China Yuchai International Ltd (CYD) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the China Yuchai International Limited Fourth Quarter and FY 2017 Earnings Webcast.

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

(Operator Instructions) On the call with us today, we have Mr. Wei Ming Hoh, China Yuchai International President; Dr. Thomas Phung, China Yuchai International CFO; Kelvin Lai, China Yuchai International Limited VP of Operations; and Mr. Kevin Theiss, Investor Relations.

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

Please go ahead, sir.

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

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, continue to, predict, intend, aim, will or similar expressions are intended to identify forward-looking statements.

All statements other than statements of historical facts are statements that may be deemed forward-looking statements.

These forward-looking statements including, 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 risk 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-F 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 they are 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.

Then Dr. Phung will review the financial results for the fourth quarter and 12 months ended December 31, 2017.

Thereafter we will conduct a question and answer session.

For the purposes of today's call, the financial results for the fourth quarter and 12 months ended December 31, 2017 are unaudited and they will be presented in RMB and U.S. dollars.

All the financial information presented is reported using international financial reporting standards as issued by the International Accounting Standards Board.

Mr. Hoh, please begin your prepared remarks.

Thank you, Kevin.

Net revenue for the fourth quarter of 2017 increased by 1.2% to RMB 3.8 billion or USD 578.6 million, compared with RMB 3.7 billion in the fourth quarter of 2016.

The total number of engines sold by our main operating subsidiary, Guangxi Yuchai Machinery Company Limited, in short GYMCL, in the fourth quarter of 2017 decreased by 3% to 73,610 units compared with 75,849 units in the same quarter a year ago.

Our overall average selling price increased primarily due to double digit sales growth of heavy duty engines and higher sales in different markets, as well as a higher percentage of engines sold who will comply with National V emission standards than in the fourth quarter 2016.

According to data reported by the China Association of Automotive Manufacturers, CAAM, in the fourth quarter of 2017 unit sales of commercial vehicles, excluding gasoline powered and electric powered vehicles, decreased by 0.4%.

Truck sales decreased by 1%, with heavy duty truck sales increasing by 0.6%.

And the bus market was -- went up by 3%, with heavy duty unit sales up 2.4%.

GYMCL's heavy duty truck engine sales in the fourth quarter of 2017 increased by 22.5%.

Our sales in the bus segment continued to be affected by commercial electric bus sales in the fourth quarter 2016.

Sales to the off-road segment improved in the fourth quarter of 2017 as well.

According to data reported by CAAM, commercial vehicle unit sales, excluding gasoline powered and electric powered vehicles, in the 2017 year grew by 16.9%.

In 2017, the total number of on and off-road engines sold by GYMCL rose 14.6% to 367,097 units compared with 320,424 units in 2016.

The increase was primarily due to growth in on-road heavy duty and light duty engines, industrial engines, and agricultural engines.

For the year of 2017, GDP growth increased to 6.9% from 6.7% in 2016, exceeding the government target of 6.5%.

Our natural gas in unit sales grew significantly in 2017 on a year-over-year basis.

In 2017, we sold over 20,600 of natural gas engines.

Our international sales achieved a new record high in 2017, as GYMCL exported over 12,000 engine units to the global mass market, and natural gas engine export sales grew 300% year-over-year to more than 2,500 units.

In relation to the Chinese government's One Belt, One Road initiative, the growth of bus export sales continues to be a priority.

During 2017, we penetrated the Cambodian bus market for the first time with the export of 98 Yutong buses powered by GYMCL's engines for use in Cambodia's capital, Phnom Penh.

598 school buses manufactured by Changan Bus Manufacturing Company powered by GYMCL engines were delivered to the Kuwait Public Transport Company Limited in 2017.

These shipments follow other international bus orders where the vehicles are propelled by HI engines, including buses used in Myanmar and Saudi Arabia.

In addition to diesel and natural gas engines, we also won orders for our hybrid engine to propel buses in China.

