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China Yuchai International Ltd (CYD) Q1 2019 Earnings Call Transcript

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China Yuchai International Ltd (NYSE: CYD)
Q1 2019 Earnings Call
May. 10, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Now I'd like to turn the conference over to Kevin Theiss. Please go ahead, sir.

Kevin Theiss -- Investor Relations

Thank you for joining us today and welcome to China Yuchai International Limited's First Quarter 2019 Conference Call and Webcast. Joining us today are Mr. Weng Ming HOH and Dr. Thomas PHUNG, 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, including, but not limited to, statements concerning the company's operations, financial performance and condition 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 risks and uncertainties and actual results may differ materially depending on the 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's under the headings Risk Factors, result of operations and business overview and 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 release made during today's call or otherwise in the future.

Mr. HOH will provide a brief overview and summary and then Dr. PHUNG will review the financial results for the first quarter ended March 31, 2019. 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, 2019 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. HoH, please begin your prepared remarks.

HOH Weng Ming -- President

Thank you, Kevin. Net revenue for the first quarter of 2019 decreased by 4% year-over-year to RMB 4.2 billion or $618.3 million, primarily due to a reduced number of units sold. This was moderated by a higher average selling price from a better product mix. China's GDP growth of 6.4% in the first quarter of 2019 was similar to the fourth quarter of 2018, but it was flat at 6.6% growth in the 2018. GDP growth surpassed some expectations at industrial production growth and retail sales and property investments exceeded expectations.

According to the data reported by China Association of Automobile Manufacturers, in the first quarter of 2019, sales of commercial vehicles excluding gasoline-powered and electric-powered vehicles decreased by 2.4%. Truck sales decreased by almost 1% with heavy-duty truck sales increasing by 0.4%. Medium-duty truck sales declined by double-digits and light-duty truck sales increased by 0.3%. The total number of engines sold by GYMCL in the first quarter of 2019 decreased by 8%, 201,300 units compared with 110,113 units in the same quarter last year.

Lower unit sales primarily reflected reduced sales of truck, passengers, partially offset by higher sales of engines for off-road market. GYMCL heavy-duty and medium-duty truck engine sales decreased in the first quarter of 2019, which was mitigated by the improvement in light-duty truck sales. Diesel and natural gas truck engine sales declined in the first quarter of 2019. GYMCL off-road engine sales rose in the first quarter of 2019 led by sales growth in agriculture equipment market. Following the 300 buses were powered by, exclusively by Yuchai Engine, they were exported to Saudi Arabia in 2018. Another 600 buses prepared by Yuchai Engines had been exported in 2019, the largest bus export order of the year so far. Saudi Arabia continues to be an important market for our engines due to our inability -- sorry, due to the ability to operate in high temperatures and in harsh wind and sand environment.

Our research and development, R&D expenses decreased by 40.1% to RMB 71.9 million or $10.7 million, mainly due to the capitalization of development cost for National VI and Tier 4 engines that met IFRS capitalization criteria. In the first quarter of 2019, the total R&D expenditure including capitalized costs was RMB 119.5 million or $17.7 million and it represented 2.9% of the net revenue compared with RMB 119.9 million, representing a 2.8% of the net revenue in the 2018 first quarter.

R&D expenses included our program to enhance the performance and quality of our current National VI and Tier 4 engines for the on-road and off-road market. In addition, we are further developing our technologies to be a major force with a popular engine meeting the even stricter National VI standards which are expected to be nationally implemented between 2022 and 2023. It is possible that orders will arise for the VI standard before national implementation and we want to capture those orders from the early adopters.

We had already introduced our model YC6K engine which is the first domestic diesel engine to be certified for the National VI emission standards in China. The K08 model significantly outperformed upcoming National VI emission standards. We will gain valuable experience through capturing early orders which can be used to further improve our engines for the national rollout. This action is consistent with our long term strategy of being a leader in emission technology in China.

