China Yuchai International Limited

Thank you for joining us today, and welcome to China Yuchai International Limited's conference call and webcast for the six months and fiscal year ended December 31, 2023. Joining us today are Mr. Wei-Ming Hou and Mr. Chun-Sin Liu, 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 include, but are not limited to, statements concerning the company's operations and financial performance and condition 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. 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 second half year and fiscal year ended December 31, 2023. Thereafter, we will conduct a question and answer session. For the purposes of today's call, the 2023 and 2022 second half year and the 2023 fiscal year financial results are unaudited, with the 2022 year financial results being audited. and they will be presented in RMB and U.S. 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.

Thank you, Calvin. We are pleased to report that we have achieved profitable revenue growth of 18.9% in the second half of 2023 and 12.6% growth for the full year 2023. in an unclear economy in China. Revenue growth resulted from others, unit volume increases, higher sales of higher rating engines, and favorable price realization. According to official data, the Chinese GDP growth rate accelerated to approximately 5.2% year-over-year in the fiscal year 2023, from 3% growth in 2022. which reflected the post-COVID-19 recovery. However, this economic growth marked a number of challenges, including the continued struggle of the important property market throughout 2023. Consumer confidence diminished in China as consumer prices declined for four straight months as of January 2024, and producer prices were also lowered according to statistics from the National Bureau of Statistics. Overall, Chinese exports declined by 4.6% in 2023, representing first yearly decline since 2016. 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 2023 increased by 28.2% year-over-year, as the sales of trucks and buses increased by 28% and 29.5% respectively. In this Chinese commercial vehicle environment, our combined truck and bus unit engine sales increased by 4% for the second half of 2023, with truck engine unit sales down slightly year-over-year and bus engine unit sales 34.5% higher year-over-year. However, our heavy-duty truck engine unit sales improved as demand, seasonal demand, including cold transportation, increased new truck mark demand in the second half of 2023. Increased logistical demand resulted in our medium-duty truck engine unit sales also experiencing growth year-over-year. Engine unit sales in the off-road markets experienced a gain of 4.2% in the second half of 2023, led by a 22.3% increase in marine and power generation engine unit sales with higher demand for data centers, including for artificial intelligence. Industrial engine unit sales went up by 14.3% year-over-year. These sales increases offset the decline in agricultural engine unit sales. For 2023, CAM data reported total sales of commercial vehicles, excluding gasoline-powered and electric-powered vehicles, increased by 17.2% year-over-year, with truck sales 15.6% higher, and the smaller bus market sales up by 28.8%. Bus engine unit sales grew by 48%, led by a 101.4% increase in ABUT bus engine sales, excluding industry growth. Medium and light-duty bus engine unit sales also produced positive sales growth for the year. Off-road engine unit sales declined by 6.3% in 2023. However, marine engine and power generation unit sales and industrial equipment engine unit sales reported increased sales for 2023, partially offsetting lower agriculture engine sales. Lower agriculture equipment purchase incentives impacted unit sales in 2023. In 2023, total R&D expenditures including capitalized costs were RMB 1.1 billion or USD 150.3 million. As our initiatives continue to enhance the quality and performance of our National 6B and Tier 4 emission standard compliant engines, we continue to emphasize further development of new energy products to expand our portfolio of these products. Our new energy goals include the greater use of alternative fuels to improve fuel efficiency and enhance emission reduction. We expect more technology enhancements and more powertrain systems and components using alternative fuels to be introduced. Examples of our alternative fuel products include our two hydrogen-powered engines using renewable hydrogen as the key propellant. During the second half of 2023, GRMCL subsidiary Each High Senglan New Energy Power Technology Company, or Each High Senglan in short, introduced the Each High Senglan SO600kW P1 parallel hybrid powertrain system for Sunny Group's 12m³ mixer trucks. The SO600kW-P1 hybrid powertrain shifts automatically to optimize engine performance as working environments change. Another example of our new energy innovations is Yi Cai Seng Lan's new 350hp hybrid electric drive continuously variable transmission or hybrid CVP power trading system. It was designed for Li Wukong Tractor and for heavy-duty agricultural and industrial tractor application. Also, GYMCL's Wangxi H.I. Marine and PowerGen Set Company Limited, MPG, in short, Sub-3, won a new contract in 2023 to install H.I.' 