China Yuchai International Ltd (CYD) 2011 Q1 法說會逐字稿

Thank you for standing by, and welcome to the China Yuchai International Limited first-quarter 2011 financial results webcast.

At this time, all participants are in a listen-only mode.

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

(Operator Instructions).

I must advise you that this conference is being recorded today, May 11, 2011.

I would now like to hand the conference over to our speaker today, Mr.

Kevin Theiss.

Please go ahead.

Thank you for joining us today, and welcome to China Yuchai International Limited first-quarter 2011 financial results webcast.

My name is Kevin Theiss and I am 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 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.

Mr.

Hoh will review the first-quarter 2011 financial results.

Thereafter, we will conduct a question and answer session.

For the purposes of today's call, the financial results are unaudited and they will be presented in CNY and US dollars.

Mr.

Saw, please start your presentation.

Thank you, Kevin.

For the first quarter of 2011, our net revenues were RMB4.2 billion compared with RMB5.1 billion in the first quarter of 2010.

The Company's main operating subsidiary, Guangxi Yuchai Machinery Company Limited, GYMCL, sold 160,831 units in the first quarter of 2011 compared with195,017 units in the first quarter of 2010, but up from 115,460 units in the fourth quarter of 2010.

Lower unit sales compared with the first quarter in 2010 was mainly due to a decline in demand for our automotive engines, while our diesel engines for the off-highway markets, especially the agriculture and industrial segments, rose during the first quarter of 2011.

Higher fuel prices combined with more expensive credit also contributed to lower vehicle sales in the first quarter of 2011.

We began to see an increase in our unit sales growth in March 2011 compared to February, as automotive sales improved from March 2011 onwards.

Gross profit was RMB944.1 million in the first quarter of 2011 and the gross margin of 22.3% was a 2.1% improvement over the first quarter of 2010.

This increase was mainly due to the productivity gains, as well as improved efficiencies from the new automated foundry facility.

Research and development, R&D, expenses were RMB78.0 million in the first quarter of 2011, a 15.9% increase over the first quarter of 2010, as we continued to invest in our technology and new product development through higher consultancy and staff costs.

We are enhancing a number of our 6-cylinder engines while developing new diesel engines with 6, 8, and 12 cylinders to expand the power range of our engine lines up to 1200 horse power at 53 liters.

We intend to continue emphasizing the development of the Company's R&D capabilities, to close the technology gap with foreign companies and maintain our position as the technology leader in China.

Operating profit was RMB428.5 million in the first quarter of 2011, and our operating income margin increased to 10.1%.

At our Xiamen Yuchai diesel engine assembly facility, we are ramping up production to supply engines to our customers in the south and eastern parts of China, and our target capacity for 2011 is 70,000 engines.

Our investment in the foundry is beginning to positively affect our financial results through improved gross margins.

We have more control over the availability of our engine blocks and heads, better costs and higher quality control.

The foundry is providing both raw material cost savings and savings through better quality products with a higher acceptance rate.

By combining the capacities of our old and new foundries and upon the completion of phase two of our foundry expansion, we should have capacity of approximately 1m units, making us essentially self-sufficient.

Our introduction of the Lean Six Sigma program has resulted in 33 projects being completed in 2010, with an annual cost savings of approximately RMB30 million.

We plan to expand the Lean Six Sigma program for the whole organization, to inculcate an efficiency and cost savings philosophy throughout the Company.

In the first quarter of 2011, China's commercial vehicle sales grew by 5% year-over-year.

However, it should be acknowledged that last year's first quarter's commercial vehicle growth was very strong, making the year-over-year growth calculation for this quarter a difficult comparison.

Truck inventories, especially heavy-duty truck inventories, were high at the beginning of the first quarter of 2011, in anticipation of a strong truck sales season that typically begins in March.

This inventory restricted growth through the quarter.

The total truck sales in the first quarter of 2011 was 889,058 units, an increase of 5.9% year-over-year.

