China Yuchai International Ltd (CYD) 2019 Q1 法說會逐字稿

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I'd 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 2019 Conference Call and Webcast.

Joining us today are Mr. Weng Ming Hoh and Dr. Thomas Phung, President and Chief Financial Officer 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, 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 conditions, 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 20F 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, and then Dr. Phung will review the financial results for the first quarter ended March 31, 2019.

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, 2019, 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 first quarter of 2019 decreased by 4 percentage -- 4% year-over-year to RMB 4.2 billion or USD 618.3 million primarily due to reduced number of units sold.

This was moderated by a higher average selling price from a better product mix.

China's GDP growth of 6.4% in the first quarter of 2019 was similar to the fourth quarter of 2018, but it was flat at 6.6% growth in the 2018.

GDP growth surpassed some expectations as industrial production grew, and retail sales in property investments exceeded expectations.

According to the data reported by China Association of Automobile Manufacturers, in the first quarter 2019, sales of commercial vehicles, excluding gasoline-powered and electric-powered vehicles, decreased by 2.4%.

Truck sales decreased by almost 1% with heavy-duty truck sales increasing by 0.4%.

Medium-duty truck sales declined by double-digit and light-duty truck sales increased by 0.3%.

The total number of engines sold by GYMCL in the first quarter of 2019 decreased by 8% to 101,300 units compared with 110,113 units in the same quarter last year.

Lower unit sales primarily reflected reduced sales of truck and passengers partially offset by higher sales of engines for off-road markets.

GYMCL's heavy-duty and medium-duty truck engine sales decreased in the first quarter of 2019, which was mitigated by the improvement in light-duty truck sales.

Diesel and natural gas truck engine sales declined in the first quarter of 2019.

GYMCL's off-road engine sales rose in the first quarter of 2019 led by sales growth in the agriculture equipment market.

Following the 800 buses that were powered by -- exclusively by Yuchai Engine, they were exported to Saudi Arabia in 2018.

Another 600 buses propelled by Yuchai Engine have been exported in 2019, the largest bus export order of the year so far.

Saudi Arabia continues to be an important market for our engines due to our inability -- sorry, due to the ability to operate in high temperatures and in harsh wind and sand environment.

Our research and development, R&D expenses decreased by 40.1% to RMB 71.9 million or USD 10.7 million mainly due to the capitalization of development cost for National VI and Tier 4 engines that met IFRS capitalization criteria.

In the first quarter of 2019, the total R&D expenditure, including capitalized cost, was RMB 119.5 million or USD 17.7 million, and it represented 2.9% of the net revenue compared with RMB 119.9 million, representing a 2.8% of the net revenue in the 2018 first quarter.

R&D expenses included our program to enhance the performance and quality of our current National VI and Tier 4 engines for the on- and off-road market.

In addition, we are further developing our technologies to be among the first, with a popular engine, meeting the even stricter National VIb standards, which are expected to be nationally implemented between 2022 and 2023.

It is possible that orders will arise for this VIb standard before national implementation and we want to capture those orders from the early adopters.

We have already introduced our model YC6 -- YCK08 engine, which is the first domestic diesel engine to be certified for the National VIb emission standards in China.

The K08 model significantly outperformed the upcoming National VI emission standards.

We will gain valuable experience through capturing early orders which can be used to further improve our engines for the national rollout.

This action is consistent with our long-term strategy of being a leader in emissions technologies in China.

Our emission control joint venture Eberspaecher Yuchai Exhaust Technology Company Limited continues to progress in developing advanced exhaust emission control systems for China commercial vehicles to meet China's National VI standards.

We believe, the joint -- JV emission control system will be critical to adding the necessary technology and quality as well as providing a ready supply to our customers in the future.

We will continue with our strategy of offering a diversified engine portfolio for the truck, bus and off-road market with heavy, medium and light-duty diesel and natural gas engines.

In this way, we are positioned to respond to growth opportunities in these market segments.

We fortify these commitments by engaging in joint ventures, partnerships, and alliances to enhance our technology and our market position, establish the Y&C Engine joint venture to produce new advanced heavy-duty engine.

The MTU Yuchai Power Company Limited joint venture, which in 2018, began commercial production of the MTU Series 4000 engine.

