China Yuchai International Limited (NYSE:CYD) Second Half and Full Year 2023 Earnings Conference Call February 27, 2024 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

Good day and thank you for standing by. Welcome to China Yuchai International Limited Second-Half and Fiscal Year 2023 Financial Results Conference Call. At this time all participants are in the listen-only mode. After the speaker's presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I'll 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 conference call and webcast for the six months and fiscal year ended December 31, 2023. 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, 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.

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 second-half year and fiscal year ended December 31, 2023. Thereafter, we will conduct a question-and-answer session. For the purposes of today's call, the 2023 and 2022 second-half year and the 2023 fiscal year financial results are unaudited. With the 2022 year financial results being audited 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. We are pleased to report that we achieved profitable revenue growth of 18.9% in the second-half of 2023 and 12.6% growth for the full-year 2023. In an unclear economy in China, revenue growth resulted from modest unit volumes increased higher sales of higher-rating engines, and favorable price realization. According to official data the Chinese GDP growth rate accelerated to approximately 5.2% year-over-year in the fiscal year 2023 from 3% growth in 2022, which period reflected the post COVID-19 recovery.

However, this economic growth marked a number of challenges, including the continued struggle of the important property market throughout 2023. Consumer confidence diminished in China as consumer prices declined for four straight months as of January 2024, and producer prices were also lower according to statistics from the National Bureau of Statistics. Overall, Chinese exports declined by 4.6% in 2023, representing first yearly decline since 2016.

According to data reported by China Association of Automobile Manufacturers, CAAM, total industry unit sales of commercial vehicles excluding gasoline-powered and electric-powered vehicles for the second-half of 2023 increased by 28.2% year-over-year, as the sales of trucks and buses increased by 28% and 29.5% respectively. In this Chinese commercial vehicle environment, our combined truck and bus engine sales increased by 4% for the second-half of 2023, with truck engine unit sales down slightly year-over-year and bus engine unit sales 34.5% higher year-over-year.

However, our heavy-duty truck engine unit sales improved as demand -- seasonal demand including co-transportation, increased new truck demand in the second-half of 2023. Increased logistical demand resulted in our medium duty truck engine sales also experiencing growth year-over-year. Engine unit sales in the off-road market experienced a gain of 4.2% in the second-half of 2023, led by a 22.3% increase in marine and power generation engine unit sales with higher demand for data centers, including artificial intelligence.

Industrial engine unit sales went up by 14.3% year-over-year. This sales increases offset the decline in agriculture engineering sales. For 2023, CAAM data reported total sales of commercial vehicles excluding gasoline-powered and electric-powered vehicles increased by 17.2% year-over-year with truck sales 15.6% higher and the smaller bus market sales up by 28.8%.

Bus engine unit sales grew by 48%, led by a 101.4% increase in heavy-duty bus engine sales, excluding industry growth. Medium and light-duty bus engine unit sales also produced positive sales growth for the year. Off-road engine unit sales declined by 6.3% in 2023. However, marine engine and power generation unit sales and industrial equipment engine unit sales reported increased sales for 2023, partially offsetting lower agriculture engine sales.

Lower agriculture equipment purchased incentives impacted unit sales in 2023. In 2023, total R&D expenditures including capitalized cost were RMB1.1 million or $150.3 million as our initiatives continue to enhance the quality and performance of our National VIb and Tier 4 emissions standard compliant engines. We continue to emphasize further development of new energy products to expand our portfolio of these products. Our new energy goal includes a greater use of alternative fuel to improve fuel efficiency and enhance emission reduction.

We expect more technology enhancement and more power train systems and components using alternative fuel to be introduced. An example of our alternative fuel product improved our two hydrogen powered engines using renewable hydrogen as the key propellant. During second-half of 2023, GYMCL subsidiaries, Yuchai Xin-Lan and New Energy Power Technology Company Limited, Yuchai Xin-Lan in short, Yuchai Xin-Lan S06-100-kilowatt P1 parallel hybrid powertrain system for SANY Group's 12-cubic-meter mixer trucks. The S06-100-kilowatt P1 hybrid powertrain shifts automatically to optimize engine performance as working environment change.