Total bus sales in the first quarter of 2011 was 109,287 units, an increase of 15.1% over the same quarter in 2010.

Heavy-duty truck sales increased by 8.7%, but medium-duty truck sales were down by 2.4% year-over-year.

Sales of large buses, defined as more than 10 meter in length, increased by 9.5%, but sales of medium buses, defined as 7 to less than 10 meter in length, decreased by 4.1%.

However, in each category, bus unit sales exceeded bus unit production during the first quarter of 2011.

We believe that there is a shift of medium-duty truck and bus sales to the heavy-duty segments, as these vehicles have heavier load and higher duty cycles.

Our CMIC-Chery joint venture started production of our new heavy-duty YC6K diesel engines in December 2010.

As a world-class diesel engine, the YC6K is certified as meeting National 3, 4 and 5 emission standards, providing us with an advantage in cities like Beijing and Shanghai where more stringent emission standards are required.

We are well positioned with our National 4 compliant engines for when National 4 becomes the national standard in China in the near future.

Additionally, the YC6K is our first engine meeting the National 6 emissions standard and we expect it to be certified in the near future.

With a larger displacement range, the YC6K will allow our engines to be used in heavier trucks, and it provides a way to enter new markets as our joint venture is expected to use this engine in 21 CMIC-Chery truck models.

Unit production of the YC6K is expected to reach 12,000 units in 2011.

However, we are ramping up our YC6K production to eventually meet an annual capacity of 50,000 units.

We are also on schedule to complete our plans to double the capacity of our 6L and 6M heavy-duty engines to 120,000 units, as we believe the heavy-duty diesel engine market will continue to grow to meet the logistical needs of moving heavier loads and higher duty cycles as China's highway system continues its expansion.

Operations of our remanufacturing joint venture with Caterpillar is expected to commence shortly.

An estimated total of 180,000 components is expected to be remanufactured in 2011.

The Geely joint venture continues to progress, after some initial delays towards its 2012 debut of the new 4D20, which is a 2-liter diesel engine for passenger vehicles in China.

Prototypes of the new engines continue to undergo rigorous engine testing.

Crankshaft manufacturing will be launched in the second quarter of 2011, to supply to Geely.

With that, let me turn the call over to our CFO, Weng Ming Hoh, to walk you through our first-quarter 2011 financial results.

Thank you, Boo Guan.

Financial highlights for first quarter 2011.

Net revenues for the first quarter of 2011 were RMB4.2 billion or $645.5 million, compared with RMB5.1 billion or $773.2 million in the first quarter of 2010.

The total number of diesel engines sold by the Company's main operating subsidiary, Guangxi Yuchai Machinery Company Limited, or GYMCL, in the first quarter of 2011 was 160,831 units compared with 195,017 units in the first quarter of 2010, but up from 115,460 units in the fourth quarter of 2010.

Thelower unit sales in the first quarter of 2011as compared with the same quarter in 2010 was mainly due to a decline in demand for our automotive engines.

Gross profit was RMB944.1 million or $144 million in the first quarter of 2011, compared with RMB1 billion or $156.4 million in the first quarter of 2010.

The gross margin was 22.3%, a 2.1% improvement over the gross margin of 20.2% in the first quarter of 2010.

This increase was mainly due to productivity gains as well as improved efficiencies from the newly automated foundry facility.

Other income rose 4.2% to RMB19.4 million or $3 million in the first quarter of 2010 (Sic -- see press release) from RMB18.6 million or $2.8 million in the first quarter of 2010.

The increase was primarily due to currency exchange gains in the first quarter of 2011.

Research and development, R&D, expenses were RMB78 million or $11.9 million in the first quarter of 2011 versus RMB67.3 million or $10.3 million in the first quarter of 2010, a 15.9% increase.

