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China Yuchai International Ltd  (NYSE:CYD)
Q2 2019 Earnings Call
Aug. 13, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

I'd like to turn the conference over to Kevin Theiss. Please go ahead sir.

Kevin Theiss -- Investor Relations

Thank you for joining us today, and welcome to China Yuchai International Limited Second Quarter 2019 Conference Call and Webcast. Joining us today are Mr. Weng Ming Hoh; and Dr. Thomas Phung, 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 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, including, but not limited to, statements concerning the Company's operations, financial performance and conditions, 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 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 a release or during the call made today or otherwise, in the future.

Dr. Phung will provide a brief overview and review the financial results for the second quarter and six months ended June 30, 2019. Thereafter, we will conduct a question-and-answer session.

For the purposes of today's call, the financial results for the second quarter and six months ended June 30, 2019 are unaudited, and they will be presented in RMB and US dollars. All the financial information presented is reported using International Financial Reporting Standards, as issued by the International Accounting Standards Board.

Dr. Phung, please begin your prepared remarks.

Thomas Khong Fock Phung -- Chief Financial Officer

Thank you, Kevin. For the second quarter of 2019, China GDP grew a slower 6.2% compared with 6.7% in the second quarter of 2018. This is a slower economic growth in the last 27 years. The economy was already on a slowing trends, and concern over the impact of the current trade issue with the US, have created additional business uncertainty, which also affecting domestic consumer in China.

China's export to the US, United States, declined by 8.1% for the first six months of 2019. In the auto market, consumer also are affected by the government implementation of new automotive emission standard, the National VI, which were implemented on July 1, in some provinces and Tier 1 city, representing the launch of National VI week ahead of the mandatory implementation date.

According to the data reported by the China Association of Automobile Manufacturers, CAAM, in the second quarter of 2019, unit sales of the commercial vehicle, excluding gasoline powered and electric powered vehicle decreased by 13.9%. The truck market unit sales declined by 14.1% led by a 36.5% decrease in the medium-duty truck sale. The bus market decreased by 12% with a significant decline in both medium and light-duty bus sales. The rate of EV bus sales continued to negatively affect bus sales powered by internal combustion engines.

However, while the bus sales declined on a year-over-year basis, second quarter bus sales increased in the heavy, medium and light-duty segment, compared with the first quarter of 2019. The government decreasing incentive for electrical buses may have helped -- helping to increase internal combustion engine sales in this -- in some bus market in -- within China.

In contrast to the decline in the overall market, our total engine sales increased by 9.3% year-over-year, led by a 19.3% increase in truck sales and a 8.2% increase in off-road engine sales. This 9.3% growth reflect an increase in the total number of engines sold to 110,059 unit in the second quarter of 2019. Higher heavy and light-duty truck engine sales will primarily generate the -- of the -- on-road unit sales increase.

Our reported off-road segment experienced year-over-year growth led by double-digit growth in industry engine sales. Off-road engine sales are a growing contributor to our sales mix. Total number of engines sold in the first six months of 2019 were 211,359 units compared with 210,788 units in the same period last year.

Net revenue for the second quarter of 2019 increased by 15.6% to RMB4.9 billion, US$707.2 million, compared with RMB4.2 billion in the second quarter of 2018. Other operating income increased to RMB98.8 million US$14.4 million mainly because of higher government grants in the second quarter of 2019.

Our operating profit increased by 6.5% year-over-year to RMB292.2 million, US$42.5 million, with a margin -- with a 6% margin. Our net profit attributed to China Yuchai's shareholder rose to RMB147.0 million, US$21.4 million compared with RMB132.1 million in the second quarter of 2018, with basic and diluted earning per share of RMB3.60, US$0.52.

In May 2019, we reported that 600 buses manufactured by Anhui Ankai Automobile Company Limited and propelled by Yuchai engines have been delivered to Saudi Arabia. This order was the largest single spot order for Chinese buses in 2019 up to that time. Hafil Transportation Company took delivery of the 12-meter buses, all equipped with Yuchai's VI-YC6L engine. Of the approximately -- approximate 12,000 buses in their fleet, Hafil has nearly 8,000 buses powered by Yuchai engine.

In the second quarter of 2019, total R&D expenditure including capitalized costs was RMB176.7 million, US$25.7 million, and it represent 3.6% of net revenue compared with 3.7% in the second quarter of 2018. This total R&D investment increased from RMB119.5 million in the first quarter of 2019. R&D expenses focused on improving the performance and quality of our current National VI and Tier 4 engine, for the on and off-road markets. Furthermore, we are enhancing our technology to be among the first with our portfolio of engines meeting the even more strict National VIb standard.

