Logo of jester cap with thought bubble.

Image source: The Motley Fool.

China Yuchai International Ltd (NYSE:CYD)
Q4 2019 Earnings Call
Mar 30, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

I would now like to turn the conference over to Mr. Kevin Theiss. Please go ahead, sir.

Kevin Theiss -- Investor Relations

Thank you for joining us today and welcome to China Yuchai International Limited Fourth 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 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, including but not limited to statements concerning the company's operations, financial performance and condition 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 the release made on today's call or otherwise in the future.

Mr. Hoh will provide a brief overview and summary, and then Dr. Phung will review the financial results for the fourth quarter and fiscal year ended December 31, 2019. Thereafter, we will conduct a question-and-answer session.

For the purposes of today's call, the financial results for the fourth quarter and the fiscal year ended December 31, 2019 are unaudited and they will be presented in RMB and U.S. dollars. All the financial information presented is reported using International Financial Reporting Standards as issued by the International Accounting Standards Board.

Mr. Hoh, please begin your prepared remarks.

HOH Weng Ming -- President

Thank you, Kevin. For the fourth quarter of 2019, China's GDP was 6%, the same growth rate as in the third quarter 2019. For the full year 2019, GDP growth was 6.1%, which was the slowest annual growth in the last 29 years.

According to data reported by China Association of Automobile Manufacturers, CAAM, in the fourth quarter of 2019, unit sales of commercial vehicle, excluding gasoline-powered and electric-powered vehicles, increased by 2.9% overall, compared with the same quarter in 2018. This growth included a 2% sales increase in the truck segment and a 10.4% increase in the bus segment.

Unit sales of heavy-duty trucks increased by 13.6%, while the medium-duty truck sales declined by 10.4% compared with the fourth quarter of 2018. Heavy-duty bus sales increased by 17.9% and medium-duty bus sales rose by 18.1% compared with the 2018 fourth quarter.

From a full year perspective, statistics from CAAM show that overall unit sales of autos in China fell 8.2% in 2019 from 2018, with a total of 25.8 million vehicles sold in 2019. This decline followed the 2.8% decrease in 2018.

In the commercial vehicle market in China, CAAM has reported 2019 annual unit sales, excluding gasoline-powered and electric-powered vehicles, decreased by 4.5% overall compared with 2018. This decrease included a 4.7% decline in the truck segment and a 2.6% decrease in unit bus sales.

Sales of heavy-duty trucks increased by 2.1% while the medium-duty truck sales declined by 21.7%. Heavy-duty bus sales increased by 8% and medium-duty bus sales declined by 2.3%. Auto sales have been affected by slower economic growth in 2019.

In addition, the first stage of the National VI emission standards was implemented nationwide in July 1, 2019 for gas engine driven vehicles. This early launch of the National VI emission standards for gas engines, as well of the mandatory implementation of diesel vehicles to be enforced between July 2020 and July 2021.

In the fourth quarter of 2019, our total engine sales were 94,649 unit compared with 93,881 units in the fourth quarter of 2018. Our overall unit sales into the truck engine market were down 4.3%, while we achieved 49.8% growth in the heavy-duty truck engine sales, far surpassing the 13.6% sales increase in the heavy-duty truck market.

Our new natural gas National VI truck engines were well received in the marketplace in the fourth quarter of 2019, as demand for National VI engines accelerated due to mandatory national implementation.

Our sales in the bus engine market increased by 11.7%, which exceeded the 10.4% growth in unit bus sales. This growth was led by double-digit growth in both the heavy and medium-duty bus engine market. Our overall off-road sales increased by 11.9% in the fourth quarter of 2019 with double-digit growth in industrial engine sales.

For 2019 year, our engine unit sales were 376,148 units compared with 375,731 units in 2018. Our truck engine sales were down 1.2% but outperformed the 4.7% decline in the overall truck market. Our sales to the heavy-duty truck market achieved double-digit growth compared with 2018. Our bus engine sales decreased by 10.1% as our sales to the light-duty bus market dropped by double-digit. Our overall off-road sales increased by 9.3% in 2019, led by double-digit growth in industrial engines.

As a technology leader, we design our growth strategy by developing next generation engines before the government mandatory implementation, which enable us to capture early orders and establish our leading market position.

For 2020, we have commercially introduced a portfolio of new diesel engine model complaint with the on-road National VI emission standards for the launch of the National VI vehicles by our OEM customers. In addition, our model YC6K08 [Phonetic] engine was the first domestic diesel engine certified to comply with the more stringent National VI MEE emission standard, which is expected to be mandatory in July 2023.

