China Yuchai International Ltd (CYD) 2019 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

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 Third 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, the VP of operations of CYI.

Before we begin, I will remind all listeners that throughout this call, we may make statements that 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.

Within 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-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 in 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 third quarter and 9 months ended September 30, 2019.

Thereafter, we will conduct a question-and-answer session with the purposes of today's call, the financial results for the third quarter and 9 months ended September 30, 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.

For the third quarter of 2019, China's GDP slowed to 6%, slightly below the expected 6.1% growth consensus.

This was the slowest growth since the first quarter of 1992.

The economy's slowing trends continue as there were lower exports from China in September, and softness was noted in the freight shipments, factory power generation as well as in the services sector.

Overall, auto sales in September 2019 reported the 15th straight months of lower sales.

Some economic analysts believe GDP growth will decline in the fourth quarter of 2019 to below 6% as recurring global demand may affect Chinese exports and domestic business to investors.

Automotive sales have affected by the government's implementation -- so have been affected by the government's implementation of new automotive emission standard, the National VI, which were implemented on 1st July in some Tier 1 cities in that engines.

These local regulations reflect the early launch of National VI vehicles before the mandatory national implementation date for the default engines.

Vehicle dealers will focus on selling the National V inventory before the mandated implementation of higher emission standards, so they would not have unsellable vehicles on their lots.

According to data reported by China Association of Automobile Manufacturers, CAAM, in the third quarter of 2019, sales of commercial vehicles, excluding gasoline-powered and electric-powered vehicles, decreased by 30.6% overall compared with the same quarter in 2018.

This included a 4.1% decrease in the truck segment and an 8.4% increase in the bus segment.

During the third quarter of 2019, the sales of heavy-duty trucks increased by 3.7%, while the medium-duty truck sales declined by 14.2%.

Heavy-duty bus sales increased by 5% and light-duty bus sales rose by 10.7%.

The government's phasing out of incentives for electric buses may be helping to increase the sale of buses propelled by total combustion engines in some Chinese bus markets.

We are cautiously optimistic, although the government policies are to continue to promote for the electric vehicle penetration of the auto market.

In the third quarter of 2019, our engine sales were 70,140 units compared with 31,062 units in the third quarter of 2018.

Engine unit sales in the first 9 months of 2019 were 281,499 units compared with 281,850 units in the same period last year.

For the third quarter of 2019, our chart engine sales were down double digits, while our bus engine sales increased by 35.4%.

Our overall off-road sales increased by 8.9% in the third quarter 2019, with double-digit growth in industrial engine sales offsetting seasonal industrial engine sales to the agricultural markets.

Off-road engine sales continue to be a significant sales channel throughout sale units.

We continue with our strategy of being technology leaders through being the first -- among the first to introduce engines that meet the new emission standards.

And by producing these next-generation engines before the mandatory implementation, we can capture early end-users and offer these engines to our current customers as well.

Our model YCK08 is an example of this strategy as it became the first domestic diesel engine has been certified for the National VIb emission standards in China, which is not expected to be mandated for the next 2 to 3 years.

In addition to the 35 new engines models that we have launched, 10 engine complied with off-road C04 emission standards for this engine to comply on-road National VI emission and 1 comply with National VIb.

We have also supplemented our engine portfolio with 4 new energy powertrain systems.

We are at the early stages of our new energy products as we anticipate launching new energy products in the future.

Since May 2019, when we announced our new energy powertrain system and products at press conference in Beijing, we've embarked on new growth topped with growth portfolio of powertrain systems, traditional powertrain technology and new energy powertrain technology.

Recently, the recent auto show in Wuhan, we showcased our new energy products, which are well received by the industry.

These new products adopt a different technology design to complete the seamless integration of initial model and internal combustion engines to enable vehicles to reach better mileage range and charging efficiency.

These powertrain systems can benefit with us in market applications such as semi-trailers, dump trucks, mass transit buses, trucks and rubber tired gantry crane.

Our capability in bidding the National VI emission standard has strong attention among OEM end-users as we signed a new strategic partnership with Guangxi Holding, a new producer -- a leading producer of heavy-duty trucks in China, and new strategic partnership with Foton Motor Group for product support for National VI-compliant engines and technologies, overseas market development and new energy product development.

Our joint venture, Eberspaecher Yuchai Exhaust Technology Co, continues to advance the new exhaust emission control systems to meet and exceed National VI emission standard.