As a percentage of net revenue, R&D spending was 1.8% of net revenue in the first quarter of 2011, compared with 1.3% in the first quarter of 2010.

The higher R&D expenses were mainly due to higher consultancy and staff costs to reflect the continuing emphasis on developing the Company's R&D capabilities.

Selling, general & administrative expenses, SG&A, in the first quarter of 2011 were RMB457 million or $69.7 million, a 10% reduction from RMB507.7 million or $77.4 million in the first quarter of 2010.

As a percentage of quarterly revenue, SG&A expenses were 10.8% in the first quarter of 2011 compared with 10% in the first quarter 2010.

The reduction in SG&A was primarily related to lower warranty and freight costs in the first quarter of 2011, as fewer engine units were shipped.

Operating profit was RMB428.5 million or $65.4 million in the first quarter of 2011, compared with RMB468.7 million or $71.5 million in the first quarter 2010.

The decrease was mainly due to lower net revenues.

The operating income margin increased to 10.1% in the first quarter of 2011 from 9.2% in the first quarter of 2010.

Finance costs rose 21.5% to RMB47.4 million or $7.2 million in the first quarter of 2011 from almost RMB39 million or $5.9 million in the first quarter of 2010, primarily due to an increase in interest rates by People's Bank of China, bank charges and cost of issuance of RMB-denominated unsecured short-term financing bonds by GYMCL.

In March 2011, the Company announced that GYMCL had received approval from China's National Association of Financial Market Institutional Investors for the issuance of RMB-denominated unsecured short-term financing bonds amounting to RMB1.7 billion, bonds.

The first tranche of the Bonds was issued on March 9, 2011, with a maturity date of March 9, 2012.

All proceeds from the issuance of the Bonds are being used by GYMCL as working capital.

Share of loss of joint ventures increased to RMB17.8 million or $2.7 million in the first quarter of 2011 from RMB7.8 million or $1.2 million in the first quarter of 2010, mainly due to start-up costs at Y&C Engine Company Limited, a joint venture company with CIMC-Chery.

Y&C Engine Company Limited has since commenced production of YC6K heavy-duty engines.

Net income attributable to China Yuchai shareholders in the first quarter of 2011 was RMB230.5 million or $35.2 million, or earnings per share of RMB6.18 or $0.94, compared with RMB271.8 million or $41.5 million, or earnings per share of RMB7.29 or $1.11 in the first quarter of 2010.

As of March 31, 2011, the Company had cash and cash equivalent of RMB4.2 billion or $647.3 million, compared with total short-term and long-term interest-bearing loans and borrowings of RMB1.5 billion or $226.2 million.

Net trade and bills receivable at March 31, 2011 rose to RMB5.6 billion or $857.6 million from RMB4.2 billion at December 31, 2010.

Net inventories rose to RMB2.8 billion or $421.4 million from RMB2.6 billion at the end of 2010.

Total equity attributable to China Yuchai's shareholders increased to RMB5.3 billion or $812.2 million on March 31, 2011 from RMB5.1 billion on December 31, 2010.

In view of the Company's performance in 2010, the Board of Directors has approved the payment of a dividend of $0.50 per ordinary share and a special dividend of $1.00 per ordinary share on May 31, 2011 to shareholders of record as of the close of business on May 23, 2011.

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

(Operator Instructions).

Your first question comes from the line of David Raso of ISI.

Hi.

Good morning.

My question is on the revenues moving forward.

You made the comment in the press release that the automotive sales -- the automotive engines in the month of March are back to being positive, year-over-year, and it sounds like the off-highway piece was already a growth in the first quarter.

Should I take the March year-over-year improvement in the automotive engines and extrapolate that, where we should be back in the second quarter to total revenues growing?

Hi, David.

This is Boo Guan Saw.

In terms of the automotive market, what we are seeing is that, first of all, because of the build-up of the inventory, and the supply chain pipeline was quite a number of inventories especially with the dealer's lot.