Another example of our new energy innovation is the Yuchai Xin-Lan new 350-horsepower hybrid electric drive continuously variable transmission or hybrid CVT powertrain system. It was designed for Liugong tractor and for heavy-duty agriculture and industrial tractor applications.

Also GYMCL, Guangxi Yuchai Marine and Power Genset Company Limited, MPG in short, won a new contract in 2023 to install Yuchai's off-gas power generation system at a production plant which specializes in silicon-manganese alloys production. This system utilizes off-gas discharges from the smelting process at the power generation field, eliminating greenhouse gas emission.

And our new Yuchai model, YCA07N hybrid engine, was chosen to power 10-meter gas-electric hydrid buses in Nanjing, a major city in China. Manufactured by Yutong Group Company Limited, more than 1,200 buses with Yuchai's engines have been ordered for local public transportation operator in Nanjing. We continue to reorganize our current operations to improve focus and resource efficiency, and new capabilities have been added as well.

GYMCL combined marine and power generation businesses to enhance its competitiveness through a new subsidiary, Guangxi Yuchai Marine and Genset Power Company Limited. This subsidiary incorporates the MTU joint-venture, producing the MTU Series 4000 engines and other related products and services. GYMCL subsidiary Yuchai Xin-Lan will accelerate the research and development of new energy technologies, as well as enhance new energy products development.

GYMCL also incorporated new subsidiaries from Xing Yun Cloud Technology Company Limited to quicken the development of proprietary cloud-based control systems for on and off-road vehicles and machineries. At the end of 2023, we also sold our 100% equity holding in Yuchai Remanufacturing Services (Suzhou) Company Limited.

For 2023, our gross profit, operating profit and earnings per share all increased by double-digits and we maintain a strong balance sheet. As at 31st December 2023, our cash and bank balances were RMB6 billion or $852.7 million.

We continue to generate positive cash flow from operations and free cash flow in 2023. The Board of Directors declared a cash dividend of $0.28 per ordinary share, which was paid on August 7, 2023. Our large diverse product portfolio provides the opportunity to supply and service a number of end markets in China and abroad. Our engine products are continually updated to provide more dynamic solutions, lower vehicle emissions and improve performance. Our growing number of NEV products addresses the need for more effective tools to help an efficient environment.

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, please begin your remarks.

Choon Sen Loo

Thank you, Weng Ming. Now let me review our unaudited six-months results, ended December 31, 2023. Revenue was RMB8.9 billion or $1.3 billion, compared with RMB7.5 billion in second-half 2022. The total number of engines sold in second-half 2023 increased by 5.2% to 147,700 units, compared with 140,345 units in the second-half 2022. The increase was mainly due to higher, heavy, and medium-duty engine sales in the truck and bus markets, as well as increased sales in the marine and power generation and industrial markets.

According to data reported by the China Association of Automobile Manufacturers CAAM, in second-half 2023, commercial vehicle unit sales in China, excluding sales of gasoline-powered and electric-powered vehicles, increased by 28.2%, compared to second-half 2022 as sales of trucks and buses increased by 28% and 29.5%, respectively.

Gross profit was RMB1.4 billion or $202.4 million, compared with RMB1.2 billion in second-half 2022. Gross margin was 16.2% in second-half 2023, compared with 16.1% in second-half 2022.

Other operating income increased by 21.8% to RMB306.2 million or $43.2 million, compared with RMB251.3 million in second-half 2022. The increase was mainly due to a gain of RMB113 million on the disposal of a subsidiary. Excluding this one-off item, the other operating income would have been RMB193.2 million or $27.3 million, lower by RMB58.1 million, compared with second-half 2022. This decline was mainly due to lower government grants.

Research and development, R&D, expenses increased by 9.9% to RMB470.5 million or $66.4 million, compared with RMB428 million in second-half 2022 due to higher personnel salaries and related expenses. Total R&D expenditures, including capitalized costs, were RMB599.2 million or $84.6 million, representing 6.8% of revenue in second-half 2023, compared to RMB540.8 million, representing 7.2% of revenue in second-half 2022.

