China Yuchai International Ltd (CYD) 0 Q0 法說會逐字稿

Ladies and gentlemen thank you for standing by.

I would now like to turn the conference over to Kevin Theiss.

Please go ahead, sir.

Thank you.

Thank you for joining us today and welcome to China Yuchai International Limited's 2011 fourth quarter and fiscal year 2011 earnings webcast.

My name is Kevin Theiss and I'm with Grayling, China Yuchai's US Investor Relations Advisor.

Joining us today are Mr.

Benny H.

Goh, President and Mr.

Kok Ho Leong, Chief Financial Officer respectively.

Before we begin, I would remind all listeners that throughout this call we may make statements that may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

The words believe, expect, anticipate, project, 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 the Company's operations, financial performance and condition.

The Company cautions that these statements by their nature involve risks and uncertainties, and actual results may differ materially depending on a variety of important factors, including those discussed in the Company's reports filed with the Securities and Exchange Commission from time to time.

The Company specifically disclaims any obligation to maintain or update the forward-looking information, whether of the nature contained in this conference call or otherwise, in the future.

Investors should note that the Company has not yet finalized its consolidated financial results for fiscal year 2011.

The financial information of the Company presented today is unaudited and may differ materially from the audited financial statements of the Company for fiscal year 2011 to be released when it's available.

Mr.

Goh will provide a brief overview and summary.

Then Mr.

Leong will review the financial results for the fourth quarter 2011 and the annual results ended December 31, 2011.

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.

Goh, please start your presentation.

Thank you Kevin.

In the beginning of 2011, there were expectations that the strong growth demonstrated in 2010 would continue into 2011.

However, as 2011 progressed, it became apparent that developments in the global economy such as the recurring sovereign debt crisis in Europe, geopolitical unrest in the Middle East and the natural disaster and nuclear crisis in Japan was going to have a substantial impact on the Chinese economy.

The effects of the Chinese government's general stimulus package was tapering off and government incentives previously extended to the automotive industry were eliminated.

As a result of the extraordinary growth in 2009 and 2010, which resulted in accelerating inflation, the Chinese government announced a switch in its monetary policy from a moderately loose stance to one of prudence to control inflation and reduce liquidity in the market.

The credit tightening measures resulted in reduced investment in infrastructure and commerce, increased financial costs for small and medium businesses and generated lower demand for commercial vehicles in both the construction and logistics sectors.

The impact of these measures were apparent in the automotive industry.

According to the China Association of Automobile Manufactures, CAAM, for the full year 2011, overall commercial vehicle sales declined by 6.3% with truck sales down 8.2%.

The much larger light-duty diesel truck market declined by 7.4% in 2011, but we saw overall bus sales in 2011 increasing by 10.1% over the previous year.

The decline in the commercial vehicle and light-duty diesel truck markets continued up to the fourth quarter of 2011.

According to CAAM, fourth quarter 2011 vehicle sales declined 11% and sales of commercial diesel vehicles were 10.7% below the same quarter in 2010.

Specifically, sales of diesel heavy-duty trucks declined by 17.7% in the fourth quarter of 2011 compared with the same period in 2010.

However, in the medium-duty truck market, where we have the dominant diesel engine market share, sales increased by 23.5% in the fourth quarter of 2011.

Overall bus sales rose by 10.8% compared with a year ago.

Diesel-powered bus sales increased by 6.9%, with every diesel bus category growing in the fourth quarter of 2011.

The expanding highway system and continued urbanization are driving the bus sales.

So clearly, there were areas of strength within the commercial vehicle market in 2011.

The outlook is guarded for the first half of 2012 as January commercial vehicle sales declined by 28.5% and heavy-duty truck sales were 32.3% lower compared with December 2011.

We sold 104,352 diesel engines during the fourth quarter of 2011 compared to 115,460 units in the same quarter last year.

This decline reflected weaker demand, partially offset by our further expansion into off-road markets, namely engines in marine, industrial and agricultural applications.

During 2011, the GYMCL Board of Directors approved the construction of facilities at the Yulin City main plant to expand annual production of marine diesel engines and power generators, to allow us to further penetrate these markets.

We are going to introduce new diesel engines with 6, 8, and 12 cylinders in late 2012 and early 2013 to offer a power range we never had before, up to 1,200 ps at 53 liters to address the needs of these markets.

We continue to be a leading provider of diesel engines to the bus market in China, and in December 2011, we rolled out our 4.6 millionth diesel engine.