Already, the growing sales of our National VI gas engines increased our penetration into the heavy-duty truck engine market in the fourth quarter of 2019. Our National VI emission standard technologies have also led to our newly formed strategic partnership with Shaanxi Holding, a leading producer of heavy-duty trucks in China and with Foton Motor Group for product support for National VI compliant engines and technologies, overseas market development and new-energy product development.

We have taken other steps to enhance our growth opportunities in the future. We are at the development stage of producing our first four new energy products, and we anticipate expanding into a larger portfolio of new energy products in the future.

Utilizing different technology design, our first new energy product, the next-generation hybrid powertrain will seamlessly integrate electric motors and internal combustion engines to enhance vehicle mileage and overall efficiency. We have identified a number of end-market application for this new powertrain product, including semitrailers, dump trucks, mass transit buses, trucks, rubber-tired gantry cranes and others.

Also, our JV, Eberspaecher Yuchai Exhaust Technology Company Limited, is ramping up production of this new exhaust emission control systems for commercial vehicles to meet China's National VI and Tier 4 emission standards. These emission controls will be used in our own engines as well as the available for sale.

We achieved double-digit growth for International sales in both the fourth quarter and for the fiscal year 2019. We have enhanced our export potential by creating a dedicated operation. We have captured further market share in our neighboring nation, Vietnam. Our new business enterprise there is focused on wholesale and retail distribution, technical advisory and consulting, engine maintenance and repair services to better attract new customers.

We also increased our ownership of YC Europe operations in 2019. We were honored as our YC4A diesel engine won the 2019 China Agricultural Machinery Industry Product Gold Award. Winning this prestigious award at the Annual Agricultural and Farming Equipment Conference, validates our effort to improve the quality and performance of Chinese agricultural machinery. The Model YC4A is a 70-horsepower agricultural vehicle engine, featuring the highest torque in the marketplace.

We were also honored as Yuchai engines propelled coach buses that carry prominent veterans and their families in the 7th year anniversary celebration in the National Day Parade in Beijing. Many of the giant electronic screens used in the celebration used Yuchai power generators as well.

Our balance sheet remains strong. At the end of 2019 year, cash and bank balances were RMB6.4 billion (US$916.1 million). And trade and bills receivable were RMB7.7 billion (US$1.1 billion). Inventories were RMB2.8 billion (US$404.8 million).

Due to our strong balance sheet and cash flow, we issued a cash dividend of you $0.85 per share in July 2019 to share our success with our shareholders.

Our new advanced engine portfolio that meets the National VI and Tier 4 emission standards is ready for full production as demand grows after these standards are being implemented across China. Our technological leadership in diesel, natural gas and hybrid engines, combined with our extensive service network, continues to attract new OEMs and partners.

On a separate note, on March 10, 2020, a dividend for the year 2019 of RMB402,040,944 was approved by GYMCL shareholders for all shareholders. China Yuchai has a 76.4% ownership of GYMCL, and the dividend will be paid to the Company in due course. This dividend attests to the financial stability and commitment to the Company's long-term shareholders during the current difficult market environment.

Looking into 2020, the outlook is somewhat clouded at present. However, we remain hopeful that limited trade agreement between China and U.S. will be beneficial to both country's economy in the near future. The coronavirus is having an economic impact on the first quarter of 2020, but we believe its impact will gradually diminish in the second quarter and we will regain sales growth in the following quarters for 2020. The Chinese government will likely further implement policies to improve economic recovery.

With that, I will turn to Thomas to go over the financial.

Dr. Thomas Khong Fock PHUNG -- Chief Financial Officer

Thank you, Weng Ming. Now, let me review our fourth quarter results for 2019. The revenue for the fourth quarter of 2019 increased by 25.4% to RMB5.7 billion (US$814.6 million), compared with RMB4.5 billion for the fourth quarter of 2018. The revenue increase was mainly due to a change in product mix.

According to the data reported by the China Association of Automobile Manufacturers, CAAM, in the fourth quarter of 2019, sales of commercial vehicles excluding gasoline-powered and electric-powered vehicles, increased by 2.9%. Truck sales increased by 2% with heavy-duty truck sales increased by 13.6%.

