China Yuchai International Limited (NYSE:CYD) Q4 2021 Earnings Conference Call February 24, 2022 8:00 AM ET

Company Participants

Kevin Theiss - Head, Investor Relations

Weng Ming Hoh - President

Choon Sen Loo - Chief Financial Officer

Conference Call Participants

William Gregozeski - Greenridge Global

Operator

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 2021 Second Half Year and Fiscal Year ended December 31, 2021 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 maybe 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 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 Operations and Business Overview and in other reports filed with 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 provide the financial results for the second half and the fiscal year ended December 31, 2021. Thereafter, we will conduct a question-and-answer session. For the purposes of today's call, the 2021 financial results for both periods are unaudited and they will be presented in RMBand US dollars. All 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. The Chinese economy in the 2021 year can best be described as experiencing two very different growth parts. In the first half of 2021, Chinese GDP expanded by 12.7% as China continues its resurgent economic growth. However, a number of factors negatively impacted the Chinese economy in the second half of 2021, which substantially reduced economic growth.

Construction activity declined in the second half of 2021 and manufacturing a key business driver earlier in 2021, slowed at power shortages off-road ongoing COVID-19 restrictions affected supply chain and disrupted supply of critical computer chips or diminished production activity.

According to data from China Association of Automobile Manufacturers, CAAM, sales of commercial vehicles, excluding gasoline-powered and electric-powered vehicles, decreased by 36.5% year-over-year in the second half of 2021. Total truck sales declined by 39.5%.

In addition to slowing economy, truck sales were also impacted by a large pre-buy of National V-compliant, commercial vehicles before the stricter National VI emission standards were nationally mandated in July.

Higher truck sales and accumulated distributor inventory before July resulted in reducing demand in the second half of the year. Supply chain disruptions also impeded the flow of vehicle components in the second half of 2021.

In such a difficult market environment, our truck engine sales decreased by 41.9%. While the truck market is resolving its issues, our main subsidiary Guangxi Yuchai Machinery Company Limited or GYMCL, that saw success in other markets consistent with this market diversification strategy.

In a relatively smaller bus market, GYMCL achieved a 55.6% rise in bus engine sales. While the overall bus market reported a 5% unit sales decline in the second half of 2021. GYMCL bus engine unit sales increased in each of its engine size categories with its new National VI-compliant engine.

GYMCL's engine sales in the off-road market also experienced a gain in the second half of 2021 as marine and power generation unit engine increased by 31.8% in the midst of the power shortages and sales of agricultural engines continue to benefit from farmers transition, from intensive labor to advance machines. Our new energy product sales also increased.

Reviewing the fiscal year 2021, GYMCL achieved positive sales growth in nearly every market except the truck market. Bus engine unit sales excluding gasoline-powered and electric-powered vehicles were 53.8% higher and outperformed the overall market bus unit sales in every size category.

Unit sales of our truck engines declined by 16.2% in 2021. Off-road engine sales were 32.7% higher in 2021 compared with a year ago, as every major category achieved over 25% growth and marine and power generation unit sales rose by 53.3% in 2021.

Our overall sales revenue in the second half of 2021 declined by 18.7% year-on-year, due to a 21% reduction in unit sales, primarily reflecting weak truck sales as to the economy slowed and issues affected the truck market. Despite this gross margin in the second half of 2021 was 15.4%, slightly lower than a year ago but higher than the first half of 2021.

Gross margin was impacted by lower unit volume. Our National VI engines have not yet realized economy of scale in production. Cost reduction programs have also limited -- have also been initiated to improve the gross margin.

In response to the lower unit sales, the selling and administrative expenses were reduced by 16.6% and finance costs were 46% lower in the second half of 2021. For the fiscal year 2021, our revenues grew by 3.3% to RMB21.3 billion or US$ 3.3 billion although 6.2% increase in unit sales.

Gross profit declined by 7.4% to RMB3 billion or US$ 463 million with a 13.9% gross margin. Net earnings per share were RMB6.67 or US$ 1.05. We spent RMB1.2 billion or US$ 182.3 million on research and development investments in the 2021 year will further improve the performance and quality of our large portfolio of National VI engines and our emerging Tier 4 compliant engines and to further develop our new energy vehicles NEV technologies.