So we believe that there is a little bit of reduction of inventory towards the end of Q1.

So, moving forward, we do see here some gains in terms of our sales in April, but there will still be some headwind moving forward, if the inventory in the supply chain is not being reduced.

So I would say that we have got to wait till probably the end of second quarter to see what the inventory situation is like for automotive industry.

David, then you also commented about the off-highway.

The off-highway has really been excellent, because probably there's news reported that says that in a month there will probably be a shutdown of some of the coal-fired power stations because of the emissions, and people are scrambling to purchase power generators.

And also, some of those construction increments, they are also -- sales has also been pretty depressed.

So, we do see the sales going up, but our volume did not really offset the loss of sales in automotive during the beginning of the first quarter this year.

And I can appreciate that you're not going to want to answer exactly, but can you remind us the difference in margins for your off-highway versus the automotive in total?

I know the automotive has a difference within from heavy to the not heavy engine, but even just taking automotive as one piece, what's roughly the difference between your off-highway margins, typically, and your automotive margins?

Hi.

This is Weng Ming here.

The difference in margins, I think this is broadly right.

It's between maybe -- depending on the mix for the quarter or the period, and also the type of engines sold, they range from between 4% to 6% difference.

That's helpful.

All right.

Thank you very much.

Your next question comes from the line of Andrew Leung of Piper Jaffray.

Hello.

Hi, Andrew.

Hi, Boo Guan.

We are looking to see you next Tuesday at the China Growth Conference.

Yes, we're looking forward to that.

Okay.

Here comes a bunch of questions.

The first question is slightly the same as the previous gentlemen.

Why did margin drop from Q4 to Q1?

If you take away all those accounting issues in Q4, the margin is still as high as 30%.

And is it the product mix led to a lower margin in Q1?

Maybe you can tell me more about the reason behind.

Okay.

Hi, Andrew.

It's Weng Ming.

Now, in Q4 last year, as you recall, there was a fair bit of account -- write-back of inventories compared to the previous year.

All right?

And that had a few percentage point impact on the gross margin.

If you remove those anomalies, if you compare the Q4 margin in 2010 to that of 2009, the margins are not too different.

Now, the thing for us is that during the year, before we would have to make some provisions for the sales expenses throughout the year because we would not know exactly how much the expense is going to come out with until we know exactly the amount of engines sold towards the end of the year, okay, and the performance according to the contract that was signed during the year.

Okay?

As a result, there were some small differences that would affect the gross margin too.

Sorry, can you further elaborate?

I'm not sure I get exactly (multiple speakers).

Okay.

I think there are a few factors here.

Okay?

Obviously the write-back inventory is one of them.

Okay?

And also the -- I think for industry it's normal for us to make estimate of the selling expenses because we only will know exactly -- because the contract -- sales contract we have will have an element of performance in it.

Okay?

And the element of performance will be obviously the volume, all right, and also the collection that we get from them.

This is all tied to the sales contract.

Okay?

So come a year we have to reassess the whole sales expenses and we will make an assessment as to what will be the appropriate amount at that point in time.

So that would add some contribution to the gross margin too.

Okay.

My understanding is you sell more than expected, and that is one of the reasons why you can have a lower selling expense because of the volume increase, and you actually all those -- additional gain in Q4?

Yes.

And also there's a mix issue as well.

So in Q4 selling a lot (inaudible) a little bit better in terms of mix as well.

I see.

Selling more high engine products?

Or even low engine but higher priced products as well.

Okay.

I see.

Thank you very much.

That's very helpful.

My second question is also regarding the inventory.

When we take a look at the inventory, it's not digesting what Mr.

Saw mentioned.

Do you see it will take us another two months to see if it's really helpful, or do you see all the inventory issue will be gone by the end of Q2?

Is that correct?

That is what we believe.

The reason is also that the credit tightening and also -- I don't know whether you've heard that recently the Chinese government has implemented a diesel fuel consumption quota for companies with truck fleets.