And also the Eberspaecher Yuchai Exhaust Technology Company to develop, produce and market new exhaust emission control system to meet the forthcoming new emission standards.

In January 2019, we signed a strategic partnership with one of the major heavy-duty truck producers in China, Shaanxi Tonly.

Our balance sheet remained strong at the end of first quarter of 2019.

Cash and bank balances were RMB 5.2 billion or USD 767.8 million, and we reduced our short- and long-term bank borrowings to RMB 1.7 billion or USD 253.4 million.

Due to a slower growth of the Chinese economy, the central government has created new and targeted stimulus including tax cuts, encouraging local government to spend on infrastructure, reducing the government's credit squeeze and increasing the money supply in March 2019.

We are optimistic these measures will help stabilize China's growth for the future.

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 first quarter results for 2019.

Net revenue for the first quarter of 2019 decreased by 4% to RMB 4.2 billion, USD 618.3 million compared with RMB 4.3 billion in the first quarter of 2018.

This decline was mainly due to a lower number of units sold and a change in the product mix due to market condition, which was partly mitigated by a higher average selling price.

The total number of engines sold by GYMCL, in the first quarter of 2019, decreased by 8% to 101,300 units compared with 110,113 units in the same quarter last year.

Lower unit sales primarily reflect lower sales of truck and bus engines, which was partially offset by higher sales of engine for the off-road market during the first quarter of 2019.

According to the data reported by the China Associations of Automobile Manufacturers, in the first quarter of 2019, sales of commercial vehicle, excluding gasoline-powered and the electric-powered vehicles, decreased by 2.4%.

The market was led by a 20.3% decrease in the medium-duty truck sales with continued decline in the bus market.

GYMCL overall truck engine sales also declined in the first quarter of 2019, but the light-duty truck sales increased, and the off-road engine sales rose, led by a higher engine sales in the agriculture equipments market.

Gross profit was RMB 761.3 million, USD 113.1 million, compared with RMB 853.5 million in the first quarter 2018.

Gross margin decreased to 18.3% from 19.7% in the first quarter of 2018.

The lower gross profit was mainly due to lower sales volume and a change in product mix in the first quarter of 2019.

Other operating income decreased by 13.0% to RMB 43.9 million, USD 6.5 million, from RMB 50.5 million in the first quarter of 2018.

The decrease was mainly due to a lower government grant by RMB 5.2 million in the first quarter of 2019.

Research and development, R&D expenses decreased by 40.1% to RMB 71.9 million, USD 10.7 million, compared with RMB 119.9 million in the first quarter of 2018.

Lower R&D expenses in the first quarter of 2019 were mainly due to the capitalization of development costs for National VI and Tier 4 engine that met the IFRS capitalization criteria.

In the first quarter of 2019, the R&D capitalizations amount was RMB 47.6 million, USD 7.1 million.

R&D expenses continue to reflect development and testing of new engine to meet higher emission standard and further efforts to enhance engine quality and performance.

In the first quarter of 2019, the total R&D expenditure, including capitalized costs, was RMB 119.5 million, USD 17.7 million, and it represents 2.9% of net revenue.

In the first quarter of 2018, the total R&D expenditure was RMB 119.9 million, representing a 2.8% of net revenue.

Selling, general and administrative, SG&A expenses increased by 4.5% to RMB 376.1 million, USD 55.9 million, compared with RMB 359.9 million in the first quarter of 2018.

SG&A expenses represent 9.0% of net revenue compared with 8.3% in the first quarter of 2018.

The increase was primarily attributable to higher warranty expenses.

Operating profits was RMB 357.3 million, USD 53.1 million, compared with RMB 424.2 million, in the first quarter of 2018.

The operating margin decreased to 8.6% from 9.8% in the first quarter last year -- in the same quarter last year.

Finance costs increased by 12.3% to RMB 25.3 million, USD 3.8 million, compared with RMB 22.5 million in the first quarter of 2018.

Higher finance costs result mainly from a nonrecurring government interest expense grant of RMB 4.2 million in the first quarter of 2018, which was partly offset by lower bill discounting in the first quarter of 2019.

