China Yuchai International Ltd (CYD) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to CYD Q2 2011 earnings call. 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 would now like to turn the conference over to your speaker today, Mr. Kevin Theiss. Sir, please go ahead.

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

My name is Kevin Theiss and I'm with Grayling, China Yuchai's US Investor Relations advisor. Joining us today are Mr. Weng Ming Hoh, Acting President and Chief Financial Officer, and Mr. Qiwei Wu, General Manager of Guangxi Yuchai Machinery Company Limited. Mr. Dixon Chen from Grayling will also join us, and assist with translation from English to Chinese and vice versa during the Q&A.

Before we begin, I'd 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 historical facts that -- 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. Hoh will provide a brief overview and summary, and then he will review the second-quarter 2011 financial results and we will conduct a question and answer session.

For the purpose of today's call, the financial results are unaudited and they will be presented in RMB and US dollars. Mr. Hoh, please start your presentation.

Thank you, Kevin.

After a lackluster first quarter in China's commercial vehicle sector, we saw market demand slowing further in the second quarter. The heavy-duty sector experienced a most noticeable year-over-year decline. Total commercial vehicles declined by 11.3%, with the decline coming mainly from truck sales. On the other hand, passenger bus sales increased by 5.2% during the second quarter of 2011.

For the first half of 2011, total automotive sales in China were up by just 3.4%, compared with the first six months of 2010. But commercial vehicle sales declined by 3.7% in the first six months of 2011 to 2.2m units, and truck sales declined by 5% to almost 2m units. In the bus market, where growth has held steady the past two years, overall passenger bus sales rose by only 9.7% in the first half of 2011.

Despite the general slowdown in China's truck market during the second quarter 2011, our main operating subsidiary, Guangxi Yuchai Machinery Company Limited, GYMCL, sold a total of 139,236 units of diesel engines, compared to 132,092 units in the same quarter last year. This increase was due to higher sales of light-duty engines, as well as engines for off-highway applications, namely engines used in marine, industrial and agriculture applications.

Our success in increasing our unit sales volume in such difficult market conditions reflects the strength of our diversified product line and our customers' confidence in our high-quality and reliable engines. We were able to quickly respond to changes in demand from different diesel engine market segments, providing an advantage over many of our domestic competitors.

This is reflected in the increased penetration in both the off-highway category and our light-duty diesel engines, which effectively offset the lower demand in other market segments in the second quarter of 2011. Our diversified strategy has enabled us to remain resilient and stay competitive in a cyclical and volatile market.

I will now provide an update on our joint venture and foundry operation. While we continue to maintain our long-term goal for expanding into the more profitable heavy-duty diesel engine sector, in view of the near-term economic conditions and overall slowdown in China's truck market, we have adjusted our outlook in that sector for the remainder of 2011. This will impact our joint venture with CIMC-Chery, where sales will be slower than initially anticipated.

We are maintaining our production capacity for this new heavy-duty engine and believe that it has strong growth potentially, when the heavy-duty engine market picks up again in the future. Likewise, we will continue with capacity expansion for our 6L and 6M heavy-duty engines, but will align our development to the market demand for heavy-duty engines. We believe heavy-duty diesel engine market will recover in the future, to meet logistical needs of moving heavier loads further at faster speed, to support the large and growing urban population and support the growing construction and manufacturing industries in China.

We are benefiting from our investment in the new foundry. Better quality control has created fewer rejected parts and the new production lines are enhancing productivity as they ramp up production, creating more economies of scale. The foundry has enabled us to have more control over the availability of our critical diesel engine blocks and heads, as well as raw material cost savings by producing better quality products with a higher acceptance rate. Our goal is to be essentially self-reliant, with the continuation of our foundry expansion.

Our remaining -- our remanufacturing joint venture with Caterpillar has commenced initial production, and the joint venture company has commenced purchasing core parts to build up this inventory in the initial stages of operation. The development of Geely joint venture prototype 4D20 2-liter diesel engine for passenger vehicles is proceeding, and we're also progressing with crankshaft manufacturing in Tiantai, Zhejiang Province.

I will now go into more detail on the financial results.

Net revenue for the second quarter of 2011 was CNY4b or $620m, which is similar to the second quarter of 2010. Despite the general slowdown in Chinese truck market, the total number of diesel engines sold by the Company's main operating subsidiary, GYMCL, during the second quarter of 2011 was 139,236 units, compared with 132,092 units in the second quarter of 2010. This was due to increased sales of light-duty engines, as well as engines for the off-highway application.