Selling, general and administrative, SG&A, expenses increased by 31.7% to RMB1 billion or $147.9 million from RMB795.3 million in second-half 2022. The increase was mainly due to increased personnel salaries and related expenses and higher warranty and travel expenses, compared with the same period last year. SG&A expenses represented 11.8% of revenue for second half 2023, compared with 10.7% for second-half 2022.

Operating profit was RMB221.8 million or $31.3 million from RMB231.3 million in second-half 2022. The operating margin was 2.5%, compared with 3.1% in second-half 2022. Finance costs increased by 15.6% to RMB46.5 million or $6.6 million from RMB40.2 million in second-half 2022, primarily due to higher bills discounting.

The share of financial results of the associates and joint ventures climbed to a profit of RMB32.5 million or $4.6 million, compared with RMB1.8 million in second-half 2022. The improvement was mainly driven by higher profits at MTU Yuchai Power Company Limited and significantly reduced losses at Y&C Engine Company Limited and Guangxi Purem Yuchai Automotive Technology Company Limited.

Income tax expense was RMB37.9 million or $5.3 million, compared with RMB2.6 million in second-half 2022. The change was mainly due to under-provision in prior years and higher taxable income in the same period of 2022 -- '23, sorry.

Net profit attributable to equity holders of the company was RMB107.1 million or $15.1 million, compared with RMB124.9 million in second-half 2022. Basic and diluted earnings per share were RMB2.62 or $0.37, compared with RMB3.06 in second-half 2022. Basic and diluted earnings per share for second-half 2023 and second-half 2022 were based on a weighted average of 40,858,290 shares.

Now we will review the unaudited financial results for the 2023 fiscal year ended December 31, 2023. Revenue was RMB18 billion or $2.5 billion, compared with RMB16 billion in FY 2022. The total number of engines sold in FY 2023 decreased by 2.4% to 313,493 units, compared with 321,256 units in FY 2022. The decrease was mainly due to lower sales in the truck and agricultural markets, partially offset by increased sales in the bus, industry, marine and power generation and new energy markets.

According to CAAM, commercial vehicle unit sales in China, excluding sales of gasoline-powered and electric-powered vehicles, increased by 17.2% year-over-year in FY 2023, as sales of trucks increased by 15.6% and the smaller bus market sales increased by 28.8%.

Gross profit increased by 16.7% to RMB2.9 billion or $411.7 million, compared with RMB2.5 billion in FY 2022. Gross margin increased to 16.2%, compared with 15.6% in FY 2022. The increase in gross margin was mainly attributable to higher revenue from heavy-duty engines and continuing cost reduction initiatives, partially offset by higher customer sales rebates.

Other operating income increased by 31.4% to RMB442.4 million or $62.5 million, compared with RMB336.8 million in FY 2022. The increase was mainly due to a gain of RMB113 million on disposal of a subsidiary. Excluding this one-off item, the other operating income would have been RMB329.4 million or $46.5 million in FY 2023.

R&D expenses increased by 4.8% to RMB876.6 million or $123.8 million, compared with RMB836.4 million in FY 2022. GYMCL continued its initiatives to enhance the engine quality and performance of its National VI and Tier-4 emission standard compliant engines and to develop new energy products. In FY 2023, total R&D expenditures, including stabilized costs, were RMB1.1 billion or $150.3 million, compared with RMB1 billion in FY 2022, representing 5.9% of the revenue, compared with 6.4% in FY 2022.

SG&A expenses were RMB1.9 billion or $264.3 million, representing 10.4% of the revenue, compared with RMB1.5 billion, representing 9.2% of the revenue in FY 2022. This increase was mainly due to higher personnel and related expenses and warranty expenses, compared with last year.

Operating profit grew by 17.4% to RMB609.4 million or $86 million, compared with RMB519.3 million in FY 2022. The operating margin was 3.4%, compared with 3.2% in FY 2022. Finance costs increased by 4.9% to RMB100.2 or $14.1 million from RMB95.5 million in FY 2022.

The share of financial results of the associates and joint ventures was income of RMB62.1 million or $8.8 million, compared with a loss of RMB29.1 million in FY 2022. The income was primarily generated by higher profits at MTU Yuchai Power Company Limited and the share of lower losses at Y&C Engine Company Limited and Guangxi Purem Yuchai Automotive Technology Company Limited.

