China Yuchai International (CYD) Q2 2018 Earnings Conference Call Transcript

China Yuchai International (NYSE: CYD) Q2 2018 Earnings Conference CallAug. 10, 2018 8:00 a.m. ET

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the China Yuchai International Limited 2018 second-quarter conference call and webcast. [Operator instructions]. On the call with us today, we have Mr. Weng Ming Hoh, China Yuchai International president; Dr. Thomas Phung, China Yuchai International CFO; Mr. Kelvin Lai, China Yuchai international VP of operations; and Mr. Kevin Theiss, investor relations.

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's second-quarter 2018 conference call and webcast. 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 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 heading Risk Factors, Result 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 press release, made today during the conference call or otherwise in the future. Mr.

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Hoh will provide a brief overview and summary, and then Dr. Phung will review the financial results for the second quarter and six months ended June 30, 2018. 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, 2018, 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.

Weng Ming Hoh -- President

Thank you, Kevin. For the second quarter of 2018, China's GDP grew 6.7%, slightly below the 6.8% of the first quarter 2018. However, China's factory output growth in June took us to a two-year low and the prospect of a trade war with United States has created some business uncertainty. According to data reported by the China Association of Automobile Manufacturers, CAAM, in the second-quarter 2018, sales of commercial vehicles, excluding gasoline-powered and electric-powered vehicles, increased by 10.3%.

The truck market unit sales grew by 12.1%, led by a 16.3% increase in heavy-duty truck sales. The bus market decreased by 3.1% with significant declines in both heavy-duty and medium-duty bus sales. The rise of EV bus sales negatively affected bus sales powered by internal combustion engine. Our net revenue for the second quarter of 2018 increased by 3.2% to RMB 4.2 billion, or USD 635.5 million, compared to RMB 4.1 billion in the second quarter of 2017.

The total number of engines booked by GYMCL during the second quarter 2018 increased by 11.1% to 100,675 units, compared with 90,638 units in the same quarter last year. Our higher engine unit sales in the second quarter of 2018 were generated by increased truck sales across the board, led by high- and medium-duty engine sales and increase in several off-road markets, including agriculture, industrial engines, and marine genset. Our off-road unit engine sales have been a great force for our engine sales. For the first six months of 2018, our engine sales grew slightly, with increases in medium- and heavy-duty trucks engine and industrial engines.

Net revenue was RMB 8.5 billion, or USD 1.3 billion, compared with RMB 8.6 billion in the same period last year. Our gross profit in the second quarter of 2018 increased by 6.2% year over year to RMB 769 million, or USD 116.2 million, as gross margin grew to 18.3%, compared with 17.8% in the same quarter last year. Operating profit increased by 12.2% year over year, to RMB 274.5 million, or USD 41.5 million, and the operating margin higher at 6.5%, compared with 6% in the second quarter of 2017. We continue our strong engine sales into international markets in the second quarter of 2018.

GYMCL was the sole engine supplier of heavy-duty engines for 800 buses manufactured by Guangxi Yuchai Automobile Company Limited and exported to Saudi Arabia. Six hundred of the buses were also powered by our 10.2-liter YC6MK engines and the remaining 2,200 buses were equipped with our 8.4-liter engine model YC6L, which is a more competitive lightweight design. Our engines have achieved a premium market position in Saudi Arabia bus market with their performance, high quality, and support. During the second quarter of 2018, GYMCL subsidiary MTU Yuchai Power completed the construction of its production line in its new facility in Yulin City, China.

Testing was completed and production of the MTU S4000 series engine has commenced. This line of a high-end product is now entering into the high-horsepower domestic Chinese market. The S4000 series engines are initially targeting the power generation and oil and gas markets in China. The S4000 engine enhance our product portfolio and provide new products to make [Inaudible] competitive in the growing off-road market for domestically produced diesel engine compliant with Tier 3 emission standards with a power level of or above 1,400 kilowatts.

MTU Yuchai Power is a 50-50 joint venture formed by MTU Friedrichshafen and GYMCL and MTU is a subsidiary of Rolls-Royce Power Systems. In addition, our strong research and development capability enables us to be among the first-tier engine manufacturers in China with engines compliant with the next emission standards. This provides us with the opportunity to capture new orders and win new customers while we gain market share with new technological advancements. Earlier in 2018, we launched 14 new engines compliant with China's most stringent National VI emission standards, including 10 diesel engines and four natural gas engines.

