China Yuchai International Limited (CYD) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the China Yuchai International Limited 2022 Unaudited Second Half and Full Year Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Kevin Theiss. Please go ahead.

Thank you for joining today, and welcome to China Yuchai International Limited's Second Half Year and Full Year Ended December 2022 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, VP of Operations of CYI. Before we begin, I will remind all listeners that throughout this call, we may make statements that may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe, expect, anticipate, project, targets, optimistic, confident that, continue to, predict, intend, aim, will or similar expressions are all intended to point out forward-looking statements. All statements other than statements of historical fact are statements that may be deemed forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning the company's operations and financial performance and conditions and are based on current expectations, beliefs and assumptions that are subject to change at any time. The company cautions that these statements, by their nature, involve risks and uncertainties, and actual results may differ materially depending upon a variety of important factors such as government and stock exchange regulations; competition; political, economic and social conditions around the world and in China, including those discussed in the company's Form 20-F under the headings Risk Factors, Results of Operations and Business Overview, and in other reports filed with the Securities and Exchange Commission from time to time. If the COVID-19 pandemic is not effectively controlled, our business operations and financial conditions may be materially and adversely affected due to a deteriorating market for automotive sales, an economic slowdown in China and abroad, a potential weakening of the financial condition of our customers, potential adverse impact to our suppliers and supply chain, 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 begin -- will provide a brief overview and summary, then Mr. Loo will review the financial results for the second half and full year ended December 31, 2022. Thereafter, we will conduct a question-and-answer session. For the purposes of today's call, the 2022 and 2021 second half financial results and the 2022 year financial results are unaudited, and they will be presented in RMB and U.S. dollars. The 2021 year results are audited. 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.