GYMCL was the exclusive supplier of 100 diesel/electric hybrid engines by Liuzhou Hengda Bus Company.

Another 76 buses powered by GYMCL diesel/electric hybrid engines were delivered to Siweimei Motor Transport Company Limited in Shenzhen City.

Our hybrid engines provide an alternative to electric vehicles by offering the advantage of high fuel efficiency, significant emissions reductions, and easy plug-in charging systems.

Government incentives continue to impact sales of electric buses and impact GYMCL's bus engine sales.

We had a number of one-time extraordinary events in the fourth quarter of 2017, which net benefitted our fourth quarter and annual profit.

We incurred a one-time gain for the completion of engineering design services for the YC6K heavy duty engine platform for our joint venture, Y&C Energy Company Limited, and a one-time gain on the sale of hotel properties by our HL Global Enterprises Limited, in short HLGE, subsidiary.

We also incurred a charge due to the impairment of intangible assets related to the intellectual property for the 4Y20 engine platform and staff severance costs.

We will discuss in more detail later on in the script.

Research and development, R&D, expenses increased by 23.3% to RMB 231 million or USD 35.4 million in the fourth quarter of 2017.

We are committed to develop a full portfolio of National VI equivalent to Euro VI diesel and natural gas engines for on-road vehicles and Tier 4 engines for off-road vehicles well before the expected mandated date.

In January 2018, 14 new engines were introduced that complied with the more stringent National VI emission standard, which is be implemented by mid-2020 according to the Ministry of Environmental Protection requirements.

We continue to focus on advancing our engine technology to increase engine performance and especially to be among the early leaders in China with engines meeting emission standards exceeding the existing national standard.

The high performance, quality, and durability of our engines all begins at the R&D stage of development.

Operating profit increased by 96.5% to RMB 745.3 million or USD 14.1 million, including from RMB 379.3 million in the same quarter last year, primarily due to the net benefit from a one-time extraordinary event.

Total net profit attributable to China Yuchai's shareholders for the fourth quarter of 2017 increased by 80.4% to RMB 407.9 million or USD 62.4 million, and basic and diluted earnings per share were RMB 9.99 or USD 1.53 and RMB 9.97 or USD 1.53 respectively.

Net profit attributable to China Yuchai shareholders net benefitted from the one-time and extraordinary events in the fourth quarter and the year.

Our balance sheet remains strong.

Cash and bank balances were RMB 6 billion or USD 922.7 million compared with RMB 4.1 billion at the end of 2016; in January 2017 aggregate dividends of approximately USD 34.7 million in cash, and 99,790 (sic) [99,997] newly issued shares based on shareholders election.

Dividends continue to be our preferred method to return value to shareholders and let them participate in our success.

HLG completed the disposal of its hotel in the fourth quarter of 2017, and China Yuchai recorded a profit attributable to equity as the parent of RMB 162.6 million or USD 24.9 million.

HLG utilized a portion of the proceeds to repay the outstanding loan of SGD 68 million extended to it by China Yuchai's wholly-owned subsidiary.

For 2017, our GYMCL subsidiary won the prestigious award, China's Export Quality and Safety Demonstration Enterprise Award in 2017.

This award, by the General Administration of Quality Supervision, Inspection, and Quarantine of People's Republic of China, is the highest credit rating and honor for companies that sell their products internationally.

Additionally, GYMCL's YC4A series product and YC6J series product won a gold award for the year 2017 and market performance award 2017 respectively.

These awards are an acknowledgement of our commitment to produce the highest performing and highest quality engines, and reflect the market's perception of our value.

2017 was an exceptional growth year, as we experienced robust unit sales, growth in on-road heavy duty and light duty engines, and industrial and agriculture engines.

We continue to improve in our core market.

After a year of strong market growth in China's engine market, we still expect some market segments will continue growing in 2018.

