China Yuchai International Limited (NYSE:CYD) Q2 2022 Earnings Conference Call August 10, 2022 8:00 AM ET

Company Participants

Kevin Theiss - Head, IR

Weng Ming Hoh - President

Choon Sen Loo - CFO

Conference Call Participants

William Gregozeski - Greenridge Global

Operator

Ladies and gentlemen, thank you for standing by, and welcome to China Yuchai International Limited First Half 2022 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 first half year ended June 30, 2022 conference call and webcast. Joining us today are Mr. Weng Ming Hoh and Mr. Choon Sen Loo, 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 or 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 include but are not limited to statements concerning the company's operations and financial performance and conditions and 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 upon 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 in other 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 maybe materially 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 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.

Mr. Hoh will provide a brief overview and summary, then Mr. Loo will review the financial results for the first half year ended June 30, 2022. Thereafter, we will conduct a question-and-answer session. For the purposes of today's call, the 2022 and 2021 financial results 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, please begin your prepared remarks.

Weng Ming Hoh

Thank you, Kevin.

Slow growth in China -- into the Chinese economy in the first half of 2022 continue from the last part of 2021. China's GDP growth was 22.5% year-over-year in the first half of 2022 and 0.4% in the same quarter of 2022 respectively contrasted with a 12.7% growth experienced in first half of 2021.

According to data reported by China Association of Automobile Manufacturers, total industry unit sales of commercial vehicles excluding some powered and electric-powered vehicles declined by 49.7% year-over-year. This truck and bus unit sales down by 50.9% and 35.1% respectively in the first half of 2022.

The industry sales decline was primarily due to lower demand from last year's high base in the first half of 2021 and pandemic-related lockdowns and travel restrictions in various parts of China. These factors cost lower commercial vehicle demand due to less logistical activities and fewer infrastructure and construction projects.

In this unsettled Chinese commercial vehicle environment, our main subsidiary Guangxi Yuchai Machinery Company Limited, GYMCL reported the combined truck and bus unit sales decline of 56.8% year-over-year in the first half of 2022. Truck sales, was 58.7% lower and bus sales declined by the 34.6%. GYMCL engine sales in the off-road market experienced the modest unit sales reduction of 12.7% year-over-year in the first half of 2022

Our overall sales revenue in the first half of 2022 declined by 32.2% year-on-year to 8.6% sorry to RMB8.6 billion or US$4.3 billion compared with RMB12.6 billion in the same period of last year. Our gross profit declined by 16.2% much less than our sales decline to RMB1.4 billion or US$202.7 million our gross margin improved by 3% to 15.9% from 12.9% in the first half of 2021.

In addition to lowering production costs, our cost cutting initiatives reduced other operating expenses. Generating operating profit in the first half of 2022 despite higher investment in our research and development, we increased our investment in research and development, R&D by 5.9% including capitalized costs so RMB476.9 million or US$71.1 million in the first half of 2022.

These expenditures represent 5.6% of total revenues compared with 3.6% in last year's same period. We continue to improve the performance and quality of National VI engines already in the marketplace even as we prepare for the deployment of our Tier 4 off-road engine portfolio later in 2022 when the emission standard is, implemented across China some R&D has been redirected in 2022 to Tier 4 engines.

We have also increased our R&D resources to our new energy vehicle technologies to accelerate product development. In the first half of 2022, we generated net profit with basic and diluted earnings share of RMB2.29 with RMB of US$0.34. Our GYMCL subsidiary has made strategic initiative in 2022 to continue to improve our NEV capabilities and other technologies.

Following the introduction of this hydrogen engine for China's commercial vehicle market in late 2021 GYMCL introduced in July 2022 the new heavy-duty hydrogen engine YCK16H engine, our joint venture Beijing Yuchai Xingshunda New Energy Technology Co., Ltd. with Beijing Xing Shun Da Bus Co., Ltd was incorporated to combined the partners resources to market and sell fuel cell powertrain.

The City of Macau is operating for and 222 new energy buses equipped with Yuchai's range extenders. More than 600 units of Yuchai's core range extenders were ordered for the Macau bus market. Yuchai's reach extender provide a fuel savings of up to 50%. Other development in the first half of 2022 include our - 50-50 joint venture with GYMCL MTU Friedrichshafen, a subsidiary of Rolls-Royce Power Systems has produced its 1,000 unit of MTU Series 4000 high-horsepower diesel engines primarily for the Chinese off-road market.