Gross profit was CNY771.1m or $119.2m, compared with CNY895.2m or $138.3m in the second quarter of 2010. The gross margin was 19.2% in the second quarter of 2011, as compared with 22.3% a year ago. The lower gross margin was mainly due to a change in product mix during the second quarter and an increase in material costs.

Other income increased to CNY21.4m or $3.3m, from CNY17.2m or $2.7m in the second quarter of 2010, mainly due to currency exchange gains.

Research and development expenses were CNY82m or $12.7m, compared with CNY82.9m or $12.8m in the second quarter of 2010. As a percentage of net revenue, R&D spending was 2. -- 2% in the second quarter of 2011, compared with 2.1% in the same quarter last year.

Selling, general and administrative expenses, SG&A, in the second quarter of 2011 were CNY420.2m or $64.9m, a reduction of CNY78.1m from CNY498.3m or $77m in the second quarter of 2010. These SG&A expenses represented 10.5% of second-quarter 2011 net revenue, compared with 12.4% for the second quarter of 2010. The decreased expenses resulted mainly from warranty and freight charges and a write-back of doubtful debts provision.

Operating profit declined to CNY290.2m or $44.8m, from CNY331.1m or $51.2m in the second quarter of 2010, mainly due to lower gross profit. The operating margin was 7.2% in the second quarter of 2011, compared with 8.2% in the second quarter of 2010.

In the second quarter of 2011, net profit attributable to China Yuchai's shareholders was CNY155.1m or $24m, or earnings per share of CNY4.16 or $0.64, compared with CNY179.1m or $27.7m, or earnings per share of CNY4.81 or $0.74 in the second quarter of 2010.

For the six months ended June 30, 2011, net revenues were CNY8.2b or $1.3b, compared with CNY9.1b or $1.4b in the first six months of 2010. The gross profit was CNY1.7b or $265m, representing a gross margin of 20.8%.

Operating profit was CNY718.7m or $111.1m. Selling, general and administrative expenses declined 12.8% from CNY1b or $155.5m in the first six months of 2010, to CNY877.3m or $135.6m in the six months ended June 30, 2011.

Net profit attributable to China Yuchai's shareholders for the six months ended June 30, 2011 was CNY385.6m or $59.6m, or earnings per share of CNY10.35 or $1.60, versus CNY450.9m or $69.7m, or earnings per share of CNY12.10 or $1.87 in the same period in 2010.

As of June 30, 2011, the Company had cash and cash equivalents of CNY2.9b or $452.2m, compared with total short-term and long-term interest-bearing loans and borrowings of CNY1.4b or $221.3m. Total equity attributable to China Yuchai's shareholders was CNY5.1b or $789.1m on June 30, 2011. The total shares issued and outstanding as of June 30, 2011 were 37,267,673 shares.

Given the PRC government's current anti-inflationary policies and measures, interest rates have continued to rise and are expected to increase further. The Group continues to explore financing options such as the issuance of short-term financing bonds to improve our profitability, financial flexibility and to meet our working capital requirements.

This change in approach is evident in the increase in bills receivable since December 30, 2010. Subsequently, the second-quarter end, as part of this new approach, GYMCL issued a second tranche of its RMB-denominated unsecured short-term financing bond, amounting to CNY700m, on July 22, 2011. The second tranche of the bonds will mature on July 22, 2012.

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

(Operator Instructions). The first question comes from David Raso from ISI Group. Please ask your question.

Yes. I'm sorry if I missed the exact detail at the beginning of the call, but the decision around the larger engines in the CIMC-Chery joint venture, can you go over that in a little more detail? And what were the key factors that drove that decision?

(Interpreted). Our plan to set up a joint venture with Chery-CIMC was basically based upon the market condition. We see the heavy-duty market players are all developing their heavy-duty engines in-house. We are looking for a good platform to build our entrance to the market. Yuchai, through this CIMC and Chery joint venture, we're able to build our brand name. And we also see the opportunity, when CIMC is branching out, to increase their coverage in the high-end logistic market. So we believe this is our opportunity to build our heavy-duty engine with a major player in that space.

And if I heard correctly, and again I apologize if I heard it incorrectly, but has there been some decision to back away from that higher-end market, temporarily? I just want to make sure I heard that properly.

Hello, David. This is Weng Ming here. There's no decision to back away from the heavy-duty engine side. We believe that heavy-duty engines is probably our future in this Company. But because of this -- for this particular year, there has been a deterioration in the heavy-duty engine market. So it is just a temporary effect, but it will not have a long-term impact on us.