Given our strategy of providing advanced heavy, medium, and light duty diesel, natural gas, and hybrid engines for on-road and multiple off-road market applications, we are better positioned to serve the needs of the market.

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

Thank you, Wei Ming.

Now let me review the fourth quarter results.

Our net revenue for the fourth quarter of 2017 increased by 1.2% to RMB 3.8 billion, USD 578.6 million, compared with RMB 3.7 million (sic, billion) in the same quarter last year.

The total number of engines sold by GYMCL in the fourth quarter of 2017 decreased by 3% to 73,610 units, compared with 75,849 units in the fourth quarter of 2016.

According to the data reported by the China Association of Automobile Manufacturers, CAAM, in the fourth quarter of 2017 sales of commercial vehicles, excluding gasoline powered and electric powered vehicles, decreased by 0.4%.

Truck sales decreased by 1%, with heavy duty truck sales increasing by 0.6%.

GYMCL heavy duty truck engine sales in the fourth quarter of 2017 increased by 22.5%.

Gross profit increased by 6.1% to RMB 1.1 billion, USD 165.4 million, compared with RMB 1.0 billion in the same quarter last year.

Gross margin rose to 28.6% in the fourth quarter of 2017 compared with 27.3% in the same quarter last year.

The gross profit increase was mainly attributed to better product mix.

Other operating income was RMB 485.8 million, USD 74.3 million, compared with RMB 43.6 million in the same quarter last year.

The increase was mainly due to higher bank interest income and a one-time gain of RMB 115.2 million, USD 17.6 million, on the completion of engineering design services for the YC6K heavy-duty engine platform for our joint venture, Y&C Engine Company Limited, Y&C, and a one-time gain of RMB 324.1 million, USD 49.6 million, on the sales of HL Global Enterprises Limited, HLGE, hotel asset, compared with the same quarter last year.

Excluding this one-time item, the other operating income was RMB 46.5 million, USD 7.1 million, compared with RMB 43.6 million in the same quarter last year.

Research and development, R&D, expenses increased by 23.3% to RMB 231.0 million, USD 35.4 million, from RMB 187.3 million in the same quarter last year.

As a percentage of net revenue, R&D spending was 6.1% compared with 5.0% in the same quarter last year.

R&D expenses reflect increased development and testing costs for new engines to meet higher emission standards and GYMCL's continued initiatives to improve engine quality.

In January 2018, 14 new engines were introduced that complied with the more stringent National VI, equivalent to Euro VI, emission standard, which is expected to be implemented by mid-2020 according to the China Ministry of Environment Protection requirement.

Selling, general and administrative, SG&A, expenses increased by 19.0% to RMB 590.0 million, USD 90.3 million, from RMB 495.7 million in the same quarter last year.

SG&A expenses represent 15.6% of net revenue compared with 13.3% in the same quarter last year.

SG&A expenses in the fourth quarter of 2017 included an impairment charge of RMB 40.0 million, USD 6.1 million, related to the intellectual property for the 4Y20 engine platform and also included a staff severance cost of RMB 31.5 million, USD 4.8 million, in the fourth quarter of 2017, which are extraordinary events.

In the same quarter last year, a staff severance cost of RMB 1.8 million was recorded.

Excluding these extraordinary events, the SG&A expenses increased by 5.0% to RMB 518.5 million, USD 79.4 million, from RMB 493.9 million in the same quarter last year.

These expenses represent 13.7% of net revenue compared with 13.2% in 2016.

Operating profit increased by 96.5% to RMB 745.3 million, USD 114.1 million, from RMB 379.3 million in the same quarter last year.

The increase included a net gain of RMB 367.8 million, USD 56.3 million, from one-time and extraordinary events.

The operating margin was 19.7% compared with 10.2% in the same quarter last year.

Excluding the one-time and extraordinary events, the operating profit decreased by 1.0% to RMB 377.4 million, USD 57.8 million, from RMB 381.1 million in the same quarter last year.