Our National VI engine can already be adapted to be in compliance with the more stringent National VIb emission standard which are expected to be mandated in 2023. Our initiatives in the NEV market continue to makes it way as we sold 501 new energy units in 2021 compared with 85 units in 2020. Our hybrid power system and range extender are in the marketplace and we have other NEV products under development for future introduction.

Our GYMCL subsidiary has made strategic initiatives in 2021 to improve our NEV capabilities and other technologies including a new strategic partnership with EV back up producer Guangxi Sunlong Automobile Manufacturing to develop new energy vehicles based upon China Yuchai's four new energy powertrain systems.

GYMCL agreed with the Government of Nanning Municipality to jointly invest in Yuchai Xin-Lan in research, development and construction of new production capacity for new energy technologies. GYMCL Yuchai Xin-Lan subsidiary entered into a cooperation agreement with Beijing Xing Shun Da Bus Company to further develop hydrogen energy applications with fuel cell powertrain systems in the Beijing Tianjin and Hebei markets.

Two new smart powertrain were announced for heavy-duty agricultural equipment, IE-Power hybrid powertrain and YCK16 diesel engine for heavy-duty agricultural and mining equipment applications. GYMCL announced its first operating hydrogen engine for China's commercial vehicle market, the YCK05 hydrogen-powered engine.

As at December 31 2021, we maintained our financial strength with cash and bank balances of RMB5.3 billion or US$ 836.2 million. We are well positioned with our broad portfolio of National VI engines to serve our large customer base and attract new customers as well.

We are excited about the potential for our growing NEV technology capabilities. And as the impact of COVID-19 diminishes, we anticipate a gradual improvement in the market conditions in China and abroad. Additionally, the Chinese government has recently introduced policy to promote faster growth.

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 second six months results ended December 31, 2021. Revenue was RMB8.6 billion or US$ 1.4 billion compared with RMB10.6 billion in the same period of 2020. The total number of engines sold by GYMCL in second half of 2021 declined by 21% to 171,449 units compared with 217,138 units in the same period last year. The decrease was mainly due to lower engine sales in the truck market, partially offset by higher sales of engines in bus, passenger vehicle and marine and power generation applications.

According to data reported by the China Association of Automobile Manufacturers, CAAM, in second half of 2021 commercial vehicle unit sales, excluding sales of gasoline-powered and electric-powered vehicles decreased by 36.5% compared to second half 2020 as unit sales of trucks and buses declined by 39.5% and 5% respectively.

Gross profit was RMB1.3 billion or US$ 208.3 million compared with RMB1.7 billion in the same period last year. Gross margin decreased to 15.4% as compared with 16.1% a year ago but increased compared to 12.9% in the first half of 2021. The decline in gross margin was mainly attributable to the lower unit volume sold, a change in the revenue mix, transition to National VI-compliant engines and higher material costs. These factors were partially offset by cost reductions during the year.

Other operating income decreased by 25.2% to RMB204.5 million or US$ 32.1 million compared with RMB273.3 million in second half 2020. The decrease resulted from lower bank interest income and reduced government grants. Research and development, R&D expenses increased by 28.9% to RMB533.1 million or US$ 83.6 million compared with RMB413.5 million in the same period last year due to lower capitalization.

In addition to further development of National VI and Tier 4 engines products under development for new energy products contributed to additional R&D expenses in second half of 2021 compared with second half 2020. Total R&D expenditures including capitalized costs were RMB712.7 million or US$ 111.7 million, representing 8.3% of revenue in second half of 2021 as compared to RMB754.6 million, representing 7.1% of revenue in the same period last year.

Selling, general and administrative, SG&A, expenses decreased by 16.6% to RMB835.9 million or US$ 131.1 million from RMB1 billion in the same period last year. The decrease was mainly due to lower warranty expenses and reduced personnel costs compared with the same period last year. SG&A expenses represented 9.7% of revenue for second half 2021 compared with 9.4% in the same period last year.

Operating profit was RMB163.8 million or US$ 25.7 million, down from RMB568.8 million in the same period last year. The operating margin was 1.9% as compared with 5.4% in the same period last year. Finance cost declined by 46% to RMB47.5 million, US$ 7.5 million from RMB88 million in the same period last year due to lower term loans, reduced interest rates and reduced bills discounting during the period.

The share of financial results of the joint ventures was a loss of RMB108.4 million or US$ 17 million compared with a loss of RMB64.5 million in the same period last year. The increased loss was largely due to higher engine development expenses and warranty costs in a joint venture company.

