China Yuchai International Limited (CYD) Q2 2021 Earnings Call Transcript

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China Yuchai International Limited (CYD)
Q2 2021 Earnings Call
Aug 11, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the China Yuchai International Limited First Half of 2021 Financial Results. [Operator Instructions]. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Now, 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's 2021 first half year conference call and webcast. Joining us today are Mr. Weng Ming Hoh and Mr. Choon Sen Loo, President and Chief Financial Officer of CYI, respectively. In addition, we also have in attendance Mr. Kelvin Lai, Vice President 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 that are based on current expectations, beliefs and assumptions, which are subject to change at any time.

The Company cautions that these statements by their nature involve risks and uncertainties and actual results may differ materially depending on a variety of important factors such as government and stock exchange regulations, competition, political, economic and social conditions around the world and in China, including those discussed in the Company's Form 20-F under the headings Risk Factors, Results of Operations and Business Overview and in other reports filed with Securities and Exchange Commission from time to time.

If the COVID-19 pandemic is not effectively controlled, our business operations and financial condition may be materially adversely affected due to a deteriorating market for automotive sales and economic slowdown in China and abroad, a potential weakening of the financial condition of our customers, potential adverse impact to our suppliers and supply chains or other factors that we cannot foresee. All forward-looking statements are applicable only as of the date they are made, and the Company specifically disclaims any obligation to maintain or update the forward-looking information, whether of the nature contained in the press release, made during today's call or otherwise in the future.

Mr. Hoh will provide a brief overview and summary, then Mr. Loo will review the financial results for the 2021 first half year ended June 30th. Thereafter, we will conduct a question-and-answer session. For the purposes of today's call, the financial results for the first half of 2021 period ended June 30, 2021, are unaudited, and they will be presented in RMB and US 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.

Hoh Weng Ming -- President

Thank you, Kevin. The Chinese economy continued to flourish. In the first half of 2021, GDP [Phonetic] grew by 12.7% and fixed asset investment grew by 12.6% -- sorry, GDP grew by 12.7% and fixed asset investment grew by 12.6%. China continued to be the global economic growth leader in the first half of 2021. This resurgent economic growth benefited the non-EV truck and bus markets as unit sales increased by almost 26% according to statistics by the China Association of Automobile Manufacturers, in short CAAM, in the first half of 2021.

A number of our target engine markets achieved strong growth in the first half of 2021. Heavy-duty truck sales totaled 1 million units with a strong 28% [Phonetic] year-over-year growth while medium-duty truck, 308,000 units sold, posted another robust increase of 51% year-over-year.

On the bus side, sales of large coach non-EV bus was up almost 10% from a year ago while medium-duty bus sales and light-duty bus sales grew by 24% and 43%, respectively. Our heavy-duty truck engine sales excluding gasoline-powered and electric-powered vehicles grew by 33% while our bus engine unit sales achieved over 51% growth. Our off-road unit sales grew by 60.7% with 76.6% growth in marine and power generator in engine unit sales, 81% [Phonetic] unit growth in the market for agricultural engines, and industrial engines experienced a 71.1% gain. Our revenue increased by 26.8% to RMB12.6 billion or $2 billion compared with RMB10 billion in the same period last year on an overall 33.8% increase in engine unit sales year-over-year.

With the more stringent National VI emission standard becoming mandated across China, truck and bus market sales grew from a strong pre-buy of National V-compliant vehicles. Natural gas engines were mandated to be National VIb compliant at the beginning of 2021 with diesel engines required to be National VIa compliant beginning in July 2021.

However, a large number of National V-compliant engine vehicles remain in the distribution channel, and these units have continued to clear the inventory, briefly hindering current sales of National VI engine. With the deadline of National V expired on June 30th, except in some cities where extensions have been given, we expect sales of National VI engines will pick up in the second half of the year.

National VI engine technology is significantly more environmentally stringent than National V engine technology, and is essential to China's plan to reduce air pollution as China is the world's largest automotive market. We have built a large portfolio of engines compliant with National VI emission standards to serve current customers and attract new ones as well.

