China Yuchai International Ltd (CYD) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the China Yuchai International Limited 2018 First Quarter Conference Call and Webcast.

(Operator Instructions)

On the call with us today, we have Mr. Weng Ming Hoh, China Yuchai International's President, Dr. Thomas Phung, China Yuchai International CFO; Kelvin Lai, China Yuchai International VP of Operations; and Mr. Kevin Theiss, Investor Relations.

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

Please go ahead, sir,

Thank you for joining us today, and welcome to China Yuchai International Limited's First Quarter 2018 Conference Call and Webcast.

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, 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 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 and economic and social conditions around the world and in China, including those discussed in the company's Form 20-F under the heading Risks, -- 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.

Within the nature contained in the release made today or 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 first quarter ended March 31, 2018.

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

For the purposes of today's call, the financial results for the first quarter ended March 31, 2018 are unaudited, and they will be presented in Reminbi 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.

For the first quarter of 2018, China's GDP growth grew at 6.8%, so slightly exceeding analyst's expectation of 6.7%, and consistent with the fourth quarter, 2017.

However, this led to investment slow to 7.5% in the first quarter of 2018 from 29.2% in the same quarter last year.

According to data reported by China Association of Automobile Manufacturers, in the first quarter of 2018, sales of commercial vehicles excluding gasoline-powered and electric-powered vehicles increased by 3.6%.

The market was led by a 13.8% increase in heavy-duty truck sales.

The bus market increased by 4.1% led by an 8.7% increase in light-duty buses, partially offset by lower heavy and medium-duty bus sales.

Our net revenue for the first quarter of 2018 decreased by 4.7% to RMB 4.3 billion or USD 689.7 million, compared with RMB 4.6 billion in the first quarter of 2017.

The total number of engines sold by GYMCL in the first quarter of 2017 decreased by 8.2% to 110,113 units compared with 120,010 units in the same quarter a year ago.

Our higher unit sales of engines for heavy-duty trucks and heavy-duty buses, industrial engines and further other off-road engines combined to generate a higher average sales price which helped to mitigate the impact of the overall lower unit sales on net revenue.

Additionally, a higher percentage of engines sold were compliant with National V emissions standards than in the first quarter of 2017.

Our gross margin growth rose to 19.7% from 18.8% in the first quarter of 2017, mainly due to a better product mix.

And our operating margin increased to 9.8% from 9.4% in the same quarter last year.

Our international bus sales achieved a new record high in 2017 with over 12,000 engine units sold this quarter.

In the first quarter of 2018, we again won a large international bus order.

300 buses manufactured by Guangxi Yuchai Automobile Company Limited and exclusively powered by GYMCL and these were exported to Saudi Arabia.

We were the sole supplier for the heavy-duty engines to power these buses, 600 of which were installed with GMYLC with YC6MK engines, and 200 buses were equipped with our model YC6L.

The performance and reliability of our engine supported by our international service capability has made our engines the preferred propulsion units for the Saudi Arabian bus market among others.

During the first quarter in 2018, we launched 14 new engines compliant with next China's most stringent National VI emissions standards.

One of our key strategies is to be the first in China with engines compliant with the next emissions standards to create a technological advantage and enhance the market leadership in the Chinese commercial vehicle market.

The more stringent National VI emissions standards are expected to be implemented in 2020 according to the Ministry of Environmental Protection Requirement, and we expect to be able to ship our National VI engine sooner.

GYMCL's new National VI engine includes 10 diesel and 4 natural gas engines with a power range from 100 to 650 of horsepower among 3 platforms, namely, S, K and Y. The S-platform engine models address the market for medium- and light-duty engines.

The K-platform engine model addressed medium- and heavy-duty market.

And the Y-platform engine models are for light-duty engine market.

At the launching ceremony, GYMCL signed a strategy partnership agreement with 22 truck OEMs and 8 bus OEM, as well as 52 key components suppliers.

Another important milestone for our future growth that occurred in the first quarter of 2018 was the announcements that GYMCL subsidiary, MTU Yuchai Power Company Limited has delivered the first MTU S4000 series engine in its new facility, and a preparation for the start of fresh production is proceeding to its final stage.

Formed by MTU Friedrichshafen GmbH a subsidiary of Rolls Royce Power Systems Company Limited and GMYCL through a 50-50 Joint Venture, MTU Yuchai Power is producing the world's leading high-end, high-speed and high-power engines for the domestic Chinese and export market.

The export of our Series MTU engines are primarily targeting power generation and oil and gas sectors in China.

The S4000 engines produced yearly are meeting the great need for domestically produced diesel engines with a power level of over 1,400 kilowatts.

This series of engines broadens our high- horsepower product line, better positions us in this market and creates new growth opportunities.

We have maintained our strong financial position, cash and bank balances were RMB 4.8 billion or USD 770.2 million on March 31, 2018.

Inventory were down slightly to RMB 2.5 billion or USD 405.4 million compared with RMB 2.6 billion at the end of 2017.

Short and long-term borrowings were unchanged at RMB 1.6 billion or USD 258.1 million.

We continue to focus on improving our financial strength and maintaining a strong balance sheet with an emphasis on cash flow generation and return on invested capital.

We achieved solid growth in [several buses] in the first quarter of 2018, and we believe our broad engine product portfolio is well positioned in different market segments.

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

Thank you, Weng Ming.

Now let me review our first quarter results for 2018.

The competitive figure for the unaudited first quarter of 2017 has been restated due to the adoption of IFRS 15, revenues for contracts with customers with approved retrospective application.

An explanation of the IFRS 15 restatement has been included at the bottom of the press release.

Our net revenue for the first quarter of 2018 decreased by 4.7% to RMB 4.3 billion, USD 689.7 million, compared with RMB 4.6 billion in the first quarter of 2017.

This decrease was mainly due to a decline in the number of units sold, which was mitigated by a higher average selling price from a better product mix.

The total number of engines sold by GYMCL in the first quarter of 2018 decreased by 8.2% to 110,113 units compared with 120,010 units in the same quarter last year.

Lower unit sales primarily reflect a -- reduce in sales of agricultural engines during the first quarter of 2018.

According to data reported by the China Association of Automobile Manufacturers in the first quarter of 2018, sales of commercial vehicle excluding gasoline-powered and electric-powered vehicles, increased by 3.6%.

The market was led by a 13.8% increase in heavy-duty truck sales.

The bus market increased by 4.1%, led by 8.7% increase in light-duty buses but partially offset by lower heavy and medium-duty bus sales.

Our gross profit was RMB 853.5 million, USD 135.7 million compared with RMB 856.0 million in the first quarter of 2017.

Gross profit margin rose to 19.7% from 18.8% in the first quarter of 2017.

The gross profit margin increase was mainly attributable to a better product mix.

Other operating income increased by 27.5% to RMB 50.5 million, USD 8.0 million from RMB 39.6 million in the first quarter of 2017.

The increase was primarily due to higher interest income from bank deposits.

Research and development expenses decreased by 3.8% to RMB 119.9 million, USD 19.1 million compared with RMB 124.6 million in the first quarter of 2017.

As a percentage of revenue, R&D spending was 2.8% for the first quarter of 2018 and 2.7% for the same quarter last year.

The lower R&D expenses was due to lower consultancy fees in the first quarter of 2018.

R&D expenses continued to reflect the further development and testing costs of new engines to meet higher emission standards and ongoing effort to improve engine quality.

Selling, general & administrative, SG&A expenses increased by 5.6% to RMB 359.9 million, USD 57.2 million, compared with RMB 340.8 million in the first quarter of 2017.

SG&A expenses represent 8.3% of net revenue compared with 7.5% in the same -- in the first quarter of 2017.

The increase was primarily related to higher personnel cost.

Operating profit was RMB 424.2 million, USD 67.5 million compared with RMB 430.2 million in the first quarter of 2017.

The operating margin increased to 9.8% from 9.4% in the same quarter last year.

The margin increase was primarily due to higher gross profit margin during the first quarter of 2018.

Finance costs decreased by 15.9% to RMB 32.5 million, USD 3.6 million compared with RMB 26.8 million in the first quarter of 2017.

Lower finance cost mainly resulted from lower bills discounting during the first quarter of 2018.

Our net profit attributable to China Yuchai shareholders was RMB 242.8 million, USD 38.6 million compared with RMB 248.5 million in the same quarter last year.

Basic and diluted earnings per share were RMB 5.94, USD 0.95 and RMB 9.53, USD 0.94 respectively, compared with basic and diluted earnings per share of RMB 6.10 in the same quarter last year.

Basic earnings per share in the first quarter of 2018 was based on a weighted average of 40,858,290 shares, and diluted earnings per share was based on weighted average of 40,916,810 shares compared with 40,712,100 basic and diluted shares in the same quarter last year.

Balance sheet highlights as at March 31, 2018.

Our cash and bank balances were RMB 4.8 billion, USD 770.2 million, compared with RMB 6.0 billion at the end of 2017.

Trade and bill receivables were RMB 8.9 billion, USD 1.4 billion, compared with RMB 7.0 billion at the end of 2017.

Inventories was RMB 2.5 million -- billion, USD 405.4 million, compared with RMB 2.6 billion at the end of 2017.

Trade and bill payables were RMB 5.4 billion, USD 865.1 million, compared with RMB 5.2 billion at the end of 2017.