So I don't know exactly how they are going to strictly implement that, but there was a directive that says that there is going to be a sort of a diesel fuel consumption quota for truck fleets.

So, in that sense, there will be some reluctance in terms of purchasing more trucks where you cannot get fuel.

Would it be strictly implemented?

I'm really not sure.

So what I believe, that if the inflation pressure in China is being relieved, I think there is really going to be some positive impact, especially on automotive sales.

And to answer your question, that is correct that in the next two months, if we can see that the pipeline has been cleared, probably here there's really going to be a good session, as also you know that the quarter and the third quarter is the seasonal high in terms of sales.

Okay.

I see, I see.

Okay.

My last question is regarding to your new joint venture.

We see start-up costs in Q1.

Do you expect it will continue, or how the start-up costs will change according to time?

Hi.

It's Weng Ming here, Andrew.

Now, for these JVs, I think most of the start-up costs were associated with the Y&C Power -- sorry, Y&C Engine Company.

Now, the reason for that is I think we have been building or investing in this company heavily since last year, so we have come to a point where we are now ready to produce engines for sale.

So we have to -- as a result, we incurred quite a bit of cost to bring it to the level that we are ready for production and sale, right?

So now this level of costs for Y&C Engines I guess will continue.

And going forward, we should see some sales revenue coming in to offset the cost.

What it is is that, Andrew, the Y&C Engine Company Limited, which is a joint venture between CIMC-Chery, they are manufacturing the YC6K engines, which is the big engines.

And one of the key factors is that we have a captive market.

In other words, the engine that will be produced is sold to our joint venture partners, CIMC-Chery.

So if we were to look at it, it's that if there's going to be demand for those trucks, we should get -- CIMC, by the way, is a container carrier company.

So if there's going to be a need for those trucks and the engine is ours, so there will definitely be revenue coming in and it will possibly impact the financials of CYI.

In other words, we hope that is going to be revenue and then the cost will be covered.

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

Hello, Gerwin.

Hi.

Good morning.

Just two questions.

In terms of after -- we're now in May and after the first quarter.

What's your latest outlook on the growth in the heavy-duty truck market for 2011?

And secondly, from the first-quarter results of some of the other comparable companies, we have seen some signs of raw material pressure.

In our first-quarter gross margin, are we seeing impact of raw materials on our cost structure also?

And further, when we talk about the inventory build up, is it mainly the light truck engines or the heavy-duty truck engines that we're seeing the inventory situation?

Thanks.

Okay.

For the heavy-duty truck market in 2011, I would say that the best case scenario that we'll see if things still worked out -- when I say worked out, which means that's there really not going to be a lot of this headwind moving forward, especially on the inventory inflation pressure whereby there's really quite a tightening, and all the other things that hopefully will just go away by the end of second quarter.

But if there is going to be anything, I believe that the 2011 level of truck sales will probably be flat, compared to 2010.

That is what I forecast it to be.

And then, in terms of the next question on the Q1, on this raw material cost pressure, what we are seeing is that the inflation has impacted a lot in terms of the cost.

But we do negotiate on a regular basis with the supplier, and also the government has given some directive.

Not a directive in terms of not raising prices, but I know that the government is especially targeting to consumer goods, in terms of pricing.

There is pressure, but we are quite confident that we will maintain a reasonable level in terms of the raw material cost increase.

Hi.

Just allow me to add a little bit more to that.

The first quarter, we did see a marginal impact of the raw material price; not a lot.

And then (multiple speakers).

And lastly, on the inventory situation, is it mostly on the heavy-duty truck engine or the light truck engine that we're seeing that?

Well, what it is is that mainly it's the medium and heavy-duty, because what we see is that the component that we see in terms of the cost will be mainly those iron ore that we purchase and that we have at our foundry, and there is some cost pressure in terms of the cost.