Finance costs increased to RMB 24.5 million, USD 3.8 million, from RMB 11.3 million in the same quarter last year.

Higher finance costs were mainly due to higher bank borrowings and higher trade bill discounting.

In the fourth quarter of 2017, total net profit attributable to China Yuchai's shareholders increased by 80.4% to RMB 407.9 million, USD 62.4 million, from RMB 226.0 million in the same quarter last year.

Basic and diluted earnings per share were RMB 9.99, USD 1.53, and RMB 9.97, USD 1.53, respectively compared with basic and diluted earnings per share of RMB 5.55 in the same quarter last year.

In the fourth quarter of 2017, net profit attributable to China Yuchai's shareholders included a net gain of RMB 179.8 million, USD 27.5 million, from one-time and extraordinary events.

Adjusted total net profit attributable to China Yuchai's shareholders in the fourth quarter of 2017, excluding the one-time and extraordinary events, was RMB 228.1 million, USD 34.9 million, compared with RMB 227.2 million in the same quarter last year.

Adjusted basic and diluted earnings per share were RMB 5.59, USD 0.85, and RMB 5.58, USD 0.85 respectively compared with adjusted basic and diluted earnings per share of RMB 5.58 in the same quarter last year.

A reconciliation table reflecting the impact of the one-time and extraordinary events on the fourth quarter of 2017 results is attached at the end of the press release.

Basic earnings per share in the fourth quarter of 2017 was based on a weighted average of 40,832,405 shares and diluted earnings per share based on a weighted average of 40,889,954 shares, compared with 40,712,100 basic and diluted shares in the same quarter last year.

In July 2017, 99,997 new shares were issued to shareholders who elected to receive shares in lieu of a dividend in cash.

Now I will review the annual results for 2017.

Net revenue was RMB 16.2 billion, USD 2.5 billion, compared with RMB 13.7 billion in 2016.

The total number of engines sold by GYMCL in 2017 was 367,097 units compared with 320,424 units in 2016, representing an increase of 14.6%.

According to the CAAM, sales of commercial vehicles, excluding gasoline powered and electric powered vehicles, increased by 16.9% in 2017.

The truck market grew by 19.5%, led by a 52.4% increase in heavy duty truck sales.

The bus market remained weak, experiencing a 0.7% decline in overall sales, with heavy duty bus sales up 0.1%.

Gross profit increased by 18.6% to RMB 3.5 billion, USD 537.9 million, compared with RMB 3.0 billion in 2016.

The gross profit margin was 21.7% in 2017 and 2016.

Other operating income was RMB 624.6 million, USD 95.6 million, compared with RMB 95.4 million in 2016.

The increase was mainly due to higher foreign exchange gains and higher bank interest income, and a one-time gain of RMB 115.2 million, USD 17.6 million, on the completion of engine design services for the YC6K heavy duty engine platform for our joint venture, Y&C, and a one-time gain of RMB 324.1 million, USD 49.6 million, for the sales of HLGE hotel assets in 2017.

Excluding these one-time items, the other operating income was RMB 185.3 million, USD 28.4 million, compared with RMB 95.4 million in 2016.

R&D expenses increased by 3.4% to RMB 608.2 million, USD 93.1 million, compared with RMB 588.0 million in 2016.

As a percentage of net revenue, R&D spending was 3.7% compared with 4.3% in 2016.

R&D expenses increased mainly due to the ongoing research and development of new and existing engine products, as well as continued initiatives to improve engine quality.

The company remains committed to its R&D programs and continues to introduce new engine models for both the on-road and off-road markets complying with increasingly stringent emission standards.

In January 2018, 14 new engine models were introduced that are compliant with the more stringent National VI, equivalent to Euro VI, emission standard.

SG&A expenses increased by 20.7% to RMB 1.8 billion, USD 277.9 million, from RMB 1.5 billion in 2016.

