China Yuchai International Ltd (CYD) 2019 Q4 法說會逐字稿

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 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 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 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 on 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 fourth quarter and fiscal year ended December 31, 2019.

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

For the purposes of today's call, the financial results for the fourth quarter and fiscal year ended December 31, 2019, are unaudited and it 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 fourth quarter of 2019, China's GDP was 6%, the same growth rate as in the third quarter 2019.

For the full year 2019, GDP growth was 6.1%, which was the slowest annual growth in the last 29 years.

According to data reported by China Association of Automobile Manufacturers, CAAM, in the fourth quarter of 2019, unit sales of commercial vehicle, excluding gasoline-powered and electric-powered vehicles, increased by 2.9% overall compared with the same quarter in 2018.

This growth included a 2% sales increase in the truck segment and a 10.4% increase in the bus segment.

The unit sales of heavy-duty trucks increased by 13.6%, while the medium-duty truck sales declined by 7.4% compared with the fourth quarter of 2018.

Heavy-duty bus sales increased by 17.9% and medium-duty bus sales rose by 18.1% compared with the 2018 fourth quarter.

From the full year perspective, statistics for -- from CAAM show that overall unit sales of autos in China fell 8.2% in 2019 from 2018 with a total of 25.8 million vehicles sold in 2019.

This decline followed a 2.8% decrease in 2018.

In the commercial vehicle market in China, CAAM has reported a 2019 annual unit sales, excluding gasoline-powered and electric-powered vehicles, decreased by 4.5% overall compared with 2018.

This decrease included a 4.7% decline in the truck segment and a 2.6% decrease in unit bus sales.

Sales of heavy-duty trucks increased by 2.1%, while the medium-duty truck sales declined by 21.7%.

Heavy-duty bus sales increased by 8% and medium-duty bus sales declined by 2.3%.

Auto sales has been affected by slower economic growth in 2019.

In addition, the first stage of the National VI emission standards was implemented nationwide in July 1, 2019, for gas engine-driven vehicles.

This early launch of the National VI emission standards for gas engines is well ahead of the mandatory implementation of diesel vehicles to be enforced between July 2020 and July 2021.

In the fourth quarter 2019, our total engine sales were 94,649 units compared to 93,881 units in the fourth quarter of 2018.

Our overall unit sales into the truck engine market were down 4.3%, while we achieved a 49.8% growth in the heavy-duty truck engine sales, far surpassing a 13.6% sales increase in the heavy-duty truck market.

Our new natural gas -- National VI truck engines were well received in the marketplace in the fourth quarter of 2019, as demand for National VI engines accelerated due to mandatory national implementation.

Our sales for the passenger market increased by 11.7%, which exceeded the 10.4% growth in unit bus sales.

This growth was led by double-digit growth in both the heavy- and medium-duty bus engine markets.

Our overall off-road sales increased by 11.9% in the fourth quarter of 2019 with double-digit growth in industrial engine sales.

For 2019 year, our engine unit sales were 376,148 units compared with 375,731 units in 2018.

Our truck engine sales were down 1.2% but outperformed a 4.7% decline in the overall truck market.

Our sales to the heavy-duty truck market achieved double-digit growth compared with 2018.

Our bus engine sales decreased by 10.1% as our sales to the light-duty bus market dropped by double digits.

Our overall off-road sales increased by 9.3% in 2019, led by double-digit growth in industrial engines.

As a technology leader, we design our growth strategy by developing next-generation engines before the government mandatory implementation, which enable us to capture early orders and establish our leading market position.

For 2020, we have commercially introduced a portfolio of new diesel engine model, compliant with the on-road National VI emission standards for the launch of National VI vehicles by our OEM customers.

In addition, our model YC6K08 engine was the first domestic diesel engine certified to comply with the more stringent National VIb emission standards, which is expected to be mandatory in July 2023.

Already, the growing sales of our National VI gas engines increased our penetration into the heavy-duty truck engine market in the fourth quarter of 2019.

Our National VI emission standard technology has also led to our newly formed strategic partnership with Guangxi Holding, a leading producer of heavy-duty trucks in China and with Foton Motor Company -- Group for product support for National VI compliant engines and technologies, overseas market development and new LNG product development.

We have taken other steps to enhance our growth opportunities in the future.

We are at the development stage of producing our first 4 new energy products, and we anticipate expanding into a larger portfolios of new energy products in the future.

Utilizing different technology design, our first new energy product, the next-generation hybrid powertrain, will seamlessly integrate electric motors and internal combustion engines to enhance vehicle mileage and overall efficiency.

