China Yuchai International Limited (NYSE:CYD) Q2 2020 Earnings Conference Call February 24, 2021 8:00 AM ET

Company Participants

Kevin Theiss - Investor Relations
Weng Ming Hoh - President
Dr. Thomas Phung - Chief Financial Officer
Kelvin Lai - Vice President-Operations

Conference Call Participants

William Gregozeski - Greenridge Global LLC
Don Espey - Shah Capital

Operator

Ladies and gentlemen, thank you for standing by and welcome to China Yuchai International Limited Second Half and Annual 2020 Financial Results. [Operator Instructions]

I would now like to turn the conference over to Kevin Theiss. Please go ahead, sir.

Kevin Theiss

Thank you for joining us today and welcome to China Yuchai International Limited’s 2020 second half and fiscal year 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 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 facts are statements that may be deemed forward-looking statements. These forward-looking statements, including, but not limited to, statements concerning the Company’s operations and 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 Forms 20-F under the headings, the risk factors, results of operations and business overview, and another reports filed with the Securities and Exchange Commission from time to time.

If the COVID-19 pandemic is not effectively controlled, our business operations and financial conditions may be materially and adversely affected due to a deteriorating market for automotive sales and economic slowdown in China and abroad, a potential weakening of the financial condition of our customers, potential adverse impacts to our suppliers and supply chains or other factors that we cannot foresee.

Our 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 at information whether of the nature contained in the press 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 second half period and fiscal year ended December 31, 2020. Thereafter, we will conduct a question-and-answer session.

For the purposes of today's call, the financial results for the second half period ended -- year ended December 31, 2020 are unaudited and they will be presented in RMB and U.S. dollars. All the financial information presented is reported using the international financial reporting standards as issued by the International Accounting Standards Board.

Mr. Hoh, begin your prepared remarks.

Weng Ming Hoh

Thank you, Kevin. 2020 year started out with despair, but ended with strong momentum for China, which was the first country hard hit by COVID-19 pandemic. This widespread infection caused major disruptions in the Chinese economy, including the large and important automotive industries in China. Customers, suppliers, workers, service networks and other auto related occupations were all impacted in the first half of 2020.

The mandatory travel restrictions and lockdowns cripple the Chinese economy in the first quarter of 2020 and China's GDP declined by 6.8%. Worse year-over-year quarterly decline since 1992. Despite the economic impact and our lower engine unit sales, we maintain profitability at the end of the first quarter of 2020 with basic and diluted earnings per share of RMB1.49. We maintain a strong financial position with cash and bank balances of RMB4.8 billion.

With the success of lockdowns and travel restrictions, the Chinese government quickly enacted economic growth catalyst, which helped the Chinese economy recover GDP -- sorry, China's GDP rose by 3.2% in the second quarter of 2020. It is sales of commercial vehicles, excluding gasoline powered and electric powered vehicles increased by 50.5%, led by truck sales increase of 56.1% according to the CAAM data.

Some of this growth was pent-up demand from the first quarter, and some was a response to incentives for when the economic stimulus would bear fruit. By the fourth quarter of 2020, the Chinese economy was fully recovered with GDP attaining at a 6.5% growth rate and 2.3% for the 2020 year. In the second half of 2020, our sales were 217,138 engine units, an increase of 31.8% compared with the same period in 2019.

Our total truck engine unit sales increased by 43.4%. This increase was spearheaded by a 64.4% gain in medium duty truck engine unit, more than double the CAAM reported 30.1% growth in the medium duty industry truck sales as our market share for -- in this segment. The heavy and light duty truck engine sales also achieved double-digit growth.

Our total off-road engine sales grew by 51% in the second half of 2020 with strong agricultural engine unit sales and industrial engines also reported double-digit unit growth as well. This gains in the truck and off-road segments more than offset lower engine unit sales in the bus segment.

Revenue rose by 18.1% and operating profit grew by 14.5% in the second half of 2020 compared with the second half of 2019. Our net profit of RMB243.2 million or US$37.3 million was impacted by our share of results of our associates and joint ventures, which decreased to a loss of RMB64.5 million or US$9.9 million, compared with a profit of RMB11.7 million in the second half of 2019.

For the 2020 year, our revenue increased by 14.2% to RMB20.6 billion, or US$3.2 billion on a 14.4% increase in engine sold to 430,320 units. Our annual truck engines unit sales were up by double digits and off-road unit. sales increased by 31.7% led by a large increase in unit sales through the agricultural market.

Our annual net profit attributable to China Yuchai's shareholders was RMB548.9 million or US$84.1 million, compared with RMB604.9 million in 2019. Basic and diluted earnings per share were RMB13.43 or US$2.06 compared with RMB14.81 in 2019. Our annual net profit was also affected by our share of results of associates and JVs which decreased to a loss of RMB59 million or US$9 million compared with a profit of RMB19 million in 2019.