And my second and last question about the gross margins obviously were down and your units were up. How should we think about -- with those comments about the heavy-duty market, including some of the heavy off-highway, how should we think about the gross margins over the next couple of quarters? Even if we can continue to shift more units, year over year, is this 19%, 20% range, given the likely mix the next couple of quarters, how we should be thinking about gross margins, that type of range, 19% to 20%?

Now, compared to last year, there has been a shift in the market this year, and we are seeing the growth this year in the off-highway segment of the market. We believe that towards the end of last year there has been quite a fair bit of heavy-duty engines being built and delivered to the market, and hence it has become part of of the channel.

So, for the next two quarters, we believe the trend will continue as it is, as we see it up to now, for the first six months, and to continue in the next two quarters. That's our view.

Thank you very much.

Thank you.

(Operator Instructions). The next question comes from Alex Potter from Piper Jaffray. Please ask your question.

Hi, guys. Thanks for taking my question. I was wondering if you're seeing any -- you'd mentioned in the press release that you are seeing some cost pressure as well, leading to the decline in gross margin. Are you having success in passing those costs on, through increased prices, to your customers? Or if not, what's preventing you from doing that? Thanks.

(Interpreted). To pass on our cost pressure to our end customer -- to our OEM customer is not possible, due to a few reasons. One is, in Chinese market now we have an issue of overcapacity, and the supply is clearly over -- more than the sales. And also, as we know, the inflation is ongoing, and a lot of distributors are working and -- a lot of distributors and OEMs are working towards clearing their inventory. So we are seeing a competitive market. It's difficult for us to pass on those cost pressures to our customers.

Understood. I assume that the increase in accounts receivable in the quarter was also to some extent the result of this sort of market environment. I was just wondering if you could give some commentary on that. It looks like your cash per share dropped pretty significantly, in line with a pretty sizeable increase in receivables. Do you expect those receivables to come down? What is your outlook for the receivables?

Hi, Alex. It's Weng Ming here. How are you? Yes, there is a change in approach in terms of managing our cash flow recently, because of the high interest rates. As you know, interest rates have gone up very significantly in China, due to inflation. And also, there is a lot of tightening of liquidity as well.

So what we have done in the last few months is we have issued short-term bonds amounting to about CNY1.7b. I think you probably have read that in our announcement. As a result, we have reduced the discounting of our bank bills -- of our bills receivable. That's why you see a significant increase in the accounts receivable in our books.

Now, we expect the receivables to continue to stay high until towards the end of the year, when they start to mature. Now, what we are doing is rather than discounting the receivables, or the bills, we are now holding them to maturity, and hence that way we should be able to save some financing costs.

Okay. All right. I understand. So this is more a result of your internal working capital management, as opposed to any specific pressure you are getting from customers?

That's correct. And within our sales contracts, we would expect to receive payment from all our customers by the end of the year. So you will see -- you will probably see a reduction in the accounts receivables by the end of the year, but the bills receivable will remain high because it takes a little while for the bills to mature and for us to cash them out.

Okay.

Okay. Yes. That makes sense. Okay. I was wondering if you could elaborate a little bit more on your outlook for heavy-duty. It sounds like -- obviously, as you were saying, there are a number of factors that play. There's overcapacity. There's still a buildup of inventory in the heavy-duty channel. And it sounds like you expect for the next couple of quarters this to persist. Do you view this as an issue of too much unsold inventory of trucks, or do you view this as -- once that inventory goes away, do you believe that the market is able to continue growing, or do you think there is idle capacity of heavy trucks out on the road that needs to be absorbed before the heavy-duty truck market can continue growing?

(Interpreted). We see the visibility is very low. There are many symptoms we are seeing. One is in 2010 we see the market had overheating sales in heavy-duty truck, and which carry over to 2011. We see a very difficult comparison. And month to month, each month, we see the sales of heavy-duty are going down, and we cannot say we have reached the bottom yet. The rough estimate of the inventory -- heavy-duty inventory -- heavy-duty truck inventory in the market is no less than 200,000 units. And right now, most of the data we are seeing is still OEM to distributor sales data. We don't have visibility in distributor to end customer sales data yet.

Due to all these reasons, the price discount -- the OEM continue to give price discount, to promote their sales of heavy-duty engines. And there are many factors contributive to these symptoms. Basically, one is due to the credit tightening policy by the Chinese Government. We see a slowdown in fixed asset investment in many big projects, including real estate market slowdown. And secondly, the gasoline price -- fuel price has gone up, which gives a lot of pressure to the logistic company. We see their profit -- logistic companies' profit margin erosion.

