China Yuchai International Limited (CYD) Q1 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to China Yuchai International Limited First Quarter 2017 Conference Call. [Operator Instructions] Please be advised that this conference is being recorded today, Tuesday, 9th of May, 2017. I would like now 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 2017 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 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 Operation 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 it is made and the company specifically disclaims any obligation to maintain or update the forward-looking information, whether of the nature contained in this conference 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, 2017. Thereafter, we will conduct a question-and-answer session. For the purposes of today's call, the financial results for the first quarter of 2017 are unaudited, and they will be presented in RMB and US 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. We are pleased with our first quarter results as witnessed by unit sales growth as there's the increase in margin expansion. Our top line increased by 34.9% on a 32.2% gain in unit sales to 120,010 units compared with 90,771 units in the first quarter of 2016. The growth of 52.3% rise in gross profit, a 169.6% jump in earnings per share. According to data reported by China Association of Automobile Manufacturers, CAAM, the first quarter of 2017 sales of commercial vehicle excluding gasoline-powered and electric vehicles increased by 26.4% year-on-year. The truck market rebounded with 32.7% growth, led by a 93% increase in heavy-duty truck sales. We experienced growth in light, medium and heavy-duty segments of the truck markets during the first quarter of 2017. Ongoing regulations on vehicle overloading and fixed asset investments contributed to the robust growth of new truck sales in the first quarter. However, according to CAAM report, excluding gasoline-powered and electric vehicles, the bus market experienced a 14.3% decline, with the heavy and medium-duty bus segments recording a 9.6% and 39.5% decline, respectively. Our international business continue to grow as we supply our high-quality passengers of Saudi Arabia and Pakistan. In February 2017, we announced that 321 units of Xiamen King Long buses has been chased by Saudi Arabia Public Transport Company for use in Mecca. This municipal buses were all powered by GYMCL YC6MK 380 and YC6L 280 heavy-duty engines. This order adds to our penetration into the Saudi Arabian municipal market as we had supplied in 2013 and 2016, a total of approximately 1,800 engines powering Xiamen King Long buses, which were exported to Saudi Arabia. We also have over 200 of our engines installed in new buses for Lahore bus rapid transit system in Pakistan. Lahore is Pakistan's second largest city and a key municipal bus market. Another 100 of our bus engines will also be installed in buses that are used in the City of Multan, further extending our coverage in Pakistan. We also registered growth in the upper markets in the first quarter of 2017. Sales of our industrial, agriculture, marine and power generation engines increased compared to the same period in 2016. After the completion of the transition from Tier 2 to Tier 3 emission standards, we regained market share. We also entered into a strategic partnership with Zoomlion Heavy Industry Science & Technology Co., Ltd, in short Zoomlion, the leading manufacturer of high-tech equipment for the engineering and agriculture industries. Other participants include Y&C Engine Co., Ltd., a joint venture entity of GYMCL based in Wuhu, Anhui Province. As the leader in powertrain system for on- and off-road applications, GYMCL together with Y&C Engine will develop and produce 6-cylinder medium- and heavy-duty engines for Zoomlion agricultural equipment. This strategic partnership will provide dedicated production to Zoomlion and enhance our penetration in the China's agricultural engine markets. Our balance sheet remains strong. Our inventories grew to RMB1.8 billion from RMB1.7 billion in December 2016. We continue to monitor our financial and operational performance to ensure that our growth is sustainable in the long run, generating positive cash flow and enhancing our return on investment capital remain our top priorities. The engine business never -- sorry, the engine business requires an EBITDA, capital expenditures and R&D investment to meet the high emission standards of the future. We are very glad that Chinese government is committed to controlling carbon emission nationwide. This declared commitment to improving the environment will benefit us, as we have RMB capabilities to continually develop in new products meeting higher emission standards. Finally, let me provide a brief update on the Memorandum of Understanding, MOU, entered into within our subsidiary, HL Global Enterprises Limited or HLGE and a Chinese property company in February 2017 for the later to acquire HLG's properties, hotel properties in China. You also note that HLG on April 16, 2017, that has no legally definitive agreement had been entered into by the agreed date of April 15 the MOU has therefore lapse. With that, I will now like to turn the call over to Dr. Thomas Phung, our Chief Financial Officer, who will provide more details for the financial results.