We have already introduced our model, YCK08 engine, which is the first domestic diesel engine being certified for the National VIb emission standard in China. The K08 model significantly outperformed the upcoming National VI emission standard. We continue with our strategy of being among the first to meet new emission standard and before their mandatory implementation.

In addition to 10 off-road engine compliant with Tier 4 and 14 on-road engine compliant with the National VI emission standard, we have recently introduced four new energy powertrain system in seven new products. The newly introduced new energy powertrain systems include, the ISG power generation powertrain, YC IE-Power, and [EVAC] power-split hybrid powertrain, YC e-CVT, an integrated electric drive axel powertrain, YC e-Axel, and a fuel cell system, YC FCS. Our strategy for new energy product is evolving, and we expect to introduce other new energy product in the future.

This technology and products will expand upon our other strategic actions including our MTU Yuchai Power Company Limited joint venture, which is now selling the MTU Series 4000 engine, and the Eberspaecher Yuchai Exhaust Technology Company, which continued to progress in developing new exhaust emission control system.

We had also signed a strategic partnership with Guangxi Holdings, a leading producer of heavy-duty trucks in China, and more recent a new strategic partnership with Foton Motor Group for product support for National VI-compliant engine and technology, overseas market development, and new energy products development. We believe this new venture and alliance will help new automotive technology and products, thereby transitioning China Yuchai, into more capable industry-leading offering a wider range of advanced products.

Our balance sheet remained strong at the end of the second quarter of 2019. Cash and bank balance were RMB6.7 billion, US$974.0 million. And trade and bills receivables increased to RMB8.4 billion, US$1.2 billion. And inventories are down to RMB2.3 billion, US$334.3 million.

On July 19, 2019, we shared our success with shareholders, with a cash dividend of US$0.85 per share. During the second quarter of 2019, our subsidiary, Venture Delta Limited, VDL, sold 4,782,764 of its 10,122,667 voting shares held in Thakral Corporation Limited. The cash consideration was SGD2,391,382, and ownership in Thakral was reduced from 7.74% before the transaction to 4.08% after the transaction. We continue to review our options on the remainder share.

We are encouraged by our recent unit sales success, as we outpaced the industry performance in specific segment. We believe the government will continue to instill belief to keep the economic growth, as it works out the international trade issue. Strategic action we have taken will result in more growth opportunity in the future.

Now let me review our second quarter result for 2019. Net revenue for the second quarter of 2019 increased by 15.6% to RMB4.9 billion, $707.2 million compared to RMB4.2 billion in the second quarter of 2018. The total number of engines sold by GYMCL during the second quarter of 2019 was 110,059 units, an increase of 9.3% compared with 100,675 units in the second quarter of 2018. The increase was mainly due to higher engine sales to the trucks and off-road segment, particularly unit sales to both the heavy and light-duty truck segment, which more than offset an overall sales decline in the bus engine segment.

According to the data reported by the China Association of Automobile Manufacturers, CAAM, excluding sales of gasoline-powered and electric vehicles, in the second quarter of 2019, sales of buses decreased by 12%, while truck sales decreased by 14.1%. According to the CAAM, in the second quarter of 2019, commercial vehicles excluding sales of gasoline-powered and electric vehicles decreased by 13.9% compared to the second quarter of 2018, while GYMCL sales to the on-road commercial vehicle market increased.

Gross profit decreased by 7.3% to RMB712.9 million, $103.7 million, compared with RMB769.0 million in the second quarter of 2018. Gross margin was 14.7% compared with 18.3% in the second quarter of 2018. The decrease was mainly attributed to higher costs incurred in production of National VI engines at the present stage. Other operating income was RMB98.8 million, $14.4 million, compared with RMB33.7 million in the second quarter of 2018. The increase was mainly due to higher government grant in the second quarter of 2019.

Research and development, R&D, expenses decreased by 29.4% to RMB110.5 million, $16.1 million, compared with RMB156.5 million in the second quarter of 2018. Lower R&D expenditure in the second quarter of 2019 was mainly due to capitalization of the development costs for National VI and Tier 4 engine that met the IFRS capitalization criteria. In the second quarter of 2019, the R&D expenditure -- R&D capitalization amount was RMB66.2 million, $9.6 million. The Company continues to further develop its National -- new National VI and Tier 4 engine for the on and off-road market, respectively.