We anticipate selling our new models throughout this fall. We highly expect a mid-2020 nationwide implementation date for the new most stringent National VI emission standards. Our R&D investment increased 28.4% to RMB 156.5 million, or USD 23.6 million, in the second quarter 2018. Much of this increase was related to building our National VI and Tier 4 technology and productions technique.

R&D increased 16.3% for the first six months of 2018 to RMB 276.4 million, or USD 41.8 million, compared with RMB 237.6 million in the same period last year. We continue to forecast our -- sorry, we continue to focus on our financial strength, with cash and bank balances of RMB 6.5 billion, or USD 982.4 million, at June 30, 2018, compared with RMB 6 billion at the end of 2017. Inventory declined to RMB 2 billion, or USD 305.1 million, compared with RMB 2.6 billion at the end of 2017. On July 10, we paid a cash dividend of USD 0.73 per ordinary share and the special dividend of USD 1.48 per ordinary share for the year ended December 31, 2017.

We continue to grow our unit sales in several markets through our broad portfolio of products. We are positioning ourselves for future growth with our investments in R&D to enhance our engine quality and add new technologies to meet the challenges of the upcoming National VI and Tier 4 emission standards. In addition, we are leveraging our leading markets position in China to attract world-class partners to add new capabilities to better serve our clients. With that, I will now like to turn the call over to Dr.

Thomas Phung, our chief financial officer, who will provide more details on the financial results.

Thomas Phung -- Chief Financial Officer

Thank you, Weng Ming. The comparative figure for the second quarter and six months ended June 30, 2017, were restated due to the adoption of IFRS 15 from January 1, 2018, and revenue from contacts with customer by a full retrospective application. The financial impact on the adoption of IFRS 15 is described and attached at the end of the press release. Now let me review the second-quarter results for 2018.

Our net revenue for the second quarter of 2018 increased by 3.2% to RMB 4.2 billion, USD 635.5 million, compared with RMB 4.1 billion in the second quarter of 2017. The total number of engines sold by GYMCL during the second quarter of 2018 was 100,675 units, compared with 90,638 units in the same quarter last year, an increase of 11.1%. The increase was mainly due to increase in engine sales to the truck and off-road segment, particularly the agriculture application, and was partially offset by the decrease in the bus segment. In addition, company's sales in the power generation and the industry equipment applications increased as compared with the same quarter last year.

According to the data reported by the China Association of Automobile Manufacturer, CAAM, excluding sales of gasoline-powered and electric vehicles, in the second quarter of 2018, sales of buses decreased by 3.1%, while truck sales increased by 12.1%. According to CAAM, in the second quarter of 2018, sales of commercial vehicles, excluding sales of gasoline-powered and electric vehicles, increased by 10.3% compared with the same quarter last year. Gross profit increased by 6.2% to RMB 769.0 million, USD 116.2 million, compared with RMB 724.0 million in the second quarter of 2017. Gross profit margin was 18.3%, compared with 17.8% in the same quarter last year.

The increase was mainly attributable to the changes in the product mix. Other operating income was RMB 33.7 million, USD 5.1 million, compared with RMB 48.6 million in the second quarter of 2017. The decrease was mainly due to foreign exchange revaluation losses in the second quarter of 2018, compared with a gain in the same quarter last year and partly offset by higher interest -- higher bank interest income in the second quarter of 2018. Research and development.

R&D expenses increased by 38.4% to RMB 156.5 million, USD 23.6 million, compared with RMB 113.0 million in the second quarter of 2017. The increase was primarily due to higher staff wages, consultancy fees, and testing-related expenses for the new -- for new engine. In the second quarter of 2018, the company incurred higher R&D expenses to further develop engine products compliant with China National VI emission standard for trucks and bus segment and Tier 4 off-road product offerings. The company also continued with initiatives to improve engine performance and quality, especially in the area of emission control.