We have identified a number of end-market applications for this new powertrain product, including semitrailers, dump trucks, mass transit buses, trucks, rubber-tired red gantry cranes and others.

Also, our JV, Eberspaecher Yuchai Exhaust Technology Company Limited, is ramping up production of these new exhaust emission control systems for commercial vehicles to meet China National VI and Tier 4 emission standards.

These emission controls will be used in our own engines as well as be available for sale.

We achieved double-digit growth for international sales in both the fourth quarter and for the fiscal year 2019.

We have enhanced our export potential by creating a dedicated operations.

We have captured further market share in our neighboring nation, Vietnam.

Our new business enterprise there is focused on wholesale and retail distribution, technical advisory and consulting, engine maintenance and repair services to better attract new customers.

We also increased our ownership of YC Europe operations in 2019.

We were honored as our YC4A diesel engine won the 2019 China Agricultural Machinery Industrial Product Gold Award.

Winning this prestigious award at the Annual Agricultural and Farming Equipment conference validates our effort to improve the quality and performance of Chinese agricultural machinery.

The model YC4A is a 70 horsepower agricultural vehicle engine, featuring the highest torque in the marketplace.

We were also honored as China -- as Yuchai engines propelled coach buses that carried prominent veterans and their families in the 70th anniversary celebration in the National Day Parade in Beijing.

Many of the giant electronic screens used in the celebration used Yuchai power generators as well.

Our balance sheet remains strong.

At the end of 2019 year, cash and bank balances were RMB 6.4 billion or USD 916.1 million, and trade and bills receivable were RMB 7.7 billion or USD 1.1 billion.

Inventories were RMB 2.8 billion or USD 404.8 million.

Due to our strong balance sheet and cash flow, we issued a cash dividend of USD 0.85 per share in July 2019 to share our success with our shareholders.

Our new advanced engine portfolio that meets the National VI And Tier 4 emission standards is ready for full production, as demand growth after these standards are being implemented across China.

Our technological leadership in diesel, natural gas and hybrid engines, combined with our extensive service network, continues to attract new OEMs and partners.

On a separate note, on March 10, 2020, the dividend for the year 2019 of RMB 402,040,944 was approved by GYMCL shareholders for all shareholders.

China Yuchai has a 76.4% ownership of GYMCL and the dividend will be paid to the company in due course.

This dividend attests to the financial stability and commitment to the company's long-term shareholders during the current financial -- current difficult market environment.

Looking into 2020.

The outlook is somewhat clouded at present.

However, we remain hopeful that limited trade agreement between China and U.S. will be beneficial to both countries' economies in the near future.

The coronavirus is having an economic impact on the first quarter of 2020, but we believe this impact will gradually diminish in the second quarter, and we will regain sales growth in the following quarters of 2020.

The Chinese government will likely further implement policies to improve economic recovery.

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

Thank you, Weng Ming.

Now let me review our fourth quarter results for 2019.

The revenue for the fourth quarter of 2019 increased by 25.4% to RMB 5.7 billion, USD 814.6 million from RMB 4.5 billion for the fourth quarter of 2018.

The revenue increase was mainly due to a change in product mix.

According to the data reported by the China Association of Automobile Manufacturers, CAAM, in the fourth quarter of 2019, sales of commercial vehicle, excluding gasoline-powered and the electric-powered vehicle, increased by 2.9%; truck sales increased by 2.0% with heavy-duty truck sales increased by 13.6%.

GYMCL's heavy-duty truck engine sales in the fourth quarter of 2019 increased by 49.8%.

The CAAM bus market increased by 10.4% in the fourth quarter of 2019.

GYMCL bus engine sales growth exceeded the market growth, as the sales of medium-duty bus engine grow significantly.

GYMCL off-road engines sales rose in the fourth quarter 2019, led by higher sales in the industrial engine market.

Gross profit increased by 28.5% to RMB 1.1 billion, USD 158.8 million compared with RMB 0.9 billion in the fourth quarter of 2018.

Gross margin was 19.5% in the fourth quarter of 2019 compared with 19.0% in the fourth quarter of 2018.

The growth in the gross margin was mainly attributed to product mix and was partially offset by higher production costs related to the National VI engines in the fourth quarter of 2019.

Other operating income was RMB 104.4 million, USD 15.0 million compared with RMB 64.4 million in the fourth quarter of 2018.

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

Research and development, R&D, expenses increased by 111.7% to RMB 228.0 million, USD 32.7 million from RMB 107.7 million in the fourth quarter of 2018.

Higher R&D expenses were mainly due to the further development of the portfolio of next-generation National VI and Tier 4 engines as well as improvement in engines' quality and performance.