So if you work on a foundry to produce blocks and heads for medium, heavy-duty, there will probably be raw material over there compared to the light duty, which is really 4-cylinder blocks and heads.

And one more question.

Looking at second quarter, do you think things will be -- on a year-over-year basis, will second quarter be better than first quarter or will it be tougher?

What's your feeling?

On highway demand.

Yes.

On highway demand, what it is is that right now we are still working on whether there are a lot of inventory, whether the inventory has been reduced substantially or whether there's going to be some demand.

What happened is that -- let me tell it as well.

In terms of our business, we are supposed to be working on rebuilding -- supplying engine to rebuild trucks, which is outside the Hubei Province.

And there is a sudden stop, a clampdown on trucks rebuilt.

So the engine -- there is no purchase of engine for rebuilding on trucks, and that amounted to about 30,000 engines.

So that is one of the factors.

And it is not because of demand, but it's just as well the government stopped the truck rebuilt.

Now, in terms of the second quarter, will it be better than the first quarter, what I see is in May and June -- April, we are doing quite okay.

But in May and June, it's going to be a little bit more of where are those inventory.

Are there inventories in a dealer's lot?

Are there inventories in the Asian manufacturer?

So we are working on that.

So I won't be able to tell you specifically that it's going to be better or it's going to be the same.

Sorry to give you here an answer that is really not definite.

(Operator Instructions).

Your next question comes from the line of Ben Wang of Merrill Lynch.

Hi, Ben.

Hi.

Actually, I have a long-term strategic question for the management.

Right now, the markets are quite concerned about the long-term customer base dilution by the vertical integration by the truck makers.

(Inaudible) and DongFeng Motors, they always have their in-house made engines to supply their self.

So I just want to know your view on the long-term strategic move to -- how to handle vertical integration by the truck makers.

That's my first question, for the long term.

My second question is according to the -- whether your company has plan to start diversification into new business such as the gear box, the truck axel or even the truck old parts business.

Business will be secure [source] for orders.

And last thing, I want to highlight a lot of interest from my side from the investors for the -- I really want to tell you there's a lot of interest from my side to follow Yuchai, yes.

Thank you so much.

Thanks for your interest, Ben.

To answer your question on the long-term OEM integration and their building in-house engines, right now, you will see that there will be this backward integration whereby truck manufacturers will have their own in-house engine.

So we have a couple of things that we go on.

One is that, as I mentioned before, the joint venture with CIMC-Chery, that's Y&C Engine Company Limited, this is something that's really good for both partners, whereby the CIMC is a container truck operator and then they have a joint venture with Chery to build trucks.

And CIMC-Chery has a joint venture with us and we have a partner whereby they are going to take care of engines, and this is really a good partnership.

So I provide the technology and the joint venture partner comes in and gives us the market.

That is really good.

Now, the other thing that you also mentioned that I heard is, like DongFeng, they are really very vertically integrated and they have their own engines and they also have joint ventures as well.

What we have done so far is that Yuchai, in terms of the market, the key thing is we have excellent customer support.

In other words, the customer provide the pull effect for our engines, which means that if they are going to buy a truck they will prefer to have a truck with a Yuchai engine.

So, in other words, if we have a better competitive advantage in terms of supporting our customers, making sure that whatever they need to require, service, in Yuchai's engine, we provide that.

So a lot of customers can do request that, okay, I buy a truck, it has got to be Yuchai's engine.

This is -- one of the key things is that we are still supplying to DongFeng, and DongFeng is one of our biggest customers as we speak.

Now, in terms of your question about diversification, what we think is that we have got an investment committee whereby we look at areas where we can diversify and we are familiar with, especially business that is adjacent to what we are doing.

So, if there is a lot of synergy and there is growth in terms of our business, we'll pursue that.

So we are very open to a lot of this diversification whereby we can leverage on the current technology and current knowledge that we have, in order to grow our business.

