China Yuchai International Limited

I would like now to turn the conference over to Kevin Fish. Please go ahead, Kevin.

Thank you for joining us today and welcome to China Yuchai International Limited's second quarter 2020 conference call and webcast. Joining us today are Mr. Wei-Meng Hou 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 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, and 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 forms 20Fs 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 release made during today's call or otherwise in the future. Mr. Ho will provide a brief overview and summary, and then Dr. Fung will review the financial results for the second quarter ended June 30, 2020. Thereafter, we will conduct a question and answer session. For the purposes of today's call, the financial results for the second quarter ended June 30, 2020 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. Ho, please begin your prepared remarks.

Thank you, Kevin. In the second quarter, China economy resumed growth as GDP increased by 3.2%, far below historical trend, but a strong rebound from the 6.8% economic contraction of the first quarter of 2020, which was severely impacted by the COVID-19 pandemic. The aftermath of the COVID-19 pandemic created major disruptions in the Chinese economy and automotive industries as it affected customers, suppliers, workers, distributors, service networks, and other auto-related occupations. The national and interprovincial travel restrictions negatively impacted many supply chains in the automotive industry. Following the reopening of the Chinese economy, the government enacted economic growth catalysts including higher fiscal spending, more approved infrastructure projects, and lowering lending rates and bank reserve requirements. Manufacturing activity increased since May, and China's export grew partially because China was among the first to ease lockdown action. According to data reported by the China Association of Automobile Manufacturers , in the second quarter of 2020, sales of commercial vehicles, excluding gasoline-powered and electric-powered vehicles, increased by 50.5%. Truck sales increased by 56.1%, with JVDT truck sales up by 64.9%, medium-duty truck sales rose by 32.5% and bus sales increased by 1.8%. Part of this growth was attributable to the pent-up demand from the first quarter of 2020 as much of the economy was essentially shut down with lockdowns and travel restrictions implemented to inhibit the spread of the COVID-19 infection. Our operational and financial results during the second quarter reflected the rebound from the disruptions in the first quarter of 2020 due to the COVID-19 outbreak. Our total unit sales improved by 32% year-over-year. Our overall truck engines and bus engine unit sales grew by 23.3% in the second quarter of 2020, with heavy-duty truck engine sales rising by 40.8%. and medium-detached truck engines up by 53.3% year-over-year. Off-road engine sales increased an impressive 51.7%, led by a 78.5% growth in the seasonal agricultural machinery market. As a result, our revenue increased by 34.7% to RMB 6.5 billion, all U.S. dollars 925.2 million. The growing sales of our National 6 engines in the Chinese heavy duty truck engine market is directly related to the growing acceptance of our National 6 natural gas engine products. We have already established a position as one of the leading suppliers of heavy duty National 6 engines to the truck and bus market in China. Operating profit increased by 53.6% to RMB $448.7 million or USD $63.4 million and basic undiluted earnings per share rose by 66.4% to RMB 5.99 or USD 85.10. In the second quarter of 2020, the total R&D expenditure, including capitalized costs, was RMB 280.3 million or USD 39.6 million. And for the six-month ended June 30, 2020, total R&D was RMB 402.7 million or USD 56.9 million R&D represented 4.3% of net revenue in the second quarter of 2020 and 4% of net revenue for the six months ended June 30, 2020. We continue to improve our National 6 and Tier 4 technologies and production techniques as we are progressing on our products for the renewable energy market. With the continuing national implementation of the more stringent National 6 emissions standards, our portfolio of national six compliant engines, including products powered by natural gas, positions us well with our existing customers and attracts new ones as well. In 2019, we have established strategic partnership with Sunsea Automobile Holding Group, a leading producer of heavy-duty trucks in China, and the Photon Motor Group, a market leader in the on-road vehicle segment. We also entered into a new strategic partnership in the second quarter of 2020 to become a strategic OEM supplier to Sanyi Truck, part of the Sanyi Group Company Limited, which is China's leading machinery equipment maker and has a worldwide presence. This new partnership will further improve our market position in the future. We have used newly developed engine technologies to build or modify engines for specific markets. During the 2020 first quarter, an advanced high-powered marine engine was introduced to penetrate the growing demand for vessels in the yacht class. This segment has historically been dominated by imported engine models. Innovative technologies have increased the engine power and reduced the engine drive weight of the YC6MJ marine engine to make it competitive with the imported engine. During the first half of 2020, GIL MCL announced that its YCA05175-S500 engine passed European Stage 5 emission test, and this EHI engine can now be marketed in the European Union for off-road applications. We retain our financial strength despite the disruptions in sales and operations in the first half of 2020, with cash and bank balances of RMB 6.6 billion at June 30, 2020, and we pay the cash dividend of US$0.85 per share on July 31, 2020. Similar to the rest of the world, China's economy still faces significant uncertainties. With China successfully reopened its economy and automobile industry already experienced a pronounced rebound beginning in April, we remain cautiously confident that Chinese economy is on the recovery path for the remainder of 2020. With that, I will turn to Thomas to go over the financials.