These expenses represent 11.2% of net revenue compared with 11.0% in 2016.

SG&A expenses included an impairment charge of RMB

40.0 million, USD 6.1 million, related to the intellectual property for the 4Y20 engine platform, and also included a staff severance cost of RMB 107.7 million, USD 16.5 million, in 2017, which are extraordinary events.

In 2016, a staff severance cost of RMB 12.9 million was recorded.

Excluding these extraordinary events, the SG&A expenses increased by 11.8% to RMB 1.7 billion, USD 255.3 million, from RMB 1.5 billion in 2016.

These expenses represented 10.3% of net revenue compared with 10.9% in 2016.

Operating profit increased by 77.4% to RMB 1.7 billion, USD 262.6 million, from RMB 967.2 million in 2016.

The increase was mainly due to the net gain of RMB 291.6 million, USD 44.6 million, from one-time and extraordinary events.

The operating margin was 10.6% compared with 7.1% in 2016.

Excluding the one-time and extraordinary events, the operating profit increased by 45.3% to RMB 1.4 billion, USD 217.9 million, from RMB 980.0 million in 2016.

Finance costs increased by 20.0% (sic, 26.0%) to RMB 100.4 million, USD 15.4 million, from RMB 79.7 million in 2016.

Higher finance costs mainly result from increased bank borrowing and higher trade bill discount during the year.

The net profit attributable to China Yuchai's shareholders increased by 85.0% to RMB 953.9 million, USD 146.0 million, or earnings per share of RMB 23.40, USD 3.58, compared with RMB 515.7 million, or earnings per share of RMB 12.89 in

2016.

Net profit attributable to China Yuchai's shareholders in 2017 included a net gain of RMB 130.3 million, USD 19.9 million, from the one-time and extraordinary events.

Adjusted total net profit attributable to China Yuchai's shareholders in

2017 excluding the one-time and extraordinary events was RMB 823.7 million, USD 126.1 million, compared with RMB 524.1 million in 2016.

Adjusted basic and diluted earnings per share were RMB 20.21, USD 3.09, compared with adjusted basic and diluted earnings per share of RMB 13.10 in 2016.

Basic and diluted earnings per share was based on a weighted average of 40,764,569 shares in 2017.

Basic and diluted earnings per share were based on a weighted average of 40,016,808 shares in 2016.

In July 2017, 99,970 new shares were issued to shareholders who elected to receive shares in lieu of a dividend in cash.

Next we will going to review the balance sheet highlights as of December 31, 2017.

Cash and bank balances were RMB 6.0 billion, USD 922.7 million, compared with RMB 4.1 billion at the end of 2016.

Trade and bills receivables were RMB 7.0 billion, USD 1.1 billion, compared with RMB 7.1 billion at the end of 2016.

Inventories were RMB 2.6 billion, USD 393.7 million, compared with RMB 1.7 billion at the end of 2016.

Trade and bill payables were RMB 5.2 billion, USD 792.3 million, compared with RMB 4.7 billion at the end of 2016.

Short and long term borrowings were RMB 1.6 billion, USD 248.9 million, compared with RMB 910.4 million at the end of 2016.

We generated positive cash flow that enhanced our strong cash position and financial strength.

A dividend of USD $0.90 per share for fiscal year 2016, up from USD $0.85 per share last year, was paid in July 2017 in cash or new shares at the election of our shareholders.

We are constantly monitoring our financial options and operating policy to ensure that we generate improved operational and financial performance.

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

Thank you, sir.

(Operator Instructions) We have the first question from the line of Manas Tiwari.

And I have three questions.

My first question is that the company's heavy duty truck engine sales outgrew the market.

Where the market grew by 0.6%, the company's sales grew by 22% in the fourth quarter.

Can you provide some color on that?

Have you gained some market share?

Okay.

I think that comparison is a little bit not accurate in the sense that the 0.6% is the whole market growth, whereas the 22% is our growth for the heavy duty segment.

So it's not an apples to apples comparison.

Okay.

But my question remains have you gained some market share in the fourth quarter?

We did gain some market share in the heavy duty truck market compared to the previous year.

But I think that you must bear in mind that the whole heavy duty market has expanded quite considerably in 2017 compared to 2016.

So if you look at it in total, 2017, the whole heavy duty truck market, our sales were about 1.1 million.

So, that is a lot higher than the previous year, yes.

On the whole, your last question, including ourselves we did gain market share, a little bit of it.

Okay.

That's helpful.

And my second question is that the inventory at December end grew 52% year-over-year.

Can you explain the reason behind the elevated inventory levels?

The increase of inventory is purely due to Q1.

We have a long holiday season at the Chinese spring festival, so to be able to deliver our commitments to our customers.

So that's the reason why we have a stock-up at the year-end, to fulfill the requirement -- the customer requirement in quarter 1.

Let me add on to that also.

Just know the Chinese New Year in China, the Chinese New Year always falls in the months of January or February.

And during that period, the whole country is closed.

As you probably are aware, people are going back to their hometown and all that.

So in order not to disrupt the supply to those customers, we built up some inventory.

Okay.

And my last question is regarding your gross margins.

So they were stable at 21.7% for both 2017 and 2016.

What do you expect in terms of margins going forward for 2018 and '19?

It should be flat, as the market is very competitive and we are facing pressure from our supplier on the inflation impact.

So we will maintain a flat growth on the gross profit margin.

We have the next question from the line of Ke Chen.

My first question is regarding the agriculture engines.

We know Yuchai is number one in market share in the agriculture engines.

Could you talk about your market share percentage in agriculture segment?

And also early this year China's number one policy regarding agriculture industry again focused on agricultural development.

So I'm wondering how this policy will further strengthen our market share in agriculture engines.

Mr. Chen, this is Kelvin.

First of all, the GYMCL are not the number one top seller of the agricultural engine in the market.

But we had a quite strong year in a certain segment, and that is especially in the harvesting machines such as the wheat harvesting machines and other harvesting machines.

And we are doing quite well in the last couple years.

And also in the year 2017, ourselves had double digit growth compared to our 2016 sales record.

So we marked quite a good year in 2017.

And we are also a little bit optimistic regarding that particular segment, and then we still grow in the year 2018 forwards.

Regarding your comment regarding the number one priority of the rural investment, it doesn't highlight any particular interest in GYMCL sales because that government incentive will be applied to all the machinery across through the industrial-wide agricultural machinery.

So we will benefit from them, but also our competitors will be benefitting from them as well.

So we believe that the sales growth then will continue later after 2018, because at the moment it's quite high inventory in the channel.

Okay.

My second question is regarding your marine engines.

We know you have become probably number one market leader in China in marine engines.

So could you talk about your market share right now in marine engines?

And please also talk about the gross operating interest in '18.

We also read that you developed the marine engine for the U.S. market and actually already reached U.S. EPA standard.

So are you going to enter the U.S. market by yourself, or you plan to work with your partners to come to the U.S. market?

This is Wei Ming here, Mr. Chen.

Firstly, we have not developed any marine engine for the U.S. market for now.

We are not targeting the U.S. market for now.

Now our focus is still going to be on Southeast Asia, which is our backyard, and for the areas that we still have room to grow.

Now, in terms of whether or not we are the number one in the marine market, actually we are seeing strong growth in the power generation segment of the market, but the marine market as a whole has not really grown in 2017.

In fact, the growth is negative.

Overall, if you add up the net power generation and the marine together, which is how we look at it, there's growth in there and we have gained some market share there.

But the thing is that in terms of marine, I think we are also -- on high profile engines, which we use a lot for this segment, we are starting to sell more of that in 2017.