Net earning attributable to China Yuchai's shareholders was RMB 198.0 million, USD 29.4 million, compared with RMB 242.8 million in the same quarter last year.

Basic and diluted earnings per share were RMB 4.85, USD 0.72, in the first quarter of 2019 compared with RMB 5.94 and RMB 5.93, respectively, in the same quarter last year.

Basic and diluted earnings per share in the first quarter of 2019 was based on a weighted average of 40,858,290 shares.

In the first quarter of 2018, basic earnings per share was based on a weighted average of 40,858,290 shares and diluted earning per share was based on a weighted average of 40,916,810 shares.

Balance sheet highlight as at March 31, 2019.

Cash and bank balance were RMB 5.2 billion, USD 767.8 million, compared with RMB 6.1 billion at end of 2018.

Trade and bills receivables were RMB 8.7 billion, USD 1.3 billion, compared with RMB 4.7 billion (sic) [RMB 7.4 billion] at the end of 2018.

Inventory were RMB 3.0 billion, USD 438.2 million, compared with RMB 2.5 billion at the end of 2018.

Trade and bills payable were RMB 5.2 billion, USD 774.5 million, compared with RMB 4.6 billion at the end of 2018.

Short- and long-term bank borrowings were RMB 1.7 billion, USD 253.4 million, compared with RMB 2.0 billion at the end of 2018.

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

(Operator Instructions) We have from William Gregozeski of Greenwich Global.

I have a few questions.

Do you guys still expect your long-term gross margin to be in the 19% to 20% range?

Well.

Yes, I think so because I think, this year, we're going to have, what I call, the new National VI implemented in some cities.

So we are around there, 90% plus or minus maybe 0.5 percentage point.

Okay.

Speaking of the National VI engines, what percent of your unit sales in the quarter were the National VI engines?

And what -- how is the market receiving those engines?

Okay.

There's not much right now because the emission standard hasn't been really implemented.

It will be gradually implemented in the second half of this year.

We have done some prototypes, which we sent out to the OEMs.

So far the reception is actually quite good.

Okay.

All right.

With the implementation coming up, some of the old engines coming up in the market, the Belt One Road and things like that, when can we start expecting to see unit sales growth on a year-over-year basis?

In terms of National VI?

Just all of your engines?

Well -- I mean this year we have sold -- so far, this year, first quarter, we sold 100,000 units, right?

So I mean the Belt One Road is -- there was -- we had some impact but it's mostly on the, what I call, export market in other countries.

As and when, I think, the -- we call the Belt Road developed, I think we probably will see some gradual increase, but I don't expect to see a big huge jump.

Okay.

What about your unit sales growth in general?

When can we expect to see your whole company unit sales start increasing year-over-year?

This is a tough question here.

So we actually don't provide any, what I call, guidance as a policy.

But I think we would expect to see some growth in the second quarter, I will say.

But I think for a full year, we are not prepared to say too much here at this point.

Okay.

In regards to your R&D, what do you expect the percent of sales or the absolute amount to be when combining expense and capitalized going forward?

We would normally expect about 3 percentage point of sales.

Okay.

And that's on the expense and capitalized combined?

Yes.

Yes.

Now this year, it will be a bit unusual because of the Nat VI and T4 emission upgrade that's going to be implemented next year and I think from this year, so we'll probably see a bit more this year.

Okay.

Okay.

The 20F, you guys -- there is a mention about you developing an EV bus powertrain.

Can you talk a little bit more about that?

And when that might be ready for a sale?

Well, this is Kelvin.

We -- actually we had started the development work on the EV powertrain, including the high-speed, and also the whole EV powertrain as well, so we are in the beginning stage.

And then, this is still an early assumption.

And at this stage and then the -- we are in a position -- and then the sourcing the suppliers and also doing the integration at this stage.

And also we also had some trail prototype and then for some end-user in the local city and then for trial at this stage.

Okay.

So if you're doing customer trials, that's relatively developed?

I mean is this something we could see for sale next year?

We have done some integration for electric vehicles, EV buses, okay?

And we have sold some systems so far this year, not a lot, but we sold some to some of the provincial cities.

Okay.

What -- I mean when, because obviously, you guys are getting really hurt on the bus market, when might this be ready to start taking some of that market share?