In the second quarter of 2019, the total R&D expenditure, including capitalized cost was RMB176.7 million, $25.7 million, and it represents 3.6% of net revenue compared with 3.7% in the second quarter of 2018.

Selling, general and administrative, SG&A, expenses increased by 10% to RMB408.9 million, $59.5 million, from RMB371.8 million in the second quarter of 2018. The increase primary resulted from higher warranty expenses, deprecation expenses and personnel-related costs in the second quarter of 2019. SG&A expenses represent 8.4% of revenue compared with 8.8% in the second quarter of 2018.

Operating profit increased by 6.5% to RMB292.2 million, $42.5 million, from RMB274.5 million in the second quarter of 2018. The operating margin was 6% compared with 6.5% in the second quarter of 2018.

Finance costs increased by 9.3% to RMB32.4 million, $4.7 million, from RMB29.6 million in the second quarter of 2018. Higher finance costs mainly resulted from higher borrowings and bills discounting compared with second quarter of 2018.

Net profit attributed to China Yuchai's shareholders was RMB147.0 million, $21.4 million, compared with RMB132.1 million in the second quarter of 2018. Basic and diluted earnings per share were RMB3.60, $0.52, compared with RMB3.23 in the second quarter of 2018. Basic and diluted earnings per share in the second quarter of 2019 was based on a weighted average of 40,858,290 shares, compared with 40,858,290 shares and 40,872,405 shares respectively, in the second quarter of 2018.

Now I will go over the six -- first six months result of 2019. Net revenue was RMB9.0 billion, $1.3 billion, compared with RMB8.5 billion in the same period last year. The total number of engines sold by GYMCL in the first half of 2019 was 211,359 units compared with 210,788 units in the same period last year. The increase was mainly due to higher engine sales in the heavy and light-duty trucks and off-road segment, particularly agricultural engine, which more than offset the sales decline in the bus segment.

Gross profit was RMB1.5 billion, $214.4 million, compared with RMB1.6 billion in the same period last year. Gross margin decreased to 16.3% as compared with 19% a year ago. The decline was mainly attributed to higher costs incurred in the production of National VI engine at the present stage.

Other operating income was RMB142.8 million, $20.8 million, compared with RMB84.2 million in the same period last year. The increase was mainly due to higher government grant than in the same period last year.

R&D expenses declined by 34% to RMB182.4 million, $26.5 million, compared with RMB276.4 million in the same period last year. Lower R&D expenses in the first half of 2019 was mainly due to the capitalization of development costs for National VI and Tier 4 engine that met the IFRS capitalization criteria. In the first half of 2019, the R&D capitalization amount was RMB113.9 million, $16.6 million.

The Company continued with its initiatives to develop new engines complaint with China's next emission standard National VI and Tier 4, and to improve engine performance and quality. In the first half of 2019, the total R&D expenditure, including capitalized cost was RMB296.3 million, $43.1 million, represent 3.3% of the net revenue compared with 3.2% in the same period last year.

SG&A expenses increased to RMB785.1 million, $114.2 million from RMB731.7 million in the same period last year. The increase was mainly due to higher warranty expenses and increased depreciation compared with the same period last year. SG&A expenses represent 8.7% of the net revenue for the first half of 2019, and 8.6% in the same period last year.

Operating profit decreased by 7% to RMB649.4 million, $94.5 million, from RMB698.7 million in the same period last year. The operating margin was 7.2% compared with 8.2% in the same period last year.

Finance costs increased to RMB57.6 million, $8.4 million, from sorry -- from RMB52.1 million in the same period last year, an increase of approximately RMB5.5 million. Higher finance costs mainly resulted from an increase in borrowings compared to the same period last year.

Net profit attributed to China Yuchai's shareholder was RMB345.0 million, $50.2 million, compared with RMB375.0 million in the same period last year. Basic and diluted earnings per share were RMB8.44, $1.23, compared with RMB9.15, RMB9.17, respectively in the same period last year. Basic and diluted earnings per share in the six months of 2019 were based on a weighted average of 40,858,290 shares, and basic and diluted earnings per share were based on a weighted average of 40,858,290 shares and 40,888,876 shares respectively, in the same period last year.

Balance sheet highlights as at June 30, 2019. Cash and bank balance were RMB6.7 billion, $974.0 million, compared with RMB6.1 billion at end of 2018. Trade and bills receivable were RMB8.4 billion, $1.2 billion, compared with RMB7.4 billion at the end of 2018.