Thank you, Kevin. Following the sluggish 2.5% GDP growth year-over-year in the first half of 2022, the Chinese economy continued its slow growth trend with 3.9% year-over-year growth for the third quarter of 2022 and 2.9% in the fourth quarter. Quarter-over-quarter economic growth between the third quarter and the fourth quarter of 2022 Q2 was flat. For fiscal year 2022, Chinese economic growth was 3%, down sharply from 8.5%, 8.4% growth experienced in 2021. The total retail sales in China declined by 0.2% and the investment in real estate development declined by 10% in fiscal 2022 year. According to data reported by China Association of Automobile Manufacturers, total industry unit sales of commercial vehicles, excluding gasoline-powered and electric powered vehicles for the second half of 2022, declined by 26.3% year-over-year, with truck and bus unit sales down by 27.5% and 18.4%, respectively. For the fiscal year 2022, commercial vehicles sales were down by 21.4% year-on-year, with truck unit sales 2.9% lower and bus unit sales down 27.1%. COVID-related lockdowns and travel restrictions in China resulted in reduced demand for commercial vehicles and logistical activity declined, and there were fewer infrastructure and construction projects in 2022. The real estate market suffered for financial liquidity and uncertainties. In addition, the interruption of the supply chain have affected production schedule. In this uneasy Chinese commercial vehicle environment, our subsidiary, Guangxi Yuchai Machinery Company Limited, or GYMCL, reported a combined truck and bus unit sales decline of 33% year-over-year in the second half of 2022. Truck sales was 33.2% lower and buses declined by 32.1%. However, GYMCL [ maybe see ] bus sales decrease by 16.9% by exceeding their market growth. GYMCL's engine sales in the off-road segment experienced a more modest engine sales reduction of 5% year-over-year in the second half of 2022. Both industrial and agricultural engine unit sales growth in the second half of 2022 on a year-over-year basis. On a more positive note, our new energy products segment has reported sales over 5,000 [ treaded ] units in the second half of 2022. For the 2022 fiscal year, GYMCL reported sales -- [ in its ] sales of trucks and buses down by 27.8% year-over-year. Truck sales declined by 49.6% and bus unit sales were down 33.2%. Off-road engine sales declined by 9.8% year-over-year. New energy product unit sales were over 6,300 units from a low base for these new products. Our revenue for second half of 2022 was RMB 7.5 billion or USD 1.1 billion, a 13.6% decline compared with RMB 8.6 billion in the same period [ 4 ] of 2021. For fiscal year 2022, revenue was RMB 16 billion or USD 2.3 billion compared with RMB 21.3 billion in 2021. Gross profit was flat at RMB 1.3 billion or USD 182.4 million in the second half of 2022 compared to the same period last year. However, the gross margin rose to 17% as compared with 16.4% in the second half of 2021. The increase in gross margin was mainly attributable to the change in revenue mix with higher off-road revenue, cost reductions, especially materials and production-related expenses, and lower sales rebate. For 2022 year, gross profit decreased by 7.9% year-over-year to RMB 2.6 billion or USD 377.7 million, but the gross margin increased to 16.4% compared with 13.9% in 2021. We are especially pleased to report a 21.2% year-over-year increase in operating profit to RMB 231.3 million or USD 33.2 million and a higher operating margin in the second half of 2022 despite the lower sales. Our 2022 operating profit was RMB 519.3 million or USD 34.6 million. As part of our cost savings initiative, selling, general and administrative expenses were reduced by approximately 8.2% year-over-year to RMB 1.6 billion or USD 231.4 million. And our research and development expenditures decreased by 1.5% year-on-year to RMB 836.4 million or USD 130.1 million for 2022. For the second half of 2022, our basic and diluted earnings per share of RMB 3.06, or USD 0.44, increased by 565.2% above the RMB 0.46 in the same period last year. For the 2022 fiscal year, basic and diluted earnings per share were RMB 5.35 or USD 0.77. In summary, our financial results once again demonstrated the strong resilience of our businesses and our presence in diversified engine market. On the sales front, we had some notable new orders in 2022. The city of Macau ordered more than 600 new energy buses equipped with Yuchai range extenders, which were fully delivered in 2022 and being operated by Macau public transit services. GYMCL's other order is for 100 heavy-duty truck, it is from Jianghuai. Heavy duty truck consist of YCK-06, YCK-08, YCK-11 and YCK-12 engines. These engines are recognized for their low-fuel consumption, low noise and high reliability. The partnership with China JAC HD Truck is extended to other National-VI compliant model engines. GYMCL's YC6GN sale for 8-liter heavy-duty natural gas engines became the exclusive engine to power 800 Ankai buses shipped to Monterey, Mexico, that country's largest city. The YC6GN provides a more environmentally-friendly bus solution. [ Below ] are some progress in the new energy segment in 2022. Yuchai model YCA07N model and hybrid engines are propelling the 10-liter gas electric hybrid buses produced by the largest bus producer in China, eCorp Group, and delivered to the bus operator in the city of Nanjing. Yuchai energy powered technology [ popular with the ] [Foreign Language] successfully integrated the 3.5 ton electric axle drive axle for the first time into an EV light bus from [ Potish and Lome ] in the first quarter of 2022. [ E try silan ] 300kw high power range extender power train system was integrated into [ Inomomole ] technologies, 200 metric ton [ smart mining truck ] the EM200 in the third quarter of 2022. The EM200 is China's first domestically made 200 metric tons smart mining truck and features really improved payload management efficiency, low carbon emissions and provides intelligent control. After introducing its first hydrogen engine for commercial research in 2021, GYMCL introduced the new heavy-duty hydrogen engine [ the YCK66H ] engine in the second quarter of 2022. Yuchai [ engine lab ] has received a total of RMB 17 million capital from 3 new investors. These funds are targeted to expand working capital and to enhance development's high-power full-electric drive system for hybrid and range-extended drive system for both on and off-road application. As at December 31, 2022, we have cash and bank balances of RMB 4.9 billion or USD 693.5 million, and we maintained a strong balance sheet. During the year, the Board of Directors declared a dividend, a cash dividend of USD 0.14 per ordinary share for the year ended 31st December 2021, which was paid on July 15, 2022. We are cautiously optimistic for 2023. Recent policy changes in 2023 have greatly reduced COVID-19 lockdowns and travel restrictions, which will improve the business and investment activities, including the supply chain. Any new policies introduced will help improve the investment environment for both domestic and export markets as well as enhance the operating environment. With that, I would like to turn the call over to Choon Sen Loo, our Chief Financial Officer, who will provide more details on the financial results. Choon Sen?