GYMCL's heavy-duty truck engine sales in the fourth quarter of 2019 increased by 49.8%. The CAAM bus market increased by 10.4% in the fourth quarter of 2019. GYMCL's bus engine sales growth exceeded the market growth as the sales of medium-duty bus engines grew significantly. GYMCL's off-road engine sales rose in the fourth quarter of 2019, led by higher sales in the industrial engine market.

Gross profit increased by 28.5% to RMB1.1 billion (US$158.8 million) compared with RMB0.9 billion in the fourth quarter of 2018. Gross margin was 19.5% in the fourth quarter of 2019 compared with 19% in the fourth quarter of 2018. The growth in the gross margin was mainly attributable to product mix and was partially offset by higher production costs related to the National VI engines in the fourth quarter of 2019.

Other operating income was RMB104.4 million (US$15.0 million) compared with RMB64.4 million in the fourth quarter of 2018. The increase was mainly due to higher interest income and government grants.

Research and development ("R&D") expenses increased by 111.7% to RMB228.0 million (US$32.7 million) from RMB107.7 million in the fourth quarter of 2018. Higher R&D expenses were mainly due to the further development of a portfolio of next-generation National VI and Tier 4 engines, as well as improvements in the engines' quality and performance. In the fourth quarter of 2019, the total R&D expenditures, including capitalized development costs, were RMB397.7 million (US$57.0 million) and it represented 7% of the revenue, compared with RMB222.9 million, representing 4.9% of revenue in the fourth quarter of 2018.

Selling, general & administrative ("SG&A") expenses increased by 36.5% to RMB663.2 million (US$95.1 million) from RMB485.8 million in the fourth quarter of 2018. SG&A expenses represented 11.7% of revenue compared with 10.7% in the fourth quarter of 2018. The higher SG&A expenses were mainly attributed to higher warranty expenses and higher impairment losses on trade receivables in the fourth quarter of 2019.

Operating profit decreased by 3.6% to RMB320.8 million (US$46.0 million) from RMB332.6 million in the fourth quarter of 2018. The operating margin was 5.6% compared with 7.3% in the fourth quarter of 2018.

Finance costs decreased by 12.8% to RMB27.1 million (US$3.9 million) from RMB31.1 million in the fourth quarter of 2018, mainly due to lower interest rates on both bank borrowings and bills discounting.

In the fourth quarter of 2019, total net profit attributable to China Yuchai's shareholders increased by 9.3% to RMB209.6 million (US$30.0 million) from RMB191.8 million in the fourth quarter of 2018. Basic and diluted earnings per share were RMB5.13 (US$0.74) compared with RMB4.69 in the fourth quarter of 2018.

Basic and diluted earnings per share in the fourth quarter of 2019 and '18 were based on a weighted average of 40,858,290 shares.

Now, let me go over the 2019 annual results.

Our revenue increased by 10.8% to RMB18.0 billion (US$2.6 billion) compared with RMB16.3 billion in 2018. Gross profit was flat at RMB3.1 billion (US$445.2 million) compared with 2018, and gross margin was 17.2% in 2019 compared 19% in 2018. The gross margin was lower due to the change in product mix as well as the higher production cost related to the National VI engine in 2019.

Other operating income increased by 75.7% to RMB338.5 million (US$48.5 million) compared with RMB192.7 million in 2018. The increase was mainly due to higher interest income and government grants.

R&D expenses increased by 9.9% to RMB492.2 million (US$70.6 million) compared with RMB447.7 million in 2018. In 2019, the total R&D expenditures including capitalized costs, were RMB859.0 million (US$123.1 million) and represented 4.8% as a percentage of revenue, compared with RMB643.5 million, representing 4% of revenue in 2018. R&D expenses were mainly for research and development of a portfolio of new engines compliant with the next-generation National VI standards, and to enhance quality and performance.

SG&A expenses rose by 16.2% to RMB1.8 billion (US$258.9 million) from RMB1.6 billion in 2018. These expenses represented 10% of revenue compared with 9.6% in 2018. The increase in SG&A expenses was primarily due to higher warranty expenses and higher impairment losses on trade receivables.

Operating profit decreased by 10.6% to RMB1.1 billion (US$164.3 million) from RMB1.3 billion in 2018. The operating margin was 6.4% in 2019 compared with 7.9% in 2018.

Finance costs increased by 16.5% to RMB131.8 million (US$18.9 million) from RMB113.1 million in 2018, mainly due to higher amounts of bank borrowing and trade bills discounting in 2019 compared with 2018.

