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spk00: Good day and thank you for standing by. Welcome to the China Yuchai International Limited first half of 2021 financial results. At this time, all participants are in listen-only mode. And after the speaker's presentation, there will be a question and answer session. And to ask a question during the session, you need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. And I'd like to turn the conference over to Kevin, please. Please go ahead, sir.
spk05: Thank you for joining us today, and welcome to China-Yuchai International Limited's 2021st first half-year conference call and webcast. Joining us today are Mr. Wei-Ming Ho and Mr. Chun-Sin Liu, President and Chief Financial Officer of CYI, respectively. In addition, we also have in attendance Mr. Calvin 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, target, 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's Form 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 condition may be materially 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 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. Ho will provide a brief overview and summary, then Mr. Liu 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 into 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. Ho, please begin your prepared remarks.
spk04: Thank you, Kelvin. The Chinese economy continues to flourish. in the first half of 2021 as GDP grew by 12.7% and fixed assets 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 the first half of 2021. A number of target engine markets achieved strong growth in the first half of 2021. Heavy-duty truck sales toppled 1 million units with a strong 28% year-over-year growth, while medium-duty trucks with 108,000 units sold posted another robust increase of 51% year-over-year. On the bus side, sales of large coached 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 engine unit sales. 51% unit growth in the market for agricultural engines and industrial engines experienced a 71.1% gain. Our revenue increased by 26.8% to RMB $12.6 billion compared with RMB $10 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 6 emission standards becoming mandated across China, truck and bus market sales grew from a strong pre-buy of National 5 compliant vehicles. Natural gas engines were mandated to be National 6B compliant at the beginning of 2021, with diesel engines required to be National 6A compliant beginning in July 2021. However, a large number of National 5 compliant engine vehicles remain in the distribution channel, and these units have continued to clear the inventory briefly hindering current sales of National 6 engines. With the deadline of National 5 expired on June 30, except in some cities where extension has been given, we expect sales of National 6 engines will pick up in the second half of the year. National 6 engine technology is significantly more environmentally stringent the National 5 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 6 emission standards to serve current customers and attract new ones as well. Our current National 6 engines are also capable of meeting the even more stringent National 6B emission standards with a few modifications. National 6B 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 NEB market are progressing. Our hybrid power system is currently available in the marketplace, as are the 65kW and 100kW range extenders. 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 U-Chai's four new energy powertrain systems. In addition, our Abbots Spicer U-Chai operation is now supplying part of our advanced exhaust treatment unit to help our engines reach the national six emissions standard. At June 30th, 2021, we maintained our financial strength with cash and bank balances of RMB 5.7 billion or USD $876.6 million after investing almost 12% more in R&D in the first half of 2021. We paid a one-off cash dividend of USD $170 per common share in early July 2021. We have a portfolio of advanced national 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 vehicles is expected to slow after the strong pre-buying in the first half of 2021. However, we have advanced automotive technology, an enormous service distribution system within China, a large customer base, an excellent reputation as a leader in automotive technology, and the production acumen for commercial vehicles in China. With that, I will welcome Chun-Seng Liu on his first conference call as our new CFO. Chun-Seng, you may begin your remarks.
spk01: Thank you, Wing Ming. Now let me review our first half results for 2021. Our revenue was RMB $12.6 billion or USD $2 billion compared with RMB $10 billion in the same period last year. The total number of engines sold by Kuangsi Yichai, our main operating subsidiary, in the first half 2021 rose by 33.2%. 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 RMB 1.6 billion or USD 251.4 million compared with RMB 1.5 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 RMB 111.7 million or USD 17.3 million compared with RMB 105.7 million in the same period last year. Research and development R&D expenses increased by 48.2% to RMB 315.7 million or USD 48.9 million compared with RMB 213 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 ratification costs largely for one engine model, hence higher testing and experimental costs and consultancy fees for National 6 and KIA 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 cost was lemminbit $450.2 million or USD $69.7 million in first half 2021 as compared to RMB $402.7 million. representing 3.6% of revenue compared with 4% in the same period last year. Selling General and Administrative expenses increased by 21.5% to RMB $920.1 million or USD $142.4 million from RMB $757.4 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 RMB 499.8 million or USD 77.4 million from RMB 613.2 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 RMB 68.4 million or USD 10.6 million from RMB 63.2 million in the same period last year. Net profit attributable to equity holders of the company was RMB 253.7 million or USD 39.3 million compared with RMB 305.7 million in the same period last year basic and diluted earnings per share were rmb 6.21 or us dollar 96 cents compared with rmb 7.48 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 million 858,290 shares. Now, let me walk you through our balance sheet highlights as of June 30th, 2021. Cash and bank balances were RMB 5.7 billion or USD 836.6 million compared with RMB 6.4 billion at the end of 2020. Trade and bills receivables were RMB 10.6 billion or USD 1.6 billion compared with RMB 8.1 billion at the end of 2020. Event risk were RMB 3.8 billion or USD 590.5 million compared with RMB 4.5 billion at the end of 2020. Trade and bills payable were RMB 8.5 billion or USD 1.3 billion compared with RMB 7.5 billion at the end of 2020. Short-term and long-term bank borrowings were RMB 2.4 billion or USD 367.3 million compared with RMB 2.2 billion at the end of 2020. I will now turn the call over to Kevin for a comment before we begin our Q&A.