Our emission control joint venture, Eberspaecher Yuchai Exhaust Technology Company Limited continues to progress in developing advanced exhaust emission control systems for China commercial vehicles to meet China's National VI standards. We believe, the JV's emission control system will be critical to adding the necessary technology and quality as well as providing a ready supply to our customers in the future.

We will continue with our strategy of offering a diversified engine portfolio for the truck, bus and off-road market with heavy, medium and light-duty diesel and natural gas engines. This way, we are positioned to respond to growth opportunities in these market segments. We fortify this commitment by engaging in joint ventures, partnerships and alliances to enhance our technology and our market position.

We established the Y&C (ph) engine joint ventures to produce new advanced heavy-duty engines. The MTU Yuchai Power Company Limited joint venture which in 2018 began commercial production of the MTU Series 4000 engine and also the Eberspaecher Yuchai Exhaust Technology Company to develop, produce and market new exhaust emission control systems to meet the forthcoming new emission standards. In January 2019, we signed a strategic partnership with one of the major heavy-duty truck producers in China, Shaanxi Tonly.

Our balance sheet remained strong at the end of the first quarter of 2019. Cash and bank balances were RMB 5.2 billion or $767.8 million and we reduced our short and long term bank borrowings to RMB 1.7 billion or $253.4 million. With the slower growth of the Chinese economy, the central government has created new and targeted stimulus including tax cuts, encouraging local governments to spend on infrastructure, reducing the government's credit squeeze and increasing the money supply in March 2019. We are optimistic this action will help stabilize China's growth for the future.

With that, I would now like to turn the call over to Dr. Thomas PHUNG, our Chief Financial Officer, who will provide more details on the financial results.

Thomas Khong Fock PHUNG -- Chief Financial Officer

Thank you, Weng Ming. Now let me review our first quarter results for 2019. Net revenue for the first quarter of 2019 decreased by 4% to RMB 4.2 billion, $618.3 million compared with our RMB 4.3 billion in the first quarter of 2018. This decline was mainly due to a lower number of units sold and a change in the product mix due to market condition, which was partly mitigated by a higher average selling price. The total number of engines sold by GYMCL, in the first quarter of 2019 decreased by 8% to 101,300 units compared with 110,113 units in the same quarter last year.

Lower unit sales primarily reflect lower sales of truck and bus engines, which was partially offset by higher sales of engine for the off-road market during the first quarter of 2019. According to the data reported by the China Association of Automobile Manufacturers, in the first quarter of 2019, sales of commercial vehicle excluding gasoline-powered and the electric-powered vehicle decreased by 2.4%. The market was led by a 20.3% decrease in the medium-duty truck sales with continued decline in the bus market. GYMCL over truck -- overall truck engine sales also declined in the first quarter of 2019, but the light-duty truck sales increased and the off-road engine sales rose led by a higher engine sales in the agriculture equipment's market.

Gross profit was RMB 761.3 million, $113.1 million compared with RMB 853.5 million in the first quarter of 2018. Gross margin decreased to 18.3% from 19.7% in the first quarter of 2018. The lower gross profit was mainly due to lower sales volume and a change in product mix in the first quarter of 2019. Other operating income decreased by 13% to RMB 43.9 million, $6.5 million from RMB 50.5 million in the first quarter of 2018. The decrease was mainly due to a lower government grant by RMB 5.2 million in the first quarter of 2019.

Research and development, R&D expenses decreased by 40.1% to RMB 71.9 million, $10.7 million compared with RMB 119.9 million in the first quarter of 2018. Lower R&D expenses in the first quarter of 2019 were mainly due to the capitalization of development cost for National VI and Tier 4 that met the IFRS capitalization criteria.

In the first quarter of 2019, the R&D capitalization amount was RMB 47.6 million, $7.1 million. R&D expenses continued to reflect development and testing of new engines to meet higher emission standards and further efforts to enhance engine quality and performance. In the first quarter of 2019, the total R&D expenditure including capitalized cost was RMB 119.5 million, $17.7 million and it represented 2.9% of net revenue. In the first quarter of 2018, the total R&D expenditure was RMB 119.9 million, representing a 2.8% of net revenue.