As a further example of this and this important engine leader in China, large commercial vehicle market, push-button powered by Yuchai's high-power engines carry the prominent veterans and their families who devoted their lives to national independence in the 70th-anniversary celebration in the National Day parade in Beijing.

Many parade vehicles were put out by China -- by Yuchai engines, including the first 6 YCS04N engines in the Beijing market.

Yuchai generators also power many of the giant electronic screens used Tiananmen Square for the celebration.

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

Cash and bank balances were RMB 5.7 billion, or USD 803.5 million and trade and bills receivables were RMB 8 billion or USD 1.1 billion.

Inventories were RMB 2.4 billion USD 334.5 billion.

On July 19, 2019, we shared our success with shareholders with a cash dividend of USD 0.85 per share.

In October, our YC4A engine model won the prestigious award at the annual agricultural and farming exhibits conference in (inaudible).

This 2019 Agricultural Industry Gold Award fixed volume for our product quality and superior technology.

The model YC4A is the best-in-class 70 horsepower, agricultural vehicle engine featuring the largest for -- amongst its peers in the marketplace.

We are pleased with our new advanced engine portfolio that meets both the National VI and Tier 4 emission standards, which will be implemented nationally in China in the near future.

Our best-in-class technology and extensive service network has attracted new OEM partners.

They expect increasing contributions from our MTU Yuchai Power Co.

Ltd.

and Eberspaecher Yuchai Exhaust Technology Co.

Ltd.

operations and our new energy initiatives in the future.

We believe the government will further initiate policies to address the decline in economic growth, although it will take a while for the impact to be realized.

Hopefully, the limited trade agreement between China and U.S. will have a significant positive impact in both countries' economies.

With that, I will turn to Thomas to go over the financials.

Thank you.

Now let me review our third quarter results for 2019.

The net revenue for the third quarter of 2019 increased by 3.7% to RMB 3.3 billion USD 467.7 from RMB 3.2 billion for the same quarter last year.

The total number of engines sold by GYMCL during the third quarter of 2019 was 70,140 units compared with 71,062 units for the same quarter last year, a decrease of 1.3%.

Higher bus industry and other engine sales partially offset by lower truck and agriculture engine sales compared with the same period last year.

Total off-road engine sales increased in the third quarter of 2019.

According to data reported by the China Association of Automobile Manufacturers, CAAM, in the third quarter of 2019, sales of commercial vehicles, excluding gasoline-powered and electric-powered vehicles, decreased by 2.6% overall compared with the same quarter in 2018.

This includes a 4.1% decrease in the truck segment and, however, an 8.4% increase in the bus segment.

During this period, the sales of heavy-duty trucks increased by 3.7%, while the medium-duty truck sales decreased by 14.2%.

Gross profit decreased by 13.8% to RMB 524.1 million, USD 74.1 million dollars from RMB 607.7 million in the same quarter last year.

Gross margin was 15.8% compared with 19.1% in the same quarter last year.

The decrease in gross profit was primarily attributable to higher production costs on the National VI engine and pricing pressure.

Other operating income was RMB 91.3 million, USD 12.9 million compared with RMB $44.1 million in the same quarter last year.

The increase was mainly due to higher government grant and higher interest income compared with the same quarter last year.

Research and development, R&D expenses increased by 28.7% to RMB 81.8 million, USD 11.6 million from RMB 63.6 million in the same quarter last year.

Higher R&D expenses was mainly due to higher consultancy fee and experimental costs.

R&D expenses will focus on new emission engines and improving existing engine products.

GYMCL continue to further develop new engine is its expanded portfolio of next-generation National VI and Tier 4 emission-compliant engines as well as improved overall energy quality and performance.

In the third quarter of 2019, the total R&D expenditure, including capitalized cost was RMB 165.0 million, USD 23.3 million, and it represents 5.0% of net revenue compared with RMB 144.3 million, representing 4.5% of net revenue in the third quarter of 2018.

Selling, general, administrative, SG&A expenses increased by 6.2% to RMB 357.7 million, USD 50.6 million from RMB 337.0 million in the same quarter last year.

The increase was mainly due to higher depreciation and higher repair and maintenance expenses.

SG&A expenses represent 10.8% of revenue compared with 10.6% in the same quarter last year.

Operating profit decreased by 30.0% to RMB 175.8 million, USD 24.9 million dollars from RMB 251.2 million in the same quarter last year.

The operating margin was 5.3% compared with 7.9% in the same quarter last year.