Thank you, Weng Ming. Now let me review the first -- our first quarter results. Net revenue for the first quarter of 2017 increased by 34.9% to RMB4.6 billion, USD660.9 million compared with RMB3.4 billion in the first quarter of 2016. The total number of engines sold by GYMCL in the first quarter of 2017 increased by 32.2% to 120,010 units compared with 90,771 units in the same quarter a year ago. According to data reported by China Association of Automobile Manufacturers, CAAM, in the first quarter of 2017, sales of commercial vehicle, excluding gasoline-powered and electric-powered vehicles, increased by 26.4%. The market was led by a 32.7% increase in truck sales with heavy-duty truck sales claiming 93.0%. The bus market continues to be weak, showing decreasing sales in every territory, led by a 39.5% decline in medium-duty bus sales. Gross profit increased by 52.3% to RMB920.7 million, USD133.4 million compared with RMB604.3 million in the same quarter of 2016. Gross margin rose to 20.2% in the first quarter of 2017 compared with 17.9% in the same quarter of 2016. The gross profit increase was mainly attributable to the higher sales and better product mix. Our operating income was RMB39.6 million, USD5.7 million compared with RMB23.3 million in the same quarter of 2016. This increase was due to higher interest income and higher gains on foreign exchange revaluation in the first quarter of 2017 as compared to the same quarter of 2016. Research and development, R&D expenses increased by 25.1% to RMB 124.6 million, USD18.1 million from RMB99.6 million in the same quarter of 2016. As a percentage of net revenue, R&D expenses -- R&D spending was 2.7% compared with 2.9% in the same quarter of 2016. R&D expenses continued to reflect development and testing cause of new engine, meeting higher emission standards and GYMCL continued initiative to improve engine quality. Selling, general and administrative, SG&A expenses increased by 17.6% to RMB 404.9 million, USD 58.7 million from RMB 344.1 million in the first quarter of 2016. SG&A expenses represent 8.9% of net revenue compared with 10.2% in the same -- in the first quarter of 2016. The increase in SG&A expenses were primarily related to higher freight usage and warranty expenses due to higher sales. Operating profit increased by 134.4% to RMB 430.8 million, USD 62.4 million from RMB 183.8 million in the first quarter of 2016. The operating margin was 9.4% compared with 5.4% in the same period of 2016. Finance costs decreased by 7.7% to RMB 26.8 million, USD 3.9 million from RMB 29.0 million in the same quarter of 2016. Low finance costs, mainly resulted from reduced bank loan and borrowing. Bank borrowings were RMB 1.4 billion, USD 198.7 million compared with RMB 2.6 billion in the same period in 2016. Total net profit attributable to China Yuchai's shareholders was RMB 249.0 million, USD 36.1 million or earnings per share of RMB 6.12, USD 0.89 compared with RMB 89.2 million or earnings per share of RMB 2.27 in the same quarter in 2016. Earnings per share for the -- in the first quarter of 2017 was based on a weighted average of 40,712,100 shares compared with 39,298,340 shares in the same period in 2016. In June 2016, 1,413,760 new shares were issued to shareholders who elected to receive share in lieu of dividend in cash. Next we will go -- we will be going to review the balance sheet highlight as of March 31, 2017. Cash and bank balance were RMB 4.2 billion, USD 614.8 million compared with RMB 4.1 billion at the end of 2016. Trade and bills receivables were RMB 8.7 billion, USD 1.3 billion compared with RMB 7.1 billion at the end of 2016. Inventory were RMB 1.8 billion, USD RMB 260.8 million compared with RMB 1.7 billion at end of 2016. Short- and long-term bank borrowing were RMB 1.4 billion, USD 198.7 million compared with RMB 910.4 million at the end of 2016. Trade and bills payables were RMB 5.6 billion, USD 812.3 million compared with RMB 4.7 billion at the end of 2016. We will continue to focus on expanding our sales and market condition in mark-to-market segment to generate free cash flow and enhance return on invested capital and create shareholder value. With that, operator, we are ready to begin the Q&A session.