spk05: Thank you, Mr. Liu. 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.
spk00: Yes, thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, please press the pound or hash key. And please stand by while we compile the Q&A roster. Once again, please press star 1 for your question. One moment, please, for the first question. Our first question is from the line of William We go Zesky of Greenridge Global. Your line is open. Please go ahead.
spk03: Hi, guys. Could you share about what percent of the engine sales in the first half were light duty?
spk04: Okay. The light duty sales will be... Just hold on a minute. Okay. You're talking about four-cylinder engines here, right? So it would be about 53% of the sales unit. Okay. All right.
spk03: As far as the gross margin, what initiatives are you guys putting in place to get those back to somewhere close to more historical levels? Because they've obviously been falling quite a bit lately.
spk04: Yes. So I think one of the main reasons for the decline in 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 have an impact on the gross margin. and we're also selling more national six engines this year compared with the same period last year so because of that we have not reached the economy of scale yet for national six engines as this because the national six engine emission standard is only going to be fully implemented from first 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 amount is to go back to our suppliers to negotiate on the pricing going forward as our national six engine unit is going to go up or improve for the next six months or even until next year because for vehicle engines you can only sell next six. And for those that we, 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 sales for the whole year. So there should be some that will relate back to the first half. Secondly, we are using the R&D to help us to cost down further for our new engines, for our National 6 engines. For your information, National 6 Engines is a new platform that we have developed in the last few years. So we're going to use R&D to continue to help us to reduce the cost through R&D. And the third initiative that we're doing will be to negotiate with our customers now to try to increase some of our pricing, especially for some of the sort of lower margin product. Through these three initiatives, we believe we can improve the gross margin going forward, especially to the next year.
spk03: 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?
spk04: I mean, this is, well, when you go to a supplier, you have to have a certain volume commitment, right? So as the volume increases, especially now, after the implementation of the National 6 engine, going forward, most of the engine sales will be National 6, except for those we export to some of the developing countries. So with that, and the volume that we are 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.
spk03: Okay. So, I mean, between everything going to National 6 now, the negotiating with suppliers and possibly getting retroactive pricing on that, gross margins in the second half should be quite strong, correct? Correct.
spk04: It should be better for the national six engines, yes.
spk03: Okay. 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 staying in the first half or is any of that going to bleed into the second half?
spk04: In fact, for the National Six Engines, we have been selling them last year, beginning of last year, and quite a bit this year as well. So those problems that came out, we have fixed most of them already by now. However, going into the 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.
spk03: Okay. All right. Thank you.
spk00: Thank you. Once again, for your questions, please press star and then number 1 and wait for your name to be announced. And to cancel the request, it is the pound or hash key. For your questions, please press star 1. Once again, for your questions, please press Par 1 and wait for your name to be announced. Our next question is from the line of Casey Ong of CGS CIMB. Please go ahead. The line is open.
spk02: Hi, measurement. Thanks for picking my question. I have a question. Regarding the current sales trend, seeing that we have already shifted into the N6 in China since July. So just wondering how's the sales trend looking right now? How's the pre-sales looking? Any comments on that?
spk04: Yeah. Now, this is relating to the vehicle sales. Now, before 1st July this year, the sales of National 5 engines has been very strong. In fact, it started towards the end of last year and flowed on into the first half of this year. So, from that point of view, we believe that there's quite a lot of National 5 inventory in the distribution. It takes a little while for it to be fully digested. I think you take two to three months to digest those. That's in the distribution. So we expect the next six engines for this second half of this year to be somewhat affected. So we expect a slowdown there compared to the first half.
spk02: 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?
spk04: Yeah, I think it won't 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 destruction 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 engines we think will probably be flat for us. But the agriculture, I think it should slow down after strong growth in the first half.
spk02: OK, got it. And I guess you mentioned that there were some one-off items or expenses in the first house. Can you give us a rough indication of how large was it? How big was the impact to the bottom line?
spk01: Hi, . So I believe you are referring to the cost for the warranty expense, right?
spk02: Yes.
spk01: So that was for the one engine model that we have been incurring the cost to rectify. That mostly has been done, but still have some remaining to be fixed. So that was that one particular engine model. brought us to have quite a bit of cost in each one.
spk04: That one is mostly an add-on to Mr. Lu. We will still expect some for the second half and maybe a little bit more in the next year. A lot of it has already been fixed.
spk02: Any indication of how large this one-off expense is? or probably because it's included in the SG&A, right? Maybe some forward-looking trend of how this SG&A expense as percentage of revenue would trend into the second half.
spk04: 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 experiences the problem and come back to us for rectification. Those that came back, we have already rectified them.
spk02: Okay, got it. Thanks.
spk00: Thank you. Once again, for those who wish to ask a question, it is star 1 on your telephone keypad. For your questions, please press star 1 and wait for your name to be announced. Once again, for those who wish to ask a question, please press star 1 and wait for your name to be announced. And to cancel the request, it is the pound or hash key. All right. We have now reached the end of our Q&A session. Now we'll turn the call back over to Mr. Ho.
spk04: 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.
spk00: Thank you. This concludes today's conference call, and thank you for participating.
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