Then lastly is the regulation. Government is coming out new laws to regulate the logistic industry, to increase the safety measure. All these are contributing a general slowdown of heavy-duty truck market.

Thank you. The next question comes from Sandy Mehta from Value Investment. Please ask your question.

Thank you. Part of my question was just answered there, but when we met with you all in Yulin back in June, one of the things that you guys were monitoring was inflation in China, because that obviously impacted the government's posture on monetary tightening or easing. And with the weakened trends in the market, oil prices having come off, do you expect that that might lead to the government easing up a little bit in terms of interest rates, and that might lead to a better outlook for sales in the second half of the year?

Can you repeat your question? The volume was really low. Sorry, Sandy.

Okay. What I'm saying is that when we met in Yulin back in June, you said that one of the leading indicators you would look for was inflation trends in China. And given that global stock markets have been off and oil prices have come off, if inflation has peaked in China, do you expect that the government might ease up on some of their monetary controls, monetary tightening? Do you think that might lead to a better environment for truck sales in the second half of the year?

Hi, Sandy. This is Weng Ming. It's a very difficult question. It's very difficult for us to predict what the government is going to do, in view of the inflation we probably have now and how successful they are in tackling the inflation. So we don't know which way the interest rate will go. Presumably, if the government is successful in tackling inflation and if the interest rate is able to be reduced significantly, I would guess that it would have some positive impact on our products and on the engine sales.

Okay. And in terms of the net cash position of the Company, so you have reported today a net cash of about $6 per share, and in the December it was $12 per share. And then you commented earlier that you have seen an increase in trade bills and receivables, so that has jumped quite a bit because of your policy in terms of discounting your bills. How do we view what is a normal level of net cash for the Company? So, if I were to look out to December when some of these bills, like you mentioned earlier, would mature, then what would you say would be your net cash position at that point?

How do we view in terms of the seasonality, given that the cash was significantly higher in December last year? And should we expect another spike up in December cash versus today's cash, due to some of these bills maturing?

Okay, Sandy. Now, at the end of last year, we have discounted quite a bit of cash and also there's quite a fair bit of money where according to the contract most of our funds will come back -- come in towards the end of the year.

Now, as we have discussed earlier before, when you were here, we do have -- we do need quite a fair bit of cash to function as a working capital requirement. For example, if you look at our cost of sales, it's in the vicinity of about CNY13b, CNY14b a year. So that works out at over CNY1b a month of cash payout that we will require. So, if you look on that basis, if we have CNY2b to CNY3b of cash, that's enough just for about two months of payment of bills.

So, going forward, we won't change our approach in financing, to reduce our finance costs, but we will still require about the same level of cash, going forward. It may reduce somewhat during the low season, like the third quarter, but it will pick up again towards the high season, as we build up -- start to build up inventory for the high season.

Also, there is a use of cash of dividend.

Yes. And the payment for dividend as well, of course.

Thank you. The next question comes from Mark Hake from Hake Investment. Please ask your question.

Hello.

Can you hear me okay? I'm asking about operating profits and sales have been falling. What are you going to do about SG&A? Are you going to lay off people and try to increase your operating profitability?

Hi. This is Weng Ming. Now, if you look at our expenses as a percentage of sales, it's already going down. It already is really lower this year -- much lower this year compared to last year, for the same period. So we are taking steps and measures to control our expenses, in view of the lower profits. But whether or not we are going to lay off people, at the moment there's no plans because the cost of the labor costs really for us is not a big item here yet. And also, our labor cost is tied to the production -- to the number of units produced during the year as well. So, in a way, it's a variable.

And when are your joint ventures going to become profitable? Give me an idea when they -- when I can look at that line and say okay, yes, it's getting close to profitability?

(Interpreted). Firstly is the Chery-CIMC joint venture. As you know, this is the joint venture to supply Chery-CIMC high-end trucks. As you know, for a new truck to enter the market, it takes time. It does take time to pick up market share as well. And we expect the ramp-up will most likely take place in the second half of 2012. But we are bullish for this venture. We believe that's going to be our growth driver.

Secondly is the Geely joint venture. As you know, we are developing a diesel car engine for the diesel Geely new line product. It's a co-development with AVL. It's a 2.0 liter diesel engine. And however, it takes time -- also takes time for diesel car to develop a market in China. So that gives us a certain level of uncertainty and we believe that will take some time. Most likely it will be later than Chery-CIMC joint venture's contribution.

