China Yuchai International Limited (CYD) Q4 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the China Yuchai International Limited’s Fourth Quarter 2015 Earnings call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session [Operator Instructions] I must advise this conference is being recorded today, the 24th of February 2016. I would now like to hand the conference over to your first speaker for today Mr. Shiwei Yin. Please go ahead, sir.

Thank you for joining us today, and welcome to China Yuchai International Limited's 2015 fourth quarter and full-year conference call and webcast. Joining us today are Mr. Weng Ming Hoh and Mr. Kok Ho Leong, 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, 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. These forward-looking statements are based on current expectations or beliefs, including, but not limited to, statements concerning the company's operations, financial performance and condition. 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, including those discussed in the Company's reports filed with the Securities and Exchange Commission from time-to-time. The Company specifically disclaims any obligation to maintain or update the forward-looking information, whether of the nature contained in the script or otherwise. Mr. Hoh will provide a brief overview and summary, and then Mr. Leong will review the financial results for the fourth quarter and full-year ended December 31, 2015. Thereafter, we will conduct a question-and-answer session. For the purposes of today's call, the financial results for the fourth quarter and full-year of 2015 are unaudited, and they will be presented in RMB and U.S. dollars. All of the financial information presented is reported using International Financial Reporting Standards as issued by the International Accounting Standards Board. Mr. Hoh, please start your presentation.

Thank you, Shiwei. The year 2015 was a challenging year for the diesel engine sector in China, due to sluggish construction and manufacturing activities as well as a result of China's slowing economy and upgrading emission standards in both on and off-road segments which impacted our customers purchasing decision. Again, in such challenging environment we maintain our profitability by selling higher priced engines compliant with stricter emission standards that’s stimulating our optional days. The annual rate of growth of the Chinese economy was 6.8% in the fourth quarter of 2015 as construction and manufacturing sectors continues to lead the slowdown. The sales of commercial vehicles excluding gasoline-powered and electric-powered vehicles third quarter declined of 4.7% and 14.4% in the fourth quarter and full-year included there on slides respectively compared to the same period in 2014. The heavy-duty and medium-duty truck and bus segments recorded even higher declines. Net revenue for the fourth quarter of 2015 was RMB2.9 billion or $450.7 million compared with RMB3.9 billion in the fourth quarter of 2014 a 25.4% decline. Market demand for engines especially medium and heavy-duty commercial engines for truck remain weak. In addition, off-road markets such as construction equipment and mining continues to experience lowered engine demand, while sales of natural gas engines were negatively affected by a lower fuel price. However, the decline in our engine sales were partially offset by this higher average selling price as we sold more additional full compliant engines. Despite the downturn in the truck market our diversified engine portfolio enabled us to mitigate this client through increase sale to international markets. In 2015, we won a competitive bid for the supply of 1300 engines for school buses that were exported to Saudi Arabia. As one of the largest Chinese bus engine export orders in 2015, our engines represented around 90% of the total units awarded in this contract. A total 1016 long buses, power or engine - buses powered with our engines were exported to Saudi Arabia. China Yuchai was one of the first group to enter the market in Saudi Arabia and we have been able to win large orders from the supplier for the supply of engine for the school buses sale. International markets are an important new growth area for us. In 2015 we formed a new joint venture YC Europe in Hong Kong and YT Euro in Germany to exclusively mark that off-road diesel and gas-engines excluding marine engine. As spare part throughout Europe as well as provide services in engine related area. We will supply engines and spare parts, training and service expertise to YT Europe and YC Europe Germany to support the European initiative. Lastly, we announced a entry into the 50/50 joint venture with MTU a subsidiary of Rolls Royce power system to broaden our portfolio of state of the art Co3 compliance, high speed [Blast 20] off-road engine. The new joint venture to be based at GYMCL manufactures facilities Yulin City well produced MTU series 4000 diesel-engine compliant with Chinese Co3 Emission Standard, a power of what is ranging from 1400 to 3490 kilowatt primarily for off-road market such as power generation and oil and gas applications. This joint venture is another testament of our quest for high quality and a advanced technology whether through our own R&D efforts or by cooperating with [indiscernible] third-parties to continue enhance our offerings and extend our distribution opportunities. As an integral part of market diversification strategy, we continue to mix price in off-road markets. In early 2015 K-Gold model C&C truck with our YC6K1340N liquid natural gas engine won the Fuel Efficient Heavy-Duty Truck of the year in 2014 as China's largest Annual Commercial Vehicle Event. The Indian has the largest displacement and highest stock power among comparable natural gas against the China, by utilizing lean-burn technology, it reduces average energy consumption by approximately to 5% compared with diesel-engines of similar size and power. This model is the only engine in China that utilizes the JACOBS in-cylinder brake technology, and has LNG braking power up to 17 kilowatt per liter. In 2015, the introduction of aggressive subsidies by the Chinese government to the electric vehicle sector, shifted demand from natural gas and diesel-powered buses to electric-powered buses. As a result of the subsidies and a weak diesel fuel prices, the growth momentum of the natural gas bus engine market developed during the period between 2012 and 2014 was expected. We expected cost sales of our natural gas and diesel engine to the Chinese market to weaken in 2015. To better adapt to the changes in the manufacturing environment, we disposed of our Xiamen facility and relocated our production back to Yulin during this fourth quarter 2015. Existing customers will continue to be served from our manufacturing facility at Yulin, with this disposal we become more efficient as we consolidated our operation back to Yulin City. Going forward, we will continue to flow of cost saving initiative while maintaining our market leadership. In addition to generating cost saving and [indiscernible] greater emphasis on some penetrated international markets. R&D continues to be important part of our long-term growth strategy. We increased our R&D spending by 20.5% during the year to RMB507 million or US$78.1 million. As a percentage of net revenue R&D spending of 3.7%, R&D expected to increase mainly due to the ongoing research and development of the new air diesel engine product, continue initiative to improve engine quality and to meet increasingly stringent emission standard for the future. In early 2016, we announced a launch of four new engine compliance with the more advanced National V Emission Standard covers the light, medium and heavy-duty, and new energy segment. We continue to be a market leader in emission control in China with engines exceeding the current National Emission Standard compared with the current National IV Emission Standard. We already developed a sold engines complaint with more stringent engine National V and VI Emission Standards. Lowering of carbon emission is a key goal of the environmental quality under the Chinese [35-year] (Ph) plan. We remained at a forefront of emission reduction through our advanced engine technology to better serve current markets and create growth opportunities for the future. On to the financial side, we continues to carefully review our financing options and take initiative to improve our balance sheet that meet the challenges of this environment. During 2015, we reduced our inventories to RMB1.7 billion from RMB1.9 billion in 2014. Meanwhile, our operations continue to generate solid cash flow. We declared a dividend of $1.10 per share for the fiscal year 2014 in July 2015 that will be paid out either in cash or new shares at the election of our shareholders. Based on the results of dividend elections, the aggregate cash dividend was approximately US$23.4 million, to the issuance of 1,102,634 new shares. We remain committed to creating an accounting shareholder value for the long-term. With that let me now turn the call over to Kok Ho Leong, our CFO to provide more details on the financial results.

