This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: I would like now to turn the conference over to Kevin Tess. Please go ahead, sir.
spk02: Thank you for joining us today, and welcome to China-Utah International Limited's 2021 second half year and fiscal year-ended December 31, 2021 conference call and webcast. Joining us today are Mr. Wei-Ming Hou and Mr. Chun-Sen Liu, President and Chief Financial Officer of CYI, respectively. In addition, we also have in attendance Mr. Calvin 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 Security Litigation Reform Act of 1995. The words believe, expect, anticipate, project, target, optimistic, confident that, confident to, 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 uncertainty, 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 headings Risk Factors, Results of Operations, and Business Overview. and another report filed with the Securities and Exchange Commission from time to time. As 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, 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. Hill will provide a brief overview and summary, then Mr. Liu will provide the financial results for the second half and the fiscal year ended December 31, 2021. Thereafter, we will conduct a question and answer session. For the purposes of today's call, the 2021 financial results for both periods are unaudited and they will be presented in RMB and U.S. dollars. All 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.
spk03: Thank you, Kevin. The Chinese economy in the 2021 year can best be described as experiencing two very different growth paths. In the first half of 2021, Chinese GDP expanded by 12.7% as China continued its resurgent economic growth. However, a number of factors negatively impacted the Chinese economy in the second half of 2021, which substantially reduced economic growth. Construction activity declined in the second half of 2021 and manufacturing a key business driver earlier in 2021 slowed as power shortages arose, ongoing COVID-19 restrictions affected supply chain and disrupted supply of critical computer chips or diminished production activity. According to data from China Association of Automobile Manufacturers, CAAM, Sales of commercial vehicles, excluding gasoline-powered and electric-powered vehicles, decreased by 36.5% year-over-year in the second half of 2021. Total truck sales declined by 39.5%. In addition to slowing economy, truck sales were also impacted by a large pre-buy of National 5 compliant commercial vehicles before the stricter National 6 emission standards were nationally mandated in July. Higher truck sales and accumulated distributor inventory before July resulted in reducing demand in the second half of the year. Supply chain disruptions also impeded the flow of vehicle components in the second half of 2021. In such a difficult market environment, our truck engine sales decreased by 41.9%. While the truck market is resolving its issues, our main subsidiary, Guangxi Chai Machinery Limited, or DYMCL, and saw success in other markets, consistent with its market diversification strategy. In the relatively smaller bus market, GYMCL achieved a 55.6% rise in bus engine sales, while the overall bus market reported a 5.10% unit sales decline in the second half of 2021. GYMCL bus engine unit sales increased in each of its engine size categories with its new National 6 compliant engines. GYMCL's engine sales in the off-road market also experienced a gain in the second half of 2021 as marine and power generation unit engines increased by 31.8% in the midst of the power shortages and sales of agricultural engines continued to benefit from farmers' transition from intensive labor to advance machines. Our new energy product sales also increased. Reviewing the fiscal year 2021, JYMCL achieved positive sales growth in nearly every market except the truck market. Bus engine unit sales, excluding gasoline-powered and electric-powered vehicles, were 53.8% higher and outperformed the overall market bus unit sales in every size category. Unit sales of our truck engines declined by 16.2% in 2021. Off-road engine sales were 32.7% higher in 2021 compared with a year ago, as every major category achieved over 25% growth and marine and power generation unit sales rose by 53.3% in 2021. Our overall sales revenue in the second half of 2021 declined by 18.7% year-over-year, due to a 21% reduction in unit sales, primarily reflecting weak truck sales as the economy slowed and issues affected the truck market. Despite this, gross margin in the second half of 2021 was 15.4%, slightly lower than a year ago, but higher than the first half of 2021. Gross margin was impacted by lower unit volume. Our national six engines have not yet realized economy of scale in production. Cost reduction programs have also been initiated to improve the gross margin. In response to the lower unit sales, selling and administrative expenses were reduced by 16.6% and finance costs were 46% lower in the second half of 2021. For the fiscal year 2021, Our revenues grew by 3.3% to RMB 21.3 billion, or US dollars 3.3 billion, on a 6.2% increase in its sales. Gross profits declined by 7.4% to RMB 3 billion, or US dollars 463 million, with a 13.9% gross market. Net earnings per share were RMB 67, or US dollars 105. Spent 1.2 billion RMB or US dollars 182.3 million