China Yuchai International Ltd (CYD) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to China Yuchai International Limited Second Quarter 2017 Earnings Conference Call.

(Operator Instructions)

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

Please go ahead, sir.

Thank you for joining us today, and welcome to China Yuchai International Limited's Second Quarter 2017 Conference Call and Webcast.

Joining us today are Mr. Weng Ming Hoh and Dr. Thomas Phung, President and CFO of CYI, respectively.

In addition, we also have in attendance Mr. Kelvin Lai, VP of Operations of CYI.

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, confident that, continued to, predict, 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, including, but not limited to, statements concerning the company's operations, financial performance and condition are based on current expectations, beliefs and assumptions, which are subject to change at any time.

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, such as government and stock exchange regulations; competition; political, economic and social conditions around the world and in China, including those discussed in the company's Form 20-Fs under the headings Risk Factors, Results of Operations and Business Overview and other reports filed with the Securities and Exchange Commission from time to time.

All forward-looking statements are applicable only as of the date it is made, and the company specifically disclaims any obligation to maintain or update the forward-looking information, whether of the nature contained in the release made during today's call or otherwise in the future.

Mr. Hoh will provide a brief overview and summary, and then Dr. Phung will review the financial results for the second quarter and 6 months ended June 30, 2017.

Thereafter, we will conduct a question-and-answer session.

For the purposes of today's call, financial results for the second quarter and 6 months ended June 30, 2017, are unaudited, and they will be presented in RMB and U.S. dollars.

All of the financial information presented is reported using International Financial Reporting Standards, as issued by the International Accounting Standards Board.

Mr. Hoh, you may begin your prepared remarks.

Thank you, Kevin.

For the second quarter 2017, our net revenue increased by 7 -- 11.7% to RMB 4.1 billion or USD 604.2 million, with both higher unit sales and average selling price, ASP.

Our ASP increase as we sold more higher priced, which is due to a better sales mix in the second quarter of 2017 compared with last year's second quarter.

We achieved double-digit growth in both the heavy-duty truck and heavy-duty bus segment.

Net earnings attributable to China Yuchai's shareholders rose 6.3% in second quarter 2017.

According to data reported by China Association of Automobile Manufacturers, CAAM, in the second quarter of 2017, sales of commercial vehicles, excluding gasoline-powered and electric vehicles, increased by 18.1% year-over-year.

Industry truck sales continued to expand, with sales up 20.3%, led by 55.1% increase in heavy-duty truck.

Light- and medium-duty trucks achieved more modest growth rates of 3.1% and 7.5%, respectively.

Our bus sales rebounded with 3% higher sales in the second quarter of 2017 as heavy- and light-duty bus sales grew 5.8% and 9%, respectively, partially offsetting a 26.2% reduction in medium-duty bus sales.

In the first half of 2017, the total number of engines sold by Guangxi Yuchai Machinery Company Limited, GYMCL, rose 18% to 210,648 units, compared with 178,562 units in the same period of 2016.

The increase was primarily due to robust growth in the heavy- and light-duty trucks segments and slow recovery of the bus market, led by higher sales of heavy-duty bus engines.

GYMCL achieved a strong increase in truck engine sales in the second quarter of 2017.

Demand for heavy-duty trucks grew due to ongoing strict enforcement of China's anti-overloading policy, which continued to be the catalyst for higher truck sales.

China's GDP growth of 6.9% and fixed asset investments in the second quarter 2017 also contributed to the growth in the demand for truck.

In the second quarter of 2017, our engine sales in the diversified off-road market were in consequence in the different sectors, with higher sales to the industrial and gen set applications, partially offset by lower sales to marine and agriculture segments.

Despite lower sales in the second quarter of 2017, we believe we have strengthened our market position in agriculture segment with our portfolio of bus engines strategy, partnership with Zoomlion Heavy Industry Science and Technology Co., Limited, the leading manufacturer of high-tech equipment for engineering and agriculture industries, presented opportunities to accelerate our penetration of this market when it become operational.