Thank you, Weng Ming. I will now proceed to report on our financial performance for the fourth quarter and full-year of 2015. Let me start with fourth quarter results. Our net revenue for the fourth quarter of 2015 decreased by 25.4% to RMB2.9 billion, US$450.7 million compared with RMB3.9 billion in the fourth quarter of 2014. The total number of GYMCL engines sold in the fourth quarter of 2015 was 60,143 units compared with 93,094 units in the same quarter a year ago, representing a decrease of 35.4%. As reported by the China Association of Automobile Manufacturers CAAM, in the fourth quarter of 2015, sales of commercial vehicles excluding gasoline-powered and electric-powered vehicles decreased by 4.7%. The market remained weak in the heavy- and medium-duty truck segments, which registered a decline in sales of 12.2% and 9.0%, respectively. The market was also weak in the heavy- and medium-duty bus segments, which registered a decline in sales of 29.4% and 31.6%, respectively. Gross profit decreased by 28.7% to RMB692.1 million US$106.6 million compared with RMB970.1 million in the same quarter of 2014. The gross profit decline was mainly attributable to lower unit sales in the fourth quarter of 2015 compared with the same quarter of 2014. Gross margin was 23.7% in the fourth quarter of 2015 compared with 24.7% in the same quarter of 2014. Other operating income was RMB25.8 million US$4.0 million, compared with RMB13.8 million in the same quarter of 2014. This increase was mainly due to foreign exchange gain in the fourth quarter of 2015 as compared to a loss in the corresponding quarter of 2014. Research and development R&D expenses declined by 7.6% to RMB122.5 million US$18.9 million from RMB132.6 million in the same quarter of 2014. As a percentage of net revenue, R&D spending was 4.2% compared with 3.4% in the same quarter of 2014. R&D expenses reflected development and testing costs as new engines were introduced to the market and we continued its initiatives to improve engine quality. Although the market condition softened, the Company maintained its efforts in R&D to prepare for the transition from Tier-2 to Tier-3 emission standards in the off-road segment and continued to introduce new engine models. Selling, general & administrative SG&A expenses decreased by 5.9% to RMB433.3 million US$66.7 million from RMB460.2 million in the fourth quarter of 2014. SG&A expenses represented 14.8% of net revenue compared with 11.7% in the fourth quarter of 2014. The increase in the SG&A percentage was mainly due to the effect of lower unit sales. Operating profit decreased by 58.5% to RMB162.2 million US$25.0 million from RMB391.1 million in the fourth quarter of 2014. The decrease was mainly due to lower revenue and lower gross profit in the fourth quarter of 2015. The operating margin was 5.5% compared with 10.0% in the fourth quarter of 2014. Finance costs decreased by 39.5% to RMB22.1 million US$ 3.4 million from RMB36.5 million in the same quarter of 2014. Lower finance costs mainly resulted from lower costs for term loans. The share of joint ventures was a gain of RMB16.3 million US$2.5 million, compared with a loss of RMB3.6 million in the same quarter of 2014. This was mainly due to the reversal of impairment made for a joint venture of our subsidiary that was booked in 2013. In the fourth quarter of 2015, total net profit attributable to China Yuchai's shareholders was RMB59.0 million US$9.1 million, or earnings per share of RMB1.50 US$ 0.23, compared with RMB241.2 million, or earnings per share of RMB6.31 in the same quarter in 2014. Earnings per share in the fourth quarter 2015 was based on a weighted average of 39,298,340 shares compared with earnings per share in the fourth quarter 2014, which was based on a weighted average of 38,195,706 shares. In July 2015, 1,102,634 new shares were issued to shareholders who elected to receive shares in lieu of dividend in cash. Let me now go over to financial highlights for the 12 months ended December 31, 2015. Our net revenue decreased by 16.4% to RMB13.7 billion US$2.1 billion compared with