range, Jeff, because what it is is that -- because of the percentage shift. I mentioned, as well, last year it used to be -- we used to have the light duty at 49% and this year -- last year it's 57% in terms of light duty and then we reduce it to about 49% in 2010. Then (inaudible) the percentage reduction in light duty or, conversely, there's an increase in the percentage of the six-cylinder, the bigger engine. Then the average pricing of our engine improves by 9.9%, so that is really on the average of all the engine pricing.

Got it.

Then is it all right if you could just talk about the hybrid market and maybe just what you view as the opportunities there? Are there any government subsidies that you think will push the hybrid engines at all?

Yes. What it is is that a hybrid bus costs about -- probably about twice compared to a diesel-powered bus. So if there is no subsidy from the government it is really very difficult for a municipality bus company to purchase hybrid buses. [The] fuel consumption is going to be lower, but the cost -- the initial capital layout cost is quite high.

So if everybody were to read the twelfth five-year plan, you're talking about the energy reduction, more energy-efficient vehicle, so then hybrid might have an opportunity whereby the government might subsidize the municipal company to purchase hybrid buses.

So that is why that our hybrid buses we sold about -- probably about 300 last year and we're really thinking we want to increase it by more than three times this year; that's really our target. And hopefully with a subsidy, or we get the government coming in to promote the energy-saving on new energy buses, then the hybrid bus will have opportunity to be able to run in big cities.

So there are no subsidies right now, but you're waiting for the new plan coming out?

That's correct.

And then just a last question. As far as you could talk about your push into the powergen market, the larger engines, maybe what opportunities you see there.

What we have seen is that, in terms of China right now for those big cities, as well as those cities that is developing, most of them have high-rise buildings. And then the government is, right now, clamping down on safety and also the fire protection. So if we were to see that there are so many tall buildings around, there is always the need for this higher KW power generation, and that is really where we think that we can penetrate that market with the 16-liter and 14-liter engines or [G] drives.

(Operator Instructions). Your next question comes from the line of [Andrew Long] of Piper Jaffray.

Hi, Andrew.

Andrew, your line is open.

Hello, can you hear me?

Yes.

Okay, sorry. Okay, congratulations for the good result. I've got two questions. The first question is who are you selling to for the high-power engines? Are you selling to FAW? Are you selling to [Futian]? And what are the existing capacity and how are you going to expand that? That's my first question.

My second question is, in terms of SG&A ratio, is there any room for improvement? Will I see economy of scale in the future? What would be the trend of that ratio? Thank you very much.

Okay, for your first question first. What we have is that we have quite a number of customer. We do sell into FAW. FAW also has their own engines. And then we also sell to Futian and then [Dongfeng] is one of our biggest customers, so there is quite a number. And then [Chungwai] is also one of our bigger customers.

Now, the key thing is that we normally work together with the OEM and then we [edge] our products in. And also we provide excellent customer service so that, at the end of the day, the end-user customer is the one who decide what engine they want to put in their trucks. So we work very well in terms of aftermarket support, providing excellent customer support for our end users. So we hope that we are working with the OEMs to engineer our products in, so that at least we know as well our product we'll be able to supply it to some of those OEMs that we have not used before. So that is really our key in terms of increasing our market share for the heavy-duty engines.

Okay. On the second question -- this is Weng Ming here. Now, you know that China there's -- the cost of labor's rising and also within the SG&A we have the bulk of the costs is actually in the selling expenses. So lately we we've cut down selling expenses, which I don't anticipate. I think the ratio's going to stay the way it is for foreseeable future, I think.

Thank you. Going back to the first question, what would be the capacity this year?

You mean the capacity for heavy-duty engine?

Yes.

Okay, the capacity for the heavy-duty engine I will say that is going to exceed 200,000 units.

Okay, thank you.

Okay, I've got a few questions here. The first one is what's the -- it's asked by one of the investors, asking us what is our planned capital expenditure for 2011?

Now, in 2011 we expect to spend between CNY800,000 to CNY900,000; that's what we plan to spend on capital expenditure. So that's the short answer to the question.

And the next question is why do we borrow when the Company has so much cash?

Okay, I think I need to explain this a little bit here. Now, the Company -- we need to use cash to pay our suppliers every month and we have been discounting our bank bills in order to generate the cash that we have. So by having a short-term bond and locking in the interest rate at 4.59% we're actually able to hold the finance costs or even from -- against the rising interest rate that actually we are seeing in China at the moment. So going forward we're actually expecting the discounting cost to go up higher, so it's a good thing for us to now lock it in.

There's also quite a few questions here on whether or not we'll pay dividends, when we're going to pay dividends [as] our dividends policy. Now, we will -- (inaudible) the appropriate time as to when you're going to make a dividend payment and how much it's going to be.

Okay, so a question on -- can you tell me all the new products that we have in and what are really the new products for 2011 and 2012?