Sales of natural gas engines grew [strongly] in the second quarter and first half of 2017 on a year-over-year basis.

Our natural gas engines are cost efficient and reduce vehicle emissions, making them attractive to the heavy- and medium-duty segments of China's commercial vehicle market.

We continue to supply high-quality bus engines to international markets in the second quarter of 2017.

Over 200 of our engines were sold in new buses for Lahore's Bus Rapid Transit system.

Lahore is Pakistan's second-largest city.

Another 100 of our bus engines will be installed in buses to be utilized in the City of Multan, Pakistan.

We further won an order to supply 600 YC6MK engines to equip the Ankai A9 high-end buses for the Saudi Arabian market.

In July of 2017, we announced 3 new international orders for our bus engines.

We received our first order from the Cambodian bus market, 98 Yutong buses powered by GYMCL's YC6G240-30 and YC4G180-30 engines were exported to Cambodia's capital, Phnom Penh.

These new buses support the Cambodian government's new public transportation plan for the capital city.

Secondly, we won an order for 100 hybrid engines for Liuzhou Hengda Bus Co., which operates Liuzhou's public transportation system.

The order is for 85 new buses from Xiamen King Long and 15 buses from Zhongtong Bus, all powered by GYMCL's YC6J200-50 electric -- diesel-electric hybrid engine.

GYMCL is the exclusive engine supplier for these orders.

Lastly, 76 diesel hybrid -- electric hybrid buses powered by GYMCL's YC6A270-50 engines was delivered to Siweimei Motor Transport Co.

in Shenzhen City.

This is the second large order for Siweimei since its purchase of 110 units at the end of 2016.

The diesel-electric hybrid system used in the buses consists of GYMCL's YC6A270-50 engine, a 7.26 liter in diesel engine with a plug-in charging battery.

Our gross profit in the second quarter of 2017 increased 5.9% to RMB 752.7 million or USD 111.1 million with a gross margin of 18.4% compared with 19.4% a year ago.

The lower gross margin was mainly due to higher material and labor costs during the quarter.

Our operating profit was essentially flat in the second quarter 2017 due to a 29.8% rise in selling, general and administrative, SG&A, expenses, offset by 19.1% decline in research and development costs.

The increased warranty expenses, staff wages, freight charges and unit sales resulted in higher SG&A expenses.

One of our key strategies is to be a leader in introducing engines that comply with future emission standards.

We continue to develop our vast technology to expand our platform to meet China's next-generation National IV and National VI vehicle emission standards.

By being among the first to market engine-compliant, high-emission standards, we can capture opportunities in the market, gain more experience with these technologies and better satisfy our customer's requirements.

We remain committed to improving the performance, manufacturing and quality of our engine.

Our balance sheet remains strong.

Cash and bank balances were RMB 4.9 billion or USD 727.4 million, compared with the RMB 4.1 billion at the end of 2016.

Our inventory remain under control of -- at RMB 1.7 billion or USD 247.4 million, similar to our level at December 31, 2016, despite higher sales.

We generated positive cash flow from operations during the quarter.

Generating positive cash flow from operations, enhancing our return on invested capital and developing financial resources to further build operations are critical goals for the future success of the company.

In July 2017, we paid an aggregate dividend of approximately USD 3.7 million in cash and issued 99,790 new shares based on shareholder's election.

We continue to believe that dividends are the preferred method to reward shareholders for their investment in and loyalty to China Yuchai.

Finally, let me provide an update on our subsidiary, HL Global Enterprises Limited, HLGE.

(inaudible) has a shareholder interest in an investment holding company with interest in hotel properties in China proposed disposal.

On 31 May 2017, HLGE entered into a conditional sale and purchase agreement to be a wholly owned subsidiary of Jingrui Holdings Limited, an entity listed on the stock exchange of Hong Kong and engaged in the core business of residential property development in the People's Republic of China.