[Operator Instructions] Your first question comes from the line of Ke Chen of Shah Capital.

My first question will be, could you please tell us in detail, how your engine export benefit from China's One Belt, One Road initiatives, including the new strategy from GYMCL to take better advantage of this initiative?

Okay. We have -- we have -- our spot market has been quite strong. Last year, we sold close to 50,000 engines exported by -- in our case, the direct part is very small but most of the export is done through other OEMs, people that we sell engines to who in turn export to the overseas market. And we have been having some pretty good results, I guess, in the sense that we have been selling quite a fair bit of buses to Saudi Arabia, which I've just mentioned earlier, and also to Pakistan, right. So far this year, the first quarter, the export has been still quite strong. It's marginally lower than last year, but it is still pretty strong.

Could you talk more about your initiatives related to One Belt, One Road, how you -- have new strategy to benefit from this policy?

Okay. I mean, it depends on which aspect of One Belt, One Road you're talking about. In terms of our engines, the best way to participate in a One Belt, One Road policy I mean, is there -- firstly, it will be through the truck, the logistic truck. I think if you radical -- if aware there is a highway, I guess, they build from China to go front towards the West. We can participate in that through the trucks. And also, we hope -- we also have some engines that's catered towards the marine applications, which can be used in the marines or the boats, rather the boats that are used to sale -- send the goods out of China. Those are 2 main areas.

Okay. Great. Great. Okay. My second question will be, you mentioned the higher standard in China require engine with higher technology. Do you think -- are you -- you talked about continue to belong in marine and also hybrid engines based on your R&D and marketing initiatives?

Well, we have -- already have some hybrid engines that we already start produce and already in the marketplace. There is supply of hybrid engines that was launched, I think, about a year back, a few months ago. So we're probably about the first to do that now. And then we also have hybrid engines that combines gas and electric, gas and diesel and electric as well. So we have all those products available that we can sell to the bus and trucks OEM. Yes. So we do have this -- and with our strong R&D, we will continue to develop that, yes.

How about Marine?

Marine wise, we have not, what I'll call, as we have high horsepower engines, but we don't have hybrid yet in the sense. Now the high horsepower engines is doing very well for us so far and it's getting -- we're actually getting the market share there. The high horsepower engines are not just used for the Marine applications, it's also used in power generation applications. So recently, if you remember, last year, we -- a year ago, we got the joint venture with MTU and that joint venture is -- purpose is mainly to produce engines for the high horsepower market. So that will help us in the long run, yes.

Great. Okay. My last question. We understand the Board has not been in favor with stock buyback, has been extra conservative; however, with over USD 400 million led cash and Yuchai trading at 3x free cash flow. We're just wondering why the board is not receptive to this acquisitive buyback policy.

Okay. Well, as you know, as we addressed -- discussed it many times, Mr. Chen. We'll rather put the money in the hands of our investors, right. And let them decide how they are investing money as opposed to the company investing for them. But the other things that you need to bear in mind, I think the Chinese moving up the emission standard for its climate as well. So I think, there has been talk about national in the next few years. We will need some money, again, funds to get ourself ready for that. So we do this some funding there and some usage of cash there.

Well, I understand that because looking at 20-F you spend a lot of money on R&D, but are you still generating lot of operating cash flow. So the free cash flow is still over around USD 250 million. So you got a lot of free cash flow, even considered that your spending on the R&D. So that's why we are suggesting buying back shares and to get back to the shareholders?

And also, there -- so we didn't expect to the board. But I think, at the moment, the view of the board is that we will rather give a cash back to the shareholders and let them decide what they do. And then shareholders can buy more shares if they want to.

[Operator Instructions] There are no further questions at this time. We have now reached the end of our Q&A session. And I will turn the call back over to Mr. Hoh.

Thank you all for participating in our conference call. We look forward to speaking with you, again, the next quarter. Thank you.