Research and development expenses were further increased by 1.2% during 2011 to meet the growing challenges of changing automotive technologies which will help determine the leaders and, ultimately, the survivors in the diesel engine industry.

During 2011, we introduced our heavy-duty model YC6L-60 diesel engine, which is China's first prototype diesel engine compliant with Euro VI emission standards.

This next-generation engine continues our long history of innovation, technological leadership in China and being the first to market with new products.

In December 2011, we announced that our YC6L-40 diesel engine was awarded the 2011 Outstanding Commercial Vehicle Engine Award at the Auto Sports' Top 10 Engines award ceremony in China.

Such recognition builds the Yuchai brand reputation among OEMs and attracts new customers.

We look forward to the completion of our new Research & Development Institute in Nanning which is expected to be operational in late 2012.

The focus of the R&D Institute in Nanning will be the development of new engine products as well as meeting improved emission standards.

I will now provide a brief update of our joint ventures.

Given the current market conditions, we are cautious over the near-term prospects of the heavy-duty diesel market, but remain confident over the outlook for the longer-term.

Heavier loads still need to be moved farther and at faster speeds to support the large and growing urban population.

Construction and manufacturing industries in China need materials moved efficiently as the Chinese economy will continue to grow, albeit at a slower rate compared to previous years.

We remain committed to expanding in the more profitable heavy-duty diesel engine sector, but we are managing the additional production capacity of our traditional 6L and 6M engines developed in 2011, and the new YC6K engine for the Chery-CIMC truck joint venture.

We are progressing with our Caterpillar remanufacturing joint venture and construction on the permanent factory is nearly complete.

We expect to move from our current temporary location to the new factory and be fully functioning at the end of 2012.

Our remanufacturing operations will leverage our service network of over 2,700 locations, the largest in the industry in China.

The Geely joint venture's crankshaft line is targeted to begin trial operation in the second quarter of 2012.

And the second and third generation prototype 4D20 2-liter diesel engine for Geely's passenger vehicles is undergoing developmental tests which is expected to complete at the end of 2012.

We are committed to offering a diversified portfolio of advanced engines to meet the requirements of customers in a number of markets including the truck, bus, construction, power generation, mining, marine and agriculture industries.

While our focus remains on the truck and bus markets, we are making progress into the market for off-road applications as there is opportunity there to increase our market share.

We rewarded our shareholders for their support and loyalty in 2011 by paying out a cash dividend of $0.50 per ordinary share and a special dividend of $1.00 per ordinary share.

We believe all shareholders should share in our success and reap the benefits of their confidence in us.

We are pleased to welcome Mr.

Kok Ho Leong as our new Chief Financial Officer who joined us on January 9, 2012.

Let me now turn the call over to Kok Ho to provide more details on our financial results.

Thank you, Benny.

Dear shareholders and analysts, it is my pleasure to join China Yuchai and I look forward to working with everyone to build long-term shareholder value.

Now, let me first walk you through our fourth quarter 2011 financial results.

Our net revenue for the fourth quarter of 2011 was CNY3.7b, $594.6m, compared with CNY3.8b in the fourth quarter of 2010.

The total number of diesel engines sold by GYMCL during the fourth quarter of 2011 was 104,352 units compared with 115,460 units in the fourth quarter of 2010.

Engine sales decreased by 11,108 units or 9.6% in the fourth quarter of 2011 compared with the fourth quarter of 2010.

This was mainly due to a softening in the commercial vehicle market in 2011 and the removal of certain government incentives in the automotive industry which were received in 2010.

The decline in net sales was 1.1% or CNY40.9m as compared to the same period in 2010.

Gross profit was CNY1.0b, $164.4m, compared with CNY1.3b in the fourth quarter of 2010.

Our gross margin decreased to 27.7% in the fourth quarter of 2011 as compared with 34.8% a year ago.

In the fourth quarter of 2010, the higher gross margin was attributable to increased sales of more profitable heavy-duty engines.

In the fourth quarter of 2011, the lower gross margin was mainly due to a shift in the sales mix to more light-duty engines.

Other income was CNY41.9m, $6.7m, an increase from CNY15.3m in the fourth quarter of 2010.

This was mainly due to larger government grants for GYMCL's research and development initiatives.

Research and development expenses were CNY84.7m, $13.4m, compared with CNY78.2m in the fourth quarter of 2010, an increase of 8.3%.

As a percentage of net revenue, R&D spending was 2.3% compared with 2.1% in the fourth quarter of 2010.

Selling, general & administrative expenses were CNY356.9m, $56.6m, from CNY461.9m in the fourth quarter of 2010, a decrease of 22.7%.