The consideration for the proposed disposal is RMB 550 million, payable in tranches and subject to adjustments.

The completion of the proposed disposal is conditional upon the satisfaction of certain conditions precedent on or before October 31, 2017.

HLGE intents to utilize a portion of the proceeds from the proposed disposal to repay current outstanding loan of SGD 68 million extended to it by China Yuchai.

The financial effect of this proposed disposal of the company have not been finalized and will be announced once it is available.

With that, I would now like to turn the call over to Dr. Thomas Phung, our Chief Financial Officer, who will provide more details on the financial results.

Thank you, Weng Ming.

Now let me review our second quarter results.

Net revenue for the second quarter of 2017 increased by 11.7% to RMB 4.1 billion, USD 604.2 million, compared to RMB 3.7 billion in the second quarter of 2016.

The total number of engines sold by GYMCL during the second quarter of 2017 was 90,638 units compared with 87,791 units in the same quarter last year, an increase of 3.2%.

The increase was mainly due to increased truck sales.

The company's sales in the power generation application and the industry and equipment application increased as compared with the same quarter last year.

The company growth in the net revenue was due to a higher average selling price result from FX sales mix and an increase in the unit sales.

According to the data reported by the China Association of Automotive Manufacturers, CAAM, excluding sales of gasoline-powered and electric vehicle, in the second quarter of 2017 sales of buses increased by 3.0%, while truck sales increased by 20.3%.

According to the -- according to CAAM, in the second quarter of 2017 sales of commercial vehicle, excluding sales of gasoline-powered and electric vehicle, increased by 18.1% compared to same quarter last year.

Gross profit increased by 5.9% to RMB 752.7 million, USD 111.1 million, compared with RMB 710.4 million in the second quarter of 2016.

Gross margin was 18.4% compared with 19.4% a year ago.

The decrease was mainly attributable to higher material costs and labor costs during the quarter.

Other operating income was RMB 48.6 billion, USD 7.2 million, compared with RMB 16.1 million in the second quarter of 2016.

The increase was mainly due to higher interest income from bank deposits and higher foreign exchange gains in the second quarter of 2017 compared to the same quarter last year.

Research and development, R&D, expenses were RMB 113.0 million, USD 16.7 million, compared with RMB 139.6 million in the second quarter of 2016.

In the second quarter of last year, the company incurred higher R&D expenses on engine products compliant with China National V emission standards for trucks and bus segments and its expansion of Tier 3 off-road product offerings.

The company also continued with its initiative to improve engine performance and quality.

As a percentage of revenue, R&D expenses decreased to 2.8% compared with 3.8% in the second quarter of 2016.

Selling, general and administrative, SG&A, expenses, increased by 29.8% to RMB 446.6 million, USD 65.9 million, from RMB 343.9 million in the second quarter of 2016.

The increase primarily resulted from higher warranty expenses, staff costs, freight charges arising from the enforcement of China's anti-overloading policy and higher unit sales in the second quarter of 2017.

SG&A expenses represent 10.9% of revenue compared with 9.4% in the same quarter last year.

Operating profit decreased by 0.6% to RMB 241.6 million, USD 35.7 million, from RMB 243.0 million in the second quarter of 2016.

The operating margin was RMB 5 -- sorry, the operating margin was 5.9% compared with 6.6% in the second quarter of 2016.

Finance costs decreased by 20.9% to RMB 16.5 million, USD 2.4 million, from RMB 20.9 million in the second quarter of 2016.

Lower finance costs mainly resulted from a decrease in borrowings.

For the quarter ended June 30, 2017, total net profit attributable to China Yuchai's shareholders was RMB 131.5 million, USD 19.4 million, or earnings per share of RMB 3.23, USD 0.48, compared with RMB 123.7 million or earnings per share of RMB 3.15 in the same quarter in 2016.

Earnings per share in the second quarter of 2017 was based on a weighted average of 40,712,100 shares compared with 39,329,412 shares in the same period in 2016.

