China Yuchai International Ltd Q2 FY2023 Earnings Call

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. 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.

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 may be 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 on 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.

Thank you, Kevin. The economy showed signs of recovery in the first half of 2023, but still faces 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 the low base effect of the pandemic-induced lockdown initiated in 2020. The export sector encountered a decline in the first half of the year as high inflation in major markets and geopolitical tensions reduced foreign demand for Chinese products. The property sector 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 market was affected by tight financial conditions and uncertainties of demand; the economic outlook for the second half of 2023 remains uncertain as the economic momentum of 2023 has slowed down with overall demand not meeting expectations. According to data reported by the 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 smaller bus unit sales up by 28.1%. In this Chinese commercial vehicle environment, our main subsidiary Guangxi Yuchai Machinery Company Limited or GYMCL reported a combined truck 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. The increase in bus engine sales was led by a 149.8% rise in heavy-duty engine sales, far exceeding the macro segment growth. The spot market also contributed to the strong sales. GYMCL's engine sales in the off-road market experienced a 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% 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 half of 2022 and RMB7.5 billion in the second half of 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 the first half of 2022. Our gross margin improved to 16.9% in the first half of 2023, thanks to an increase in sales of larger engines across many of our diverse end-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 by 19.8% to RMB4.37 or $0.60 compared with RMB2.29 in the first half of 2022. We invest substantially in research and development to deliver engines and 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, which is 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 using alternative fuel is another avenue for growth. For instance, we have developed hydrogen 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 in the bus coach segment. One of our new products, Yuchai's model YCA07N hybrid engine, is powering a 10-liter gas-electric hybrid bus in Nanjing, a major city in China. These buses were manufactured by Yutong Group Co., the largest bus producer in China and one of our key customers. They've ordered more than 1,200 buses equipped with Yuchai engines. A bus operator in Wuhan, another important city in China, has also chosen this Yuchai hybrid engine for their buses. The Yuchai Xin-Lan 600-kilowatt hybrid powered mixer truck has been deployed to assist in engineering machinery. This system details 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 operations in the first half of 2023. GYMCL has restructured its marine and power generation businesses to enhance competitiveness in these markets. GYMCL has established a new subsidiary, Guangxi Yuchai Marine and Genset Power Company Limited, which has been created for 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 more integrated and comprehensive marine and power generation solutions to its customers. GYMCL's subsidiary, Yuchai Xin-Lan New Energy Power Technology Company Limited, has secured new investments totaling RMB20 million from unrelated outside investors in 2023. This new investment accelerates research and development of new energy technologies and enhances product development. Additionally, GYMCL incorporated a new subsidiary for Xing Yun Cloud technology to focus on developing proprietary cloud-based control systems for off-road vehicles and machinery. Xing Yun Cloud will also oversee IT operations and create intelligent networks and processors for the group company. As of June 30, 2023, cash and bank balances stood at 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 customers' vehicles. Customers leverage our technologies to enhance their operational performance at lower costs and participate in building a cleaner environment with low-emission powertrain systems. We are also developing innovative solutions in our new energy vehicle 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.

Thank you, Weng Ming. Now let me review our unaudited six-month results ended June 30, 2023. Revenue was RMB9.2 billion or US$1.3 billion compared with RMB8.6 billion in the first half of 2022. The total number of engines sold by GYMCL in the first half of 2023 declined by 8.4% to 165,793 units compared with 180,911 units in the first half of 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 bus, industrial, and marine and power generation markets. According to data reported by the China Association of Automobile Manufacturers, in the first half of 2023, commercial vehicle unit sales excluding gasoline-powered and electric-powered vehicles increased by 8.3% compared to the first half of 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 the first half of 2022. Gross margin increased to 16.9% as compared with 15.9% in the first half of 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 RMB136.2 million or US$18.8 million compared with RMB85.5 million in the first half of 2022. The increase was mainly due to higher government grants received and recognized. Research and development expenses decreased slightly to RMB406 million or US$56.2 million compared with RMB408.5 million in the first half of 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 capitalized costs, were RMB465.2 million or US$64.4 million, representing 5.1% of revenue in the first half of 2023 compared to RMB476.9 million or 5.6% of revenue in the first half of 2022. Selling, general and administrative expenses increased by 19.3% to RMB894.5 million or US$123.8 million, from RMB749.6 million in the first half of 2022. The increase was mainly due to a higher provision for personnel and other selling and administrative expenses compared with the same period last year. SG&A expenses represented 9.8% of revenue for the first half of 2023 compared with 8.7% in the first half of 2022. Operating profit rose by 34.6% to RMB387.7 million or US$53.7 million from RMB288 million in the first half of 2022. The operating margin was 4.2% compared with 3.4% in the first half of 2022. Finance costs declined by 2.9% to RMB53.6 million or US$7.4 million from RMB55.2 million in the first half of 2022. The share of financial results of the associates and joint ventures was a profit of RMB29.6 million or US$4.1 million, compared with a loss of RMB30.9 million in the first half of 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 RMB110.6 million or US$15.3 million as compared with RMB56.5 million in the first half of 2022. The change was mainly due to the higher taxable income in the first half of 2023 and adjustment for under-provision in the prior year. Net profit attributable to equity holders of the company was RMB178.4 million or US$24.7 million compared with RMB93.7 million in the first half of 2022. Basic and diluted earnings per share were RMB4.37 or US$0.60 compared with RMB2.29 in the first half of 2022. Basic and diluted earnings per share for the first half of 2023 and the first half of 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 RMB5.6 billion or US$777.2 million compared with RMB4.9 billion at the end of financial year 2022. Trade and bill receivables were RMB9 billion or US$1.3 billion compared with RMB6.8 billion at the end of financial year 2022. Inventories were RMB4.9 billion or US$682.4 million compared with RMB4.9 billion at the end of financial year 2022. Trade and bill payables were RMB8 billion or US$1.1 billion compared with RMB6.9 billion at the end of financial year 2022. Short-term and long-term loans and borrowings were RMB3 billion or US$419.7 million compared with RMB2.3 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.

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.

I am showing we have no questions on the phone line. Please continue.

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

The opportunity of the Annual General Meeting to make a change has provided us with the option to give the company greater flexibility to utilize share purchases in any method that is permissible under the Bermuda Companies Act. We, of course, have to comply with US equity law for this buyback, and if there is any plan, we will make an announcement to that effect.

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

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.

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