So, once again, thanks for your interest in Yuchai.

Okay.

My last question, I'm so sorry, (inaudible) investor was asking me how you've had to differentiate them with -- in terms of not only in the heavy truck engine but also in the medium truck.

What's the difference in terms of quality, difference in terms of the price and difference of the distribution network?

Okay.

What this is is we obviously wouldn't know about what the other competitors is really doing in the deal.

But what we can do is that we'll see in terms of the market.

What is important is that if we provide more value to our customers and we do a good job in servicing our customers, I think that we have a better competitive advantage.

Yes, price is definitely a very important factor and quality is also a very important factor.

And we have got to look at the whole package itself, in order to be able to make sure that we have a better preference from a customer standpoint, and that is the only way that we can compete.

It doesn't really matter who those competitors are.

We need to provide what the customers want and value whereby the customer can accept.

And this is really a better product compared to the other competitor product.

And at this time, we will take questions from the webcast.

Okay.

The first question here is what is the revenue of CIMC-Chery JV in first quarter 2011 and its output?

How about revenue outlook in 2011 for this JV?

Now, as I said earlier, we are starting to -- brought this JV to a level where we are starting to produce some engines for our joint venture partners.

Up to this point, we have not had very significant sales, but we will expect to see that the sales will ramp up in the later part of this year, when these facilities start to improve.

Okay.

The next question is on the dividend.

The question is I see the dividend was $1 special and $0.50 normal.

Can we expect to see an annual special dividend as long as the dividend CYD receives from its diesel engine subsidiary is at the same or higher level?

Now, we hope so.

But then again, it all depends on our cash flow needs at the point in time and what we plan to do for the company, whether or not we need to have some funds set aside for some new needs or not.

Okay.

We'll take the next question from the web.

The question says that, in 20-F, CYI disclosed the first time the marine diesel engines.

What is the gross margin and revenue contribution for marine diesel engines?

What it is is that -- maybe we can really go back to what we did.

The marine diesel engines is really part of our conscious strategy to move into the industrial engines, not only marine but also power generation, and that is going to be a much higher horse power.

So we started with a 6T, which is a 16-liter engine.

And that engine we are now going to produce another 40 liters, 53 liters, and we're going to produce another 32 liters as well.

So that is going to come on-stream to focus on marine and power generation.

And in terms of the gross margin, we are expecting that this gross margin will be in the mid-30s, or it's going to be -- if we have got a better product, that margin is going to be a lot better than what we see in our current product line.

We've got another question.

Is it correct that you sold 109,000 bus engines of the 161,000 total in 1Q?

And what's the outlook for bus market this year?

The short answer is no, we did not sell 109,000 bus engines, but bus engines is a big part of our business.

We think that it will continue to be a big part of our business.

Well, the 109,000 I believe that I mentioned in the speech is -- this is the overall bus market that's in there.

So what we have in terms of the bus market is that we are having quite good sales in terms of the large bus and medium bus.

And the 109,000 includes the large, medium and small bus.

And I do not have the breakdown here with me, but I remember that what we did is that we sold about -- I think it's about 30,000 engines in terms of the first quarter of this year.

At this time, we will take a phone question from the line of Andrew Leung of Piper Jaffray.

Hi, Andrew.

Hi.

I've got a couple more questions.

The first question is we do see some volatility in terms of the gross margin, and do we expect to see this volatility may continue like the coming fourth quarter?

Do we expect to see a sudden increase of gross margin?

That's my first question.

My second question is about the special dividend.

What's the rationale of having a special dividend?

Is it because you had a great year in 2010?

Yes.

(Multiple speakers).

I'll take the first question on the gross margin volatility.

What it is is that the gross margin, in terms of what we consciously plan to do is to improve the margin as we move forward, and that is important for us.

So if we were to look at the gross margin, and most of the time we are working on the proportion between 4-cylinders and 6-cylinders.