Income tax credit was RMB42.4 million or US$ 6.7 million compared with an income tax expense of RMB69.9 million in second half 2020, primarily due to lower income and higher tax credits on R&D-related costs. Net profit attributable to equity holders of the company was RMB19 million or US$ 3 million compared with RMB243.2 million in the same period last year.

Basic and diluted earnings per share were RMB0.46 or US$ 0.07 compared with RMB5.95 in the same period last year. Basic and diluted earnings per share for second half 2021 and second half 2020 were based on a weighted average of 40,858,290 shares.

Now we will review the unaudited financial results for the 2021 fiscal year ended December 31, 2021. Revenue was RMB21.3 billion or US$ 3.3 billion compared with RMB20.6 billion in full year 2020. The total number of engines sold by GYMCL in FY 2021 increased by 6.2% to 456,791 units compared with 430,320 units in FY 2020.

The increase was mainly due to higher engine sales in the bus engine markets, passenger, vehicles engine sales and across the board in the company's off-road segments, particularly agriculture engines and marine and power generation engines, which more than offset the unit sales decline in the truck engine segment.

According to CAAM, in FY 2021, commercial vehicle unit sales, excluding sales of gasoline-powered and electric-powered vehicles decreased by 6.9% compared to FY 2020 as unit sales of trucks declined by 8.7% while unit sales of buses rose by 13.7%.

Gross profit decreased by 7.4% to RMB3 billion or US$ 463 million compared with RMB3.2 billion in FY 2020. Gross margin decreased to 13.9% compared with 15.5% in FY 2020. The decline in gross margin was mainly attributable to a change in revenue mix, transition to National VI-compliant engines and higher material costs but was mitigated by cost reductions.

Other operating income decreased by 16.6% to RMB316.2 million or US$ 49.6 million compared with RMB378.9 million in FY 2020. The decrease was mainly due to lower government grants and reduced bank interest income compared with FY 2020.

R&D expenses increased by 35.5% to RMB848.8 million or US$ 133.1 million compared with RMB626.5 million in FY 2020, largely due to lower capitalization of the R&D expenses. The company continued with its initiative to improve engine performances and qualities of its engines compliant with China's National VI and Tier 4 emission standards and to develop products for new energy vehicles.

In FY 2021, the total R&D expenditures, including capitalized costs, were RMB1.2 billion or US$ 182.3 million, which maintained the same level as FY 2020 and represented 5.5% of the revenue compared with 5.6% in FY 2020.

SG&A expenses were RMB1.8 billion, US$ 275.4 million, representing 8.3% of the revenue, compared with RMB1.8 billion, representing 8.6% of the revenue in FY 2020. Operating profit was RMB663.5 million or US$ 104.1 million, down from RMB1.2 billion in FY 2020.

The operating margin was 3.1% compared with 5.7% in FY 2020. Finance costs decreased by 23.3% to RMB115.9 million, US$ 18.2 million from RMB151.2 million in FY 2020. Lower finance costs mainly resulted from reduced term loan interest and less bills discounting compared to FY 2020.

The share of financial results of the joint ventures was a loss of RMB95.9 million, US$ 15 million, compared with a loss of RMB59 million in FY 2020. The increased loss was primarily attributable to higher engine development expenses and warranty costs in a joint venture company.

Income tax expense declined by 77.2% to RMB43.8 million, US$ 6.9 million from RMB192.5 million in FY 2020 due to lower income and higher tax credits on R&D-related costs. Net profit attributable to China Yuchai's shareholders was RMB272.7 million or US$ 42.8 million compared with RMB548.9 million in FY 2020.

Basic and diluted earnings per share were RMB6.67 or US$ 1.05 compared with RMB13.43 in FY 2020. Basic and diluted earnings per share for FY 2021 and FY 2020 years were based on a weighted average of 40,858,290 shares.

Now let me walk you through our balance sheet highlights as of December 31, 2021. Cash and bank balances were RMB5.3 billion or US$ 836.2 million compared with RMB6.4 billion at the end of FY 2020. Trade and bills receivables were RMB7 billion or US$ 1.1 billion compared with RMB8.1 billion at the end of FY 2020.