Our current National VI engines are also capable of meeting the even more stringent National VIb emission standards with a few modifications. National VIb standards are expected to be mandated in 2023, but we already have the technology in place to produce these engines. We are pleased to report that our initiatives in the NEV market are progressing. Our hybrid power system is currently available in the marketplace as are the 65-kilowatt and 100-kilowatt range extender. Other NEV products remain under development for future introduction.

We also entered into a new strategic partnership agreement with Guangxi Sunlong bus to develop new energy vehicles based upon China Yuchai's four new energy powertrain systems. In addition, our Eberspaecher Yuchai operation is now supplying part of our advanced exhaust treatment units to help our engines reach the National VI emission standard.

At June 30th, 2021, we maintained our financial strength with cash and bank balances of RMB5.7 billion or $376.6 million after investing almost 12% more in R&D in the first half of 2021. We paid a one-off cash dividend of $1.70 per common share in early July 2021. We have a portfolio of advanced National VI and Tier 3 engines to serve our large customer base in China and abroad. The effects of COVID-19 have been minimized in China, and we look forward to greater export sales as overseas markets improve.

There are challenges ahead as the Chinese market for commercial vehicle engines is expected to slow after the strong prebuying in the first half of 2021. However, we have advanced automotive technology and enormous service distribution system within China and large customer base and excellent reputation as a leader in automotive technology and the production acumen for commercial vehicles in China.

With that, I will welcome Choon Sen Loo on his first conference call as our new CFO. Choon Sen, you may begin your remarks.

Loo Choon Sen -- Chief Financial Officer

Thank you, Weng Ming. Now, let me review our first half results for 2021. Our revenue was RMB12.6 billion or $2 billion compared with RMB10 billion in the same period last year. The total number of engines sold by Guangxi Yuchai, our main operating subsidiary, in first half 2021 rose by 33.8% to 285,342 units compared with 213,182 units in the same period last year. The increase was mainly due to higher engine sales in the heavy-duty truck and off-road segments, particularly, power generator sets and agricultural and industrial engines.

Gross profit was RMB1.6 billion or $251.4 million compared with RMB1.5 billion in the same period last year. Gross margin decreased to 12.9% as compared with 14.8% a year ago. The decline in gross margin was mainly attributable to a change in the revenue mix and higher material costs. Other operating income increased to RMB111.7 million or $17.3 million compared with RMB105.7 million in the same period last year.

Research and development, R&D expenses increased by 48.2% to RMB315.7 million or $48.9 million compared with RMB213 million in the same period last year. Higher R&D expenses in first half 2021 were mainly due to an increase in R&D activities, including the rectification cost largely for one engine model, hence, higher testing and experimental costs and consultancy fees for National VI and Tier 4 engines.

In addition, products under development for strategic partners as well as new energy products, contributed to higher R&D expenses in first half 2021 compared with first half 2020. The total R&D expenditure including capitalized costs was RMB450.2 million or $69.7 million in first half 2021 as compared to RMB402.7 million, representing 3.6% of revenue compared with 4% in the same period last year.

Selling, General and Administrative, SG&A expenses increased by 21.5% to RMB920.1 million or $142.4 million from RMB757.4 million in the same period last year. The increase was mainly due to higher warranty expenses and an increase in activity level compared with the same period last year. SG&A expenses represented 7.3% of revenue for first half 2021 compared with 7.6% in the same period last year.

Operating profit decreased by 18.5% to RMB499.8 million or $77.4 million from RMB613.2 million in the same period last year. The operating margin was 4% compared with 6.2% in the same period last year. Finance costs increased to RMB68.4 million or $10.6 million from RMB63.2 million in the same period last year.

Net profit attributable to equity holders of the Company was RMB253.7 million or $39.3 million compared with RMB305.7 million in the same period last year. Basic and diluted earnings per share were RMB6.21 or $0.96 compared with RMB7.48 in the same period last year. Basic and diluted earnings per share for first half 2021 and first half 2020 was based on a weighted average of 40,858,290 shares.