In July 2017, a total of 99,790 new shares were issued to shareholders who elected to receive shares in lieu of a dividend in cash.

Now I will review the 6-month result.

Net revenue increased by RMB 1.6 billion or 22.9% to RMB 8.7 billion, USD 1.3 billion, compared with the RMB 7.0 billion in the same period last year.

The total number of engines sold by GYMCL in the first half of 2017 was 210,648 units compared with 178,562 units in the same period in 2016, an increase of 18.0%.

The increase was due to solid growth in the truck segment and off-road segment.

Gross profit was RMB 1.7 billion, USD 247.0 million, compared with RMB 1.3 billion in the same period last year.

Gross profit margin increased to 19.3% as compared with 18.7% a year ago.

These increases was mainly attributable to higher unit sales and a higher average unit selling price.

Other operating income was RMB 88.2 million, USD 13.0 million, an increase of RMB 48.8 million from RMB 39.4 million in the same period last year.

This increase was mainly due to higher interest income from bank deposits and gains on disposal of property, plant and equipment in the first 6 months of 2017.

In the same period last year, the company incurred losses on disposal of property, plant and equipment.

R&D expenses were RMB 237.6 million, USD 35.1 million, compared with RMB 239.2 million in the same period in 2016.

The company continued with its initiatives to improve engine performance and quality.

As a percentage of revenue, R&D spending was 2.7% in the first 6 months of 2017 compared with 3.4% in the same period last year.

SG&A expenses increased to RMB 851.5 million, USD 125.7 million, from RMB 688.1 million in the same period last year.

The increase was mainly due to higher warranty expenses, staff costs, freight charges arising from the enforcement of China's anti-overloading policy and higher unit sales in the first 6 months of 2017 as compared with the same period last year.

SG&A expenses represented 9.8% of the net revenue for both 2017 and 2016.

Operating profit increased to RMB 672.5 million, USD 99.3 million, from RMB 426.8 million in the same period in 2016.

The increase was mainly due to higher unit sales.

The operating margin was 7.8% compared with 6.1% in the same period last year.

Finance costs decreased to RMB 43.3 million, USD 6.4 million, from RMB 49.9 million in the same period last year, a decrease of RMB 6.6 million or 13.2%.

Lower finance costs mainly resulted from a decrease in borrowings.

For the 6 months ended June 30, 2017, the total net profit attributable to China Yuchai's shareholders was RMB 380.5 million, USD 56.2 million, or earnings per share of RMB 9.35, USD 1.38, compared with RMB 212.9 million or earnings per share of RMB 5.42 in the same period last year.

Earnings per share were based on a weighted average of 40,712,100 shares compared with 39,313,876 shares in 2016.

In July 2017, a total of 99,790 new shares were issued to shareholders who elected to receive shares in lieu of a dividend in cash.

Our finance -- sorry, our balance sheet highlights as at June 30, 2017, were cash and bank balances were of RMB 4.9 billion, USD 727.4 million, compared with RMB 4.1 billion at the end of 2016; trade and bills receivables were RMB 8.4 billion, USD 1.2 billion, compared with RMB 7.1 billion at the end of 2016; inventories were RMB 1.7 billion, USD 247.4 million, similar to that at the end of 2016; trade and bills payables were RMB 5.5 billion, USD 805.9 million, compared with RMB 4.7 billion at the end of 2016; short-term and long-term bank borrowings were RMB 1.5 billion, USD 226.5 million, compared with RMB 910.4 million at the end of 2016.

We continue to focus on generating free cash flow and higher return on invested capital through building our portfolio of advanced engines to expand our leadership position in the on and off-road markets.

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

(Operator Instructions) We have the first question from the line of [Mone Stiwari].

Can you provide the breakdown of mix sales into bus engine, truck engine and off-road application unit sales?

This is Weng Ming here.

Yes.

No, we don't break it out to those numbers.