As a percentage of revenue, R&D expenses increased to 3.7%, compared with 2.8% in the second quarter of 2017. Selling, general, and administrative. SG&A expenses decreased by 10.4% to RMB 371.8 million, USD 56.2 million, from RMB 414.8 million in the second quarter of 2017. The decrease primarily result from a lower warranty and freight charges, reverse of allowance for doubtful trade receivable, and indirect taxes in the second quarter of 2018.

SG&A expenses represent 8.8% of revenue, compared with 10.2% in the same quarter last year. Operating profit increased by 12.2% to RMB 274.5 million, USD 41.5 million, from RMB 244.7 million in the second quarter of 2017. The operating margin was 6.5%, compared with 6% in the second quarter of 2017. Finance costs increased to RMB 29.6 million, USD 4.5 million, from RMB 16.5 million in the second quarter of 2017.

Higher finance costs mainly result from higher borrowings and bill discounting compared with the second quarter of 2017. Net profit attributable to China Yuchai's shareholders was RMB 132.1 million, USD 20.0 million, compared with RMB 133.9 million in the same quarter last year. Basic and diluted earnings per share were RMB 3.23 million, USD 0.49, compared with RMB 3.29 in the same quarter last year. Basic earnings per share in the second quarter of 2018 was based on a weighted average of 40,858,290 shares and diluted earnings per share was based on weighted average of 40,872,405 shares, compared with 40,712,100 shares in the same quarter last year Now, I will review the first six months results for 2018.

Our revenue -- our net revenue was RMB 8.5 billion, USD 1.3 billion, compared with RMB 8.6 billion in the same period last year. The total number of engines sold by GYMCL in the first half of 2018 was 210,788 units, compared with 210,648 units in the same period last year. The increase was mainly due to increased engine sales in the trucks and off-road segment, particularly in industrial engines and partly offset by the decrease in the bus segment and agriculture application. Gross profit was RMB 1.6 billion, USD 245.2 million, same as the same period last year.

Gross profit increased to 19%, as compared with 18.3% a year ago. This increase was mainly attributable to the changes in product mix. Other operating income was RMB 84.2 million, USD 12.7 million, compared with RMB 88.2 million in the same period last year. R&D expenses were RMB 276.4 million, USD 41.8 million, compared with RMB 237.6 million in the same period in 2017.

The company continued with initiative to develop new engine compliant with China next emission standard, National VI and Tier 4, as well as to improve engine performance and quality for the current portfolio of engine. As a percentage of revenue, R&D spending was 3.2% in the six months of 2018, compared with 2.8% in the same period last year. SG&A expenses decreased to RMB 731.7 million, USD 110.6 million, from RMB 755.7 million in the same period last year. The decrease was mainly due to lower warranty expenses and freight charges and a reversal of allowance for doubtful trade receivable compared with the same period last year.

SG&A expenses represent 8.6% of net revenue for 2018 period and 8.8% in the same period last year. Operating profit increased to RMB 698.7 million, USD 105.6 million, from RMB 674.9 million in the same period in 2017. The increase was mainly due to higher gross profit and lower SG&A expenses, partly offset by higher R&D expenses. The operating margin was 8.2%, compared with 7.8% in the same period last year.

Finance costs increased to RMB 52.1 million, USD 7.9 million, from RMB 43.3 million in the same period last year, an increase of approximately RMB 8.8 million. Higher finance costs mainly result from an increase in borrowings. Net profit attributable to China Yuchai's shareholders was RMB 375.0 million, USD 56.7 million, compared with RMB 382.4 million in the same period last year. Basic and diluted earnings per share were RMB 9.18, USD 1.39, and RMB 9.17, USD 1.39, respectively, compared with basic and diluted earnings per share of RMB 9.39 in the same period last year.

Earnings -- basic earnings per share in the six months of 2018 was based on a weighted average of 40,858,290 shares, and diluted earnings per share was based on a weighted average of 40,888,876 shares, compared with 40,712,100 in the same period last year. Next, we will review the balance sheet highlights as of June 30, 2018. Cash and bank balance were RMB 6.5 billion, USD 982.4 million, compared with RMB 6.0 billion at the end of 2017. Trade and bills receivables were RMB 8.3 billion, USD 1.3 billion, compared with RMB 7.0 billion at the end of 2017.