Now let me walk you through our balance sheet highlights as at June 30th, 2021. Cash and bank balances were RMB5.7 billion or $876.6 million compared with RMB6.4 billion at the end of 2020. Trade and bills receivables were RMB10.6 billion or $1.6 billion compared with RMB8.1 billion at the end of 2020. Inventories were RMB3.8 billion or $590.5 million compared with RMB4.5 billion at the end of 2020. Trade and bills payables were RMB8.5 billion or $1.3 billion compared with RMB7.5 billion at the end of 2020. Short-term and long-term bank borrowings were RMB2.4 billion or $367.3 million compared with RMB2.2 billion at the end of 2020.

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

Kevin Theiss -- Investor Relations

Thank you, Mr. Loo. Please note that due to COVID-19, the 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.

Questions and Answers:

Operator

Yes. Thank you. [Operator Instructions]. The first question is from the line of William Gregozeski of Greenridge Global. Your line is open. Please go ahead.

William Gregozeski -- Greenridge Global LLC -- Analyst

Hi, guys. Could you share about what percent of the engine sales in the first half were light-duty?

Hoh Weng Ming -- President

Okay. The light-duty sales will be -- just hold on a minute. You're talking about four-cylinder engines here, right? So it'll be about...

William Gregozeski -- Greenridge Global LLC -- Analyst

Yes.

Hoh Weng Ming -- President

It should be about 53% of the sales.

William Gregozeski -- Greenridge Global LLC -- Analyst

Okay. All right. As far as the gross margins, what initiatives are you guys putting in place or -- to get those back to somewhere close to more historical levels? So they've obviously been falling quite a bit lately.

Hoh Weng Ming -- President

Yes. So I think the -- one of the main reasons for the decline in the negative gross margin -- sorry, the gross margin is that we're selling more off-road engines this year compared to last year. And that has an impact on the mix and directly has an impact on the gross margin. And, we're also selling more National VI engine this year compared with the same period last year. So because of that, we have not reached the economy of scale yet for National VI engines since because the National VI engine emission standard is only going to be fully implemented from 1st July this year, which has just been done, happened, right?

So what we are going to do going forward to help to improve the margin, one is to go back to our suppliers to negotiate on the pricing going forward as our National VI engine units sort of go up or improve for the next six months or even into next year because that's -- for vehicle engines, we can only sell Nat VI. And for those service, the negotiation for this year is still ongoing, so we expect to finalize some of them in the third and fourth quarter. So for those that we finalize in the third and fourth quarter, we will be able to -- if there's any reduction that we get, we should be able to get it for the whole -- the sales for the whole year. So there should be some that will relate back to the first half.

Secondly, we will -- we are using the R&D to help us to cost down further for our new engines, for National VI engines. National VI is -- for your information, National VI engine is a new platform that we have developed in the last few years. So we're going to use R&D to help -- to continue to help us to reduce the costs through R&D.

And the third initiative that we're doing will be to negotiate with our customers now to try to increase our pricing, especially for some of the lower-margin product. Through these three initiatives, we believe we can improve the gross margin going forward especially into the next year.

William Gregozeski -- Greenridge Global LLC -- Analyst

Okay. On the economies of scale, because you've talked about that a few times in the past, what's the unit amount or the target where you'll hit that point and we'll see the margins improve from that?

Hoh Weng Ming -- President

I mean this is a -- when we negotiate with a supplier then we will have to have certain volume commitments, right? So as volume increases, especially now after the implementation of the National IV engines going forward, most of the engine sales will be National VI except for those we export to some of the developing countries. So with that, and the volume that we're achieving, so far this year, we have achieved a volume of sales -- total sales of 285,000 units. So with that, we should be able to go back to the suppliers to negotiate.

William Gregozeski -- Greenridge Global LLC -- Analyst

Okay. So I mean, between everything going to National VI now, the negotiation with suppliers and possibly getting retroactive pricing on that, gross margins in the second half should be quite strong, correct?

Hoh Weng Ming -- President

It should be better for the National VI engines, yes.

William Gregozeski -- Greenridge Global LLC -- Analyst

Okay. And last question is about the engine that needed to be fixed and the warranty related to that. Can you just kind of briefly talk about the issues with that? And are all the costs on fixing it and warranty in the -- staying in the first half? Or is any of that going to bleed into the second half?