Short- and long-term bank borrowings remain unchanged at RMB 1.6 billion, USD 258.1 million.

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

(Operator Instructions) Your first question comes from the line of David Raso with Evercore ISI.

Thank you.

I was on mute, my apologies.

Wanted to get your updated thoughts on the impact of the National VI emission standards roll-out.

How do you think it's impacting current demand?

Any thoughts on the prebuy and any thoughts on how will it be implemented?

Will it be firmly incremented?

Will it be something that sort of gradually gets implemented?

If you could just give us your updated thoughts are heavy truck market related to the new emissions?

Hi David, it's Weng Ming here.

I think recently there's been some announcements that says in some cities already considering some early implementation.

Although, the targeted date was 2020, some are looking at implementing it in 2019 [sometime in] 2019.

So I think some bigger cities will probably do that.

I think (inaudible) there's already a couple cities that have already made some form of announcement or something along that line.

I believe there will be other cities that might follow suit going forward.

Now I think the implementation date of 2020 is quite solid.

I think now we have a certain level of color here as to how -- whether or not it's going to be one date and everybody comply or it's going to be phased in.

I think it's more likely -- my personal view as we go into the path, it's more likely to be phased in than one solid deadline.

And the impact on demand, could you give some sense...

The impact, I think like any (inaudible)

On the impact on -- has there been any pricing with the new models so we can think through if it does make sense to pull forward demand or so forth?

Now in terms of demand, I think in the past, while we -- any new emission upgrade -- there is likely to trigger some pre-buys.

And because National VI technologies, it's more advanced than the National V and it's going to be a quite a leap in technology.

The pricing of the new National VI engine is likely to be higher.

So that will definitely trigger a pre-buy effect even for the heavy-duty trucks.

I think, yes.

Does that answer your question?

Yes, I think it does.

I was also trying to think through the demand this year has been a little better than some folks feared, and I was just curious if there was any feedback from customers, dealers that maybe there's already some impact from National VI down the road that's causing some buying this year above expectations?

Or would you argue it's too early, this is more a pure demand, this is not anything related to a pre-buy.

Well, my personal thinking is that -- I think the growth in the -- what's called the heavy-duty engines has slowed.

I know that last year, we were seeing over 50% growth rate for heavy-duty engines.

In the first quarter, I think it's dropped to about 13%.

So my view is that, no, I still think that the heavy-duty engines [probably don't] grow too much this year.

You might even still see a slight drop in the heavy-duty engines market before trucks [side].

So for other markets, I think we're seeing some growth in the higher horsepower, especially power generation side of the business.

I think that's growing, we still see some strong growth this year.

The industrial engines in our construction -- those used in construction applications, infrastructures, those are still growing quite strongly this year.

(Operator Instructions)

Okay, we have a question here.

It says, "What you can tell us about dividend?" At this stage, we have not discussed that yet.

I think when we make a decision, we will definitely make announcement on what we can do with the dividend.

So for now, there's nothing much -- not much I can talk about at this point in time.

Your next question comes from the line of Mr. David Raso, again from Evercore ISI.

I had a follow-up on the farm equipment market in China, and my apologies if you said this in your prepared remarks and I missed it.

The government, with the delayed budget for AG, was that something you saw in the market?

Is that a main reason that you're seeing the weakness in farm equipment sales?

And do you have any update on the government budget for agriculture?

No, I don't think so.

I think the emission upgrade from T2 to T3 took place in the year 2016, I think actually.

All right.

And I mean, there was a kind of a phase-in the upgrade.

And then, in the year 2017, this last year, I mean, they were pre-buy before that, right?

And in the year 2016, we were not allowed to produce T2 engines, only T3 engines.

So come the year that is '17, there was some kind of inventory replenishment in the channel for the agriculture engine.

So that actually drove our (inaudible) sales for the year 2017.

But now at this time, this happened, I think we are still digesting the pre-buy.

So the first quarter, I think, the growth is not that competitive.

Last year was [flush] due to the replenishment of channels.

But this year, I think the whole agri-business, at this point agri-engines will come back to normal this year.

I think probably the next two, three quarters you'll probably see some improvement there or I expect.

Okay, thank you.

Somebody else prominent in the industry noted the Chinese subsidy budget for agriculture had not yet been put out, it was sort of delayed that -- maybe that was having some impact on demand.

But you're saying it's more of a tough comparison after '17 and the replenishment last year.

So okay.

I appreciate it.

Thank you for the color.

(Operator Instructions) we have now reached the end of our Q&A session, and I will turn the call back over to Mr. Hoh.

Thank you all for participating in the conference call.

We look forward to speaking with you again in next quarter.

Bye-bye.

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

Thank you for participating.

You may now all disconnect.