SG&A expenses represented 9.5% of fourth quarter 2011 net revenue compared with 12.2% in the same quarter a year ago.

The decrease in SG&A expenses was due mainly to lower product warranty expenses, lower sales commissions payable from reduced sales volume and overall tighter cost controls.

Our operating profit declined to CNY636.4m, $101m, from CNY793.9m in the fourth quarter of 2010, mainly due to lower gross profit and higher R&D expenses partially offset by lower SG&A and higher other income.

Our operating margin was 17% compared with 21% in the fourth quarter of 2010.

Finance costs rose to CNY56m, $8.9m, from CNY32.9m in the fourth quarter of 2010.

In 2011, the issuance of short-term financing bonds at favorable interest rates helped to contain the increase in finance costs.

Our share of joint ventures was a loss of CNY44.2m, $7m, compared with a loss of CNY47.4m in the fourth quarter of 2010.

These losses were mainly due to an impairment of assets held by HL Global Enterprises Limited's joint ventures.

In the fourth quarter of 2011, total net profit attributable to China Yuchai's shareholders was CNY342.6m, $54.4m, or earnings per share of CNY9.19, $1.46, compared with CNY448.9m, or earnings per share of CNY12.05 in the fourth quarter of 2010.

Now, I will discuss the results for the fiscal year 2011.

Our net revenue for 2011 was CNY15.4b, $2.5b, compared with CNY16.2b in 2010.

The total number of diesel engines sold by GYMCL was 510,777 units, a 7.4% decline from 551,592 units sold in 2010.

In 2011, there was a softening in the commercial vehicle market compared to 2010.

With the Company's broad portfolio of diesel engines, higher sales of light-duty and off-road engines partially offset lower sales to the truck market.

Gross profit in 2011 was CNY3.4b, $546.3m, compared with CNY4b in 2010, a decrease of 14.1%.

The gross margin was 22.3% compared with 24.7% in 2010, representing a drop of 2.4%.

This was due to lower sales of heavy-duty and medium-duty engines in 2011 and higher depreciation expenses.

Other income was CNY56.7m, $9m, down from CNY87.6m in 2010.

The decrease was mainly due to higher exchange losses and lower interest income in 2011 as compared to 2010.

Research and development expenditures rose to CNY328.1m, $52.1m, in 2011 from CNY324.1m in 2010.

As a percentage of net revenue, R&D spending was 2.1% compared with 2% in 2010.

We continue to maintain our efforts in R&D to develop new products and more advanced engines with higher fuel efficiency and better emission standards.

Selling, general & administrative expenses in 2011 were CNY1.6b, $261.7m, compared with CNY1.8b in 2010, a decrease of 9.6%.

Selling, general and administrative expenses were 10.7% of net revenue compared with 11.3% in 2010.

The decrease was mainly due to lower product warranty expenses and sales commissions payable as a result of lower sales volumes in 2011.

Our operating profit in 2011 was CNY1.5b, $241.6m, compared to CNY1.9b in 2010, a decrease of CNY0.4b.

The operating profit margin was 9.9% compared with 12% in 2010, the result of a change in sales mix.

Finance costs in 2011 increased to CNY156.2m, $24.8m, from CNY130.4m in 2010 due to a tightening of monetary policy in China, resulting in higher finance costs.

During 2011, GYMCL issued short-term financing bonds amounting to CNY2.39b at interest rates lower than China's benchmark one-year lending rate at the time of the issuance of the short-term financing bond.

Our share of joint ventures was a loss of CNY81.2m, $12.9m, in 2011 compared with a loss of CNY53.9m in 2010.

The increase of losses of CNY27.3m was mainly due to impairment of assets held by HLGE's joint ventures.

Net profit attributable to China Yuchai's shareholders in 2011 was CNY791.8m, $125.7m, from CNY1.1b in 2010, a decrease of 29.1%.

Earnings per share were CNY21.25, $3.37, in 2011, down from CNY29.98 in 2010.

As of December 31, 2011, a total of 37,267,673 shares were issued and outstanding.

Now, I would like to discuss a few highlights from the balance sheet.

As at December 31, 2011, cash and cash equivalents were CNY4.12b, $654.6m, compared with CNY4.06b at the end of 2010.

Short- and long-term borrowings increased to CNY3.7b, $586.7m, from CNY625.4m at the end of December 2010.

The increase in loans was mainly due to the issuance of short-term financing bonds.

Trade and bills receivable was CNY6.7b, $1.1b, compared with CNY4.2b at the end of 2010.