Hoh Weng Ming -- President

In fact, for the National VI engines, we have been selling them last year -- beginning of last year and quite a bit this year. So those problems that came out we have fixed most of them already by now. However, going into next six months, we believe there will still be some, but it will not be as much as in the first half of this year or even last year.

William Gregozeski -- Greenridge Global LLC -- Analyst

Okay. All right. Thank you.

Operator

Thank you. [Operator Instructions]. Our next question is from the line of KC Ong of CGS-CIMB. Please go ahead. Your line is open.

Khang Chuen Ong -- CGS-CIMB -- Analyst

Hi, management. Thanks for taking my question. I have a question regarding the current sales trend, seeing that we have already shifted into the N VI in China since July. So just wondering how's the sales trend looking right now, how's the presales looking? Any comments on that will be helpful.

Hoh Weng Ming -- President

Yeah. Now, this is relating to the vehicle sales. Now before 1st January -- sorry, 1st July this year, that's the -- what we call the sales of vehicle -- National V engines has been pretty strong, very strong. In fact, it started toward the end of last year and slowed down into the first half of this year. So from that point of view, we believe that there's quite a lot of National V inventory in the distribution. It takes a little while for it to be fully digested. I think it takes a couple -- two to three months to digest those in the distribution. So we expect the National VI engines for this -- second half of this year to be somewhat affected. So we expect a slowdown there compared to the first half.

Khang Chuen Ong -- CGS-CIMB -- Analyst

Okay. I see. And I guess on your product mix, you did mention that in the first half, we saw a very strong pickup in off-road. Do we expect this product mix to remain generally the same in second half? How should we think about it?

Hoh Weng Ming -- President

Yeah, I think it will be too far away. In fact, we still continue to expect the power generation market to grow strongly in China. There's been a bit of power shortage especially in Southern China this year. So there's been quite a bit of disruption for a lot of companies. So that one, we think will continue to grow and to be strong. For the others, like the agriculture engines and industrial engines, industrial engine, I think will probably be flat for us. But agriculture, I think it should slow down after a strong growth in the first half.

Khang Chuen Ong -- CGS-CIMB -- Analyst

Okay. Got it. And I guess you mentioned that there were some one-off items or expenses in the first half. Can you give us a rough indication of how large was it? How big was the impact to the bottom line?

Loo Choon Sen -- Chief Financial Officer

Hi. It's Loo Choon Sen. So I believe you are referring to the rectification costs for the R&D expense, right?

Khang Chuen Ong -- CGS-CIMB -- Analyst

Yes, yes.

Loo Choon Sen -- Chief Financial Officer

Yeah, so that was for the one engine model, right, that we have been incurring, the cost to rectify. That mostly, that has been done, right, but still have some remaining to be fixed, right? So that was the -- that one particular engine model, right, that brought us to have this quite a bit of cost in H1.

Hoh Weng Ming -- President

Well, those are mostly [Indecipherable] I'll add on to Mr. Loo. We still expect some for the second half and maybe a little bit more into next year. So it's a lot of it has already been fixed.

Khang Chuen Ong -- CGS-CIMB -- Analyst

Okay. Any indication of how large this one-off expense is or probably -- because it's included in the SG&A, right?

Hoh Weng Ming -- President

Yeah.

Khang Chuen Ong -- CGS-CIMB -- Analyst

Maybe some forward-looking trends of how this SG&A expense as a percentage of revenue would trend into the second half.

Hoh Weng Ming -- President

It would be very much more. Again, it's hard to give you a good answer because I think, it depends a lot on whether or not the user experienced the problem and come back to us for rectification. Those that came back, we have rectified them.

Khang Chuen Ong -- CGS-CIMB -- Analyst

Okay. Got it. Thanks.

Operator

Thank you. [Operator Instructions]. We have now reached the end of our Q&A session. Now I will turn the call back over to Mr. Hoh.

Hoh Weng Ming -- President

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

Operator

[Operator Closing Remarks].

Duration: 31 minutes

Call participants:

Kevin Theiss -- Investor Relations

Hoh Weng Ming -- President

Loo Choon Sen -- Chief Financial Officer

William Gregozeski -- Greenridge Global LLC -- Analyst

Khang Chuen Ong -- CGS-CIMB -- Analyst

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