The net profit attributable to China Yuchai's shareholders decreased by 13% to RMB604.9 million (US$86.7 million), or basic and diluted earnings per share of RMB14.81 (US$2.12), compared with RMB695.3 million, or earnings per share of RMB17.02 in 2018.

Basic and diluted earnings per share in 2018 and 2019 were based on a weighted average of 40,858,290 shares.

Some balance sheet highlight as of December 31, 2019.

Cash and bank balances were RMB6.4 billion (US$916.1 million) compared with RMB6.1 billion at the end of 2018. Trade and bills receivables were RMB7.7 billion (US$1.1 billion) compared with RMB7.4 [Phonetic] billion at the end of 2018.

Inventories were RMB2.8 billion (US$404.8 million) compared with RMB2.5 billion at the end of 2018. Trade and bills payables were RMB5.7 billion (US$822.1 million) compared with RMB4.6 billion at the end of 2018.

Short- and long-term borrowings were RMB2.1 billion (US$294.6 million) compared with RMB2.0 billion at the end of 2018.

I will now turn the call over to Kevin for the more comments before we begin the Q&A.

Kevin Theiss -- Investor Relations

Thank you, Thomas. Please note that due to COVID-19, some officers of China Yuchai are remotely calling into the conference call because of travel restrictions. This may result in a slight delay in providing answers to some questions. We apologize for any inconvenience and thank you for your patience. Operator, we are now ready for the Q&A.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of William Gregozeski from Greenridge Global. Please ask your question.

William Gregozeski -- Greenridge Global -- Analyst

Hi, guys. Great quarter. Can you talk about how you were able to get such high heavy-duty sales in the quarter and the year relative to the market?

HOH Weng Ming -- President

Okay. Hi, Greg. This is Weng Ming here. I mean, the first -- there is -- I think, it has a lot to do with the gas engines. They were implemented in the later -- from 1 July 2019. So, a lot of the heavy-duty engines that we sold in the fourth quarter are actually gas engines.

William Gregozeski -- Greenridge Global -- Analyst

Okay. And is that -- are you expecting to see similar growth on that going forward?

HOH Weng Ming -- President

Well, we will see sort of more gas engines being sold in this coming year. Now, that's partly because of the government's push to have a better environment. So, we do expect to see -- but again, a lot of it depends also on the oil prices as well.

William Gregozeski -- Greenridge Global -- Analyst

Okay. And it looked like you ended the quarter with a pretty good inventory balance. Have you had any interruptions in shipping or part availability or anything like that related to the lockdowns in different areas of China?

HOH Weng Ming -- President

Well, OK. Now, we'll break it down into months now. In the month of January before Chinese New Year, there were no problems at all. After Chinese New Year, when the coronavirus or COVID-19 outbreak were at its peak, yes, we had problems getting components. But it has since improved now, now it's not very much. It seems improved and things are gradually getting back to normal in China. A lot of our suppliers are also now starting to gear up and beef up their production.

William Gregozeski -- Greenridge Global -- Analyst

Okay. And then what kind of impact have you -- I mean, have you seen any other direct impact from this? I presume first quarter sales are going to be quite a bit lower just because of the different shutdowns. I know you can't go too much into detail on that, but can you just kind of talk generally about the impact other than the part availability on the company?

HOH Weng Ming -- President

Okay. Yes, sure. Now, the whole country was in a lockdown, especially the Hubei province, Wuhan, that's kind of Chicago of China. So, some of the critical components came from that region. Of course, not all our components are from Hubei. So, without certain critical components, we can't produce. We can only use up what inventories that we have in the warehouse, OK? And also, with the whole country in a lockdown, other parts of China too, the components from other part of China were affected.

So, for the month of February, I think generally it's not just for ourselves but for the general economy and most of -- many of the businesses. So, the supply chain has been barely affected. Does that answer your question?

William Gregozeski -- Greenridge Global -- Analyst

Okay. Yes. And you think that's pretty much back to normal, now going into the fourth quarter -- sorry, the second quarter?

HOH Weng Ming -- President

Yes. There may -- it's not 100% yet. Although -- yes, it's -- I think, from what we have seen, our own production has improved a lot compared to February. So, we are gradually getting there. I think by second quarter we should get mostly there, if not third quarter.

William Gregozeski -- Greenridge Global -- Analyst

Okay. And last question is, what was the amount of the write-offs of receivables in the quarter and then for the full year?

HOH Weng Ming -- President

Yes. Thomas, you want to answer that?

