China Yuchai International Limited (NYSE:CYD) Q1 2020 Earnings Conference Call May 26, 2020 8:00 AM ET

Company Participants

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

Conference Call Participants

Don Espey – Shah Capital

Operator

Ladies and gentlemen, thank you for standing by and welcome to China Yuchai International Limited’s First Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.

I would like now 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 first quarter 2020 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 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’s Form 20-Fs under the headings Risk Factors, Results of Operations and Business Overview, and in other reports filed with the Securities and Exchange Commission from time to time.

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

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 press release, made during today’s call or otherwise in the future.

In this presentation, while we are going to provide comparisons between the first quarter of 2020 and 2019, respectively, we must caution that any comparison of operational and financial data between the two quarters will likely be a very limited value. 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, 2020. Thereafter, we will conduct a question-and-answer session.

For the purposes of today’s call, the financial results for the first quarter ended March 31, 2020 are unaudited and they will be presented in RMB and U.S. dollars. All financial information presented is reported using International Financial Reporting Standards as issued by the International Standard Board.

Mr. Hoh, please begin your prepared remarks.

Weng Ming Hoh

Thank you, Kevin. In the first quarter, the COVID pandemic – 19 pandemic has created major disruptions in the economy and automobile industries in China as it has affected customer suppliers, workers, the service networks and other auto-related occupations. We believe the economic conditions will improve over the remainder of 2020 year, barring any unforeseen circumstances. The COVID-19 pandemic has, as – what was already a slowing economy and auto market in China. Slower economic growth affected business confidence and industrial investments as fixed assets investment declined by a reported 16.1 % for the first quarter 2020.

In addition, the implementation of the first phase of National IV emission standards and the ongoing trade tension between U.S. and China has been weighing on the Chinese economy and auto industry. For the first quarter of 2020, China’s GDP declined by 20%, the worst year-over-year quarterly decline since 1992. The government’s national travel restrictions and lockdown created unavoidable interruptions in employment, consumer, industrial services and transportation, which affected nearly all industrial production and supply chain distribution in the first quarter of 2020. The unemployment rate rose to 6.2% in February 2020, the highest level ever reported.

Turning to data reported by China Association of Automobile Manufacturers, CAAM. In the first quarter 2020, sales of commercial vehicles, excluding gasoline-powered and electric-powered vehicles, decreased by 25.7%, truck sales decreased by 25.5%, with heavy-duty trucks sales down 15.6%, and bus sales decreased by 38%.

Our operational and financial results during the first quarter reflected the impact as the Chinese government mandated a nationwide lockdown to limit the spread of COVID-19 outbreak, leading to massive disruption to the movement of products and people. Our total unit sales suffered a 33% year-over-year decline. Our overall truck engine and bus engine sales declined in the first quarter of 2020, but heavy-duty truck sales decreased by single-digit compared with the market performance. Off-road engine sales decreased in the first quarter of 2020, with the sale of engines to the agricultural machinery market down by 6.5%.

Our National VI emission standard technologies have created new opportunities in 2019, including strategic partnership with Guangxi Automobile Holding Group, a producer of heavy-duty trucks in China, and Foton Motor Group for product support for National VI compliant engines and technologies. The growing sales of our National VI natural gas engines in the Chinese heavy-duty truck engine market is directly related to the early launch of our National VI gas engine product, and we continue to expand our product offerings in other markets as well.

During the 2020 first quarter, our subsidiary, GYMCL, introduced an advanced high-powered marine engine to address the growing domestic demand for vessels in the yacht class. This is a segment that has been historically dominated by imported engine models. This new high-powered boat engine optimizes the existing design of Yuchai model, YC6MJ engine, with innovative technology tailored for yacht-class engine requirements. Innovative technologies have increased the engine power and reduce the truck engine drive ways of YC6MJ marine engine.

Subsequent to the first quarter of 2020, GYMCL announced that its YCA05175-S500 engine has passed the off-road European Stage V emission standards in Europe, and this Yuchai engine can now be marketed in the European Union for off-road application, such as construction machinery, generators and others.

This engine utilizes common rail fuel injection technologies featuring advanced Diesel Oxidation Catalyst after treatment, a Diesel Particulate Filter and a highly efficient active Selective Catalytic Reduction emissions control technology system, which are believed to be superior to the comparable product currently in the marketplace.