on research and development investment in the 2021 year to further improve the performance and quality of our large portfolio of national six engines and our emerging tier four compliant engines. And to further develop our new energy vehicle NUB technologies. Our national six engines can already be adapted to be in compliance with the most stringent national 6D emission standards, which are expected to be mandated in 2023. Our initiatives in the NUV market continue to make headway as we sold 501 new energy units in 2021 compared with 85 units in 2020. Our hybrid power systems and range extenders are in the marketplace, and we have other NUV products under development for future introduction. Our GIMCL subsidiary has made strategic initiatives in 2021 to improve our NEV capabilities and other technologies, including a new strategic partnership with EV bus producer Wangxi Sunlong Automobile Manufacturing to develop new energy vehicles based upon China's four new energy powertrain systems. GIMCL agreed with the government of Nanning Municipality to jointly invest in Yichai Sinlan in research development and construction of new production capacity for new energy technologies. GYMCL's Yichai Sinlan subsidiary entered into a cooperation agreement with Beijing Xinshuntai Bus Company to further develop hydrogen energy applications with fuel cell powertrain systems in the Beijing, Tianjin and Hebei markets. Two new smart The powertrain system was announced for heavy-duty agricultural equipment, i.e., power hybrid powertrain and YC6K60 diesel engines for heavy-duty agricultural and mining equipment applications. GIMCL announced its first operating hydrogen engine for China's commercial vehicle market, the YC6K05 hydrogen-powered engine. As at December 31st, 2021, we maintain our financial strength with cash and bank balances of RMB 5.3 billion, all US dollars 836.2 million. We are well positioned with our broad, popular national six engines to serve our large customer base and attract new customers as well. We are excited about the potential for our growing NEV technology capabilities. And as the impact of COVID-19 diminishes, we anticipate a gradual improvement in the market conditions in China and abroad. Additionally, the Chinese government has recently introduced policies to promote faster growth. With that, I would now like to turn the call over to Chunxing Lu, our Chief Financial Officer, who will provide more details on the financial results. Chunxing, you may begin your remarks.
spk01: Thank you, Wei Ming. Now, let me review our second six-month results, ended December 31, 2021. Revenue was RMB 8.6 billion or US dollar 1.4 billion compared with RMB 10.6 billion in the same period of 2020. The total number of engines sold by GMCL in second half of 2021 declined by 21% to 171,449 units compared with 217,138 units in the same period last year. The decrease was mainly due to lower engine sales in the truck market, partially offset by higher sales of engines in bus, passenger vehicle, and marine and power generation applications. According to data reported by the China Association of Automobile Manufacturers , in second half of 2021, commercial vehicle unit sales excluding sales of gasoline-powered and electric-powered vehicles, decreased by 36.5% compared to second half 2020, as unit sales of trucks and buses declined by 39.5% and 5% respectively. Gross profit was RMB 1.3 billion or USD 208.3 million, compared with RMB 1.7 billion in the same period last year. Gross margin decreased to 15.4% as compared with 16.1% a year ago, but increased compared to 12.9% in the first half of 2021. The decline in gross margin was mainly attributable to the lower unit volume sold. A change in the revenue mix transition to national six compliant engines and high-end material costs. These factors were partially offset by cost reductions during the year. Other operating income decreased by 25.2% to RMB 204.5 million or US dollar 32.1 million compared with RMB 233.3 million in second half 2020. The decrease resulted from lower bank interest income and reduced government grants. Research and development R&D expenses increased by 28.9% to RMB 533.1 million or USD 83.6 million compared with RMB 413.5 million in the same period last year due to lower capitalization. In addition to further development of National 6 and Tier 4 engines, products under development for new energy products contributed to additional R&D expenses in second half of 2021 compared with second half 2020. Total R&D expenditures including capitalized costs were RMB 712.7 million or USD $111.7 million representing 8.3% of revenue in September 2021 as compared to RMB $754.6 million representing 7.1% of revenue in the same period last year. Selling General and Administrative , expenses decreased by 16.6% to RMB US$835.9 million or US$131.1 million from RMB 1 billion in the same period last year. The decrease was mainly due to lower warranty expenses and reduced personnel costs compared with the same period last year. SG&A expenses represented 9.7% of revenue for second half 2021 compared with 9.4% in the same period last year. Operating profit was RMB 163.8 million, or US dollar 25.7 million, down from RMB 568.8 million in the same period last year. The operating margin was 1.9%, as compared with 5.4% in the same period last year. Finance cost declined by 46%, to