Dr. Thomas Khong Fock PHUNG -- Chief Financial Officer

William, could you repeat your question again?

William Gregozeski -- Greenridge Global -- Analyst

Yes. What was the amount of the receivable write-offs in the quarter and for the full year?

Dr. Thomas Khong Fock PHUNG -- Chief Financial Officer

It's -- it was actually happened in the last quarter. And the payment is approximately 25 million.

William Gregozeski -- Greenridge Global -- Analyst

I assume that's RMB.

Dr. Thomas Khong Fock PHUNG -- Chief Financial Officer

RMB, yes.

William Gregozeski -- Greenridge Global -- Analyst

Okay. Great. Thank you, guys.

HOH Weng Ming -- President

William, actually we made a provision for it, because there is -- there is a delay in payment and having some issues with the customer. So, we will take some actions to try recover it.

William Gregozeski -- Greenridge Global -- Analyst

Okay. Thank you.

HOH Weng Ming -- President

All right.

Operator

Your next question comes from the line of Don Espey of Shah Capital. Please ask your question.

Don Espey -- Shah Capital -- Analyst

Good morning, all. Don Espey with Shah Capital here. You provided color on National VI, but please provide an update on your electric powertrain and natural gas engines.

HOH Weng Ming -- President

Okay. Firstly, natural gas engines, as I mentioned earlier, the natural gas National VI emission standard was implemented from 1 July 2019, and since then we have sold several natural gas engines. So, in total, for the full year of 2019, we probably sold about 21,000 units, most of them in the second half.

Don Espey -- Shah Capital -- Analyst

Is it 20,000?

HOH Weng Ming -- President

22,000. Now, for the new-energy powertrain, the one that a lot of customers have a lot of interest in is the range extender. So, we are working with our OEMs to try to -- to get it built into the systems, the vehicles. And there is a lot of interest in the marketplace for that particular powertrain.

Now, the others are not so well advanced, especially for the fuel cell. I mean, the market is not quite there yet, but we are progressing with it. We are also looking at the OEMs to start up with a prototype, to build prototype and the OEMs to test products that we currently have.

Don Espey -- Shah Capital -- Analyst

Okay. What was your operating cash flow in Q4 and calendar year 2019, and approximate U.S. dollar capex for 2020?

HOH Weng Ming -- President

Thomas, you can take that. Thomas?

Dr. Thomas Khong Fock PHUNG -- Chief Financial Officer

Okay. You are referring to the free cash -- the operating cash flow, right?

Don Espey -- Shah Capital -- Analyst

Yes, that's right.

Dr. Thomas Khong Fock PHUNG -- Chief Financial Officer

I mean, we -- in the fourth quarter, we do contribute a positive cash flow of about RMB600 million. And for the full year, we have contributed about RMB1.5 billion.

Don Espey -- Shah Capital -- Analyst

And an approximate U.S. dollar capex for 2020?

Dr. Thomas Khong Fock PHUNG -- Chief Financial Officer

Kelvin, you want to answer that?

LAI Tak Chuen Kelvin -- Vice President, Operations

I'll answer. Now, we can break it down into two components. One is for the maintenance capex, which is about RMB300 million. I think that's somewhere equivalent to about nearby 7 -- about $40 million. And then for the continuing development -- development of the National VI and Tier 4 engines, will probably be RMB300 million to RMB500 million, again about $40 million, $40 million to $50 million. So, all in all looking about $80 million, maybe $90 million.

Don Espey -- Shah Capital -- Analyst

Okay. And we saw engine sales were up in March in China. Same trend at CYD?

LAI Tak Chuen Kelvin -- Vice President, Operations

When you say up, compared to which period? Compared to February, it's definitely up. Compared to -- for this year, you're talking about 2019, or 2020?

Don Espey -- Shah Capital -- Analyst

Yes, 2020.

LAI Tak Chuen Kelvin -- Vice President, Operations

Yes, I can't go into too much detail because March financial numbers are not really finalized here. But compared to last month, yes, we expect it to be up.

Don Espey -- Shah Capital -- Analyst

Okay. Okay. We were glad to see the dollar plus dividend. However, with CYD Board, with over $50 million sitting in Singapore, why is the Board still not buying back shares trading under IPO share price and with net cash level?

LAI Tak Chuen Kelvin -- Vice President, Operations

Well, I mean, I think we have gone through this many times. Even with you or your colleague before in the past. I think the Board has preferred to reward the shareholders through dividends as opposed to other methods. So, I think that the Board hasn't changed its approach yet as of today.