Inventories were RMB 2.0 billion, USD 305.1 million, compared with RMB 2.6 billion at the end of 2017. Trade and bill payables were RMB 5.3 billion, USD 806.2 million, compared with RMB 5.2 billion at the end of 2017. Short-term and long-term borrowings were RMB 1.8 billion, USD 275.0 million, compared with RMB 1.6 billion at the end of 2017. With that, operator, we are ready to begin the Q&A session.

Questions and Answers:

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator instructions. We have the first question from the line of David Raso.

Please ask your question.

David Raso -- Evercore ISI -- Analyst

Thank you for the time. I was just curious how you're seeing the development of the tariffs situation, how it's impacting your order book? The truck market, obviously, the weakness we're starting to see there, we've been waiting for that now for like six, seven months so that was, sort of, due to the harder comparisons. But I'd be curious if you could parcel out how much of the incremental weakness of late on truck do you think actually is related to some concerns by the broader slowdown in tariffs? And maybe also, take that conversation over to the off-highway markets, which especially in agriculture, still seem strong for you, but curious to get your perspective on the tariff's impact on off-highway markets as well.

Weng Ming Hoh -- President

OK. David, this is Weng Ming here. OK, the tariff will not affect us directly simply because we do not sell to America. We don't sell any of our engines to America.

This is mainly for domestic consumption and we have 50% exported to regions in Southeast Asia, Middle East and Latin America and African nation. So we do not have a direct impact, so to speak. But -- and also we sell our -- most of our raw materials or components locally as well. Now, however, if the economy of China is affected, then there will definitely be an indirect impact on our business.

Now as it stands now, while we still expect the heavy-duty trucks market to slow down, we haven't seen up till now at this point in time any significant impact on our business as yet. So the -- it's going to be very difficult to, kind of, quantify the uncertainties that are now surrounding the economy. I'm sorry...

David Raso -- Evercore ISI -- Analyst

And the on-highway market -- to the on-highway market, before we discuss off-highway. And I know the expectations to start the year was off -- was on-highway was going to be down. But have you seen in the last three months, maybe I ask more directly, your forecast for on-highway truck three months ago versus today for the full year, how has that changed?

Weng Ming Hoh -- President

At the beginning of the year, we expected the heavy-duty truck market to slow for this year, but it did not. I mean, we had continued growth -- to grow. So we expect that the last year, I think, the whole market absorbed about 1.1 million units of vehicles. This year, for first six months, I see growth there, so we expect the second half to start to slow down.

But overall, for the full year, it probably be about the same level as last year, that's our assumption. And for the off-highway market, which you mentioned earlier, we saw very strong sales of engines in the -- not only in the industrial engines, but also in the agriculture applications as well as marine and power generation segment as well. So our off-market segments actually grew quite strongly in the second quarter.

David Raso -- Evercore ISI -- Analyst

So the off-highway markets are not showing any sentiment concern about the Chinese economy in the order books, is that what [Inaudible] fairly healthy off-highway?

Weng Ming Hoh -- President

Yes. You're right. Not yet [Inaudible].

David Raso -- Evercore ISI -- Analyst

And my last question. The commitment the government has to National VI, has there been any wavering in that at all? Are we still at least it appears to be committed to an urban rollout in summer of '20 and a countryside rollout in summer of '21, is that still the basic case? And if so, how do we think about the cost increases? Just trying to think through a potential partial or full, kind of, prebuy?

Weng Ming Hoh -- President

OK. Now I think the government is pretty committed and frankly, we were issued a directive not too long ago. They're going to start with the gas engines first in 2019, 1st July, followed by the heavy trucks in the [Inaudible]. So obviously, we think the cost of -- for this National VI engines is going to higher than National V or IV that they had.

So yes we are [Inaudible].

David Raso -- Evercore ISI -- Analyst

OK. Thank you.

Operator

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

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

Weng Ming Hoh -- President

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

Operator

[Operator signoff]

Duration: 34 minutes

Call Participants:

Kevin Theiss -- Investor Relations

Weng Ming Hoh -- President

Thomas Phung -- Chief Financial Officer

David Raso -- Evercore ISI -- Analyst

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Contents:

Prepared Remarks:

Questions and Answers:

Call Participants: