China Yuchai International Limited (NYSE:CYD) Q2 2023 Earnings Conference Call August 10, 2023 8:00 AM ET

Company Participants

Kevin Theiss - Head, Investor Relations

Weng Ming Hoh - President

Choon Sen Loo - President & Chief Financial Officer

Conference Call Participants

Operator

Good day and thank you for standing by. Welcome to the China Yuchai International First Half 2023 financial results. At this time all participants are in a listen-only mode. [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 first half year ended June 30, 2023 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 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 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 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 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 ended June 30, 2023. Thereafter, we will conduct a question-and-answer session. For the purposes of today's call, the 2023 and 2022 financial results are unaudited and they will be presented in RMB and US dollars. 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. And economy showed signs of recovery in the first half of 2023, but still face challenges from external and internal factors. According to official data the GDP growth rate for the first half of 2023 was 5.5% year-over-year, with a 6.3% increase in the second quarter compared to 4.5% in the first quarter. However, these figures were influenced by low base effect of the pandemic-induced lockdown initiated in 2020. The export sector after a decline in the first half of the year as high inflation in major markets and geopolitical tensions reduced foreign demand for Chinese students.

The property sector also continues to experience a slowdown as property investments fell by 7.9% year-over-year, and property sales dropped by 5.3% in terms of floor space in the first six months of 2023. The real estate marked was affected by tight financial conditions and uncertainties of demand, the economic outlook for second half of 2023 remains uncertain as the economic momentum of 2023 has slowed down as overall demand has not met expectations.

According to data reported by China Association of Automobile Manufacturers, total industry net sales of commercial vehicles, excluding gasoline-powered and electric-powered vehicles for the first half of 2023 increased by 8.3% year-over-year with truck unit sales up by 6% and a smaller bus unit sales were up 28.1%.

In this Chinese commercial vehicle environment, our main subsidiary Guangxi Yuchai Machinery Company Limited or GYMCL reported a combined trucks unit engine unit sales decline of 1.5% year-over-year in the first half of 2023.

Truck unit sales were 10.4% lower year-on-year with net sales 55.5% higher year-over-year. Increase in bus engine sales were led by 149.8% rise in heavy-duty engine sales far exceeding the macro segment growth.

Spot market also contributed to the strong sales. GYMCL engine sales in the off-road market experienced unit sales reduction of 13.3% year-over-year in the first half of 2023. Industrial and marine power generation unit sales increased year-over-year partially offsetting reduced agricultural unit sales.

New energy product unit sales grew by 38.3% [ph] from a low base to 1,319 units in the first half of 2023. Revenue for the first half of 2023 grew by 7% to RMB9.2 billion or US$1.3 billion compared to RMB8.6 billion in the first one half 2022 and RMB7.5 billion in second half 2022.

Our gross profit increased by 14.1% outpacing revenue growth to RMB1.6 billion or US$214.8 million compared with RMB1.4 billion in one half 2022. Our gross margin improved to 16.9% in the first half 2023 thanks to more sales of larger engines across many of our diverse ender user markets.

Operating profit rose by 34.6% to RMB387.7 million or US$53.7 million, and the operating margin increased to 4.2%. For the first half of 2023, basic and diluted earnings per share increased 19.8% to RMB4.37 or $0.60 compared with RMB2.29 in one half 2022.

We invest substantially in research and development to deliver engines that powertrain products that meet the needs of our customers. Our R&D spending including capitalized costs amounted to RMB465.2 million or $64.4 million or 5.1% of our revenue in the first half of 2023.

Our R&D aims to improve the performance and efficiency of our diesel and gas engines. We are also increasing our R&D focus on new products for the emerging new energy market.

We continue to develop engines and products for the new energy market that use alternative fuels, improved fuel efficiency, and enhanced emission reduction. The development of engines use alternative fuel is another avenue for development.

For instance we have developed hydrogen by engines that can run on clean and renewable energy. We are also committed to developing our innovative products for the new energy market.

Our hybrid systems have been well-received among leading Chinese customers, especially the bus coach segment. One of our new products or Yuchai's model YCA07N hybrid engine is powering a 10-liter gas electric hybrid buses in Nanjing, a major city in China. These buses were manufactured by Yutong Group Co., the largest part producer in China and one of our key customers.

They've ordered more than 1,200 buses equipped with Yuchai engine. A bus operator in Wuhan, another important city in China, has also chosen this Yuchai hybrid engine for their buses.

Also the Yuchai Xin-Lan 600-kilowatt hybrid powered [Technical Difficulty] [indiscernible] Yuchai Xin-Lan [indiscernible] Mixer Truck. Sunny Group is a leading global engineering machinery manufacturers. This system details a proprietary control software that optimizes the performance of the engine electric motor and automated mechanical transmission gearbox, resulting in significant fuel savings.

To make our operations more focused, we continue to restructure our operations in first half 2023. GYMCL has restructured its marine and power generation businesses to enhance its competitiveness in these markets. GYMCL has established a new subsidiary, Guangxi Yuchai Marine and Power -- sorry Guangxi Yuchai Marine and Genset Power Company Limited, which has been our GYMCL Marine and Power Generation businesses. This new operation has incorporated the MTU Series 4000 engine and other related products and services. This move will enable GYMCL to offer a more integrated and comprehensive -- and power generation solutions to its customers.

GYMCL subsidiary Yuchai Xin-Lan and New Energy Power Technology Company Limited has secured new investments totaling RMB20 million to new unrelated outside investors in 2023. This new investment accelerates the research and development of new energy technologies and enhances product development.