Thank you. The next question comes from David Raso, ISI Group. Please ask your question.

Yes. Thank you for taking my follow-up. Really three questions, if you don't mind. First, if we can get a little more detail on the off-highway markets, how you're expecting the second half of this year on a year-over-year growth rate for construction equipment and agriculture equipment and so forth.

Secondly, on policy in China, when it comes to the emission standard that's coming up in some cities or anything else maybe you're hearing on policy that might influence the truck market the next couple of quarters, some policy response with obviously the last couple of weeks people less concerned about maybe inflation and starting to think about the opposite side in a couple of quarters.

And the third question, the heavy-truck market. You mentioned more competition, given the inventory issue. Can you elaborate a little bit more on that? Is it some particular competitors trying to hold on to some key market shares, or just if you can just elaborate a little bit? Is it the engine competitors or is it the truck makers themselves with that pricing that's pushing back on the price you can get to the truck maker? Thank you.

(Interpreted). Answer to your first question on off-highway market. Yes, even we are seeing the truck market experiencing a slowdown in 2011 first half, but we do see the construction equipment, agriculture equipment posted strong growth. However, we see that sector is also slowing. Towards the end of the year, we think on annual basis year-over-year growth probably will achieve around 10%. And we believe, as market leader in that space, we may overtake general market growth trend, so we should be a bit higher than that growth -- general market growth trend, higher than 10%.

In terms of an answer to your second question in terms of government policy in the second half, unfortunately, we don't have visibility. As you know, in the past two years we see government actually initiated a number of stimulus packages which we believe is due for adjustment. And in today's business environment or global economic environment, I think government probably will be more careful in terms of using those tools. It's been overheating in 2010, and that's contributing to a very rosy year followed by a slowdown in 2011. Last year's growth was not normal.

In answer to your inventory question, the OEM basically are reducing the production. Of course, in order to sell their inventory, they have to cut the price and increase promotion. And lastly, they probably need to provide more service -- aftersales service to please the customers.

Thank you. The next question comes from Gerwin Ho from Citigroup. Please ask your question.

Hi. Good morning. I will pose my question in Chinese. (Spoken in Chinese).

So Gerwin has two questions. First question is he wants -- again, he wants to know, general heavy-duty market 2011, what's your view on the growth and condition.

And the second question, also on the EPA. We see the 2012 January 1 that the government already appointed that day to release the Euro 4 standard. There are some market rumors talking about the potential delay. What's your view on that?

(Interpreted). The short answer is it's impossible to see a growth for 2011 in the heavy-duty sector. In July month alone, the sales for heavy-duty engines was 47,000 units. In -- from January to July, we see a 9.5% year-over-year decline for the trucks. And on the semi-trailer, we see an even more severe decline, 34%.

So, there are many projections by industry experts. There are talks 15% to 20%. There was someone more pessimistic. They are even projecting 25% to 30% decline for the heavy-duty sector. Even the best performer in Chinese heavy-duty sector, like Dongfeng Motors, first half of the year they outperformed their competitors, but when they get into month of July they also see a negative growth. FAW even declined further. Jiefang brand under FAW experienced a large decline in sales.

Second question -- answer to your second question on the EPA Euro 4 standard, EPA has -- the Chinese state EPA has not changed their timetable, at least publicly. They have not announced a change on January 1, 2012 timetable. And OEMs are -- and also the engine makers are working closely together, focusing on 2.5 tonne -- 3.5 tonne above trucks Euro 4 engine development implementation. So we are all working together. We haven't seen a slowdown, at least from the EPA side.

Thank you. The next question comes from Jerry Revich from Goldman Sachs. Please ask your question.

Good evening. It's Jerry Revich here. Thank you very much for your extended time here. Can you give us an update on the national 4 standards, in terms of the extent of cost increases you expect on your products and your ability to cover those cost increases with pricing, considering the pricing pressure that you commented on earlier in the call? Thank you.

(Interpreted). As you know, China Yuchai is a leader in the emission category. We are very well prepared for the Euro 4 implementation. Even as early as three years ago, we have already developed and sold Euro 4 engine in China. And we believe the market, especially for the bus sector, is ready to roll into Euro 4. However, we believe the truck is probably not quite ready yet, and that's why OEM are working closely with engine producers towards their products prepared for the Euro 4 rollout -- national 4 rollout.