And that has improved the mix for us and also the contribution to our business.

Okay.

My third question is recently Hong Kong Stock Exchange is allowing different shares -- cast of shares to listing.

I'm wondering if the company is considering potential listing in Hong Kong.

At the moment, we are still very happy with New York Stock Exchange, so we will continue to maintain our listing where we are right now.

We have the next question from the line of [Andrei Morosanu].

Yes.

Good evening, gentlemen; a couple questions.

First, can you kind of provide some overview of 2018 and your expectations for the market?

Obviously 2017 has been very strong from a heavy duty perspective.

But just kind of looking out in terms of visibility that you have into this coming year in respect to demand, and perhaps if you could talk a little bit about the mix that you see over the course of 2018.

Okay.

Now, if you look back in 2017, the major growth is actually in the heavy duty truck segment, and of course the industrial machinery as well.

Now, the heavy trucks, I mean, if you look at the statistics, last year I think the whole market sold about 1.1 million engines.

And that is really was the normal norms that the market -- normally what they would sell.

So going forward into 2018, we don't see -- we don't expect the same level of growth.

In fact, we expect to see some decline in the heavy duty market.

But I think for the whole year, Q1 will still probably be okay.

But going into the rest of the year, I think it will start to decline.

The medium duty, light duty market, I think it's going to be okay, sort of flat, plus or minus a few percentage points.

The other area that's going to be growing, in our view, is the industrial engine market.

That will continue to grow.

It had good growth last year.

It continued to grow.

But before 2017, it's been on a decline, so now it's just starting to grow back, to pick up some growth here.

The agriculture engine, as my colleague has mentioned a little bit, expect that to continue to improve simply because the implementation of the T3 emission standards has now been -- a bill has finally passed since the implementation.

So we should expect the pre-buying to help digest that, and we will get back some more normality there, okay?

Yes, great.

And then you mentioned before that your gross margins should remain fairly stable in 2018.

But at the same time, you kind of highlighted some of the risk surrounding the heavier competition and the pressure from your suppliers.

Can you maybe perhaps talk about what are the countering factors to that in respect to why margins should remain fairly flat?

Is it pricing from your standpoint?

I guess you just mentioned that heavy duty will be a little -- the growth will probably decline in 2018.

So where is the offsetting factor to those two points of pressure that you've highlighted before?

Thank you.

Now, this industry is highly competitive.

It's always been for a number of years now, right?

So yes, I think in terms of pricing, in terms of the margin there's always pressure.

Every year there's pressure.

But we have some of the programs that we put in place, things like lean manufacturing, where we have been able to take out cost.

We are pulling out cost from our manufacturing process that we are able -- to help us maintain the gross margin in the last 2 or 3 years.

We think that we can continue to do that going forward.

And at the same time, whilst our OEM customers would like us to reduce price when they negotiate with us, we also do the same with our suppliers as well.

So at the end of the day, net-net, we believe that we will still be able to maintain the gross margin at the current level, broadly about the same level as we have in the last couple of years.

Okay.

And then my last question, in respect to the other items such as SG&A and the R&D, so R&D was barely -- this year was a little less than last year as a percentage of sales.

Can you talk about the expectation for R&D spend over 2018 and perhaps 2019?

And then on the SG&A front, do you expect a similar level as a percentage of sales?

Well, okay.

I'll talk about SG&A first.

SG&A will probably be flat depending on the sales volume.

R&D, now you're probably read in our announcement that we have launched 14 new engine platforms, National VI engine platforms this year, the latest year.

So these engines are now at the stage where we are now working with our OEM customers to design into their trucks or buses, and then we will test run it.

So for the next 2 years, we will probably incur a little bit more R&D cost just to make sure that the engine is properly functioning, tested, before the implementation date in 2020, okay?

We have the next question from the line of Ke Chen.

Please ask your question.

Okay.

The first question will be about operational cash flow.