's off-gas power generation system at a production plant which specializes in silicon manganese alloys production. This system utilizes off-gas discharges from the smelting process as a power generation fuel, eliminating greenhouse gas emissions. And our new HRI model YCL-A07N hybrid engine was chosen to power 10m gas-electric hybrid buses in Nanjing, a major city in China. Manufactured by Yitong Group Co Ltd, more than 1,200 buses with HRI engines have been ordered for local public transportation operators in Nanjing. We continue to reorganize our current operations to improve focus and resource efficiency. And new capabilities have been added as well. UAMCL combines marine and power generation businesses to enhance its competitiveness through a new subsidiary, from CHI Marine and Power Chancet, Chancet Power Company Limited. This subsidiary incorporated the MTU joint venture, producing the MTU Series 4000 engines and other related products and services. GYMCL subsidiary, CHI Singlan, will accelerate the research and development of new energy technologies as well as enhance new energy product development. UIMCL also incorporated new subsidiary, Guangxi Xingyun Cloud Technology Co., Ltd., to quicken the development of proprietary cloud-based control system for on- and off-road vehicles and machineries. At the end of 2023, we also sold our 100% equity holding in Yichai Remanufacturing Services, Suzhou Co., Ltd., For 2023, our gross operating profit and earnings per share all increased by double digits, and we maintained a strong balance sheet. As at 31st December 2023, our cash and bank balances were RMB 60 billion, or USD $852.7 million. We continued to generate positive cash flow from operations and free cash flow in 2023. The Board of Directors declared a cash dividend of US $0.28 per ordinary share, which was paid on August 7, 2023. Our large, diverse product portfolio provides the opportunity to supply and service a number of end markets in China and abroad. Our engine products are continually updated to provide more dynamic solutions, lower vehicle emissions, and improve performance. Our growing number of NEV products addresses the need of for more effective tools to help benefit the environment. With that, I would now like to turn the call over to Chunsheng Lu, our Chief Financial Officer, who will provide more details on the financial results. Chunsheng, please begin your remarks.

Thank you, Wing Ming. Now, let me review our unaudited six-month results entered December 31, 2023. Revenue was RMB 8.9 billion or US dollar 1.3 billion compared with RMB 7.5 billion in second half 2022. The total number of engines sold in second half 2023 increased by 5.2% to 147,700 units compared with 140,345 units in September 2022. The increase was mainly due to higher heavy and medium-duty engine sales in the truck and bus markets as well as increased sales in the marine and power generation and industrial markets. According to data reported by the China Association of Automobile Manufacturers, CAAM, in second half 2023, commercial vehicle unit sales In China, excluding sales of gasoline-powered and electric-powered vehicles increased by 28.2% compared to second half 2022, as sales of trucks and buses increased by 28% and 29.5% respectively. Gross profit was RMB 1.4 billion or USD 202.4 million compared with RMB 1.2 billion in second half 2022. Gross margin was 16.2% in second half 2023 compared with 16.1% in second half 2022. Other operating income increased by 21.8% to RMB 306.2 million or US dollar 43.2 million compared with RMB 251.3 million in second half 2022. The increase was mainly due to a gain of RMB 113 million on the disposal of a subsidiary. Excluding this one of item, the other open income would have been RMB 193.2 million or US dollar 27.3 million, lower by RMB 58.1 million compared with second half 2022. This decline was mainly due to lower government grants. Research and development R&D expenses increased by 9.9% to RMB 470.5 million or USD 66.4 million compared with RMB 428 million in second half 2022 due to higher personnel salaries and related expenses. Total R&D expenditures including capitalized costs were RMB 599.2 million or USD 84.6 million representing 6.8% of revenue in second half 2023 compared to RMB 540.8 million representing 7.2% of revenue in second half 2022. Selling general and administrative SG&A expenses increased by 31.7% to RMB $1 billion or USD $147.9 million from RMB $795.3 million in second half 2022. The increase was mainly due to increased personnel, salaries and delivery expenses and high warranty and travel expenses compared with the same period last year. SG&A expenses represented 11.8% of revenue for second half 2023 compared with 10.7% for second half 2022. Operating profit was RMB 221.8 million or US dollar 31.3 million from RMB 231.3 million in second half 2022. The operating margin was 2.5% compared with 3.1% in Spare Health 2022. Finance costs increased by 15.6% to RMB 46.5 million or USD 6.6 million from RMB 40.2 million in second half 2022, primarily due to higher bills discounting. The share of financial results of the