Fiona Lim

Fiona Lim from Bank of America asked for an elaboration on the significant gross profit margin improvement in the second half of 2025, specifically if it was driven by increased deliveries to power generation clients and a better product mix. She also sought guidance for 2026 given the improved product mix and inquired about the expected R&D expenses growth rate for 2026 and 2027, along with key R&D focus areas.

Answer

Weng Ming Hoh (President) attributed the gross profit margin improvement to a 30% increase in unit sales volume, a significant rise in high-horsepower engine sales (from 750 to 2,000 units), and leveraging fixed costs. For 2026 guidance, he noted challenges due to government policies like Qianwangsi, but expects double-digit growth for data centers, with non-data center sales remaining similar if policies continue. Regarding R&D, Weng Ming Hoh stated expenses are around 5% of revenue, focusing on new energy (range extender EV, ammonia, methanol, hydrogen combustion engines), preparing for potential National VII emission standards, and continuous product efficiency improvements.

Fiona Lim asked for clarification on the significant improvement in gross profit margin in the second half of 2025, if it was driven by a better product mix from power generation clients, and then inquired about the company's gross margin guidance for 2026. She also asked about the expected R&D expenses growth rate for 2026 and the key R&D focus areas for 2026 and 2027.

Answer

President Weng Ming Hoh confirmed the improved gross profit margin was due to a 30% increase in unit sales volume, significantly higher sales of high-horsepower engines (from 750 to 2,000 units), and the resulting leverage of fixed costs. He stated that providing guidance for 2026 is challenging due to the influence of Chinese government policies, such as the Guo Sanquan replacement policy that drove 2025 growth. He anticipates double-digit growth in data center demand for 2026, while non-data center sales are expected to remain similar to 2025 if current policies persist. He also explained R&D expenses are approximately 5% of revenue, with key focus areas including new energy solutions (range extender EVs, ammonia, methanol, and hydrogen combustion engines) and preparing for the potential National VII emission standards expected in the next two to three years, alongside continuous product efficiency enhancements.