Finance costs increased by 57.4% to RMB 47.0 million, USD 6.7 million compared with RMB 29.9 million in the same quarter last year.

Higher finance costs was mainly due to higher amount of trade bill discounter.

Net profit attributable to China Yuchai's shareholder was RMB 50.3 million, USD 7.1 million compared with RMB 128.5 million in the same quarter in 2018.

Basic and diluted earnings per share were RMB 1.23, USD 0.17, compared with earnings per share of RMB 3.15 in the third quarter of 2018.

Basic and diluted earnings per share in the third quarter of 2018 and 2000 -- sorry, 2019 and 2018 were based on a weaker average of 40,858,290 shares.

Now I will go over the first 9 months result of 2019.

For the first 9 months ended September 30, 2019, net revenue increased by 5.1% to RMB 12.3 billion or USD 1.7 billion from RMB 11.7 billion in the same period last year.

The total number of engines sold by GYMCL in the first 9 months of 2019 was 281,499 units compared with 281,850 units in the same period last year.

The collected data reported by CAAM, in the 9 months ended September 30, 2019, sales of commercial vehicle, excluding gasoline-powered and electric-powered vehicle decreased by 6.8%, with lower sales in the trucks and bus segment compared with the same period in 2018.

Gross profit decreased by 10.4% to RMB 2.0 billion, USD 282.5 million compared with RMB 2.2 billion in the same period last year.

Gross margin was 16.2% compared with 19.0% in the same period last year.

The decrease was mainly attributable to higher cost in the production of National VI engine and pricing pressure.

Other operating income increased by 82.4% to RMB 234.1 million, USD 33.1 million compared with RMB 128.3 million in the same period last year.

The increase was mainly due to higher government grant and higher interest income.

R&D expenses were RMB 264.3 million, USD 37.4 million compared with RMB 340.0 million in the same period last year.

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

The ongoing R&D program is focused on new and existing engine products as well as continued initiatives to improve engine quality.

In the first 9 months of 2019, total R&D expenditure, including capitalized cost was RMB 461.3 million, USD 65.2 million compared with RMB 420.7 million in the same period last year.

As a percentage of revenue, R&D spending was 3.7% in the first 9 months of 2019 compared with 3.6% in the same period last year.

SG&A expenses were RMB 1.1 billion, USD 161.6 million, similar to RMB 1.1 billion in the same period last year.

SG&A expenses represent 9.3% of revenue for the first 9 months of 2019 compared with 9.1% in the same period last year.

Operating profit was RMB 825.3 million, USD 116.7 million from RMB 949.9 million in the same period last year.

Operating margin was 6.7% in the first 9 months of 2019 compared with 8.1% in the same period last year.

Finance cost was RMB 104.7 million, USD 14.8 million compared with RMB 82.0 million in the same period last year.

Higher finance costs were mainly due to higher amount of trade bills discounted.

Net profit attributable to China Yuchai's shareholder was RMB 395.3 million, USD 55.9 million, compared with RMB 503.5 million in the same period last year.

Basic and diluted earnings per share were RMB 9.68 million, USD 1.37, compared with RMB 12.32 in the same period last year.

Basic and diluted earnings per share in the first 9 months of 2019 were based on a weighted average of 40,858,290 shares compared with a weighted average of 40,858,290 shares for the basic earnings per share and a weighted average of 40,872,254 shares for the diluted earnings per share in the same period in 2018.

Some of the balance sheet highlights as of September 30, 2019.

Cash and bank balance were RMB 5.7 billion, USD 803.5 million, compared with RMB 6.1 billion at the end of 2018.

Trade and bill receivable were USD 8.0 billion, USD 1.1 million -- billion, compared with RMB 7.4 billion at the end of 2018.

Inventory were RMB 2.4 billion, USD 334.5 million, compared with RMB 2.5 billion at the end of 2018.

Trade and bills payables were RMB 5.3 billion, USD 755.0 million, compared with RMB 4.6 billion at the end of 2018.

Short and long-term borrowing were RMB 1.6 billion, USD 228.4 million, compared with RMB 2.0 billion at the end of 2018.

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

(Operator Instructions) We have the first question coming from the line of William Gregozeski from Greenridge.

I have a few questions.

Regarding the National VI engines, can you talk about how the sales have been and what the outlook is you're seeing from your customers for those engines?

Okay.