Even in this travel environment, we maintain profitability with basic and diluted earnings per share of RMB1.49, US$0.21 compared with RMB4.85 in the first quarter of 2019. We maintain our financial strength with cash and bank balances of RMB4.8 billion or US$681.7 million as at March 31, 2020, and we declared a cash dividend of US$0.85 per ordinary share to be paid on July 31, 2020.

Entering in the second quarter of 2020, lockdown restrictions have been lifted in nearly all provinces and cities in China. In April, the sale of commercial vehicle, excluding gasoline-powered and electric-powered vehicles, has increased by 34.4% year-over-year monthly led by 62.2% growth in heavy-duty vehicles according to data from CAAM. This growth clearly represented pent-up demand from the restriction related to the effect of the COVID-19 pandemic.

While the outlook for the remainder of 2020 may not be so clear, we remain hopeful that the economies of China and its major trading partners can quickly resume growth. The Chinese central government has initiated a tax cut, improved regulations, develop some monetary policies to stimulate the domestic economy. The first phase of U.S.-China trade agreement has been agreed upon, will help improve trade for both countries.

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

Thomas Phung

Thank you, Weng Ming. Now let me review our first quarter results for 2020. Our revenue for the first quarter of 2020 decreased by 18.1% to RMB3.4 billion, US$481.2 million, from RMB4.2 billion for the first quarter of 2019. The revenue decrease was mainly due to the impact of the COVID-19 pandemic, which result in a lockdown and travel restrictions in China.

According to the data reported by the China Association of Automobile Manufacturers, CAAM, in the first quarter of 2020, sales of commercial vehicle, excluding gasoline-powered and electric-powered vehicles, decreased by 25.7%. Truck sales decreased by 25.5%, with heavy-duty trucks sales down 15.6%, and the result decreased – and bus sales decreased by 28.0%.

GYMCL overall truck engine sales declined by 40.2% and bus engine sales declined by 58.4% in the first quarter of 2020 compared with the same quarter last year. However, GYMCL’s heavy-duty truck engine sales decreased by a single-digit compared with the same quarter last year. In addition, GYMCL’s off-road engine sales decreased in the first quarter of 2020, with the sales of engine to the agricultural machinery market down 6.5% compared with the same quarter last year.

Gross profit decreased by 30.4% to RMB529.9 million, US$74.8 million compared with RMB761.3 million in the first quarter of 2019. Gross margin was 15.5% in the first quarter of 2020 compared with 18.3% in the first quarter of 2019. The reduction in gross profit growth and gross margin was mainly attributable to lower unit sales due to the COVID-19 pandemic impact as well as higher unit production costs.

Other operating income was flat at RMB43.9 million, US$6.2 million compared with the same quarter last year, with higher interest income and lower fair value loss on foreign exchange forward contracts in the first quarter of 2020 being offset by higher unrealized exchange losses.

R&D – sorry, research and development, R&D expenses increased by 5.7% to RMB76.0 million, US$10.7 million from RMB71.9 million in the first quarter of 2019. Higher R&D expenses were mainly due to the ongoing development of a portfolio of next-generation National VI and Tier-4 engine as well as improvements in the engine quality and performance. In the first quarter of 2020, the total R&D expenditure, including capitalized development costs, were RMB122.4 million, US$17.3 million and this represents 3.6% of revenue, compared with RMB119.5 million, representing 2.9% of revenue in the first quarter of 2019.

Selling, general & administrative, SG&A expenses decreased by 11.4% to RMB333.3 million, US$47.0 million, from RMB376.1 million in the first quarter of 2019. SG&A expenses represented 9.8% of revenue compared with 9.0% in the first quarter of 2019. The lower SG&A expenses was mainly due to lower warranty expenses and lower outward freight charges, partially offset by higher impairment losses on trade receivables in the first quarter of 2020.

Operating profit decreased by 5.3 – sorry, 53.9% to RMB164.5 million, US$23.2 million from RMB357.3 million in the first quarter of 2019. The operating margin was 4.8% compared with 8.6% in the first quarter of 2019. The decrease was mainly – was primarily due to the adverse impact of the COVID-19 pandemic. Financial costs increased by 44.1% to RMB36.5 million, US$5.1 million from RMB25.3 million in the first quarter of 2019, mainly due to higher amount of trade bills discounted.

In the first quarter 2020, total net profit attributable to China Yuchai shareholders was RMB61.1 million, US$8.6 million, compared with RMB198.0 million in the first quarter of 2019. Basic and diluted earnings per share were RMB1.49, US$0.21 compared with RMB4.85 in the first quarter of 2019.