Thank you, Weng Ming. Now let me review our unaudited 6 months' results ended December 31, 2022. Revenue was RMB 7.5 billion or USD 1.1 billion compared with RMB 8.6 billion in second half 2021. The total number of engines sold by GYMCL in second half 2022 declined by 18.1% to 140,305 units compared with 131,449 units in the second half of 2021. The decrease was mainly due to lower IG sales in the truck, bus, marine and power generation application market, partially offset by higher sales in agricultural and industrial engines. According to data reported by the China Association of Automobile Manufacturers, CAAM, in the second half 2022, commercial vehicle unit sales, excluding sales of gasoline-powered and electric-powered vehicles decreased by 36.3% compared to the second half of 2021, as sales of trucks and buses declined by 37.5% and 18.4%, respectively, reflecting demand in these market segments. Gross profit was RMB 1.3 billion or USD 182.4 million compared with the same amount of RMB 1.3 billion in second half 2021. Gross margin increased to 17% as compared with 15.4% in second half 2021. The increase in cost margin was mainly attributable to a change in revenue mix, with an increase in off-road segment over the on-road segment, cost reductions and lower sales rebate. Other operating income increased by 22.9% to RMB 251.3 million or USD 36.1 million compared with RMB 204.5 million in second half 2021. The increase was mainly due to higher government grants. Research and development, R&D, expenses decreased by 19.7% to RMB 428 million or USD 61.4 million compared with RMB 533.1 million in the second half of 2021 due to lower R&D expenses incurred in commercial vehicle engines that were partially offset by higher R&D expenses incurred in marine engines and power generation engines and new energy products. Total R&D expenditures, including capitalized costs, were RMB 540.8 million or USD 77.6 million, representing 7.3% of revenue in second half 2022 as compared to RMB 712.2 million, representing 8.3% of revenue in second half 2021. Selling, general and administrative, SG&A, expenses increased slightly to RMB 802.1 million or USD 133.8 million from RMB 835.9 million in the second half 2021. The increase was mainly due to increased warranty expenses compared with the same period last year. SG&A expenses represented 11.6% of revenue for second half 2022 compared with 9.7% in second half 2021. Operating profit rose by 41.2% to RMB 231.3 million or USD 33.2 million from RMB 153.8 million in second half 2021. The operating margin was 3.1% compared with 1.9% in second half 2021. Finance costs decreased by 15.3% to RMB 40.2 million or USD 5.8 million from RMB 47.5 million in second half of 2021. The share of financial results of the associates and joint ventures was a profit of RMB 1.8 million or USD 0.3 million compared with a loss of RMB 108.4 million in second half 2021. This gain was largely due to higher profit at the MTU Yuchai Power Company Limited and a share of lower losses at Y&C Engine Company Limited. Income tax expense was RMB 2.6 million or USD 0.4 million as compared with an income tax credit of 42.4 million in the second half of 2021. The change was mainly due to the higher export income in second half 2022. Net profit attributable to equity holders of the company was RMB 124.9 million or USD 17.9 million compared with RMB 19 million in second half 2021. Basic and diluted earnings per share were RMB 3.06 or USD 0.44 compared with RMB 0.46 in second half 2021. Basic and diluted earnings per share for second half 2022 and second half 2021 were based on a weighted average of 40,858,290 shares. Now we review the unaudited financial results for the 2022 fiscal year ended December 31, 2022. Revenue was RMB 16 billion or USD 2.3 billion compared with RMB 21.3 billion in full year 2021. The total number of engines sold by GYMCL in financial year 2022 decreased by 29.7% to 301,256 units compared with 456,791 units in financial year 2021. The decrease was mainly due to weakness in the truck and bus market and