So our products ranges from 75 horsepower, we call [pesco], to about 1,000 pesco, which is horsepower. Now, the new products that we have launched, which is mainly last year. And then what? It is the [60-liter] engine and then also towards the end of last year we launch the [40-liter] engine, which is 6C. And then there is also the K, which is the 10-liter, and then we have the -- just the end of last year we have done -- developed the K12 liters in [Hungwei] province, which is under our joint venture.

Now, if I were to look at all these new products that we have launched, the key thing is when we develop a product it goes towards a certain market segment and mainly most of the market segment, other than the 60-liter and the 40-liter, is developed for automotive market.

And then later on, which is a lot of work that we did in 2010 and to follow up to 2011, will be a product enhancement. Recent product enhancement it is really going to be for different application. Say, for example, if we have the 40-liter, which is really mainly for power generation, we are also really working for the marine applications, we are also going to work for those mine trucks application. So there is going to be a lot of product enhancement in terms of different applications in our product.

So when we have to get all this engine carcass in this model series, we will be able to develop those engine into very different applications so as to just share all this development cost across different market segments.

So the next question is, we are now at the end of Q1, do you have any views on the volume mix of your sales on the first quarter and the rest of the year?

So just now I mentioned a little bit of the general outlook of 2011 and just want to make sure that (inaudible) answer, we don't provide guidance in terms of 2011 unit sales and revenues. What we can tell you is that the -- we're working with the OEMs to edge in products into their vehicles so that our pricing will not be the only negotiating point and then we are going to increase our market share, like what I say just now.

And then the other important thing to look at, which I've mentioned, is that the GDP growth is going to be between 7% to 9%. The government mentioned 7% and there's really other analysts who mention that it is going to be 9%. And there is also the government 12-year plan which encourages new energy, energy-efficient vehicle so that will help Yuchai to be able to sell more of National IV, National V and also the hybrid engines. And that is really where we believe that we are in a good position to be able to get (inaudible) on the twelfth five-year plan.

The next question is when will CYI management come to USA for investor road show?

Well, we have been busy the last year and what we are planning is that we will be participating in Piper Jaffray's China Growth Conference in New York City on May 17, so we plan to meet the investors during that time.

Okay. There is a question here on our outlook for accounts receivable. It's going down, but not as much as last year. Now, I think the typical in the industry, or maybe particularly in our case, the way the sales contract is structured is such that we will take most of our payment towards the end of the year. And also in the case of China, very typical that companies will pay us using bank use rather than cash or a check.

So in a bank this can only be cash out. We didn't (inaudible) three months' to six months' timeframe, so that is the reason why the trade bills and accounts receivable number -- figure has gone up and also in terms of number of days it's also gone up. The main reason for that is that the necessary increase in the bank bills that we have been receiving towards the end of the year.

Okay. Your next question comes from the line of Alex Potter of Piper Jaffray.

Hi, Alex.

Hi, guys. I just wanted to -- I had one last question here. Inventories seem to jump up pretty substantially in the quarter. Is that just normal seasonality in preparation for the high season? And has that come back down now, or should we expect to see that coming back down here in the next quarter? Thanks.

Okay. That is quite largely due to seasonality, Alex. Now, the way it works is that I think towards the end of the year each year you have to start to build up our raw materials and our parts, to buy the parts, so that we can build the engines for the next year. Now, if you look at our trend, I think like last year -- last year the January month is (inaudible) highest number of sales (inaudible) first quarter is the biggest quarter for the year, so (inaudible) they're building up inventory for next year. And come the middle of the year it should come down a bit.

Your next question comes from the line of Gerwin Ho of Citigroup.

Hi. I was just wondering, in the construction machine market what was your unit sales and which of the companies are you selling to right now, in terms of construction machine engines?

Off hand I don't remember exactly the numbers, but I can tell you that the -- last year's construction that we increased our (inaudible) about 35% or 38%. I cannot (inaudible) the number, but I remember that (inaudible) increase in terms of getting our engines sales to the construction market. Now, the construction market, as you know, Gerwin, is that it is really a very fragmented market and what Yuchai is really focusing on are mainly those loaders, so those loaders has really the 30-ton, 40-ton, 50-ton loaders, so we participate in that market.

And then we are participating right now in a much bigger way on the excavator market as well. So when I look at those motor graders and the rest of this, we are thinking about how do we get into those markets. So currently our participation is really in a very small market segment and we hope that we can improve in terms of the market penetration to the construction market.

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

Okay, before we leave I would like to say a few words. As everybody knows and the whole world knows, there is really this disaster in Japan in this Miyagi Prefecture, whereby, you have got a big tragedy in terms of earthquake and also the tsunami that wipe out quite a lot of people and also their properties and all that.

So it is really a big tragedy and we hope that this Miyagi Prefecture will be able to recover as soon as possible. And for those victims and their families our thoughts and prayers goes to those people who suffer in those tragic disaster and, again, we hope that they recover again as soon as possible.

And then we have reached towards the end of our Q&A session and I would like to thank all of their participation -- participants in our earnings webcast and we thank you for all your questions as well, and we look forward to speaking with you again. And I wish you all a very good day. Thank you.

Thank you. And thank you for participating in today's conference. You may now disconnect.