But the bulk of our sales are in the -- on the on-road application, mainly bus and truck.

Okay.

[For over] 1.5 year of sluggish demand, the bus sales finally picked up in the second quarter.

Do you believe that things have started to turn around in the bus market?

And can you provide some color on that time line for phasing out of subsidies on EV buses?

Well, I mean, we saw some pick up in the heavy-duty buses in the second quarter, yes.

And those segments (inaudible), we see a 3% improvement, right.

But I mean, whether or not that's going to continue into the next 2 quarters, I think it's going to be difficult to say.

But we also see the electric vehicle sales profit dropping from January to May, and there is also a turnaround in June.

So -- but overall, the incentive for the electric buses, vehicles, for that matter, were reduced from January of this year.

So as to whether or not there is going to be any changes, I think it's going to be -- we have no clue on that one.

(Operator Instructions) We have the next question from the line of the Himanshu Shah from Shah Capital.

Weng Ming, a few questions for you.

Can you talk about the hybrid engines and also the marine engines and what kind of market share Yuchai had not just in Q2 but in 2017?

Then I have a follow-up.

Okay.

Now the hybrid engines, we're starting to sell some of them, as I've mentioned in the -- in my scripts.

We sold some to the bus application.

This is diesel and electric hybrid.

It's not a big part of the business at the moment, but we do see that there's a potential in there.

In the case of marine engines, the overall market for the marine, for both applications, actually is not growing too much.

In fact, there was a decline.

What we saw in terms of growth is in the gen set side of the business.

So here, we're beginning to see some significant growth in the gen set business, which in a way offsets the decline in the marine, both applications of the marine engine.

So overall, we saw an improvement overall for the, what we call, the gen set and marine applications together.

All right?

Are we maintaining our #1 market share?

Or do you see that being challenged by a competitor?

We are growing some market share.

We are taking a little bit from our competitors.

We haven't loss much any of it yet to anybody.

The next question comes from the line of David Raso from Evercore ISI.

I was curious, I think the general consensus is building that this year's sales in China truck, heavy truck, is so strong that sort of base case next year we have to assume China truck is down.

I was just curious for your thoughts on that just given the strength we've seen year to date and your view of normalized demand.

What is an early -- and I know it's early, but an early thought about how to think about 2018 industry demand for heavy trucks in China?

Okay.

Thank you, David.

All right, now the Chinese -- the heavy truck growth in the first half was very, very significant, okay, and also towards the end of last year.

Now the main driving force for that, the factors for there are twofold.

One is the strict enforcement of the anti-overloading policy.

There is a law, but I think it wasn't strictly enforced.

So the government decided to enforce it towards, I think, toward the end of last year.

So as a result, I think there were quite a few vehicle replacement.

Now the other factor is that, although it's not a big factor, there was the implementation of National V emission standards from this month on as well, in most cases.

So there is -- although the price difference is not very big, but there is opportunity for trucks to upgrade that.

And so there was also an increase in the fixed asset investments in China.

So all those drove the heavy-duty truck in the first half of this year and fourth quarter last year.

Now I would think, from my point -- from my viewpoint is that the replacement due to anti-overloading may be coming to an end, okay.

So very good [busier this year].

I think we will still see sales, but it would not be -- it will not have the same level of growth compared to the first 6 months of this year.

And it will probably better off towards the beginning of next year.

Because by then, whatever that needs to be replaced would have been replaced.

And I think it takes a little -- few years before this new round of purchases will be up for replacement.

So in the case of first quarter, second quarter of next year, my personal view is it will be flat or maybe even see some level of decline or some decline in the heavy truck segment.

(Operator Instructions) There are no further questions at this time.

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

Over to you, sir.

Thank you all for participating in our conference call.

We look forward to speaking to you again.

Bye.

Thank you.

Ladies and gentlemen, this does conclude our conference for today.

Thank you all for your participation.

You may all disconnect your lines now.

Thank you.