The increase of CNY2.5b was mainly due to a reduction in bills discounting.

For the sake of clarity, a substantial portion of these trade and bills receivables are guaranteed by the banks.

Net inventory declined to CNY2.4b, $383.4m, from CNY2.6b in 2010 as we adjusted production in view of a softening in the commercial vehicle market.

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

Hello operator.

We are now ready for the Q&A session.

Thank you.

(Operator Instructions).

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

Please ask your question.

Hi, guys.

Thanks for taking the questions.

I was wondering first if you could comment on seasonality in gross margin.

This is the third straight year where gross margin has spiked up pretty significantly in Q4.

Just wondering if you could provide some color there.

Is there some, I guess, warranty timing issues or something that results in over-stating of cost of goods sold in Q1 through Q3 and then you true that up in Q4.

What is it that drives that yearly spike in Q4 gross margin?

Thanks, Alex.

I will ask Kok Ho to comment in detail in a while, but what happens generally is that in Q4 we have all our provisions in accounts receivables and incentives that will be finalized.

And also what happens then is that this is [normally done] in Q4 which is why it shows up every year, on the last quarter of the year.

Kok Ho, do you want to comment on that?

Yes.

This is also due to the fact that all these issues such as relating to provisions, relating to the incentives are depending on the full-year sales statistics.

In addition to that, inventory counts will be only completed at the fourth quarter and adjustments will be made in Q4.

You can see we tend to err on the side of caution, usually in the first quarter, second quarter and third quarter.

And that is the reason why you do see swing, consistently I may say, in the fourth quarter of the financial year.

Okay.

So this indicative of a one-time seasonal event as opposed to signaling some sort of structural change in gross margin going forward.

That's correct.

It's actually very much due to the way we operate.

Okay, very good.

And then I have similar questions here on the G&A line item.

Obviously that line item was very low as well in the quarter.

I don't know that you've had consistently G&A levels this low since the financial crisis.

So I was just wondering if that is also driven by some one-time items or if that's indicative of some sort of structural change that you guys have made.

I think if you look at trend of G&A, we have been consistently trying our very much -- our very best to make sure that G&A is contained and kept low.

So that is a trend that you see across the years.

However in Q4 I think there are some items that have come about, similar to gross margins.

Kok Ho?

Yes.

Among all these there are also relating to those provisions such as warranty expenses and that were depending on the total number of units sold over the year and the warranty period that you will cover.

So that's what we do, that at the close of the year we will do an overall calculation and adjustment will be made accordingly.

Yes.

And also you can see, depending on the seasonal factor, sometimes certain freight costs may be affected, as you can see in this year.

Production has slowed down and some of the stocking at the other locations has slowed down a little bit.

And we can see these translated to savings in the selling and distribution expenses.

Okay.

Okay, that's helpful.

Thank you.

I was wondering also too if you could comment, from a strategic standpoint, if you have decided to continue sticking with your original plan which was to basically stop expanding capacity in the light-duty segment or if you've revisited that and are looking at starting to ramp capacity there?

Basically our strategy of having a wide portfolio of products was very helpful in 2011.

We obviously saw certain segments that were very weak, like some were in the heavy-duty engine area.

And so this strategy of having a wide portfolio and also going into the off-road applications was very useful.

So that will continue to be the case.

And we believe that our strategy continues to be the right one in this kind of market where there are headwinds that we're encountering.

Okay.

And then, I guess my very last question and then I'll jump in queue again.

If you could give some sort of end market breakdown in the quarter, given what you were just talking about there.

You've got obviously the truck segment, bus segment, marine, any of these off-market -- or off-road segments, if you could give a breakdown in terms of percentage of sales, that would be helpful.

Thanks very much.

Okay.

Typically the mix has been very much the follows.

We have in our heavy-duty around 24% which is heavy-duty engines.

The medium-duty and also the industrial engines combined is about 32% to 33%.

And then last year our light-duty engines was 43%.

So that was the product mix that we saw.

So that reaffirms the strategy that we had last year.

Alright, thank you.

Your next question comes from the line of David Raso from ISI Group.

Please ask the question.

Hi.

Thank you for taking my question.

My question's related to the outlook you have for the industry in 2012.

Could you give us your view of retail sales, not the industry shipping trucks, truly the end sales for the year?

And, if you could, if you could break it down between how you view retail sales growth for the industry in just the commercial market, heavy, medium and light-duty?

Thank you.

David, we generally do not provide guidance on outlook.