RMB 47.5 million, USD 7.5 million from RMB 88 million in the same period last year due to lower term loans, reduced interest rates and reduced bills discounting during the period. The share of financial results of the joint ventures was a loss of RMB 108.4 million or USD 17 million compared with a loss of IMB $34.4 million in the same period last year. The increased loss was largely due to higher engine development expenses and voluntary costs in a joint venture company. Income tax credit was IMB $42.4 million, US dollar $6.7 million, compared with an income tax expense of IMB $69.9 million in second half 2020, primarily due to lower income and higher tax credits on R&D-related costs. Net profit attributed to equity holders of a company was RMB $19 million or USD $3 million compared with RMB $243.2 million in the same period last year. Basic and diluted earnings per share were RMB 46 cents or US dollars 7 cents compared with RMB 5.95 in the same period last year. Basic and diluted earnings per share for second half 2021 and second half 2020 were based on the weighted average of 40,858,290 shares. Now we will review the audit financial results for the 2021 fiscal year ended December 31st, 2021. Revenue was RMB 31.3 billion or US dollar 3.3 billion compared with RMB 20.6 billion in full year 2020. The total number of engines sold by GMCL in FY 2021 increased by 6.2% to 456,791 units compared with 430,320 units in FY 2020. The increase was mainly due to higher engine sales in the bus engine market, passenger vehicles engine sales, and across the board in the company's off-road segments, particularly agriculture engines and marine and power generation engines, which more than offset the unit sales declined in the truck engine segment. According to CAM, in FY 2021, commercial vehicle unit sales, excluding sales of gasoline power and electric power vehicles, decreased by 6.9% compared to FY 2020, as unit sales of trucks declined by 8.7%, while unit sales of buses rose by 13.7%. Gross profit decreased by 7.4% to RMB $3 billion, or US$463 million, compared with RMB $3.2 billion in FY 2020. Gross margin decreased to 13.9%, compared with 15.5% in FY 2020. The decline in gross margin was mainly attributable to a change in revenue mix, transition to national six compliant engines, and higher material costs, but was mitigated by cost reductions. Other operating income decreased by 16.6% to RMB 316.2 million or US dollar 49.6 million. compared with RMB $378.9 million in FY 2020. The decrease was mainly due to lower government grants and reduced bank interest income compared with FY 2020. R&D expenses increased by 35.5% to RMB $848.8 million or USD $133.8 million. 1 million compared with RMB 626.5 million in FY 2020, largely due to lower capitalization of the R&D expenses. The company continued with its initiatives to improve energy performances and qualities of its engines, complying with China's National 6 and Tier 4 emission standards, and to develop products for new energy vehicles. In FY 2021, the total R&D expenditures, including capitalized costs, were R&D $1.2 billion or USD $182.3 million, which maintained the same level as FY 2020 and represented 5.5% of the revenue compared with 5.6% in FY 2020. SG&A expenses were RMB 1.8 billion, USD $275.4 million, representing 8.3% of the revenue, compared with RMB 1.8 billion, representing 8.6% of the revenue in FY 2020. Opening profit was RMB $663.5 million, USD $104.1 million, down from RMB 1.2 billion in FY 2020. The operating margin was 3.1% compared with 5.7% in FY 2020. Finance costs decreased by 23.3% to RMB 115.9 million, US dollar 18.2 million, from RMB 151.2 million in FY 2020. Lower finance costs mainly resulted from reduced term loan interest and less bills discounting compared to FY 2020. The share of financial results of the joint ventures was a loss of RMB 95.9 million, USD 15 million compared with a loss of RMB 59 million in FY 2020. The increased loss was primarily attributable to higher energy development expenses and volume cost in a joint venture company. Income tax expense declined by 77.2% to RMB 43.8 million, US dollar 6.9 million, from RMB 192.5 million in FY 2020 due to lower income and higher tax credits on IMD related costs. Net profit attributable to China-YuChai shareholders was RMB $272.7 million or USD $42.8 million compared with RMB $548.9 million in FY 2020. Async and diluted earnings per share were RMB $6.67 or USD $1.05 compared with RMB $13.43 in FY 2020. basic and direct earnings per share for FY 2021 and FY 2020 years were based on a weighted average of 40,858,290 shares. Now let me walk you through our balance sheet highlights as of December 31st, 2021. Cash and bank balances were RMB 5.3 billion or USD 836.2 million compared with RMB 6.4 billion at the end of FY 2020. Trade and Bills Reservables were RMB 7 billion or USD 1.1 billion compared with RMB 8.1 billion at the end of FY 2020. Inventories were RMB 5.2 billion or USD 8.817 million compared with RMB 4.5 billion at the end of FY 2020. Trade and bills payables were RMB 7.4 billion, US dollar 1.2 billion, compared with RMB 7.5 billion at the end of FY 2020. Short-term and long-term bank borrowings were RMB 2.2 billion, US dollar 345.5 million, compared with RMB 2.2 billion at the end of FY 2020. I will now turn the call over to Kevin for a comment before we begin our Q&A.