Income tax expense was RMB148.5 million or $21 million as compared with RMB59.1 million in FY 2022. The increase was mainly due to under-provision in prior years and higher taxable income in FY 2023. Net profit attributable to China Yuchai's shareholders was RMB285.5 million or $40.3 million, compared with RMB218.6 million in FY 2022.

Basic and diluted earnings per share were RMB6.99 or $0.99, compared with RMB5.35 in FY 2022. Basic and diluted earnings per share for FY 2023 and FY 2022 were based on a weighted average of 40,858,290 shares.

Now we'll go through our balance sheet highlights as of December 31, 2023. Cash and bank balances were RMB6 billion or $852.7 million, compared with RMB4.9 billion by the end of FY 2022. Trade and bills receivables were RMB7.8 billion or $1.1 billion, compared with RMB6.8 billion at the end of FY 2022.

Inventories were RMB4.6 billion or $656.4 million, compared with RMB4.9 billion at the end of FY 2022. Trade and bills payables were RMB7.6 billion or $1.1 billion, compared with RMB6.9 billion at the end of financial year 2022. Short-term and long-term loans and borrowings were RMB2.5 billion or $358.7 million, compared with RMB2.3 billion at the end of FY 2022.

I will now turn the call over to Kevin for a comment for Q&A section.

Kevin Theiss

Thank you, Choon Sen. 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're ready to begin the Q&A session.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] We have the call from William Gregozeski from Greenridge Global. Please go ahead.

William Gregozeski

Hi, guys. Can you talk about your outlook for 2024 and how you see the product mix, if it's going to be any different from 2023 or about the same?

Weng Ming Hoh

Okay. Bill, this is Weng Ming here. Okay, our product mix will be likely more or less the same, but we will hope to increase our vehicle sales in 2024. We expect the market for vehicle engines, especially for the heavy-duty and medium-duty market to grow by between 10% to 15% in 2024. So with that growth, we hope to capture more of the market and, therefore, also have some success in the penetration of some OEMs. Hopefully, they will result in some improved sales for us as well.

Other than that, I think the others will probably be the same. We do expect some growth in the marine and power generation sales. The agriculture sales, that we hope will get better this year. Last year, there wasn't too much incentives from the government. So hopefully, if there is any sort of more better incentives coming from the government, we'll see an improvement in that area as well.

The industrial engines is still being affected by the weakness in the building industry, especially the housing market. So that one, we're like a bit still a bit concerned. I think -- but then I don't think that sort of deteriorates much further in that particular sector.

William Gregozeski

Okay. And then with the expectation for the higher medium-duty and heavy-duty sales this year, are you expecting gross margins to increase?

Weng Ming Hoh

We expect the market increase, between 10% to 15%. So we will expect our market -- our own engine sales to have an improvement as well for this year, yes.

William Gregozeski

Okay. And then anything on the operating expense side? That was up obviously for personnel and travel this year. Is that going to be continuing to grow with sales? Or have you kind of made those expenditures you need last year?

Choon Sen Loo

It's Choon Sen. Yes, thank you for your questions. Yes, so if you look at that, 2023, pretty much there's quite a substantial increase in the staff service expenses, including traveling, right? So we expect that it's probably maintain the same, right, or increase a little bit because of the market drove calling the…

Weng Ming Hoh

Let me add to that. I think the increase in the operating expenses mostly come from the, what I'd call, the selling and distribution expenses. We also have some increase in the royalty costs in the service distribution on top of this staff cost that Choon Sen has alluded to. So those two are the drivers of the main increase in the operating expenses.

We'll have to see how these years go, but we expect them to be broadly the same. But if the volume increases, compared to last year, we would expect to see an increase in the royalty provision as well.

William Gregozeski

Okay, all right, great. Thank you guys.

Weng Ming Hoh

Okay.

Operator

Thank you for the questions. [Operator Instructions]

Weng Ming Hoh

There is a question from a viewer. Perhaps we should take the next question first. This is from -- the question -- there are three questions there, and I'll take the first two, and I'll let Choon Sen handle the first question.

The first question is, why is Yuchai didn't grow unit growth? And is the unit growth still significantly lagging that of the industry average?

