China Yuchai International Limited

Ladies and gentlemen, thank you for standing by and welcome to China Yuchai International Limited's first quarter 2020 conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press Tar 1 on your telephone. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Kevin Thies. Please go ahead, sir.

Thank you for joining us today and welcome to China Yuchai International Limited first quarter 2020 conference call and webcast. Joining us today are Mr. Wei Ming Ho and Dr. Thomas Fung, 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 Delegation 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 and 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 risk 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 20F 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 condition may be materially and adversely affected due to the 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 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. In this presentation, while we are going to provide comparisons between the first quarter of 2020 and 2019 respectively, we must caution that any comparison of operational and financial data between the two quarters will likely be of very limited value. Mr. Ho will provide a brief overview and summary and then Dr. Fung will review the financial results for the first quarter ended March 31, 2020. Thereafter, we will conduct a question and answer session. For the purposes of today's call, the financial results for the first quarter ended March 31, 2020 are unaudited and they will be presented in RMB and U.S. dollars. All financial information presented is reported using International Financial Reporting Standards as issued by the International Standards Board. Mr. Ho, please begin your prepared remarks.

Thank you, Kevin. In the first quarter, the COVID-19 pandemic has created major disruptions in the economy and automobile industries in China, as it has affected customers, suppliers, workers, the service networks, and other auto-related occupations. We believe the economic conditions will improve over the remainder of the 2020 year barring any unforeseen circumstances. The COVID-19 pandemic has exacerbated what was already a slowing economy and auto market in China. Slower economic growth affected business confidence and industrial investment as fixed asset investment declined by a reported 16.1% in the first quarter of 2020. In addition, The implementation of the first phase of National Six Emissions Standard and the ongoing trade tensions between US and China have been weighing on the Chinese economy and auto industry. For the first quarter of 2020, China's GDP declined by 6.8%, the worst year-over-year quarterly decline since 1992. The government's national travel restrictions and lockdown created unavoidable interruptions in employment consumer industrial services, and transportation, which affected nearly all industrial production and supply chain distribution in the first quarter of 2020. The unemployment rate rose to 6.2% in February 2020, the highest level ever reported. According to data reported by China Association of Automobile Manufacturers, CAAM, in the first quarter of 2020, sales of commercial vehicles excluding gasoline-powered and electric-powered vehicles decreased by 25.7%, truck sales decreased by 25.5%, with heavy truck sales down by 15.6%, and bus sales decreased by 28%. Our operational and financial results during the first quarter reflected the impact as the Chinese government mandated a nationwide lockdown to limit the spread of COVID-19 outbreaks. leading to massive disruption to the movement of products and people. Our total unit sales suffered a 33% year-over-year decline. Our overall truck engine and bus engine sales declined in the first quarter of 2020, but heavy-duty truck sales decreased by a single-digit compared with the market performance. Off-road engine sales decreased in the first quarter of 2020, with the sale of engines to the agricultural machinery market down by 6.5%. Our National 6 emission standard technologies have created new opportunities in 2019, including strategic partnership with Sunsea Automobile Holding Group, a producer of heavy-duty trucks in China, and Photon Motor Group for product support for National 6 compliant engines and technologies. The growing sales of our National 6 natural gas engines in the Chinese heavy-duty truck engine market is directly related to the early launch of our national six-gas engine product. And we continue to expand our product offerings in other markets as well. During the 2020 first quarter, our subsidiary GYMCL introduced an advanced high-powered marine engine to address the growing domestic demand for vessels in the yacht class. This is a segment that has been historically dominated by imported engine models This new high-powered boat engine optimizes the existing design of H-I model YC6MJ engine with innovative technology tailored for yacht class engine requirements. Innovative technologies have increased the engine power and reduced the engine dry weight of YC6MJ marine engine. Subsequent to the first quarter of 2020, GYMCL announced that is YCA05175-S500 engine has passed the Off-Road European Stage 5 emission standard in Europe. And this H-I engine can now be marketed in the European Union for off-road applications, such as construction machinery generators and others. This engine utilizes common-rail fuel injection technology, featuring advanced dissolved oxidation catalyst after treatment, a diesel particulate filter, and a highly efficient active selective catalytic reduction emissions control technology system, which are believed to be superior to the comparable products currently in the marketplace. Even in this troubled environment, we maintain profitability with basic and diluted earnings with share of RMB $1.49, US$0.21, compared with RMB 4.85 in the first quarter of 2019. We maintain our financial strength with cash and bank balances of RMB 4.8 billion or USD 681.7 million as of March 31, 2020 and we declare a cash dividend of USD 0.85 per ordinary share to be paid on July 31, 2020. Entering in the second quarter of 2020, lockdown restrictions have been lifted in nearly all provinces and cities in China. In April, the sale of commercial vehicles, excluding gasoline-powered and electric-powered vehicles, has increased by 34.4% year-over-year, monthly, led by 62.2% growth in heavy-duty vehicles, according to data from CAAM. This growth clearly represented pent-up demand from the restrictions related to the effect of the COVID-19 pandemic. While the outlook for the remainder of 2020 may not be so clear, it remains hopeful that the economies of China and its major trading partners can quickly resume growth. The Chinese central government has initiated a tax cut, improved regulations and loosened monetary policies to stimulate the domestic economy. The first phase of US-China trade agreement has been agreed upon will help improve trade for both countries. With that, I will turn to Thomas to go over the financials.