Inventory were RMB2.3 billion, $334.3 million, compared with RMB2.5 billion at the end of 2018. Trade and bills payables were RMB5.6 billion, $820.2 million, compared with RMB4.6 billion at the end of 2018. Short and long-term bank borrowings were RMB2.1 billion, $308.0 million, compared with RMB2.0 billion at the end of 2018.

With that, operator, we are ready to begin the Q&A session.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] It is from the line of William Gregozeski of Greenridge Global. Please go ahead.

William Gregozeski -- Greenridge Global -- Analyst

Hi. Engine sales were strong in, obviously, a tough market, do you think that growth is replicable over the second half now that there's been some early implementation of the National VI standard?

Hoh Weng Ming -- President

Hi. William, this is Weng Ming here. Now as you know, the National VI engine has just been started to be implemented gradually in China, starting with some big cities like Beijing, Shanghai and some provinces. So far, I think the number of units sold or the demand in the marketplace has been quite low. It's principally for prototypes for the OEMs. So we haven't seen a big impact yet, as we expect that to gradually improve through the end of the year and also to, call it, by July next year, 2020, when government were implemented for all its vehicles. The Nat VI or gas engine has already been implemented from July 1, 2019. So we saw -- we do see a big jump in some engine sales or pre-buy sales in the month of May and June. But the impact -- the number involved is not that large, and so the impact on the overall engine sales for the industry, also for GYMCL, is really quite small. So yes, we expect -- in short, yes, we expect the Nat VI engines to gradually improve through the end of the year, and even into the next year.

William Gregozeski -- Greenridge Global -- Analyst

Okay. And you mentioned the National VI as being a reason for the margin decline in the quarter. I look back for the National V implementation, and there was no similar margin decline that you guys reported. And then last quarter, you were thinking long-term margins, 19% to 20%, what should we be looking for over the next -- or just in case for the rest of this year?

Hoh Weng Ming -- President

Okay. Right now, the thing is that the component cost, I mean -- I think this engine, National VI engine, has a -- is a little bit different from National V. National V, the actual upgrade from National IV in terms of technology is not that great, right. But from National V to National VI is actually quite a jump. So now what was happening is that because of the small number of engines sold so far, year-to-date, that in 2019 in our case. There is no economy of scale yet. So we haven't seen that yet. It's more for prototypes, for the OEMs, whatever they get, they're getting into their systems, right. So what we are seeing right now is not quite reflective of what is yet to come. We expect to see a gradual improvement and to sell more, and see our volume improve together into, like some level economies of scale, there'll be no cost of the component. So if you take out the impact of this National VI for now, and some transfer engine cost, the actual core business with margin for the quarter -- second quarter of 2019 is about slightly lower than the same quarter last year.

William Gregozeski -- Greenridge Global -- Analyst

Okay.

Hoh Weng Ming -- President

Right, so it's not far away, if you remove this abnormally.

William Gregozeski -- Greenridge Global -- Analyst

Okay. It looks like you guys had much higher than normal other operating income, was that -- was anything specifically sold? Or what was that from?

Hoh Weng Ming -- President

Thomas, you want to say -- respond to that, Thomas?

Thomas Khong Fock Phung -- Chief Financial Officer

Yes. We have received -- basically it's the release of the government grant that have contributed to the other income. So there's sort of our -- that is the upside on it.

William Gregozeski -- Greenridge Global -- Analyst

Okay. And last question, is there any additional detail you can provide on the Foton partnership?

Hoh Weng Ming -- President

No. This strategy -- it's the strategy aligned for -- it's mainly for National VI. So we won't see much impact in the near term. Maybe later on you will probably see a impact, but not at this stage. We can't provide much information or clarity on it right now.

William Gregozeski -- Greenridge Global -- Analyst

Okay. That's all I have. Thank you, guys.

Hoh Weng Ming -- President

Thank you.

Operator

Thank you. [Operator Instructions] We have questions from the [Indecipherable].

Yes, we have one from Ke Chen of Shah Capital. Please go ahead.

Ke Chen -- Shah Capital -- Analyst

Yes. My first question is regarding cash. Apparently, we have -- on the balance sheet, you have more cash. Could you talk about the operating cash flow in the first half? My rough estimation is around like $90 million to $100 million, is that right?

Hoh Weng Ming -- President

Thomas, you want to comment on that, Thomas?

Thomas Khong Fock Phung -- Chief Financial Officer

Yes. So yes -- it is Thomas. In the first half of 2019, we have positive cash flow from operation. And it is in range of about RMB1 billion.