Now the growth in 2023 came mainly from the, especially for the heavy- and medium-duty market, from the trailers market. And this trailers market is dominated by five OEMs. And of the five OEMS -- in fact, all the five OEMs have their own, what I call, in-house engine production. The direct exception is Dongfeng. Dongfeng has its own production as well, but they also use some of our engines. So that is where majority of the growth for this 2023 came from. And we will -- I mean, again, it's dominated by the OEMs with their own in-house production.

And the other part of the growth is from the gas engine side of the business. Unfortunately, in 2023, our gas engine range is not as complete as before, as we like it to be. So going to 2024 -- and that's answering your second question of how are you seeing the current market conditions and what are some levers we are intending to pull to drive stronger growth in 2024, right? So we see continued growth in the vehicle sales, especially in the heavy- and medium-duty market as well as the gas engine market. So coming in 2024, we have a more complete set of products to offer for the gas engine in particular. So we do expect that to help to improve the sales hopefully in 2024.

Choon Sen Loo

Okay. I would take the question three, right? What's the key reason for us in the SG&A increase in FY 2023? Are there any other items there? And also, how should we expect margins to trend in financial year 2024, right?

So for SG&A, as I mentioned earlier on, so there are a few things here. So one is the warranty -- average unit warranty cost increase, right? That's also pretty much based on the unit -- engine units out there that is still within the warranty period for the last 24 months. And the other one is, as mentioned, that the series and those specific projects and deliverables that trigger the employees' bonuses, right? So that is one of the area in increase in 2023 and also predominantly due to the higher revenue as well, right? So that's pretty much the baseline to drive the staff service.

And then the third one is the traveling expenses, right? So we have seen that we are pretty much aggressive in improving the sales, right? And for the new customer or new customers for the product launching and new -- for the new engines or upgraded engine as well, right?

So there is -- is there any exceptional item there, right, in 2023? In terms of margin expectation, right? And also, you can see we improved to 16.2% for the full-year, right? So the product mix, that is one of the reasons.

And also, you are seeing the -- our agriculture engines margin actually better, especially with the Tier-4 emission standard, despite the overall volume in 2023 was lower than 2022. But we hope that, that will continue the same trend in 2024, then we can get some margin gain in 2024 or maintain at least the same level as 2023.

Operator

Thank you for your questions. [Operator Instructions]

Choon Sen Loo

Yes, we have a question here. Maybe I'll read the question. Can we expect Yuchai's OPM, our supposed operating margin to revert to longer-term average in coming years? It seems depressed in recent years. What do we need to see for margins to revert to longer-term average?

So if you look back since the National VI emission standards upgrade from National V, so that was about two years ago, right? Since then, there were a lot of efforts done to improve the margin to the current state, right? Of course, the debt has not been reaching to the previous National V engines margin level, right? So the efforts continue, right? But it may not necessarily that we should have reached that margin level back in those days, right?

So that's the way that we are seeing right now, right? But of course, the margin improvement will continue. It also very much depends on the product mix or the revenue mix, right? So we have been seeing the off-road profile, right, compared to on-road that actually for the last two years is actually increased than on-road. So we hope that the on-road sales will increase, the initials increase. So we shall tap on the benefit of the autonomous SKUs from the transition perspective.

Weng Ming Hoh

Okay. And then let me add to that. I think just every year, we would have a cost reduction for brand and a target that we hope to achieve. And in the last couple of years, we have been able to sort of achieve the targets we have set. So going forward, we will continue to do so, and that will be one of the factors that we will use to track down to improve the operating margin.

But of course, at the same time, you expect our customers to want to -- has to tackle our pricing as well, which is an ongoing dispensation or discussion which we have with the customer every year. So yes, so one of the drivers that will be to use -- to do cost reduction of our products in particular. And the other one, of course, is to drive the mix to a higher-rating engines to improve the operating margins.

Operator

[Operator Instructions] I see there are no further questions at this time. We have now reached the end of our Q&A session. I will turn the call back over to Mr. Hoh.

Weng Ming Hoh

Thank you all for joining us in this conference call. We look forward to seeing you again in the next call. Bye. Thank you, and take care.

Choon Sen Loo

Thank you.