the markets of marine and power generation engines. According to CAAM, commercial vehicle unit sales, excluding sales of gasoline-powered and electric-powered vehicles, decreased by 41.4% in financial year 2022 as sales of trucks declined by 42.9% while sales of buses declined by 27.1%. The impact of COVID-19 restrictions and related supply chain disruptions impacted market conditions in China and in foreign markets. Gross profit decreased by 10.9% to RMB 2.6 billion or USD 37.7 million compared with RMB 3 billion in financial year 2021. Gross margin increased to 16.4% compared with 13.9% in H1 2021. The increase in gross margin was mainly attributable to a change in revenue mix with higher off-road revenue as a greater proportion of the total revenue and lower sales rebate. Other operating income increased by 6.5% to RMB 306.8 million or USD 48.4 million compared with RMB 315.2 million in financial year 2021. The increase was mainly due to higher government grants. R&D expenses decreased by 1.4% to RMB 836.4 million or USD 120.1 million compared with RMB 846.8 million in FY 2021. GYMCL continued with its initiative to improve engine performance and the qualities of its engines compliant with China's National VI and Tier 4 emission standards and to develop new energy products. In FY 2022, total R&D expenditures, including capitalized cost, was RMB 1 billion or USD 36.1 million compared with RMB 1.2 billion in financial year 2021, representing 6.4% of the revenue compared with 5.5% in financial year 2021. SG&A expenses were RMB 1.6 billion or USD 231.4 million, representing 10.1% of the revenue compared with RMB 1.2 -- 1.8 billion, representing 8.3% of the revenue in full year 2021. This decrease was mainly due to lower freight, personnel and warranty expenses. Operating profit was RMB 519.3 million or USD 74.6 million, down from RMB 663.5 million in financial year 2021. The operating margin was 3.2% as compared with 3.1% in FY 2021. Finance costs decreased by 17.6% to RMB 95.5 million or USD 13.7 million from RMB 115.9 million in FY 2021. The share of financial results of the associates and joint ventures was a loss of RMB 39.1 million or USD 4.2 million compared with a loss of RMB 95.9 million in financial year 2021. The decreased loss was primarily attributable to higher profit at the MTU Yuchai Power Company Limited and the share of lower losses at Y&C Engine Company Limited. Income tax expense was RMB 59.1 million or USD 8.5 million as compared with RMB 43.8 million in FY 2021. Net profit attributable to China Yuchai shareholders was RMB 218.6 million or USD 31.4 million compared with RMB 232.7 million in FY 2021. Basic and diluted earnings per share were RMB 5.35 or USD 0.77 compared with RMB 6.67 in FY 2021. Basic and diluted earnings per share for FY 2021 and FY 2022 -- sorry, for FY 2022 and FY 2021 were based on a weighted average of 40,858,219 shares. Now let me walk you through our financial highlights as of December 31, 2022. Cash and bank balances were RMB 4.9 billion, USD 606.5 million compared with RMB 5.3 billion at the end of FY 2021. Trade and bills receivables were RMB 6.8 billion, USD 935.4 million compared with RMB 6.8 billion at the end of financial year 2021. Inventories were RMB 4.9 billion or USD 709 million compared with RMB 5.2 billion at the end of FY 2021. Trade and bills payables were RMB 6.9 billion or USD 993.5 million compared with RMB 7.4 billion at the end of financial year 2021. Short-term and long-term bank borrowings were RMB 2.3 billion or USD [Technical Difficulty] compared with RMB 2.2 billion at the end of financial year 2021. I will now turn the call over to Kevin for his comment before we begin our Q&A.

Thank you. Please note, some officers of China Yuchai are remotely calling in to 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 now ready to begin the Q&A session.

[Operator Instructions] Dear speakers, there are no questions at this time. Please continue.

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

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.