Ke Chen -- Shah Capital -- Analyst

Sorry, RMB1 billion operating cash flow?

Thomas Khong Fock Phung -- Chief Financial Officer

RMB1 billion.

Ke Chen -- Shah Capital -- Analyst

Okay. Thank you.

Thomas Khong Fock Phung -- Chief Financial Officer

Okay.

Ke Chen -- Shah Capital -- Analyst

Okay. Yes. We're talking about National VI engines, do you have rough estimation for your market share in the first half for National VI engine, right now?

Hoh Weng Ming -- President

No. No, it's too early to tell, Mr. Chen. It's too early to tell. In fact, this -- the -- what we call the National VI, hasn't really been implemented officially yet until July 1, next year. Probably seeing some early implementation by some major cities and provinces. So the number of engines sold so far, I think, in the marketplace is really not that high.

Ke Chen -- Shah Capital -- Analyst

Okay. But similarly, we will see, like you said, obviously, you'll have more National VI engines sold in the second half, and probably in 2020, so what is the -- like what's your margin improvement?

Hoh Weng Ming -- President

Well, I mean, at the moment, right now -- sorry?

Ke Chen -- Shah Capital -- Analyst

Yes. What's the margin improvement that you will expect?

Hoh Weng Ming -- President

Okay. At the moment, the -- because of the economy of scale, that's not there, we don't see a lot of -- it's actually -- the component actually is quite expensive. So as and when the National VI has been implemented, and if it reach the level of unit sales as we had for National V, we should expect to see the margin growing gradually -- gradually growing back up to the late teens or early 20s.

Ke Chen -- Shah Capital -- Analyst

Okay. We all know that Cummins and Caterpillar reported poor results in China, but you guys and all the Chinese dominant player have better results. So is that -- you guys getting market share from them?

Hoh Weng Ming -- President

We can't comment on competitors. And what we're seeing is that the market is actually quite weak, especially in the heavy-duty and medium-duty segment. If you look back in the last two years, especially in the year 2018 and also perhaps 2017, you see that the heavy-duty engine market sales was about 1.1 million, and if you add medium-duty engines, it's 1.3 million or 1.4 million. It's a historical high, all right. So if you go back further into a few more years, when the cycle was slow, the heavy-duty net sales was about 700,000 to 800,000. So I mean, with the cycle as I speak right now, so we should see some decline in the next few months or even into next year.

Ke Chen -- Shah Capital -- Analyst

Okay. Again, you mentioned that China is actually cutting VAT tax and provide more R&D grant to promote innovation, and it's showed in your results. First of all, can you quantify that how much grant you have been receiving? And secondly, do you see that continue going forward?

Hoh Weng Ming -- President

Well, we've received some government grants from time to time. But no, we are not, at this point, ready to disclose that information.

Ke Chen -- Shah Capital -- Analyst

Okay. Lastly, on your new LNG products. Can you provide some outlook when you're going to see the revenue coming, maybe in the second half or in 2020?

Hoh Weng Ming -- President

Okay. No, recently we launched four products. One is the hybrid, we've got the fuel cell, we have the -- what do you call, emission standard, and we have electric powertrain, right. So the -- we've seen some interest in the fuel cell -- no, sorry, not the fuel cell, in the hybrid -- no, sorry, emission standard. And also, we are starting to sell some in the, what we call it, the electric vehicle segment. Not a lot right now, but it's -- we expect it -- we hope that it'll grow. But I think the impact, right, if any, a positive impact of this is, of course, new energy vehicles would not be seen in a lashed way or in a cynical way this year, nor in the first half of next year. I think it'll be a bit longer than that before it's here simply because of the impact.

Ke Chen -- Shah Capital -- Analyst

Okay. Thank you. That's all.

Hoh Weng Ming -- President

All right.

Operator

Thank you. [Operator Instructions] We have now reached the end of our Q&A session. I'll now turn the call back over to Dr. Phung.

Thomas Khong Fock Phung -- Chief Financial Officer

Thank you to all for participating in our conference call. We look forward to speaking with you again. Good bye.

Operator

[Operator Closing Remarks]

Duration: 42 minutes

Call participants:

Kevin Theiss -- Investor Relations

Thomas Khong Fock Phung -- Chief Financial Officer

William Gregozeski -- Greenridge Global -- Analyst

Hoh Weng Ming -- President

Ke Chen -- Shah Capital -- Analyst

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