Basic and diluted earnings per share in the first quarter of 2020 and 2019 were based on with average of 40,858,290 shares. Balance sheet highlights as at March 31, 2020. Cash and bank balance were RMB4.8 billion, US$681.7 million, compared with RMB6.4 billion at the end of 2019. Trade and bills receivable were RMB8.0 billion, US$1.1 billion, compared with RMB7.8 billion at the end of 2019.

Inventories were RMB4.6 billion, US$655.4 million, compared with RMB2.8 billion at the end of 2019. Trade and bills payables were RMB7.0 billion, US$982.7 million compared with RMB6.2 billion at the end of 2019. Short-term borrowings were flat at RMB2.1 billion, US$295.2 million.

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

Kevin Theiss

Thank you, Thomas. Please note that due to COVID-19, the officers of China Yuchai are remotely 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 session.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Don Espey from Shah Capital. Please ask your question.

Don Espey

Weng Ming, good quarter. We have a few questions. Your 2019 free cash flow was US$110 million. Should we assume around US$100 million in 2020 as gas – as engine sales have picked up from Q1?

Weng Ming Hoh

At this point in time, with the COVID-19, the way it is, I mean, China was affected by COVID-19 in February, particularly, and took another month or two to improve – to get back CapEx normal. So I think – and the rest of the world are still having a – is still dealing with this. So at this point in time, it’s going to be quite difficult to provide any type as to how much free cash flow is going to be. We believe that it will be positive. We don’t think it’ll be negative, but it’ll depend on the results for the full year.

Don Espey

Okay. Could you talk about Yuchai’s role in further consolidation of the diesel engine sector, especially in China?

Weng Ming Hoh

Yes. If you look at the top players in – different engine players in the Chinese market, I think they are all still there. I think most of them will still be around. I don’t think they will have difficulties complying with the National VI emission standards. And in fact, I think many of them already have already prepared for it. So I don’t think you’ll see a major consolidation in the industry.

Don Espey

Okay. Could you talk about growth drivers for your gas engines, electric powertrain and hybrid truck business?

Weng Ming Hoh

Okay. Kelvin, Kelvin Lai, do you want to take that call – that question?

Kelvin Lai

Sorry, sorry, I missed that. Yes. I missed the part of the question. And then the growth driver for what application you mentioned there.

Don Espey

Growth drivers for gas engines, electric powertrain and the hybrid truck business.

A - Kelvin Lai

Okay. Yes. So regarding on the gas engine, it’s mainly because of the high heavy-duty truck and trader, and then they are being used in the some of the restricted area. For example, in the terminal, in the port area, and so that’s really the demand there. And GYMCL and then the Yuchai, we have our Nat VI and gas engines ready late last year ready and then for the Nat VI implementation. So this is one of the major demand there.

And regarding on the electrical drivetrain, we don’t have the right product at this stage because our range extender is ready for the commercial launch, but still take some more time for the trial. And we are also ready on the next-generation hybrid, but that’s still – will take time and then for the OEM testing. So we are not ready, and then picking up on this particular segment at this stage.

Don Espey

Okay. And JV income was around US$700,000 in Q1. Should we expect same or higher quarterly trend in 2020?

Weng Ming Hoh

Okay. You’re referring to the share of loss or profit of joint ventures and associates that presumed, right? Now the thing is that the – not only GYMCL is affected by COVID-19. The joint ventures are also affected, okay? So first quarter is probably one of the worst quarters to offset the quarter that China had to do – had the lockdown basically the country and instructed the whole flow of goods and people. So on that basis, I think it will be better than first quarter coming – for the rest of the quarter.

Don Espey

Okay. And in light of the political tensions, why isn’t CYD Board looking more closely into having a second listing in Shenzhen or Hong Kong?

Weng Ming Hoh

Yes. I think you asked this question last time, too, Don. At this point in time, we have no plan for any another listing, another store market. I think we still prefer to stay on with the U.S. Stock Exchange as it is, and we have been with the U.S. Stock Exchange stock market for – since 1994. And yes, we have no plans to do another one at this point in time.

Don Espey

Okay. That’s all from us. Thanks.

Weng Ming Hoh

Thank you.

Operator

[Operator Instructions] There are no questions at this time. Please continue. Excuse me presenters, we don’t have questions on the line. Please continue.

Weng Ming Hoh

All right. Since we have no question, we have now reached the end of our Q&A session. I will turn – thank you all for participating in our conference call. We wish each of you good health and be – please be safe during the crisis. We look forward to speaking with you again. Goodbye.

Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may all disconnect.