For the 2020 year, R&D expenses increased by 27.3% to RMB626.5 million or US$96 million as we continue to further develop our portfolio of new engines compliant with China's next emission standards. The National VI for on-road and Tier 4 for off-road application and to improve engine performance and quality. In 2020, the total R&D expenditure including capitalized costs was RMB1.2 billion or US$177.4 million, representing 5.6% of the net revenue.

The National VI emission standards is significantly more stringent compared with the National V standard. And it's one part of the Chinese government's campaign to improve the environment. We saw National VI engines during 2020 year and with a National VI A emission standards to be nationally mandated in 2021, we are ready with a complete portfolio of National VI diesel and natural gas engines.

A major part of our product strategy is to be among the first to introduce engines that meet or surpass upcoming new emission standards to better serve current clients, attract new customers as well. In the Marine space, we introduced a new lightweight, high powered engine designed to replace in boat [ph] engines in the yacht. Plus, also our YCA05175-S500 engine has the European Stage V emission standard test. And this engine -- Yuchai engine can now be marketed in the European Union for off-road application.

Yuchai's long history of providing high quality, high performance advanced engines has attracted many of the leading automotive OEMs in China as well as customers as well as creating opportunities for strategic alliances and joint ventures. In addition to the current joint ventures YC engines, Eberspaecher Yuchai Exhaust and MTU Yuchai, we enter a new strategic alliance in 2020 with Sany Truck, which were among other potential applications, further increase our presence in the heavy truck -- heavy duty truck.

We look forward to improving contributions from these joint operations in the future as well as exploring the potential for new alliances. At December 31, 2020, we maintain our financial strength with cash and bank balances of RMB6.4 billion or US$988.1 million after higher R&D spending, paying cash dividends and investing RMB1.7 billion more in inventories.

The higher inventory consisted of increased amount of National V engines for an expected pre-buy of these engines before the National VI emission standards are nationally mandated. And we have increased the purchase materials and components for National VI engine production as a standard approach. We rebounded strongly in the second half of 2020 from the issues caused by the COVID pandemic.

We entered 2020 with momentum and strong product lines to meet the challenges of the upcoming national rollout of National VI A emission standard. In addition, foreign markets should generate higher demand in 2021 as [indiscernible] economy's improved. As always, we continue to focus on maintaining our financial strength to provide the resources to enhance shareholder value.

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

Dr. Thomas Phung

Thank you, Weng Ming. Now let me review our second half result for 2020. Revenue for the second half of 2020 increased by 18.1% to RMB10.6 billion, US$1.6 billion compared to RMB9.0 billion in the second half of 2019.

The total number of engines sold by GYMCL during the second half of 2020 was 217,138 unit, an increase of 31.8% compared with 146,789 units in the second half of 2019. The increase was mainly due to higher engine unit sales in the truck markets where total unit sales to the heavy and medium duty trucks market segment more than offset the overall unit sales declined in the bus engine segment.

The off-road market also achieved significant sales -- unit sales growth in the second half of 2020 compared with the second half of 2019.

According to data reported by the China Association of Automobile Manufacturers, CAAM, in the second half of 2020, commercial vehicle unit sales, excluding sales of gasoline-powered and electric-powered vehicles, increased by 35.4% compared with second half of 2019, as unit sales of bus declined by 4.6%, while truck unit sales rose by 43.4%.

GYMCL's engine unit sales to the on-road commercial vehicle market increased by 23.5% with truck unit sales rising by 43.4%, matching the truck market growth. GYMCL's engine unit sales to the off-road markets increased by 51.0% compared with second half of 2019. The Company's higher off-road engine unit sales were led by a strong growth in the agriculture segment in the second half of 2020 compared with the second half of 2019.

Gross profit increased by 4.9% to RMB1.7 billion, US$262.3 million compared with RMB1.6 billion in the second half of 2019. Gross margin was 16.1% compared with 18.1% in the second half of 2019 mainly due to changes in the sales mix and higher material costs.

Other operating income increased by 39.6% to RMB273.3 million, US$41.9 million, compared with RMB195.7 million in the second half of 2019. The increase was mainly due to higher government grants in the second half of 2020 compared with the second half of 2019.

Research and development, R&D expenses were RMB413.5 million, US$63.4 million compared with RMB309.8 million in the second half of 2019. The Company continues to further develop its new National VI and Tier 4 engines for the on and off-road markets. In the second half of 2020, the total number of -- the total R&D expenditure, including capitalized costs was RMB754.6 million, US$115.6 million and it represented 7.1% of revenue compared with 6.3% in the second half of 2019.

Selling, general and administrative, SG&A expenses were RMB1.0 billion, US$153.7 million representing 9.4% of revenue compared with RMB1.0 billion representing 11.4 million -- 11.4% of revenue in the second half of 2019.

Operating profit increased by 14.5% to RMB568.8 million, US$87.2 million from RMB496.6 million in the second half of 2019. The operating margin was 5.4% compared with 5.5% in the second half of 2019.

Finance costs increased by 18.7% to RMB88.0 million, US$13.5 million from RMB 74.2 million in the second half of 2019. Higher finance costs mainly resulted from higher loan amounts compared with second half of 2019. The share of financial results of the joint ventures decreased by a loss of RMB64.5 million, US$9.9 million, compared with a profit of RMB11.7 million in the second half of 2019.

Net profit attributable to China Yuchai's shareholders decreased by 6.4% to RMB243.2 million, US$37.3 million compared with RMB259.9 million in the second half of 2019. Basic and diluted earnings per share decreased by 6.4% to RMB5.95, US$0.91 compared with RMB6.36 in the second half of 2019. Basic and diluted earnings per share in the second half of 2020 and the second half of 2019 were based on a weighted average of 40,858,290 shares.

Now I'll go over the fiscal year 2020 results. Revenue was RMB20.6 billion, US$ 3.2 billion compared with RMB18.0 billion in the fiscal year 2019. The total number of engines sold by GYMCL in the fiscal year of 2020 increased by 14.4% to 430,320 units compared with 376,148 units in the fiscal year 2019. The increase was mainly due to higher engine sales in the heavy and medium-duty truck markets and the off-road segments, particularly agricultural engines, which more than offset the unit sales decline in the bus segment.

Gross profit increased by 2.7% to RMB3.2 billion, US$488.8 million compared with RMB3.1 billion in the fiscal year 2019. Gross margin decreased to 15.5% compared with 17.2% in the fiscal year 2019. The decline in gross margin was mainly attributable to change in the sales mix and higher material costs.

Other operating income increased by 12% to RMB378.9 million, US$58.1 million compared with RMB338.5 million in fiscal year 2019. The increase was mainly due to higher government grants compared with fiscal year 2019.

R&D expenses increased by 27.3% to RMB626.5 million, US$96.0 million compared with RMB492.2 million in the fiscal year 2019. The Company continued with its initiatives to develop new engines compliant with China's next emission standards, National IV -- sorry, National VI and Tier 4, and to improve engine performances and qualities. In fiscal year 2020, the total R&D expenditure including capitalized costs was RMB1.2 billion, US$177.4 million representing 5.6% of the revenue compared with 4.8% in fiscal year 2019.

SG&A expenses were RMB1.8 billion, US$269.7 million representing 8.6% of the revenue compared with RMB1.8 billion representing 10.0% of the revenue in fiscal year 2019.

Operating profit increased by 3.1% to RMB1.2 billion, US$181.2 million from RMB1.1 billion in the fiscal year 2019. The operating margin was 7.4 -- sorry, the operating margin was 5.7% compared with 6.4% in fiscal year 2019.

Finance costs increased by 14.7% to RMB151.2 million, US$23.2 million from RMB31.8 million (sic) [RMB131.8 million] in the fiscal year 2019. Higher finance costs mainly resulted from an increase in loan amounts compared to fiscal year in 2019. The share of financial results of the joint ventures decreased to a loss of RMB59.0 million, US$9.0 million compared with a profit of RMB19.0 million in fiscal year 2019.

Net profit attributable to China Yuchai's shareholders was RMB548.9 million, US$84.1 million compared with RMB604.9 million in fiscal year 2019. Basic and diluted earnings per share were RMB13.43, US$2.06 compared with RMB14.81 in fiscal year 2019. Basic and diluted earnings per share for fiscal year 2020 and fiscal year 2019 were based on a weighted average of 40,585,290 shares (sic) [40,858,290 shares].

Now let me walk you through our balance sheet highlights as of December 31, 2020. Cash and bank balances were RMB6.4 billion, US$988.1 million compared with RMB6.4 billion at the end of fiscal year 2019. Trade and bills receivables were RMB8.1 billion, US$1.2 billion compared with RMB7.8 billion at the end of fiscal year 2019.

Inventories were RMB4.5 billion, US$685.3 million compared with RMB2.8 billion at the end of fiscal year 2019. Trade and bills payables were RMB7.5 billion, US$1.1 billion compared with RMB6.2 billion at the end of fiscal year 2019. Short and long-term bank borrowings were RMB2.2 billion, US$341.8 million compared with RMB2.1 billion at the end of fiscal year 2019.

I'll now turn the call over to Kevin for the comments before we begin our Q&A.