However we are optimistic over the longer term as to the economy of China continues to expand.

The new [resource] development, the continued expansion of the highway system and also the greater urbanization will require more truck and buses.

In addition the government is promoting the public bus transportation in urban areas, so all these will lead to a lot of growth over the retail end.

That's [why] we are going to at this stage.

Would you at least maybe rank the attractiveness in '012 of heavy versus medium versus light-duty?

I'm just trying to get a feel for maybe some of the economic sensitivity if we do continue to see better inflation data in China and a more aggressive lending policy.

I'm just curious where do you think you'll begin to see it first?

Actually we see the growth in the bus sector, this is where -- in the heavy and also the medium bus area it's definitely the growth area.

And also we do see the marine and the gen-set sector as something which is very attractive going forward.

In the medium and heavy-duty trucks I think we might see a bit of a flat or even decline in this year.

Okay, that's helpful.

Thank you very much.

Thank you, David.

(Operator Instructions).

Okay.

We've got a question here which asked about the strong -- our strong engine R&D pipeline for China Yuchai, and in particular the hybrid engines that we have and what's the business outlook going forward.

Well, I'd like to comment on the fact that we do believe that the hybrid engines, although is a fairly small market today, is going to be very interesting going forward.

As of today we believe we have about 1,000 units in the market -- 1,000 systems in the market today.

And that will certainly take us going forward.

And it is a Yuchai self-development system, which is very unique.

And we do believe that this has got a lot of advantages for us.

(Operator Instructions).

We've got a question asking about diversifying HLGE.

What do you expect going forward?

The answer is that, yes, that definitely HLGE will continue to be diversified and we want this to go forward to see what we can do in terms of possibly augmenting, it if not divesting it.

And, of course, what you might want about HLGE, so you want to do it at the right time and the right value so that it can create the best, optimal price for our shareholders.

Thank you.

We do have a follow-up question from the line of David Raso.

Please ask the question.

Yes, thank you for the second question.

I'm not sure if you'll answer it, but I'm curious.

With the market for the commercial vehicles obviously being a little bit challenged, how would you characterize the pricing in the industry year over year?

I'm just trying to get a feel for maybe the initial reaction in -- maybe, about a year ago there might have been some pricing that was aggressive by some of your competitors to have that initial reaction to addressing the market slowing.

But now that the market has been weak for a little while, I'm just trying to get a feel if pricing continues to get more challenging or have we found maybe an equilibrium at a lower level?

No, David.

We still find the pricing environment very competitive.

In fact in the light-duty engine the pricing is much more than the heavy-duty, and where there are fewer competitors and there's less pricing pressure for the higher-duty margins.

The customers are always expecting the players to pass on our productivities and raw materials savings on to them.

And so given this very challenging markets, this appears to be continuing.

And we want to find ways to create value such that we can maintain our price competitiveness.

How would you describe your price versus cost and for the larger commercial medium and heavy and versus the light duty?

I'm just trying to think through with this, whenever one might project the volumes might be able to improve again year over year, I'm also curious about any change we might see for price/cost?

So just so that I have the benchmark correct, would you describe your price/cost right now as negative, neutral or still slightly positive?

I think our price/cost will probably be around neutral.

We are definitely not in the negative situation.

Thank you very much for the call.

Thanks, David.

Okay.

We've got a question they asked about our revenue and profitability outlook for 2012 and the next three years.

For 2012 again, as we have mentioned, we were optimistic but cautiously so because our -- in the first two months, as we pointed out in my discussion just now, we do see a much softer market compared to the Q1 of last year.

But looking forward, three years ahead, I think we are very optimistic because our R&D capabilities will come fully on line.

Our joint ventures will definitely be the time that we start reaping our rewards.

And so I would say from 2013 onwards the silver lining will get definitely much, much brighter.

There is a question relating to our dividend.

We have not made any announcement relating to the dividend in 2012.

What I only can say now, we will make the necessary dividend announcement at the right time to commensurate our performance that we registered in 2011.

That much I can say as no announcement has been made at this juncture.

There's also another question that relates to the tax rate of our operation.

If you look at our year-on-year basis, our tax rate remained fairly stable and in the relatively low range.

We expect it to continue to be so, the reason being that we are actually operating from the western side of China where we enjoy certain preferential tax rate.

As long as we continue to operate in that location we will continue to enjoy that.

Thank you.

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

Goh.

Well, I just need to say thank you, all of you, for participating in our fourth quarter 2011 and full year 2011 earnings webcast.

We look forward to speaking with you again and thank you.

Good-bye.