GYMCL upgraded Eicher SO4 220-51 series of engines has been certified by the [indiscernible] European VI emission standard of [indiscernible] with China providing us greater access to European and American markets.

GYMCL subsidiary Guangxi Yuchai Machinery Monopoly Development Co., Ltd. will form a new joint venture with Suzhou Yuxing Automobile Technology Co., Ltd. to enhance the initial white engine services and emergency support for all vehicles followed by Yuchai engines in China.

GYMCL YC6 GN 7.8-liter heavy duty natural gas engines became the exclusive engines to power 800 [indiscernible] buses to shipped to Monterrey, Mexico, the country's third largest cities.

YC6 GN is providing a more environmentally friendly bus solution. As at June 30, 2022, we maintained our cash and bank balances of RMB5.3 billion or US$783.5 million. After reviewing to 2021 earnings and cash flow current operations, as well as the operating and capital budget for 2022, the Board of Directors declared a cash dividend of $0.40 per ordinary share for the year ended December 31, 2021, which was paid on July 15, 2022.

Our large portfolio of advanced National VI engine is generating sales and safeguarding our market position in the Chinese on road market in this uncertain market. Meanwhile, our portfolio of Tier-4 engines is ready to go. When those submissions are implemented nationwide in China this year. We are pleased to have customers' acceptance of our NEV technology and we expect to introduce more NEV products in the future to enhance the capabilities of customers vehicle.

With that, I would now like to turn the call over to Choon Sen Loo, our Chief Financial Officer, who will provide more detail for the financial results. Choon Sen, you may begin your remarks.

Choon Sen Loo

Thank you, Weng Ming.

Now, let me review our first six months results ended June 30, 2022. Our revenue was RMB8.6 billion or US$1.6 billion compared with RMB12.6 billion in the same period last year. Reflecting the both industry conditions, the total number of engines sold by GYMCL in first half 2022 was 180,911 units, 26.6% decrease compared with 285,342 units in the same period last year.

GYMCL reported 56.8% decline in truck and bus engine sales and 12.7% decline in off-road engine sales in the first half 2022. Gross profit was RMB1.4 billion or US$202.7 million compared with RMB1.6 billion in the same period last year. Gross margin increased to 15.9% compared with 12.9% in the same period last year. The increase in gross margin was mainly attributable to improved margin in National VI engine sales and also to the increase in sales mix in the off-road engine segment in first half 2022.

The other operating income was RMB85.5 million or US$12.7 million compared with RMB111.7 million in first half 2021. The decline was primarily due to lower interest income and higher foreign exchange losses compared with the same period last year.

Research and development, R&D expenses increased by 29.4% to RMB408.5 million or US$60.9 million compared with RMB315.7 million in the same period last year. Higher R&D expenses in the first half 2022 were mainly due to an increase in experimented costs, primarily for the engines used for marine and power generation applications. GYMCL continued to improve the performance and qualities of its engines in comprised with China's National VI and Tier-4 emission standards. And develop products for new energy vehicles.

The total R&D expenditure including capitalized costs was RMB476.9 million or US$71.1 million in first half 2022 as compared to RMB450.2 million in the same period last year, representing 5.6% of revenue compared with 3.6% in the same period last year.

Selling, general and administrative, SG&A expenses represented 8.7% of revenue for first half 2022 compared with 7.3% in the same period last year. SG&A expenses decreased by 18.5% to RMB749.6 million or US$111.7 million from RMB920.1 million in the same period last year. The decrease was mainly due to lower warranty and freight expenses, and reduced personnel costs compared with the same period last year.

Operating profit decreased by 42.4% to RMB288 million or US$42.9 million from RMB499.8 million in the same period last year. The operating margin was 3.4% for first half 2022 compared with 4% in the same period last year.

Finance costs decreased by 19.3% to RMB55.2 million or US$8.2 million from RMB68.4 million due to lower bank loans and lower bills discounting rates compared with the same period last year.

The share of financial results of the joint ventures was a loss of RMB30.9 million or US$4.6 million for first half 2022 compared with a profit of RMB12.5 million in the same period last year. The loss was largely due to the loss in our joint venture with the heavy-duty truck producer, C&C Trucks.