For the National VI engines, as you probably know, some of the major cities that implement it and the jet engine has been -- also been implemented since 1st July 2019.

We are getting some orders.

In fact, it's increasing.

So we expect this year to sell out with quite a good number of units sold, and we'll be waiting for next year to sell quite a bit -- fair bit of our National VI engine.

I think up to the end of this year, we expect we should reach at least (inaudible) engines.

Okay.

And are you still -- on the gross margins, you mentioned the National VI, are you still doing then the batch production?

And when will you switch to the commercial production for these engines?

Some of them are still in batch production, and some of them already in the, what we call, volume production.

So we are seeing improving trend for gross margin for National VI products.

So actually, in the last few months, it's been on the increase, and the volume of National VI engine saw an increase as well.

The rest of the remaining engine -- gross margin for the remaining engines for National V and below, we -- the gross margin basically are at about the same level as previous year, perhaps a little bit lower.

Okay.

And then on the new energy technology development, can you talk more about kind of where you are in that cycle?

Obviously, there's a lot more -- I mean, not even just buses, but now there's other vehicles moving to electric.

Where are you in the development of these?

And when do you think you might have something on the market that you can compete with?

Okay.

We are selling some electric power systems.

Out of those that we have launched in May in Beijing, we have just have orders, especially, in particular, for the range extender.

We are getting some -- a lot of very good inquiries for that particular, what I call, the system.

We are at a stage where we are actually selling the prototypes to some of the OEMs, for them to test on the vehicles -- for the vehicles.

So now for other energy, likely for fuel cells units that we have, we are probably a much -- a bit more longer before you get to the stage where we can actually say we have commercial sales product.

Okay.

When do you think you'll be getting more commercial-sized orders for the electric motor systems?

The electromotor systems, I think, we have decent integration.

We have full-time integrated systems now, right now.

But we don't see that we'll have it in a big way yet.

It will probably take us a little while, I think, to build it up, it's still in the early stage of the electric vehicle segment of the market, whereas, for the range extender, we are a little bit further ahead.

So we should see some sales, I think, maybe in the year -- 2020, 2021 year.

(Operator Instructions) We have our next question coming from the line of Ke Chen from Shah Capital.

Yes.

What's the operating cash flow in the third quarter?

We are almost -- Ke Chen, this is Thomas.

We are almost neutral.

We have slightly under by minus $40 million.

So we're almost breakeven.

But compared with Q3 of last period, we are very much better, last Q3 was a huge negative.

And that is mainly due to strong collections for the third quarter.

That's great.

Please talk about the MTU Yuchai-related revenue and profit in your third quarter.

And more importantly, what's the outlook for this JV?

Mr. Chen, this is Kelvin.

Regarding on the MTU joint venture, and we have sold around 60 units.

And then we -- in the third quarter of 2019, and we -- our forecast for the next years are not finalized yet, but we will be expecting in the range of 200 to 250 units for 2020.

What's the revenue range?

Our range was around in the range of about $85 million or 60 engines.

I see.

With better legal environment in Hong Kong, are you guys considering listing Hong Kong like what Alibaba did recently?

We haven't thought about it yet.

Yes, at this point, we're not prepared to do so, no.

So you mean you will consider?

Or are you going to think about it?

Or...

Well, I mean, yes, we are discussing.

We haven't really given it a fresh thought.

So no.

And at this point in time, there's no plans right now.

Okay.

My last question about gross margin.

Again, the trend actually improving for our second quarter.

Do you see this gross margin go back to 19% narrow like you did for the last couple of years?

I mean do you see that trend eventually.

Yes.

That is -- as it is, we are seeing an improving trend now because as the volume increases, the gross margin also improved for the National VI, right?

So going to next year when the government has to buy only National VI engines in the middle of next year, we should see a substantial increase in its sales for next year.

So over time, yes, we do expect to go back to the same kind of gross margin rates, yes.

Okay.

So with these higher emission standards and higher technology requirements in China, do you see more engine market consolidation going forward?

Well, it's hard to say, we rather not so far comment on our competitors, but we hope that there will be some, so that (inaudible).

(Operator Instructions) We do not have any further questions at the moment.

We have now reached the end of our Q&A session.

I will turn the call back to Mr. Hoh.

Please go ahead, sir.

Thank you all for participating in our conference call.

We look forward to speaking with you again.

So thank you.

Thank you, sir.

Ladies and gentlemen, that concludes our conference for today.

Thank you for your participation.

You may disconnect now.