You mentioned that you have positive operational cash flow.

Could you talk about the rough number?

Is that roughly USD 100 million?

Ke Chen, this is Thomas.

It's in the range of about RMB 1.5 billion.

Okay, great.

My second question is regarding the National VI engines.

Yuchai is the first one to launch 14 different models in National VI, which is Euro VI engines in China.

Could you talk about -- elaborate around particularly how you stand out from your competitors, and also about your new engines from your MTU JV.

And is the engine you just mentioned the 4Y20?

Will this National VI engine requirement make the engine business be less competitive because it's a required higher standard and make this business more oligopolistic going forward?

Mr. Chen, it's Kelvin again.

Early in January, then we're launching 14 models across the full portfolio of the engine platform and then for the different markets, including the on-road and off-road.

So it doesn't mean then that we will definitely then be in the market by launching these products, because remember we are not the only one engine supplier launching the National VI or Tier 4 engine product to the markets.

Some of our competitors, they did the same thing late last year or in the coming months or coming years, and then we do the same.

So in this stage and in the -- it's difficult to say if we have any advantage and then to -- for us in the launching all the full platform of the engine to the market.

But it does mean in the end we had commitment and then to the National VI and Tier 4 products for the coming demand.

And also, we work with our OEMs together and then make sure that they have the right products by the time of the implementation of the new emissions standards.

So regarding those new products, are they also more competitive or not, it is difficult to say at this stage because we have to prove broader one once it's available for the market and then have it all go into the OEM machinery.

So I think that we'll have to wait and see.

But of course, from Yuchai point of view, we are quite confident about our development.

And also we would like to see those products, and then we'll be using in different OEMs in the market in the future, okay?

We have the next question from the line of [Andrei Morosanu].

I have one last question too, if I may.

Can you provide some updates on the JV with MTU and just kind of your expectations for that business?

Once it starts up, what are you targeting from that JV?

Just pretty much any guidance you could provide on that, that would be great.

It's Kelvin again.

Regarding our joint venture with MTU, we are now in the final stage of the factory setting up, and so we actually then have the factory building ready.

And then we are now installing all the necessary assembly equipment and also building up the aging testing stand and other facilities for the engine building.

So we target then to have the production by in Q2 of this year.

And we also have already informed most of the capability in China and then regarding the product launching programs.

And then we will have the right product delivered to the end user by end of Q2 or maybe beginning of Q3, something like that.

So we have some preliminary orders already in hand, so we are quite optimistic about the products having one official launching.

And regarding the joint venture product, we will first -- we will be available to the domestic market in China first.

And then we maybe take a year or a couple years later and then we will -- going through to our international sales channel and into the Asian countries or other countries as well.

So we are pretty optimistic regarding all these particular JV products because of the widely adopted products in both China and also international markets.

Currently who are you competing with in China?

Are there other similar producers or suppliers of these large engines?

Yes, definitely.

And then our competitors, something like the Cummins, Caterpillars.

Cummins, okay.

Yes.

So they are our major competitors.

And just the -- I was trying to scour the Internet, I guess, for pricing on these units.

Obviously there's going to be variations in it, but kind of looking at some of the used equipment or the size engines that you're going to be selling there, just whether or not -- if you could confirm these numbers, but is it right that these engines probably sell for, as new, between $300 and $4,000 per unit?

Well, it depends on the rating of the engine.

I think that's about the price.

And the engine -- I mean the product itself versus not so many supply available to that, so there's a -- I mean it will be a little bit more expensive than what we are doing in Yuchai now anyway.

Okay.

But I'm in the right ballpark, I guess.

I have no further comment.

Ladies and gentlemen, as there are no further questions at this time, I'd like to hand the call back to your speakers.

All right.

Thank you all for participating in our conference call.

We look forward to speaking with you again soon.

Bye-bye.

Thank you, sir.

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

Thank you for participating.

You may all disconnect.