Also GYMCL incorporated a new subsidiary for Xing Yun Cloud technology to focus on developing proprietary cloud-based control systems or on off-road vehicles and machineries. Xing Yun Cloud will also oversee IT operations and create intelligent networks and processors for a group company.

As of June 30, 2023, cash and bank balances were RMB5.6 billion or US$777.2 million and we maintained a strong balance sheet. With our financial strength, the Board of Directors declared a cash dividend of RMB0.028 for the ordinary share for the year ended December 31, 2022, which was paid on August 7, 2023.

Looking to the second half of 2023, our diverse product portfolio remains a key driver of our growth and profitability and we continue to upgrade our engine products, which contribute to lower emissions in our customer’s vehicle. Customers leverage our technologies to enhance their operational performance with lower cost and participate in building a cleaner environment, low emission power train systems. We are also developing innovative solutions in our new NEV products that align with our society's environmental agenda.

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

Choon Sen Loo

Thank you, Weng Ming.

Now let me review our unaudited six months results ended June 30, 2023. Revenue was RMB9.2 billion or US$1.3 billion compared with RMB8.6 billion in first half 2022. The total number of engines sold by GYMCL in first half 2023 declined by 8.4% to 165,793 units compared with 180,911 units in the first half 2022. The decrease was mainly due to lower engine sales in the truck and agriculture application markets, partially offset by higher engine sales in the bar, industrial and marine and power generation markets.

According to data reported by the China Association of Automobile Manufacturers in the first half 2023, commercial vehicles unit sales excluding gasoline power and electric-powered vehicles increased by 8.3% compared to first half 2022 as truck and bus sales increased by 6% and 28.1%, respectively.

Gross profit increased by 14.1% to RMB1.6 billion or US$214.8 million compared with RMB1.4 billion in first half 2022. Gross margin increased to 16.9% as compared with 15.9% in first half 2022. The increase in gross profit and gross margin was mainly attributable to margin improvement across most market segments with greater sales of larger engines and contributions from ongoing cost reduction efforts.

Other operating income increased by 59.3% to RMB 136.2 million, or US$18.8 million compared with RMB 85.5 million in the first half 2022. The increase was mainly due to higher government grants received and recognized. Research and development R&D expenses decreased slightly to RMB 406 million, or US$56.2 million compared with RMB 408.5 million in the first half 2022. The company continues to invest in research and development for on-road engines in the commercial vehicles market and off-road engines as well as new energy products.

Total R&D expenditures including stabilized costs were RMB 465.2 million, or US$64.4 million, representing 5.1% of revenue in first half 2023, as compared to RMB 476.9 million, or 5.6% of revenue in first half 2022.

Selling, general and administrative, SG&A expenses increased by 19.3% to RMB 894.5 million, or US$123.8 million from RMB 749.6 million in first half 2022. The increase was mainly due to higher provision of personnel and other selling and administrative expenses compared with the same period last year. SG&A expenses represented 9.8% of revenue for first half 2023 compared with 8.7% in first half 2022.

Operating profit rose by 34.6% to RMB 387.7 million, or US$53.7 million from RMB 288 million in first half 2022. The operating margin was 4.2% compared with 3.4% in first half 2022.

Finance costs declined by 2.9% to RMB 53.6 million, or US$7.4 million from RMB 55.2 million in first half 2022. The share of financial results of the associates and joint ventures was a profit of RMB 29.6 million, or US$4.1 million, compared with a loss of RMB 30.9 million in first half 2022. This improvement was primarily due to higher profits at MTU Yuchai Power Company Limited and a return to profitability at Y&C Engine Company Limited.

Income tax expense was RMB 110.6 million, or US$15.3 million as compared with RMB 56.5 million in first half 2022. The change was mainly due to the higher taxable income in first half 2023 and adjustment for under provision in the prior year.

Net profit attributable to equity holders of company was RMB 178.4 million, or US$24.7 million, compared with RMB 93.7 million in first half 2022. Basic and diluted earnings per share were RMB 4.37, on US$0.60 compared with RMB 2.29 in first half 2022. Basic and diluted earnings per share for first half 2023 and first half 2022 were based on a weighted average of 14,858,290 shares.

Now let me go through our balance sheet highlights as of June 30, 2023. Cash and bank balances were RMB 5.6 billion or US$777.2 million compared with RMB 4.9 billion at the end of financial year 2022. Trade and bill receivables were RMB 9 billion or US$1.3 billion compared with RMB 6.8 billion at the end of financial year 2022. Inventories were RMB 4.9 billion or US$682.4 million compared with RMB 4.9 billion at the end of financial 2022.

Trade and bills payables were RMB 8 billion or US$1.1 billion compared with RMB 6.9 billion at the end of financial year 2022. Short-term and long-term loans and borrowings were RMB 3 billion or US$419.7 million compared with RMB 2.3 billion at the end of financial year 2022.

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

Kevin Theiss

Thank you. Please note, 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 are ready to begin the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] I am showing we have no questions on the phone line. Please continue.

Kevin Theiss

There's a question on the webcast. Mr. Seng has asked why has CYD decided to amend the corporate documents regarding share repurchase?

Choon Sen Loo

Okay. The opportunity of the AGM to make a change so that you've given an option and you will provide the company with a greater flexibility to utilized share purchase came in any method that is permissible under the Bermuda Companies Act. And we of course have to comply with US equity law for this buyback and if there is any plan we will make announcement to that effect.

Kevin Theiss

Okay. Mr. Hoh, would you please provide your closing comments?

Weng Ming Hoh

Okay. All right. Thank you all for participating in our conference call. We wish each of you good health and we look forward to speaking with you again. Goodbye.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.