In the fourth quarter of 2019, the total R&D expenditure, including capitalized development costs, were RMB 397.7 million, USD 57.0 million, and it represents 7.0% of revenue compared with RMB 222.9 million, representing 4.9% of revenue in the fourth quarter of 2018.

Selling general and administrative, SG&A, expenses increased by 36.5% to RMB 663.2 million, USD 95.1 million from RMB 485.8 million in the fourth quarter of 2018.

SG&A expenses represent 11.7% of revenue compared with 10.7% in the fourth quarter of 2018.

The higher SG&A expenses were mainly attributed to higher warranty expenses and higher impairment loss on trade receivable in the fourth quarter of 2019.

Operating profit decreased by 3.6% to RMB 320.8 million, USD 46.0 million from RMB 332.6 million in the fourth quarter of 2018.

The operating margin was 5.6% compared with 7.3% in the fourth quarter of 2018.

Finance costs decreased by 12.8% to RMB 27.1 million, USD 3.9 million from RMB 31.1 million in the fourth quarter of 2018, mainly due to lower interest rate on both bank loan borrowings and bill discounting.

In the fourth quarter of 2019, total net profit attributable to China Yuchai's shareholders increased by 9.3% to RMB 209.6 million, USD 30.0 million from RMB 191.8 million in the fourth quarter of 2018.

Basic and diluted earnings per share were RMB 5.13, USD 0.74 compared with RMB 4.69 in the fourth quarter of 2018.

Basic and diluted earnings per share in the fourth quarter of 2019 and '18 were based on a weighted average of 40,858,290 shares.

Now let me go over the 2019 annual results.

Our revenue increased by 10.8% to RMB 18.0 billion, USD 2.6 billion compared with RMB 16.3 billion in 2018.

Gross profit was flat at RMB 3.1 billion, USD 445.2 million compared with 2018.

The gross margin was 17.2% in 2019 compared with 19.0% in 2018.

The gross margin was lower primarily due to the change in product mix as well as the higher production costs related to the National VI engine in 2019.

Other operating income increased by 75.7% to RMB 338.5 million, USD 48.5 million compared with RMB 192.7 million in 2018.

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

R&D expenses increased by 9.9% to RMB 492.2 million, USD 70.6 million compared with RMB 447.7 million in 2018.

In 2019, the total R&D expenditure, including capitalized costs, were RMB 859.0 million, USD 123.1 million and represent 4.8% as a percentage of revenue compared with RMB 643.5 million, representing 4.0% of revenue in 2018.

R&D expenses were mainly for research and development of a portfolio of new engine compliant with the next-generation National VI standard and enhanced quality and performance.

SG&A rose -- expenses rose by 16.2% to RMB 1.8 billion, USD 258.9 million from RMB 1.6 billion in 2018.

The expenses represent 10.0% of revenue compared with 9.6% in 2018.

The increase in R&D expenses was mainly due to higher warranty expense and higher impairment loss on trade receivables.

Operating profit decreased by 10.6% to RMB 1.1 billion, USD 164.3 million from RMB 1.3 billion in 2018.

The operating margin was 6.4% in 2019 compared with 7.9% in 2018.

Finance costs increased by 16.5% to RMB 131.8 million, USD 18.9 million from RMB 113.1 million in 2018, mainly due to higher amount of bank borrowings and trade bill discounting in 2019 compared with 2018.

The net profit attribute to China Yuchai's shareholders decreased by 13.0% to RMB 604.9 million, USD 86.7 million, or basic and diluted earnings per share of RMB 14.81, USD 2.12 compared with RMB 695.3 million or earnings per share of RMB 17.02 in 2018.

Basic and diluted earnings per share in 2018 and 2019 were based on a weighted average of 40,858,290 shares.

Some balance sheet highlights as of December 31, 2019.

Cash and bank balance were RMB 6.4 billion, USD 916.1 million compared with RMB 6.1 billion at the end of 2018.

Trade and bill receivables were RMB 7.7 billion, USD 1.1 billion compared with RMB 4.7 billion at the end of 2018.

Inventories were RMB 2.8 billion, USD 404.8 million compared with RMB 2.5 billion at the end of 2018.

Trade and bill payables were RMB 5.7 billion, USD 822.1 million compared with RMB 4.6 billion at the end of 2018.

Short- and long-term borrowing were RMB 2.1 billion, USD 294.6 million compared with RMB 2.0 billion at the end of 2018.

I will now turn the call over to Kevin for the more comments before we begin the Q&A.

Thank you, Thomas.