As you said, we do see some price pressure in the truck market going to the Euro 4. However, the heavy-duty sector is a lot better. But the pressure is mostly in the light-duty, especially the initial margin -- OEM margin is quite low. Also, as a lot of light-duty trucks are -- when they install the Euro 4 engine, we see a transition from non-electric injection to electric injection, fuel injection. And secondly, we see the after-treatment area needs to get upgrade.

So due to those technology upgrades, we'll see there will be some pricing pressure. And so we are working closely with our production team and R&D team in our cost management, especially in our SCR engines. We are working on a solution to lower the cost and to help our downstream customers -- OEM customers.

Thank you. The next question comes from Wang Ping, Bank of America. Please ask your question.

Thank you, everyone. I think my question will be in Chinese and [wait for the] translation. (Spoken in Chinese).

My question is on the policy changing, because recently you have [on load empty] overload policy in China, so which means in a sense amount of cargo. It might not only be one truck; maybe in the future it's two or three trucks. And my question for management is whether your policy or your great inbuilt demand, or whether this policy can be implemented strictly. Thank you so much.

(Interpreted). To answer your question, since July 1 the new legislation -- highway safety legislation has been implemented, mainly targeting overloading situation conditions in China. And we believe this legislation will be strictly implemented. And in response to such a regulation, OEM are working closely to develop the new product, mostly focusing on lighter truck weight that will help to solve this overloading situation. And so, for us as an engine maker, we are also working on our product to work closely with OEM to fit into their new models. And so everybody is working towards achieve the best quality to price ratio for the best value, and we believe we have some advantage in that space.

We will take a couple of questions from the web audience here. One of the questions is Yuchai's most important customer, Dongfeng's commercial vehicle sales particularly, Dongfeng's heavy-duty truck have done relatively well this year. Please discuss Yuchai's relationship with Dongfeng, particularly for Dongfeng's popular heavy-duty trucks such as [Daishun], Chenglon, Balong.

(Interpreted). As you know, Dongfeng Motors in 2011 first half already outperformed the market. Daishun, as you mentioned, this particular model has increased their sales, year over year. With their growth, we are expanding in that particular model as well. We now have more than 50% of Daishun supplied. And Daishun is a construction equipment and Yuchai has been instrumental in the construction equipment sector for Dongfeng Motors. And secondly, the Balong model you mentioned, in 2010 they have done very well. But this year, due to the market condition, they also came down and so you can expect our sales in Balong accordingly will decline.

Overall, Yuchai has a very strong relationship with Dongfeng Motors, and this relationship is at a very strategic level.

We have another question from the audience. The question is about R&D capability. Please tell us the Yuchai Machinery R&D capabilities. What is in the R&D pipeline? When the new products will contribute to the revenue and earnings via Euro 4 engines, hybrid engines, gas engines and marine engines?

(Interpreted). We believe we have the strongest R&D team in the Chinese diesel engine market. We have a -- we not only have the development -- product development capability; we also have a very strong testing capacity. And we -- in the past many years, we've been working closely with a lot of engine developers in Europe and US, including FAW in Germany, Ricardo in United Kingdom, AVL in Austria, South West Research Institute in US, and we do have a very strong product pipeline when we are working with those guys.

In the past few years, we have made a number of technology breakthroughs, especially in the area of developing nat gas engine, hybrid engine, petroleum PV engine and marine engine. On the heavy-duty sector, we are co-developing -- we have co-developed YC6K model that features 12 to 13 liter engine. We worked with AVL. And also we have the 6T, which has a 16 liter power. 6C model has over 40 liter and AC 56 liter, all the way to 80 liter engine. We have a wide range of products. And also, on the passenger vehicle side, we have 1.4 liter, 2.0 liter and 2.5 liter diesel engines.

Now, on the nat gas sector, we are focusing on LNG and CNG fuel and nat gas engine. And as you know, in recent years there are major exploration discovery on the nat gas in China, and also there are major imports of nat gas. So we believe this sector is going to take off and we do have good products getting ready for those markets. Even to further talk about nat gas application, even in the trailer market, even in the large marine application you see utilization of nat gas engines, so we believe that will be a good growth opportunity for us.

We believe we have produced the best R&D result, especially in the R&D sector. So these are hybrids for petroleum and diesel with electric or nat gas with electric. So we do have a number of products already testing and sold.

Thank you. We have now reached the end of our Q&A session. I will now turn the call back to Mr. Hoh.

Thank you to all for participating in our second-quarter 2011 earnings webcast. We look forward to speaking with you again, and I wish you all a good day. Thank you.

Portions of this transcript that are noted interpreted were interpreted on the conference call by an Interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.