Selling, general & administrative, SG&A expenses increased by 4.5% to RMB 376.1 million, $55.9 million compared with RMB 359.9 million in the first quarter of 2018. SG&A expenses represented 9% of net revenue compared with 8.3% in the first quarter of 2018. The increase was primarily attributed to higher warranty expenses. Operating profit was RMB 357.3 million, $53.1 million compared with RMB 424.2 million in the first quarter of 2018. The operating margin decreased to 8.6% from 9.8% in the first quarter last year -- in the same quarter last year.

Finance cost increased by 12.3% to RMB 25.3 million, $3.8 million compared with RMB 22.5 million in the first quarter of 2018. Higher finance cost resulted mainly from a non-recurring government interest expense grant of RMB 4.2 million in first quarter of 2018, which was partially offset by lower bills discounting in first quarter of 2019.

Net earnings attributable to China Yuchai's shareholders was RMB 198.0 million, $29.4 million compared with RMB 242.8 million in the same quarter last year. Basic and diluted earnings per share were RMB 4.85, $0.72 in the first quarter of 2019 compared with RMB 5.94 and RMB 5.93 respectively in the same quarter last year. Basic and diluted earnings per share in the first quarter of 2019 was based on a weighted average of 40,858,290 shares. In the first quarter of 2018, basic earnings per share was based on a weighted average of 40,858,290 shares and diluted earnings per share was based on a weighted average of 40,916,810 shares.

Balance sheet highlight as at March 31, 2019. Cash and bank balances were RMB 5.2 billion, $767.8 million compared with RMB 6.1 billion at the end of 2018. Trade and bills receivables were RMB 8.7 billion, $1.3 billion compared with RMB 4.7 billion at the end of (Technical DIfficulty) $774.5 million compared with RMB 4.6 billion at the end of 2018. Short and long term bank borrowings were RMB 1.7 billion, $253.4 million compared with RMB 2.0 billion at the end of 2018.

With that, operator, we are ready to begin the Q&A session.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we'll now begin the question-and-answer session. (Operator Instructions) We have from William Gregozeski from Greenridge Global. Please go ahead.

William Gregozeski -- Greenridge Global -- Analyst

Hi. I have a few questions. Do you guys still expect your long term gross margin to be in the 19% to 20% range?

HOH Weng Ming -- President

Well, yeah. I think so because I think this year we're going to have what I call the new National VI implemented in some cities. So we are around there 19% plus and minus maybe at half a percentage point.

William Gregozeski -- Greenridge Global -- Analyst

Okay. Speaking of the National VI engines, what percent of your unit sales in the quarter were the National VI engines and what -- how is the market receiving those engines?

HOH Weng Ming -- President

Okay. There's not much right now because the emission standard hasn't been really implemented. It will be gradually implemented in the second half of this year. We have done some prototypes which we sent out to the OEMs. So far the reception is actually quite good.

William Gregozeski -- Greenridge Global -- Analyst

Okay. All right. With the implementation coming up, some of the old engines coming up the market, the Belt One Road and things like that, when can we start expecting to see unit sales growth on a year-over-year basis?

HOH Weng Ming -- President

In terms of National VI?

William Gregozeski -- Greenridge Global -- Analyst

Just all of your engines.

HOH Weng Ming -- President

Well, I mean this year we have sold third parties. This year, first quarter we sold 100,000 units. So I mean the Belt One Road is -- there was -- we had some impact mostly on the what I call export market in other countries. As and when I think the quality of Belt Roads developed, I think we probably will see some gradual increase. I don't expect to see a big huge jump.

William Gregozeski -- Greenridge Global -- Analyst

Okay. What about your unit sales growth in general? When can we expect to see your whole company unit sales start increasing year-over-year?