associates and joint ventures climbed to a profit of RMB 32.5 million or US dollar 4.6 million compared with RMB 1.8 million in second half 2022. The improvement was mainly driven by higher profits at MTU Yichai Power Company Limited and significantly reduced losses at YNC Engines Company Limited and Guangxi Purim Yuchai Automotive Technology Company Limited. Income tax expense was RMB 37.9 million or USD 5.3 million compared with RMB 2.6 million in second half 2022. The change was mainly due to under-provision in prior years and higher taxable income in the same period of 2023. Net profits attributable to equity holders of a company was RMB 107.1 million or USD 15.1 million compared with RMB 124.9 million in second half 2022. Basic and direct earnings per share were RMB 2.62 or USD 37 cents compared with RMB 3.06 in second half 2022. Basic and direct earnings per share for second half 2023 and second half 2022 were based on a weighted average of 40,858,290 shares. Now we will review the unaudited financial results for the 2023 fiscal year entered December 31, 2023. Revenue was RMB 18 billion or US dollar 2.5 billion compared with RMB 16 billion in FY2022. The total number of engines sold in FY2023 decreased by 2.4% to 313,493 units compared with 321,225 units. to divide uh 256 units in fy2022 the decrease was mainly due to lower sales in the truck and our cultural markets partially offset by increased sales in the past industry marine and power generation and new energy markets According to CAM, commercial vehicle unit sales in China, excluding sales of gasoline-powered and electric-powered vehicles, increased by 17.2% year-over-year in FY2023, as sales of trucks increased by 15.6%, and the smaller mass market sales increased by 28.8%. Gross profit increased by 16.7% to RMB 2.9 billion or US dollar 411.7 million compared with RMB 2.5 billion in FY2022. Gross margin increased to 16.2% compared with 15.6% in FY 2022. The increase in gross margin was mainly attributable to higher revenue from heavy-duty engines and continuing cost reduction initiatives partially offset by higher customer sales rebates. Other operating income increased by 31.4% to RMB $442.4 million or USD $62.5 million compared with RMB $336.8 million in FY2022. The increase was mainly due to a gain of RMB $130 million on disposal of a subsidiary, excluding this one-off item. The other operating income would have been RMB $309.4 million or USD $46.5 million in FY2023. R&D expenses increased by 4.8% to RMB US$836.6 million or US$123.8 million, compared with RMB$836.4 million in FY2022. GMCL continues its initiatives to enhance the engine quality and performance of its national sixth and tier four emission standard compliant engines and to develop new energy products. In FY2023, total R&D as managers including tabloid costs were RMB 1.1 billion or USD 150.3 million compared with RMB 1 billion in FY2022, representing 5.9% of the revenue compared with 6.4% in FY2022. SG&E expenses were RMB 1.9 billion or USD 264.3 million, representing 10.4% of the revenue, compared with RMB 1.5 billion, representing 9.2% of the revenue in FY2022. This increase was mainly due to higher personnel-related expenses and royalty expenses compared with last year. Operating profit grew by 17.4% to RMB 609.4 million or USD 86 million compared with RMB 519.3 million in FY2022. The operating margin was 3.4% compared with 3.2% in FY2022. Finance costs increased by 4.9% to RMB $100.2 million or USD $14.1 million from RMB $95.5 million in FY2022. The share of financial results of the associates and joint ventures was income of RMB $62.1 million or USD $8.8 million compared with a loss of RMB RM39.1 million in FY2022. The income was primarily generated by higher profits at MTU Yuchai Power Co., Ltd. and the share of lower losses at YNC Engines Co., Ltd. and Guangxi Pureng Yuchai Automotive Energy Co., Ltd. Income tax expense was RMB 148.5 million or USD 21 million as compared with RMB 59.1 million in FY2022. The increase was mainly due to under-provision in prior years and higher taxable income in FY2023. Net profit attributable to China Yichai's shareholders was RMB 285.5 million or USD 40.3 million, compared with RMB 218.6 million in FY2022. Basic and Diluted Earnings Per Share were RMB 6.99 or USD 0.99, compared with RMB 5.35 in FY2022. Basic and Diluted Earnings Per Share for FY2023 and FY2022 were based on a weighted average of 40,858,219 shares. Now we'll go through our balance sheet highlights as of December 31st, 2023. Cash and bank balances were RMB 6 billion or US dollar 852.7 million compared with RMB 4.9 billion at the end of FY2022. Trade and bills receivable were RMB 7.8 billion or US dollar 1.1 billion compared with RMB 6.8 billion at the end of FY2022. Inventories were RMB $4.6 billion or USD $656.4 million compared with RMB $4.9 billion at the end of FY2022. Trade and abuse payables were RMB $7.6 billion or USD $1.1 billion compared with RMB $6.9 billion at the end of FY2022. Short-term and long-term loans and borrowings were RMB $2.5 billion or US dollar $358.7 million compared with RMB $2.3 billion at the end of FY2022. I will now turn the call over to Kevin for a comment for Q&A section.