Please note that due to COVID-19, some officers of China Yuchai are remotely calling into the conference call because of travel restrictions.

This may result in a slight delay in providing answers to some questions.

We apologize for any inconvenience, and thank you for your patience.

Operator, we are now ready for the Q&A.

One moment please for the first question.

(Operator Instructions) Your first question comes from the line of William Gregozeski from Greenridge Global.

Great quarter.

Can you talk about how you were able to get such high heavy-duty sales in the quarter and the year relative to the market?

Greg (sic) [William], this is Weng Ming here.

I mean first -- during the -- I think it has a lot to do with the gas engine that was implemented, call, in the later -- from July 1, 2019.

So a lot of the heavy-duty engines that we sold in the fourth quarter are actually gas engines.

Okay.

And is that -- are you expecting to see similar growth on that going forward?

Well, we would see sort of more gas engines business, what I call, in this coming year.

Now that's partly because of the, what I call, the government's push to have a better environment.

So we do expect to see, but again, a lot of it depends also on the oil prices as well.

Okay.

And it looked like you ended the quarter with a pretty good inventory balance.

Have you had any interruptions in shipping or part availability or anything like that related to the lockdowns in different areas of China?

Well, okay.

Now if I break it down into months now, in the month of January before Chinese New Year, there were no problems at all.

After Chinese New Year, when the coronavirus or COVID-19 outbreak was at its peak, yes, we had problems getting components, but they have since improved now but not very much.

Yes, it's improved.

And things are gradually getting back to normal in China.

A lot of our suppliers are also now starting to gear up and beef up their production.

Okay.

And then what kind of impact have you -- I mean, have you seen any other direct impact from this?

I presume first quarter sales are going to be quite a bit lower just because of the different shutdowns.

I know you can't go too much into detail on that, but can you just kind of talk generally about the impact other than the part availability on the company?

Okay.

Yes, sure.

Now, the whole country was under lockdown, especially the Hubei province, Wuhan, that's kind of a Chicago of China.

So some of the critical components came from that region.

Of course, not all our components are from Hubei.

So without certain product components, we can't produce.

We can only use up what inventories that we have in the warehouse, okay?

And also with the whole country under lockdown, other parts of China too -- the components for other part of China too were affected.

So for the month of February, I think generally is not just for ourselves but for the general economy and most of -- many of our businesses.

So the supply chain has been fairly affected.

And you think that's pretty much back to normal now start going into the fourth quarter -- or sorry, the second quarter?

Yes.

I mean, it's not 100% yet.

Although -- yes, it's -- I think from what we can see, our own production has improved a lot compared to February.

So we are gradually getting there.

I think by second quarter, we should get mostly there, if not third quarter.

Okay.

And last question is what was the amount of the write-offs of receivables in the quarter and then for the full year?

Yes, Thomas, you want to answer that?

Sorry, William, could you repeat your question again?

Yes.

What was the amount of the receivable write-offs in the quarter and for the full year?

It's -- it was actually happened on the last quarter on the impairment is approximately CNY 25 million.

I assume that's RMB?

Yes, RMB.

RMB, yes.

Yes.

I think -- essentially, we have made a provision for it because there's a delay in payment and we're having some issues with the customer.

So we will take some actions to try and recover it.

Your next question comes from the line of Don Espey of Shah Capital.

Don Espey with Shah Capital here.

You provided color on National VI, but please provide an update on your electric powertrain and natural gas engines?

Okay.

Firstly, natural gas -- yes, mentioned earlier, the natural gas -- National VI emission standards was implemented from July 1, 2019.

And since then, we had so far favored natural gas engines.

So in total, for the full year of 2019 probably sold about 21,000 units, most of them in the second half.

Is it 20,000?

22,000.

Now for the new energy powertrains, the one that shows -- there seems to have -- a lot of customers have a lot of interest in is the [recent] standard.

So we are working with our OEMs to try to -- to get this built into their systems, vehicles, and there is a lot of interest in the marketplace for that particular powertrain.

Now the others are not so well advanced, especially for the fuel cell, I mean, the market is not quite there yet, but we are progressing with it.

We're also working with OEM to start off with the prototype -- to build a prototype the OEM to test product that we currently have.

Okay.

What was your operating cash flow in Q4 and calendar year 2019 and an approximate U.S. dollar CapEx for 2020?

Thomas -- you can take that, Thomas.

You're referring to the free cash -- the operating cash flow, right?

Yes, that's right.

We -- in the fourth quarter, we do contributed a positive cash flow of about RMB 600 million.

And for the full year, we have contributed about RMB 1.5 billion.