HOH Weng Ming -- President

This is a tough question here. So we actually don't provide any what I call guidance as a policy, but I think we would expect to see some growth in the second quarter I would say. But I think for the full year we are not prepared to say too much here at this point.

William Gregozeski -- Greenridge Global -- Analyst

Okay. In regards to your R&D, what do you expect the percent of sales or the absolute amount to be when combining expense and capitalized going forward?

HOH Weng Ming -- President

We would normally expect about three percentage points of sales.

William Gregozeski -- Greenridge Global -- Analyst

Okay. And that's on the expense and capitalized combined?

HOH Weng Ming -- President

Yeah, yeah.

William Gregozeski -- Greenridge Global -- Analyst

Okay.

HOH Weng Ming -- President

Now this year...

William Gregozeski -- Greenridge Global -- Analyst

And then one year...

HOH Weng Ming -- President

This will be a bit unusual because of the National VI and Tier-4 emission upgrade that's going to be implemented next year and starting from this year. So it's obviously a bit more this year.

William Gregozeski -- Greenridge Global -- Analyst

Okay. The 20-F you guys -- there was a mention about you're developing an EV bus power train. Can you talk a little bit more about that and when that might be ready for the sale?

LAI Tak Chuen Kelvin -- Vice President, Operations

Well, this is Kelvin. We actually we had starting the development work on the EV power train including the high-speed and also the whole EV power train as well. So we are in the beginning stage. And then it's still an early assumption. And then at this stage and then the -- we are in the position sourcing the suppliers and also doing the integration at this stage and also we have also had some trial (inaudible) and for some end user in the local city and then for trial at this stage.

William Gregozeski -- Greenridge Global -- Analyst

Okay. So if you're doing customer trial that's relatively developed, I mean is this something we could sale in the next year?

HOH Weng Ming -- President

We have done some integration for electric vehicles, EV buses. And we have sold some systems so far this year, not a lot, but we sold some to some of the provincial cities.

William Gregozeski -- Greenridge Global -- Analyst

Okay. What -- I mean when, because obviously you guys are getting really hurt on the bus market, when might this be ready to start taking some of that market share?

HOH Weng Ming -- President

I don't think you'll see very much this year.

William Gregozeski -- Greenridge Global -- Analyst

Okay, all right. And any idea when the dividend might be announced?

HOH Weng Ming -- President

We'll let you know. Really can't say too much right now.

William Gregozeski -- Greenridge Global -- Analyst

Okay, all right. That's all I have. Thank you very much.

HOH Weng Ming -- President

Okay.

Operator

Thank you. Our next question comes from the line of David Raso of Evercore. Please go ahead.

David Raso -- Evercore -- Analyst

Hi. Thank you. I was curious, your comments about the government assistance and helping some markets. Can you give us a little more color on which verticals, which particular type of projects or so forth you can give us a little more color on regarding where do you see the help and maybe where the help feels the most significant when you even look out to 2020 or beyond?

HOH Weng Ming -- President

Help on the certain (ph) segments, you're seeing? Now there are some incentives for EVs, Mitsubishi is already in place and I think that they're going to gradually wind it now. On order some incentives I think like for example in the past you have seen some for agriculture equipment. But I think that there wasn't -- other than those, I think that there's not many that we actually are aware of this specifically targeting for the industry.

David Raso -- Evercore -- Analyst

But are there any particular infrastructure projects or where you were describing some of the ag equipment subsidies. Just trying to understand which are the verticals be a product category, type of project that you're seeing the most help?

HOH Weng Ming -- President

Right now it is the electric vehicle, right now. Other than that I think...

David Raso -- Evercore -- Analyst

There's no particular from transportation to waterways to whatever may be that you're seeing any particular assistance that appears to be government driven and project activity say on the off-highway side?

HOH Weng Ming -- President

Not yet. Normally there will be some for agriculture generally, but (inaudible) So I think...

David Raso -- Evercore -- Analyst

And on -- go ahead.