I don't think you'll see very much this year.

Okay.

All right.

And any idea when the dividend might be announced?

We will let you know.

We can't say too much right now.

All right?

Our next question comes from the line of David Raso of Evercore.

I was curious, your comments about the government assistance and helping some markets.

Can you give us a little more color on which verticals, which particular type of projects or so forth you can give us a little more color on regarding where do you see the help?

And maybe where the help feels the most significant when you even look out to 2020 or beyond?

Help on the certain segments you're saying?

No, there are some incentives for EVs.

Mitsubishi is already in place.

And I think there is a -- they're going to gradually wind it [down].

On and off, you see some incentives, I think like for example, in the past, you have seen some for agriculture equipment.

But I think that there wasn't -- other than those, I think that there's not many that we actually are aware of that's specifically targeting for the industry.

But are there any particular infrastructure projects or what you were describing, some of the ag equipment subsidies?

Just trying to understand, which of the verticals?

Be it product category, type of project that you're seeing the most help?

Right now it is the electric vehicle, right now.

Other than that I think...

But there's no particular -- from transportation to waterways to whatever it may be that you're seeing any particular assistance that appears to be government-driven in project activities, say on the off-highway side?

Not yet.

Normally, there will be some for agriculture, generally, but (inaudible) No, we have not -- we are not aware of any significant one right now.

And when it comes to credit availability, what have you seen, by way of impact, from some of the looser monetary policy that we began to see towards the end of last year?

How has that manifested itself in customer activity or maybe it hasn't?

I mean they would have affected -- I mean the housing market, for example.

And then I think the government has been increasing some infrastructure spending in the likes of high-speed rail, and that's still ongoing right now.

I'm just trying to figure the off-highway strength or at least better than feared, how would you summarize why that has occurred year-to-date?

Or maybe this was an outlook that you already had for off-highway and you did expect it to be up this year.

Okay.

Let me put it in other way, I think, in the case of agriculture, I think I'm not sure where you're driving at here, I'm sorry.

There the whole market is generally quite, kind of, flat right now.

All right?

We don't think that it's going to decline but it's just sort of flat for the market, but we have been doing quite well in the agriculture market right now because we were able to get into sort of new segments, like, for example, in the rice harvester.

So that has helped us mitigate some of the losses in other segments like (inaudible) market.

So in the case of, for industrial engines, which I think you may be alluding to, there is just some growth -- good growth there.

And it's driven a lot of it by the -- some increase in the infrastructure spending, also probably partly driven by the increased liquidity that the government had introduced in the early part of this year.

Okay.

Yes, I'm just trying to size up how much has the government helped the market this year?

And it sounds like you don't necessarily have the ability to connect the dots on a particular vertical, a particular level of increased liquidity where it's obvious.

In general, the market for off-highway has been probably a little better than most people feared 3, 4 months ago?

Yes.

And I was just trying to figure out, can you help us pinpoint a little bit where has the pleasant surprise have come from, but it doesn't sound like you've been surprised by your off-highway engines being up year-to-date.

Yes.

Because it probably came from -- in our case, it came from agriculture, which is from a new segment that we got -- managed to step into.

(Operator Instructions)

Okay.

I think we have one question from -- on the web questions from [Mr.

Kurton].

The question is what is the cash flow in Q1?

I believe the question is whether we generate positive cash flow?

The answer is no, we are having negative cash flow in Q1, which is pretty seasonal.

So that is the answer.

Let me add to that.

Initially, in our industry, the first quarter and second quarter are probably the strongest quarters.

I know the first half is obviously -- usually better than second half.

So during the first half, you generally have to build up certain inventory.

And of course, in building up inventories, you will self-consume cash, right?

And you will collect them back in the second half and towards the end of the year.

That's why, come end of the end year, if you look at our open, how I call, receivables position is actually -- the number of days of receivables outstanding is actually very low.

It's less than 1 month, in terms of 1 or 2 weeks.

So that is a type of seasonality that we have been seeing and experiencing in the past few years -- or number of years.

There's a question again on the web.

Does the trade war concern you?

Yes, if it leads to a slow down in general economy, it would concern me.

And if the general economy is down, it would definitely affect our business.

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