Thank you, Winmin. Now let me review our first quarter result for 2020. Our revenue for the first quarter of 2020 decreased by 18.1% to RMB $3.4 billion, US dollar $481.2 million, from RMB 4.2 billion for the first quarter of 2019. The revenue decrease was mainly due to the impact of the COVID-19 pandemic, which result in a lockdown and travel restriction in China. According to the data reported by the China Association of Automobile Manufacturers, CAAM, In the first quarter of 2020, sales of commercial vehicles, excluding gasoline-powered and electric-powered vehicles, decreased by 25.7%. Truck sales decreased by 25.5%, with heavy-duty truck sales down 15.6%. And the result decreased, and bus sales decreased by 58.0%. GMCL overall truck engine sales declined by 40.2% and bus engine sales declined by 58.4% in the first quarter of 2020 compared with the same quarter last year. However, GMCL heavy-duty truck engine sales decreased by a single digit compared with the same quarter last year. In addition, GM cell off-road engine sales decreased in the first quarter of 2020 with the sales of engine to the agricultural machinery market down 6.5% compared with the same quarter last year. Gross profit decreased by 30.4% to RMB $529.9 million, US dollar $74.8 million. compared with RMB 761.3 million in the first quarter of 2019. Gross margin was 15.5% in the first quarter of 2020 compared with 18.3% in the first quarter of 2019. The reduction in gross profit growth and gross margin was mainly attributed to accessible to the lower unit sales due to the COVID-19 pandemic impact, as well as higher unit production costs. Other operating income was flat at RMB 43.9 million, US dollar 6.2 million, compared with the same quarter last year. With higher interest income and lower fair value loss on foreign exchange forward contracts in the first quarter of 2020 being offset by higher unrealized exchange losses. R&D, sorry, research and development R&D expenses increased by 5.7% to RMB 76.0 million, US dollar 10.7 million from RMB 71.9 million in the first quarter of 2019. Higher R&D expenses will mainly due to the ongoing development of a portfolio of next-generation National 6 and Tier 4 engines, as well as improvements in the engine quality and performance. In the first quarter of 2020, the total R&D expenditure, including capitalized development costs, will R&D $122.4 million, U.S. $17.3 million. and this represents 33.6% of revenue compared with RMB 119.5 million representing 2.9% of revenue in the first quarter of 2019. Selling general administrative SG&A expenses decreased by 11.4% to RMB 333.3 million, US dollar 47.0 million from RMB $376.1 million in the first quarter of 2019. SG&A expenses represent 9.8% of revenue compared with 9.0 in the first quarter of 2019. The lower SG&A expenses was mainly due to lower warranty expenses and lower on outward freight charges partially offset by higher impairment losses on trade in the first quarter of 2020. Operating profit decreased by 53.9% to RMB $164.5 million, US dollar $23.2 million, from RMB $357.3 million in the first quarter of 2019. The operating margin was 4.8% compared with 8.6% in the first quarter of 2019. The decrease was primarily due to the adverse impact of the COVID-19 pandemic. Financial costs increased by 44.1% to RMB 36.5 million, US dollar 5.1 million, from RMB 25.3 million in the first quarter of 2019 mainly due to higher amount of trade bill discounted. In the first quarter of 2020, total net profit attributed to China Yichai shareholder was RMB 61.1 million, US dollar 8.6 million compared with RMB 198.0 million in the first quarter of 2019. Basic and diluted earnings per share were RMB 1.49, USD 0.21, compared with RMB 4.85 in the first quarter of 2019. Basic and diluted earnings per share in the first quarter of 2020 and 2019 were based on a weighted average of 40,858,290 shares. Balance sheet highlight as at March 31, 2020. Cash and bank balance were RMB $4.8 billion, US$681.7 billion, compared with RMB $6.4 billion at the end of 2019. Trade and bill reserve were RMB $8.0 billion, US$1.1 billion, compared with RMB $7.8 at the end of 2019. Inventory were RMB 4.6 billion, US dollar 655.4 million, compared with RMB 2.8 billion at the end of 2019. Trade and bill payable were RMB 7.0 billion, US dollar 982.7 million, compared with RMB 6.2 billion, At the end of 2019, short-term borrowing will flat at RMB 2.1 billion, U.S. dollar 295.2 million. I will now turn the call over to Kevin for the comments before we begin the Q&A.