HOH Weng Ming -- President

No, we are not aware of any significant ones right now.

David Raso -- Evercore -- Analyst

And when it comes to credit availability, what have you seen by way of impact from some of the looser monetary policy that we began to see toward the end of last year? How has that manifested itself in customer activity or maybe it hasn't?

HOH Weng Ming -- President

I mean they would have affected -- I mean the housing market for example. And then I think somewhat has been increasing some infrastructure spending in the lights of high-speed rail that's still ongoing right now.

David Raso -- Evercore -- Analyst

I'm just trying to figure the off-highway strength or at least better than feared how would you summarize why that has occurred year-to-date or maybe this was an outlook that you already had for off-highway and you did expect it to be up quickly?

HOH Weng Ming -- President

Okay. Let me say in our way. I think in the case of agriculture, I think I'm not sure where you're driving it here, I'm sorry. There the whole market is generally quite flat right now. We don't see that sort of decline by just sort of flat for the market, but we have been doing quite well in the agriculture market right now because we were able to get into certain new segments like for example in the rice harvester. So that has helped us mitigate some of the losses in other segments like when that was a flat market. So in the case of for industrial engines, which I think you may be alluding to, there is some growth there and it's driven, a lot of it by the -- some increase in the infrastructure spending also probably partly driven by the increased liquidity that the government had introduced in the early part of this year.

David Raso -- Evercore -- Analyst

Okay. Yeah, I'm just trying to size up how much has the government helped the market this year. And it sounds like you don't necessarily have the ability to connect the dots on a particular vertical, a particular level of increased liquidity where it's obvious. In general, the market for off-highway has been probably a little better than most people feared three, four months ago?

HOH Weng Ming -- President

Yeah.

David Raso -- Evercore -- Analyst

And I was just trying to figure out can you help us pinpoint a little bit where has the pleasant surprise have come from, but it doesn't sound like you've been surprised by your off-highway engines being up year-to-date?

HOH Weng Ming -- President

Yeah, because it probably came from, in our case it came from agriculture which is from a new segment that we got managed scale (ph) services.

David Raso -- Evercore -- Analyst

Okay. Thank you very much.

HOH Weng Ming -- President

Okay.

Operator

Thank you. (Operator Instructions)

Kevin Theiss -- Investor Relations

Okay. We have one question from, a web question from Mr. Kurton (ph). The question is, what is the cash flow in Q1? I believe he is -- the question is whether we generate positive cash flow. The answer is, no, we are having negative cash flow in Q1, which is pretty seasonal. So that's the answer.

HOH Weng Ming -- President

Let me add to that. Initially, in our industry, the first quarter and second quarter are probably the strongest quarters, I know that first half is usually better than second half. So during the first half you generally have to fill up certain inventory. And of course in building up inventories you will consume cash. And you will start collect them back in the second half and toward the end of the year. That's why come end of year if you look at our open, how I call, receivables position is actually the number of days of receivables outstanding is actually very low (inaudible) usually in terms of one or two weeks. So that is a kind of seasonality that we have been seeing and experiencing in the past few years, a number of years.

There is a question again on the web. Does the trade war concern you? Yes, if it lead to a slow down in general economy, it would concern me. And if the general economy is down, it would definitely affect our business.

Operator

Thank you. We have now reached the end of our Q&A session. And I'll turn the call back over to Mr. HOH.

HOH Weng Ming -- President

All right. Thank you for joining us in this conference call. We look forward to speaking to you again next quarter. Thank you.

Operator

Thank you. Ladies and gentlemen that does conclude the conference for today, and thank you for participating. You may now all disconnect.

Duration: 33 minutes

Call participants:

Kevin Theiss -- Investor Relations

HOH Weng Ming -- President

Thomas Khong Fock PHUNG -- Chief Financial Officer

LAI Tak Chuen Kelvin -- Vice President, Operations

William Gregozeski -- Greenridge Global -- Analyst

David Raso -- Evercore -- Analyst

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