Kevin Theiss

Thank you. Please note that due to the COVID-19, the officers of China Yuchai are locally calling into the conference call. This may result in a slight delay in providing answers to some questions. We apologize for any inconvenience and thank you for your patience.

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

Question-and-Answer Session

Operator

[Operator Instructions] We have the first question from the line of William Gregozeski from Greenridge Global. Please go ahead.

William Gregozeski

Hi, guys.

Weng Ming Hoh

Hey, hi, William.

William Gregozeski

Could you talk about what your expectations are for the current year in terms of volumes, the unit volume sales and also the mix of that?

Weng Ming Hoh

While we don't provide forecasts or guidance, William, but what we are seeing in the first 2 months of this year seems quite positive. The order numbers seems -- it's much better than what we had in the last year or two. So we believe the first quarter, which will be super good for us. One of the reasons for that is probably because of the implementation nationwide for the National VI A emission standard. So that will be implemented 1st July 2021. So that could have resulted in some pre-buy effects that is causing some the higher order numbers we're seeing now in the -- in January, February.

William Gregozeski

Okay. In terms of product mix, I mean, do you think that it's going to be somewhat similar to last year, or I guess I'm trying to get towards the gross margin, it was down quite a bit in 2020. And if there's things we can do to get that up this year.

Weng Ming Hoh

Right. I think this last year -- in year 2020, we saw some pretty good growth in our agricultural segment. That sale has slightly lower margin, right, compared to the truck segment. So we will still expect the agricultural segment to grow next year in the [indiscernible]. Now with the truck [indiscernible] is already very high. I mean, for especially for the heavy, medium duty truck in 2020. We don't see too much more growth in there. We [indiscernible] some decline for the whole year.

William Gregozeski

Okay, okay. So we should probably expect lower gross margins for 2021 compared to 2020?

Weng Ming Hoh

More or less what we have is basically I think we should go forward to 2021. Actually [indiscernible] more National VI, we expect that to [indiscernible] margin.

William Gregozeski

Okay.

Weng Ming Hoh

I don't see too much of deterioration there any further.

William Gregozeski

Okay. Can you talk about the R&D, obviously, you're spending a lot more now than you have in the past. Can you talk about where all that money is going towards?

Weng Ming Hoh

Well, it's -- in fact for the new, this National VI [indiscernible] actually gone and develop a whole new platform. So that has taken up a fair bit of R&D money, especially in the last 3 years. [Indiscernible] is actually took place in 2021, potentially 2020. Now with the National VI now implemented [indiscernible] the product already, so we didn't expect it to grow further. In fact, they [indiscernible] to be less compared to the previous 2020.

William Gregozeski

Okay, all right. Great. And then last question is what was the loss from the JVs from?

Weng Ming Hoh

Okay. That's from our unit up north. The two things are there. One is the -- in fact for the cost of precious metals like platinum, rhodium and palladium, has been shot through the roof right in the last couple of years too. So that that's one of the costs of materials that has impacted that unit. And also one of the [indiscernible] in new products that we had there, we ran into some problems. So there were some replication costs there that [indiscernible] that should be behind us for 2021.

William Gregozeski

Okay, all right. All right. Great. Thank you. Thank you, Weng Ming.

Weng Ming Hoh

Okay.

Operator

Thank you. We have the next question from line of Don Espey from Shah Capital. Please go ahead.

Don Espey

Good morning.

Weng Ming Hoh

Hi, Don.

Don Espey

Approximately what -- hello. Approximately what percent of the RMB1.2 billion R&D spend was spent on new energy vehicles, including transmission and green hydrogen initiatives?

Weng Ming Hoh

[Indiscernible] is actually spent on the National VI and [indiscernible] development in the last 3 years. So the reason why the above is on this is because the National VI standard will be implemented nationwide by July 1st, right? This was 6A, 6BOB [ph] 2 years later. And Tier 4 is scheduled to be implemented in 2020 -- sorry 2022. Now -- so the power of [indiscernible] has gone in there. So we will have -- certain amount is spend on the new energy side of things. But it will not be as high as the other two. I would say it's less than 20% -- perhaps somewhat there.

Don Espey

20%?

Weng Ming Hoh

Yes, or less. Yes.

Dr. Thomas Phung

Yes.

Don Espey

Okay. Thank you. That's all from us.

Operator

Thank you. [Operator Instructions] We have now reached the end of our Q&A session, and I will turn the call back over to Mr. Hoh.

Weng Ming Hoh

Thank you all for participating in our conference call. We wish each of you good health and please be safe during this crisis. We look forward to see you again. Good bye.

Operator

Thank you. Ladies and gentlemen, that concludes the conference for today. Thank you for participating. You may all disconnect now. Thank you.