Thank you, Thomas. 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.

Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press R1 on your telephone and wait for a name to be announced. If you wish to cancel your request, please press the pound or hash key. Once again, if you wish to ask a question, please press star one on your telephone and wait for a name to be announced. Your first question comes from the line of Don Espy from Shah Capital. Please ask your question.

Wen Ming, good quarter. We have a few questions. Your 2019 free cash flow was 110 million US. Should we assume around 100 million US in 2020 as gas, as engine sales have picked up from Q1?

At this point in time, with the COVID-19, where it is, I mean, China was affected by COVID-19 in February, particularly, and took another month or two to improve, to get back to normal. So I think, and the rest of the world are still dealing with this. So at this point in time, it's going to be quite difficult to provide any information guide as to how much pre-cash flow is going to be. We believe that it will be positive. We don't think it will be negative, but it will depend on the results for a few years.

Could you talk about Yuchai's role in further consolidation of the diesel engine sector, especially in China?

If you look at the top players, diesel engine players in the Chinese market, I think they are all still there. I think most of them will still be around. I don't think they will have difficulties complying with the national six emission standards. In fact, I think many of them have already prepared for it. Don't think you'll see a major consolidation in the industry.

Okay. Could you talk about growth drivers for your gas engines, electric powertrain, and hybrid truck business?

Okay. Calvin, do you want to take that call, that question? Okay.

Sorry, I missed that. I missed up the part of the question, and then the growth driver for what application you mentioned?

Growth drivers for gas engines, electric powertrain, and the hybrid truck business.

Okay. Yeah, see, regarding on the gas engines, mainly because of the heavy-duty truck and trailer, And then they are being used in some of the restricted area, for example, in the terminal, in the port area. And so that's the really and then the demand there. And GIMC and then the Utah, we had our NET6 and gas engines ready late last year, ready and then for the NET6 implementation. So this is one of the major demand there. And regarding on the electrical dry train, We don't have the right product at this stage because our range extender is ready for the commercial launch, but still takes some more time for the trial. And we are also ready and then on the next generation hybrid, but that is still red and we take time and then for the OEM testing. So we are not really in the picking up on this particular segment at this stage.

Okay. And JV income was around 700,000 U.S. in Q1. Should we expect same or higher quarterly trend in 2020?

Okay. You're referring to the... the share of loss or profit of joint venture and associates, I presume, right? Now, the thing is that not only GMCL is affected by COVID-19, the joint ventures are also affected. So first quarter is probably one of the worst quarter because that's the quarter that China had to lock down basically the country and disrupted the whole flow of goods and people. So, yeah, on that basis, I think it will be better than first quarter for the rest of the quarter.

Okay. And in light of the political tensions, why isn't CYD board looking more closely into having a second listing in Shenzhen or Hong Kong?

Yeah, I think you asked the question last time, too, Don. At this point in time, we have no plans listing in another stock market. I think we still prefer to stay on with the U.S. Stock Exchange as it is. And we've been with the U.S. Stock Exchange stock market since 1994. And, yeah, we have no plans to do another one at this point in time.

Okay. That's all from us. Thanks.

Thank you.

Once again, ladies and gentlemen, if you wish to ask a question, please press star 1 on your telephone and wait for a name to be announced. Once again, ladies and gentlemen, if you wish to ask a question, please press star 1 on your telephone. If there are no questions at this time, please continue. Excuse me, presenters, we don't have questions on the line. Please continue.

All right.

All right, since there's no questions, we have now reached the end of our Q&A session. I will turn and thank you all for participating in our conference call. We wish each of you good health and please be safe during the crisis. We look forward to speaking with you again. Goodbye.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.