RMB16.4 billion in 2014. The total number of engines sold by GYMCL in 2015 was 364,567 units compared with 483,825 units in 2014, representing a decrease of 119,258 units, or 24.6%. As reported by CAAM, sales of commercial vehicles, excluding gasoline-powered and electric-powered vehicles, decreased by 14.4% in 2015. The market remained weak in the heavy and medium-duty truck segments, which registered a decline in sales of 26.0% and 21.0%, respectively. The market was also weak in the heavy and medium-duty bus segments, which registered a decline in sales of 25.5% and 19.8%, respectively. Gross profit decreased by 15.2% to RMB2.8 billion $429.7 million compared with RMB3.3 billion in 2014. The gross profit decline was mainly attributable to lower unit sales. Gross profit margin increased to 20.3% compared with 20% in 2014. The higher gross margin was mainly due to higher average selling price and lower raw material costs. Our operating income was RMB19.3 million $3.0 million compared with RMB94.9 million in 2014, a decrease of RMB75.6 million. This decrease was mainly due to foreign exchange losses and losses from the disposal of GYMCL's shareholding interest in Xiamen, Yuchai Diesel Engines Company, Limited. Xiamen Factory. Research and development R&D expenses increased by 2.5% to RMB507.0 million US$78.1 million compared with RMB494.6 million in 2014. As a percentage of net revenue, R&D spending was 3.7% compared with 3% in the 2014. R&D expenses increased mainly due to ongoing research and development of new and existing engine products as well as continued initiatives to improve engine quality. Although the market conditions soften. We maintain our efforts in R&D to prepare other transition from Tier-2 to Tier-3 emission standards in the off road segments and continue to introduce new engine models. Selling, general & administrative, SG&A expenses declined 6.3% to RMB1.05 billion, US$230.7 million compared with RMB1.06 billion in the 2014. SG&A expenses represented 10.8% of net revenue compared with 9.7% in the 2014. The increase in SG&A percentage was mainly due to the effect of lower unit sales. Operating profit decreased by 37.7% to RMB805.2 million, US$124 million from RMB1.3 billion in 2014. The decrease was mainly due to lower revenue. The operating margin was 5.9% compared with 7.8% in 2014. Finance costs declined 25.7% to RMB116.4 million, US$17.9 million from RMB156.7 million in 2014. Lower finance costs mainly resulted from lower cost for term loan and less bill discounting. The share of joint ventures was a loss of RMB2.9 billion, US$0.5 million, compared with the loss of RMB20.7 million in 2014. Impairment made for the joint venture of our subsidiary that was booked in 2013. In 2015, there was a loss of RMB17.3, US$2.7 million relating to the Xiamen Factory's disposal. However, in 2014 there were gain arising from acquisition of RMB95.2 million. The net profit attributable to China Yuchai shareholders was RMB341.1 million, US$52.5 million or earnings per share of RMB8.81, US$1.26 compared with RMB730.3 million or earnings per share of RMB19.36 in 2014. Earnings per share were based on with the average of 38,712,282 shares compared with earnings per share in 2014 which were based on with the net average of 27,720,248 shares. In July 2015 1,102,634 new shares were issued to shareholders of elected to receive shares in lieu of dividend in cash. Let me now go to the balance sheet highlights as of December 31, 2015. Cash and bank balances were RMB3.8 billion, US$582.4 million, compared with RMB2.5 billion at December 31, 2014. Trade and bills receivable were RMB7.2 billion, US$1,105.5 million compared with RMB8.1 billion at the end of 2014. Inventories were RMB1.7 billion, US$263.5 million, compared with RMB1.9 billion at the end of 2014. Short and long-term borrowings were RMB2.5 billion, US$378.2 million, compared with RMB2.3 billion at the end of 2014. Trade and bills receivable were RMB3.9 billion, US$594.5 million, compared with RMB4.2 billion at the end of 2014. With that operator, we are ready to begin the Q&A session.