Net profit attributable to equity holders of the Company was RMB93.7 million or US$14 million compared with RMB253.7 million in the same period last year.

Basic and diluted earnings per share were RMB2.29 or US$0.34 compared with RMB6.21 in the same period last year. Basic and diluted earnings per share for first half 2022 and first half 2021 were based on a weighted average of 40,858,290 shares.

Now let me walk you through our balance sheet highlights as at June 30, 2022. Cash and bank balances were RMB5.3 billion or US$783.5 million compared with RMB5.3 billion at the end of 2021. Trade and bills receivables were RMB6.6 billion or US$982.6 million compared with RMB7.0 billion at the end of 2021.

Inventories were RMB4.0 billion or US$601.8 million compared with RMB5.2 billion at the end of 2021. Trade and bills payables were RMB6.1 billion or US$904.9 million compared with RMB7.4 billion at the end of 2021. Short-term and long-term bank borrowings were RMB2 billion or US$296 million compared with RMB2.2 billion at the end of 2021.

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

Kevin Theiss

Please note that due to the COVID-19 some 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're now ready to begin the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] We have question from William Gregozeski. Please go ahead.

William Gregozeski

Hi, I have a couple of questions. What percent of the unit sales and the revenue was outside of China for the first half of 2022, and then also the first half of last year?

Weng Ming Hoh

Okay. In the first half of 2022. In terms of unit sales, we probably have bonus about 10% to 12% of our unit sales are from outside China, so from our export or even when you say export, this includes export that we export through the OEMs in China. So the actual direct sales to China out - directly to those end user is actually very low is probably less than 5%. Last year was not that good because last year, the rest of world health affected by the COVID-19 pandemic.

So the miles export sales - as a ratio for first half was actually quite low. There are two reasons one is the export sales number unit is slower and two, because last year in China, there was this emission upgrade from the 1st of July, 2021 and there was quite significant prebuy, so that helped depress compressed, the ratio of fab built.

William Gregozeski

Okay, all right. What is your outlook for the engine market in China for the remainder of this year and then next year?

Weng Ming Hoh

This is a difficult question to answer this will. We had a rather weak commercial market this year simply because of few factors. One is, yes in the first half of last year, there was a lot of pre-buy. So actually, there was actually - it was kind of buoyant market. So this year, the decline due to quite a few factors one is the significant lockdown of various part of the country that affected the logistic and as well as the construction infrastructure service.

So - they have affected not only the commercial vehicles, but also the construction machinery as well. So and in May last year, if you have read, the government came up with quite a lot of measures to try to get the economy going again. So we have to wait and see how this could have trickled down to the entire economy. Just for now, it's still early days. So it's going to be quite difficult for me to judge especially how it's going to be looked like for the rest of the year and into next year. But I personally think that you probably you will see some green shoots in the fourth quarter. And hopefully that will flow on over to the next financial year.

William Gregozeski

Okay. And last question, outside of Macau range extender announcement, can you give updates on the progress of the other new energy products you guys are developing?

Weng Ming Hoh

Okay. The main one that we have right now in terms of inner range actually the range extender, the range extender that we have is quite well accepted. So we are now working with not just the on-roads, OEM but also some off-road OEMs, while also interested in this product hours. So it is still - we're still developing the bigger range for this product. So it will take a little while for it to fully develop. But we do see quite a fair bit of potential there.

And the other one that is doing quite well, a fair bit of sales for us is to electric vehicles that we are doing some integration work for. So that why we do sales performer as well, the market for fuel cells actually were quite slow right now, it hasn't quite taken off yet it still in early stage. We have not had the many that we sold. Thankfully, we only got one or two they called prototypes out there in the marketplace. But that will take some time so that again that - that one for hydrogen powered vehicles. The market is still in the early stage of development. So we're still working on it.

William Gregozeski

Okay, all right. Thanks from me.

Weng Ming Hoh

Yes.

Operator

Thank you for your question. There are no further questions at the moment. We are now reached the end of the Q&A session. I will turn the call back over to Mr. Hoh. Please go ahead.

Weng Ming Hoh

Thank you all for participating in a conference call. We wish each of you good health and please be safe. We look forward to speaking with you again. Good bye.

Operator

That concludes the conference for today. Thanks you for participating you may all disconnect.