Don Espey -- Shah Capital -- Analyst

We don't understand why they're still electing to not do it even at these prices. I mean, is the company planning on going private?

LAI Tak Chuen Kelvin -- Vice President, Operations

No, we haven't discussed any of this issue. I don't know. I think the Board is -- it's up to the Board, our shareholders. Cash is very important to us in this very difficult environment right now we are. So, especially for now with the COVID-19, the whole environment is very-very uncertain right now.

So, the more cash you have with us, the better it's going to be.

Don Espey -- Shah Capital -- Analyst

All right. Thank you. That's all I have.

LAI Tak Chuen Kelvin -- Vice President, Operations

All right.

Operator

[Operator Instructions].

HOH Weng Ming -- President

Okay. We have a question here. How much revenue do you expect to decline due to the virus? What is the impact on trade receivables? Are you able to elaborate further on the RMB 300 million rise in the SG&A?

Okay. Now, the impact from the virus is largely in the month of February, largely. It will be soft in March. So, both domestically in China we hope that the things will get better in the second, third quarter and fourth quarter. So, hopefully starting in the second quarter. Now, it's going to be very difficult right now to -- due to the uncertainties to actually forecast the impact of the virus.

Receivables, we do not expect to have too much from receivables. We always have been able to collect our receivables in the past. We don't expect it to be different this year.

Now, Thomas, would you respond on the rise in SG&A?

Dr. Thomas Khong Fock PHUNG -- Chief Financial Officer

I can let you read the question, because it's so small.

HOH Weng Ming -- President

I'll read out to you. Are you able to elaborate further on the RMB300 rise in SG&A?

Dr. Thomas Khong Fock PHUNG -- Chief Financial Officer

The main increase on that is due to the warranty expenses, as we had -- went into the National VI series introductions or launch. We do expect to service the engine as it's on the pilot run. So, that is the major impact on the G&A.

HOH Weng Ming -- President

Okay. Now, we have another question relating to MTU unit. Kelvin, maybe will attend to that one. What it says is, what was the unit output revenue, gross margin and profit for MTU unit? And what would be the target in 2020 for these numbers? Kelvin?

LAI Tak Chuen Kelvin -- Vice President, Operations

Yes, this is Kelvin. Regarding on the operating profit for the engine and it depends from selling price and then the -- so, I don't think that we can specify what the margin we are taking from the engine on selling to the customer here. But I would say -- and then the engine margins are better than what we are doing on the traditional vehicle engine sales and in the Yuchai [Phonetic] engine.

On the sales target for the year 2020, we are expecting to sell around 300 engine for this year. But it -- now it will be a question mark because of the -- we definitely will lose the first quarter on the sales to the end-user market due to the coronavirus pandemic. So, possibly and then we would miss this target, but we will strive to sell as much as we can.

HOH Weng Ming -- President

Final question will be, what will be the gross margin trend in 2020 with more National VI sales?

Yes. National VI sales contribution to the gross margin is not very big at the moment, simply because we are still -- we still haven't reached -- we haven't been selling a lot yet, and we expect to sell more in 2020. But it will still not be large enough to give us a volume or the economy of scale that we need. So, we will expect -- however, we do expect the gross margin to improve for National VI in 2020.

We have another question here. The question is, what will be the percentage National VI sale in 2020?

Well, it's too early to tell right now, especially with the COVID-19 outbreak. We had hoped to sell more than 13,000 units, which we did last year. It will definitely be more than that. But with the COVID-19, with the first quarter being affected by the COVID-19, it's going to be difficult for us to forecast right now due to the uncertainty. We do expect to sell more than what we did last year.

Kevin Theiss -- Investor Relations

Operator?

Operator

Yes. We have now reached the end of our Q&A session and I will turn the call back to Mr. Hoh. Please go ahead.

HOH Weng Ming -- President

Thank you all for participating in this conference call. We wish each of you good health and please be safe during this crisis. We look forward to speaking with you again.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Kevin Theiss -- Investor Relations

HOH Weng Ming -- President

Dr. Thomas Khong Fock PHUNG -- Chief Financial Officer

LAI Tak Chuen Kelvin -- Vice President, Operations

William Gregozeski -- Greenridge Global -- Analyst

Don Espey -- Shah Capital -- Analyst

More CYD analysis

All earnings call transcripts

AlphaStreet Logo