And approximate U.S. dollar CapEx for 2020?

Kelvin, do you want to answer that?

I'll answer it.

Now we can break it down into 2 components.

One is the -- what's called the maintenance CapEx, which is about RMB 300 million.

I think that is somewhere equivalent to about year by 7 -- about USD 40 million.

And then for the continuing development of the National VI and T4 engines, it will probably another CNY 300 million to CNY 500 million, again, about USD 40 million to USD 50 million.

For all in all, we're looking about USD 80 million, maybe USD 90 million.

Okay.

And we saw engine sales were up in March in China, same trend at CYD?

When you say up, is it compared to which period?

Compared to February, it's definitely up.

Compared to -- for this year, you're talking about 2019 -- 2020?

Yes.

2020.

Yes, I can't go into too much detail because March final numbers are not really finalized yet.

But compared to last month, yes, we expect it to be up.

Okay, okay.

We were glad to see the dollar plus dividend.

However, with CYD Board -- with over USD 50 million sitting in Singapore, why is the Board still not buying back shares trading under IPO share price and with net cash level?

Well, I think we have gone through this many times, even with you all fairly before in the past.

I think the Board has preferred to reward the shareholders through dividends as opposed to other methods.

So I think that the Board hasn't changed its approach yet as of today.

We don't understand why they're still electing to not do that even at these prices.

I mean, is the company planning on going private?

We have -- no, we haven't discussed any of this issue.

I don't know.

I think the Board -- It's up to the Board of shareholders.

Cash is very important to us in this very difficult environment right now.

So -- especially for now with the COVID-19, the whole environment is still very, very uncertain right now.

So the more cash we have with us, the better it is going to be.

(Operator Instructions)

Okay.

We have a question here.

How much were revenue you -- how much revenue do you expect to decline due to the virus?

What is the impact on trade receivables?

Are you able to elaborate further on the CNY 300 million rise in the SG&A?

Okay.

Now the impact on the -- from the virus, it's largely in the month of mid-February largely.

There's probably some spill on March.

So domestically in China, we hope that the things will get better in the second, third quarter and fourth quarter.

So hopefully, starting in the second quarter.

Now it's going to be very difficult right now due to the uncertainties to actually forecast the impact of the virus.

Receivables, we do not expect to have too much of problem in receivables.

We always have been able to collect our receivables in the past.

We don't expect it to be different this year.

Now Thomas, do you want to talk or respond on the rise in SG&A?

I can't actually read the questions because it's so small.

I'll read out to you.

Are you able to elaborate further on the CNY 300 million rise in SG&A?

The main increase on that is due to the warranty expenses as we had went into the National VI series introductions or launch.

We do expect to service the engine as is on the pilot run.

So that is the major impact on the G&A.

Okay.

Now we have another question relating to MTU unit.

Kelvin, maybe you want to attend to that one.

It states that what was the unit output, revenue, gross margin and profit for MTU units and what will be the target in 2020 for these numbers?

Kelvin?

Yes, this is Kelvin.

Regarding on the operating profit for the engine, and it depends on the selling price.

And then the -- so I don't think that we can specify then what the margin we are taking from the engine to -- on selling to the customer here.

But I would say, and then the engine margin is better than what we are doing on the traditional vehicle engine sales and then in the Yuchai engine.

On the sales target for the year 2020, we are expecting then to sell around 300 engine for this year, but it now will be a question mark because of we definitely lose the first quarter on the sales to the unusual market due to the coronavirus epidemic -- pandemic.

So possibly -- and then we will miss this target but we will try to sell as much as we can.

Okay.

Final question will be what will be the gross margin trend in 2020 with more National VI sales?

The National VI sales contribution to the gross margin is not very big at the moment, simply because we are still -- we still haven't reached -- we haven't been selling a lot yet, and we expect to sell more in 2020, but it will still not be large enough to give us the volume or the economy of scale that we need.

So we will expect -- however, we do expect the gross margin to improve for National VI in 2020.

We have another question here.

It's -- the question is what will be the percentage National VI sales in 2020?

While it's too early to tell right now, especially with the COVID-19 outbreak, we had hoped to sell more than 13,000 units, which we did last year.

It will definitely be more than that.

But with the COVID-19 -- with the first quarter been expected by the COVID-19, it's going to be difficult for us to forecast right now due to uncertainties.

We do expect to sell more than what we did last year.

Operator?

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

Please go ahead.

Thank you all for participating in this conference call.

We wish each of you good health, and please be safe during this crisis.

We look forward to speaking with you again.

Bye.

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

Thank you for participating.

You may now all disconnect.