If say, for example, like last year, we have the 6-cylinder which is a relatively higher margin, so it was like 53%, so then the gross margin is higher.

And if the proportion of 4-cylinder is higher, then we'll have a lower gross margin overall.

But what we believe that, moving forward, as you have heard as well, we are focusing on medium, heavy-duty, and we are working on the higher horse power in terms of power generation, marine, that will bring us a higher margin.

So we hope that we can stabilize the margin, and we will get a higher margin overall.

That is what we plan to do.

So if -- we see that when we are introducing this product, as it matures, then this margin will be very consistent.

Hi.

This is Weng Ming, Andrew.

I just want to answer your second question on the dividend.

Well, 2010 is an exceptional year for us, as you can see.

We had an exceptional profit level, and as a result we were able to obtain a fair amount of dividends from our operating subsidiary.

But this is an exceptional year.

That's why we have a special dividend declared for the year.

I see.

Okay.

My final question.

Can you comment on your ability to raise price in terms of the engines?

What it is is that the -- for our product, it is going to be the market that dictates the price.

So, when there is a high demand, let's say like last year first quarter, high demand for heavy-duty engines, the pricing was good in a way that there's really demand.

And in terms of today, although we do see there's some inventory presence in there, we still maintain those pricing.

The market did not ask for this price reduction.

But moving forward, we don't know whether it will happen.

The market over in China is that as long as there's really not over supply, I think that the price will remain very stable.

And what we need to do in our operations is that we continuously want to improve in terms of our cost.

And obviously there is always this room for improvement in terms of taking ways out and reducing some of the efficiency.

And we hope that by doing that, even if the price remains stable or we don't increase the price, we can really get a better margin out of it.

So market determines the price.

So we hope that if there's high demand, we can get a little bit better in terms of our pricing.

At this time, we will take a question from the webcast.

Hi.

Now there's a question that asks us does the Company's increased borrowing indicate that cash flow at operating level is running negative, and by how much?

Okay.

Now the increase in borrowing here is just a different form of financing.

Now, rather than discounting a bill, we have opted to issue a bond last year -- this year, so that we can hold the interest rate at a lower level in a rising interest environment.

Some of you have known that in China the interest rate has gone up quite a bit in the last few months.

Okay?

Yes, the operating cash flow is negative, simply because there is an increase in the trading accounts receivable.

We received a lot of money, of payment, towards the end of 2010.

And by not discounting it and by borrowing, issuing a bond, this has helped lengthen the cash cycle.

That's why we have a negative operating cash flow.

But it should come right, I think, in the next one or two quarters, as these bills mature and the cash starts flowing.

The next question is why did receivables increase so much in Q1 versus Q4?

Now, the reason why it increased is that I think, unlike last year, last year where we have discounted some bills, this year we did not discount as much bills, because we were able to issue the short-term bond of CNY1b.

That's one of the major reasons why the receivable has increased.

They said was this an indication that there are issues and are DongFeng paying their bills, or are lengthening their payment period?

Well, this is not DongFeng not paying their bills.

So, in general, just to add to what Weng Ming Hoh has mentioned, is that if you have receivables in a low interest environment, it is good to turn receivables, which means that you bring the receivables to a bank and then you turn the receivables into cash, and since in a low interest rate environment we don't incur a lot of transaction fee in that process.

But once the interest increases, it is not so lucrative for -- it is not good for us to pay fees, higher transaction fee, to turn receivable into cash.

So that is why that we prolong those receivables and not turning them into cash.

But just to make sure that everybody understands that receivables over what we have kept are good receivables, which means that we can get a good -- turn it into cash at maturity without any problem.

Just to follow your information, a large part of the receivables are bank bills, so they're guaranteed by the bank.

We have now reached the end of our Q&A session.

I will turn the call back over to Mr.

Saw.

Thank you for all the participation in our first quarter of 2011 earnings webcast.

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

Thank you.