Thank you sir [Operator Instruction] We have the first question from the line of Sandy Mehta. Please ask your question.

Yes good morning and thanks for taking my call. A few questions, can you comment on the inventory situation in the channel? And what you are seeing in terms of inventory levels out there?

Hello Sandy, this is Kevin. And regarding on the inventory on the channel, we would anticipate at the moment it's quite healthy and because it seems that limitation of the National IV from National III, the [indiscernible] there has been diminishing and also the [indiscernible] and then to increasing their stocks of the new vehicles, because of the cost demand and they are concerning about pricing increasing from the National III to National IV. And then the whole channel and then the announced [indiscernible] levels is just quite healthy and I believe that is in the range of about two to three months.

Okay. And then the second question is any thoughts on the dividend what you are thinking of or how you will approach the dividend declaration in a few months time?

Okay. This is Weng here [Sandy] (Ph). It's a little early now to talk about dividend. I think the Board hasn’t taken any decision of this concept yet. So when the time comes, we will defiantly let you know.

Okay. And one final question, you talked about better prospects for your international sales, you have some good order for example from Saudi Arabia, what is the overall level of international sales as a percentage of your total mix? And how do you see international sales growing going forward?

Okay. Last year we saw about 42,000 unit - at quarter it was 42,000 units of engine as a directly by supply through our OEM. So that is mixed about close probably about [25%] (Ph) 30% at our total sales volume now. We continue to see growth in our international sales, we believe that this year it would still be better coming from our traditional markets within the South East Asian and Middle East region. Obviously we will get to see some from the [indiscernible] as well, all right. And interestingly thereafter we have setup of the Europeans joint ventures in European embassy. We have seen some sales now, of some interest now in our engines in the European markets. So that’s looking good.

I'm sorry the number you said was 30%?

No, 13%, one three. About…

13% okay.

Yes.

13%. And are these international sales are they sort of at the same margin level as your domestic business are perhaps higher?

Well it depends on the engine mix, Sandy, if it is the highest range engine, yes it will be higher and lower has been lower, but the mix is probably about the same compared to our domestic sales, I mean depending on where you export to, some countries will like bigger engines, other countries will like smaller engines.

And when you telling internationally deal sort of have a - what is the selling factor, is it the price or you’re the quality, the reputation, what sort of gets you the sale?

Well we've been selling internationally for a long time now, Sandy, particularly the [indiscernible] market which is our biggest export market. We have a law association with these countries, with this people for them China is [indiscernible] to China and also goods produced out of China well receive within [indiscernible].

Okay. Thank you so much. Thank you.

Okay we have a question from the webcast. It is any timeline on these similar incentives? Well, it is very hard to predict what [indiscernible] do so far that starting official that were seen, the diesel engine market aspect for those a new emission standard that has come up, that can be good or bad you know so we don’t really know, for now we haven’t seen anything officially yet.

[Operator Instructions] As there are no further questions at this time, I would like to hand the call back to your speakers for today for any closing remarks.

Thank you all for participating in this conference call. We look forward to speaking with you again. Thank you and good-bye.