Inventories were RMB5.2 billion or US$ 817 million compared with RMB4.5 billion at the end of FY 2020. Trade and bills payables were RMB7.4 billion, US$ 1.2 billion compared with RMB7.5 billion at the end of FY 2020. Short-term and long-term bank borrowings were RMB2.2 billion or US$ 345.5 million compared with RMB2.2 billion at the end of FY 2020.

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

Kevin Theiss

Thank you. 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

Thank you. [Operator Instructions] We have the first question from William Gregozeski from Greenridge Global. Sir, please go ahead.

William Gregozeski

Hi. You mentioned that you saw a gross margin improvement from the first half due in part to the economies of scale from the National VI engines. Is that something we can expect to see in 2022 continued margin improvement?

Weng Ming Hoh

Okay. Yes. In 2021, definitely we sold more National VI engines. And the National VI engines margin has been increasing and improving month and month, every month right up to December. So, for the year 2022, we will still be continuing with our cost reduction initiative program to reduce further costs as much as possible. And as we go to National for 2022 we should be selling even more National VI engines. In fact, most of the engines sold in China, which is National VI. So yes, we think we will still be able to improve the margin from where it is today.

William Gregozeski

Okay, great. The press release mentioned higher warranty costs. Was that any kind of significant issue? And what did that relate to?

Weng Ming Hoh

Okay. The higher warranty cost is actually relating to one of our gas engines where we had some quality issues. We have been addressing it. In the last two years, I think we've got -- it's under control now but there will still be some going into next year but it should be much less than this year.

William Gregozeski

Okay. On the R&D side, it was quite a bit higher than it's been in the past whether you're talking just the expense or the capitalized. Can you break out what is towards the traditional engines and how much is for your new energy platforms?

Weng Ming Hoh

Okay. I don't have the data here. But generally, the thing is we have been spending about close to $1 billion or $2 billion in the last two three years for R&D. Now with the National VI platform coming to a close now so -- but we'll still be needing R&D to continue to, I call, expect this engine and to work with our OEM to put the engines in our OEM vehicles and get it tested and certified and so forth. There was [Indiscernible] 29:50 have great but the money involved for this will be lower.

But we also have to spend now some cost on getting our engine ready for the Tier 4 emission standard for off-road engine. This new emission standards will be effective from the end of this year. So, we still be looking -- spending some money on that to bring it up to that level. And we believe we'll be able to get there in time without an issue. And on top of that, we'll also be looking at spending some on the new energy vehicle. So whilst the reduction -- there will be some reduction in the National VI, R&D cost this will be sub-channel to other areas. I think this is the same question you asked earlier as well as one or two conference calls before.

William Gregozeski

Yes. So, I mean what -- should we expect similar R&D levels for this year and beyond as -- what you did for all of 2021?

Weng Ming Hoh

Yes. In 2022, I think we should be looking at about same level of R&D costs because of the emission upgrade to Tier 4 and also the new energy vehicles. So, I think we'll be spending more money there. Obviously some of this will be capitalized line item.

William Gregozeski

Right. Okay. Okay. At the end of December, you announced the hydrogen engine. Is there any update on when that's going to be commercially ready for sale?

Weng Ming Hoh

I think we are a bit early yet for that. The market is not quite ready. So we are developing sort of -- the way we're going right now is this one done. So we will probably start to develop a few more engines. I think that will be the focus for this year and next year rather than commercialization. Of course, at the same time, we will be working with our OEMs to try to spec into the vehicle. To really get to commercialization, I think it will take a bit more time.

William Gregozeski

Okay. And last question is what kind of impact did the chip shortage have on you guys in the second half? And what do you expect for this year?

Weng Ming Hoh

Okay. The chip shortages, the impact on our whole last year was quite severe in the middle of last year and up until the third and fourth and beginning of the fourth quarter, largely because of the COVID in Malaysia where most of the chip comes from but we caught up. So, overall impact last year was about 16,000 to 18,000 units of engine impact for the full year. Going into this year, there are still some issues. But depending on the demand if one of the market comes down as we expect it to for, especially for truck market, then the impact shouldn't be that severe as last year, I think we should be able to manage this. Although there will still be some impact.

William Gregozeski

Okay. All right. Great. Thank you.

Weng Ming Hoh

All right.

Operator

For the moment, we have no more questions. [Operator Instructions] No other question. 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 pandemic. We look forward to speaking with you again. Bye for now.