spk02: Thank you. Please note that due to the COVID-19, some 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're now ready to begin the Q&A session.
spk00: Thank you. We will now begin the Q&A session. Audio participants, we have a question to pose. Please press 01 on your telephone keypad, and you will be placed in the queue. To cancel the queue, please press 02. Once again, it's 01 on your telephone keypad. One moment, please, for the first question. We have the first question from William Gregozeski from GreenLane Global. So please go ahead.
spk04: Hi. You mentioned that you saw gross margin improvement from the first half due in part to the economies of scale from the national six engines. Is that something we can expect to see in 2022, continued margin improvement?
spk03: OK. Yeah. In 2021, definitely we saw more national six engines. And the next year's six-inch margin has been increasing and improving month by month, every month, right up to December. So for year 2022, we will still be continuing with our cost reduction initiative or program to reduce further costs as much as possible. And as we go to 2022, we should be selling even more National 6 engines. In fact, most of the engines sold in China will be just National 6. So, yeah, we think we will still be able to improve the margin from where it is today.
spk04: Okay, great. The press release mentioned higher warranty costs. Was that any kind of significant issue, and what did that relate to?
spk03: Okay, the higher warranty cost is actually related to one of the gas engines, so we have some quality issues. We have been addressing it in the last two years. I think we've got it under control now, but there will still be some going to next year, but it should be much less than this year.
spk04: Okay. On the R&D side, it was quite a bit higher than it's been in the past, whether you're talking just the expense or the capitalized. Can you break out what is towards the traditional engines and how much is for your new energy platforms?
spk03: Okay, I don't have the data here, but generally the thing is we have been spending about close to $1 billion, more than $2 billion in the last two, three years for R&D. Now, with the National Six platform coming to a close now, but we still be needing R&D to continue to prosper. I call spec these engines and work with our OEM to put the engines in our OEM vehicles and get it tested and certified and so forth. That will still be ongoing, but the amount involved for that will be lower. But we also have to spend now some cost on getting our engines ready for the Tier 4 emission standard for off-road engines. This new emission standard will be effective from the end of this year. So we'll still be looking at spending some money on that to bring it up to that level. And we believe we'll be able to get there in time without any issue. And on top of that, we'll also be looking at spending some on the new energy vehicles. So while there'll be some reduction in the next six R&D costs, this will be self-channeled to other areas. I think this is the same question you asked earlier as well than one or two conference calls before.
spk04: Yeah, so I mean, should we expect similar R&D levels for this year and beyond as what you did for all of 2021?
spk03: Yeah, I think 2022, I think we should be looking at about the same level of R&D courses because of the new admission upgrade to T4. Uh, and also the new energy vehicles. I think we'd be spending more money there. Uh, obviously some of this will be capitalized.
spk04: Right. Okay. Okay. And, uh, at the end of December, you, you announced the hydrogen engine. Is there any update on when, you know, that's going to be commercially ready for sale?
spk03: I think we are a bit early yet for that. The market is not quite ready yet. So we are developing, the way we are going right now is this one done, so we will probably start to develop a few more engines. I think that will be the focus for this year and next year rather than commercialization. Of course, at the same time, we will be working with our OEMs to try to spec this into the vehicle. To really get to commercialization, I think it will take a bit more time.
spk04: Okay, and last question is, what kind of impact did the chip shortage have on you guys in the second half, and what do you expect for this year?
spk03: Okay, the chip shortages, the impact on our whole, in fact, it was quite severe in the middle of last year and up until the third quarter and beginning of the fourth quarter, largely because of the COVID in Malaysia where most of the chips come from. but it caught up. So overall impact last year was about 18,000 units of engine impact for the full year. Going into this year, there are still some issues, but depending on the demand, if the demand of the market comes down as we expect it to, especially for a truck market, then the impact shouldn't be that severe as last year. I think we should be able to manage this year, although there will still be some impact.
spk04: Okay. All right. Great. Thank you.
spk00: Thank you. For the moment, we have no more questions, ladies and gentlemen. Just a reminder, if you wish to ask a question, please press 01 on your telephone keypad. It's 01 on your telephone keypad. Thank you. No question for the moment. Just a reminder, if you wish to ask a question, please press 01 on your telephone keypad. A little reminder ladies and gentlemen, if you wish to ask a question, please press 01. Last reminder ladies and gentlemen, if you wish to ask a question, please press 01 on your telephone keypad. Thank you. No other questions. We have now reached the end of our Q&A session, and I will turn the call back over to Mr. Hou.
spk03: 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. Bye for now.
Disclaimer