China Yuchai International - H2 2022

Transcript

Operator (participant)

Thank you for standing by. Welcome to the China Yuchai International Limited 2022 unaudited second half and full year financial results conference call. At this time, all participants are in listen only mode. After the speaker's presentation, there will be the question and answer session. To ask a question during the session, you need to press star 11 on your telephone keypad. You will then hear an automatic message advising your hand is raised. To withdraw your question, please press star 11 again. Alternatively, you can submit your question via the webcast. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Kevin Theiss. Please go ahead.

Kevin Theiss (IR Representative)

Thank you for joining today and welcome to China Yuchai International Limited's second half year and full year ended December 2022 conference call webcast. Joining us today are Mr. Weng Hoh and Mr. Choon Loo, 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. Private Securities Litigation Reform Act of 1995. The words believe, anticipate, project, optimistic, confident that, continue to predict, intend, will, or similar expressions are all intended to apply to forward-looking statements. All statements other than statements of historical fact or statements made in.

These forward-looking statements include, but are not limited to statements concerning these operations and financial performance conditions, and are based on expectations, beliefs, and assumptions that are subject to change at any time. The company acknowledges that these nature involve 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 including those discussed in the company's Form 20-Fs under the headings Risk Factors, Results of Operations and Business. There are other reports filed with the Securities and Exchange Commission from time to time.

If COVID-19 is not effectively controlled, our business operations and financial condition may be materially and adversely affected due to a deteriorating market for automotive sales and economic slowdown at home and abroad, a potential weakening of financial condition of our customers, a potential adverse impact on our suppliers and supply chain, or other factors that we cannot foresee. All forward-looking statements are applicable only as of the date they are made, the company specifically disclaims any obligation to maintain or update forward-looking information, whether of the nature contained in press release made during today's call or otherwise in the future. Mr. Hoh will provide a brief overview and summary. Mr. Loo will re-review the financial results for the second half and full year ended December 31, 2022. Thereafter, we will conduct a question and answer session.

For the purposes of today's call, the 2022 and 2021 second half financial results and the 2022 year financial results are unaudited and they will be presented in RMB and US dollars. The 2021 year results are audited. 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.

Weng Ming Hoh (President)

Thank you, Kevin. Following the sluggish 2.5% GDP growth year-over-year in the first half of 2022, the Chinese economy continued its slow growth trend with 3.9% year-over-year growth for the third quarter of 2022 and 2.9% in the fourth quarter. Quarter-over-quarter economic growth between the third quarter and fourth quarters of 2022 was flat. For fiscal year 2022, Chinese economic growth was 3%, down sharply from 8.4% growth experienced in 2021. The total retail sales in China declined by 0.2%, and investment in real estate development declined by 10% in fiscal 2022 year.

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 2022 declined by 26.3% year-over-year, with truck and bus unit sales down by 27.5% and 18.4% respectively. For the fiscal year 2022, commercial vehicles unit sales were down by 41.4% year-over-year, with truck unit sales 42.9% lower and bus unit sales down 27.1%. COVID-related lockdowns and travel restrictions in China resulted in reduced demand for commercial vehicles as logistical activities declined, and there were fewer infrastructure and construction projects in 2022. The real estate market suffered from financial liquidity and uncertainties.

The interruption of the supply chain also affected production schedules. In this uneasy Chinese commercial vehicle environment, our subsidiary Guangxi Yuchai Machinery Company Limited or GYMCL reported a combined truck and bus unit sales decline of 33% year-over-year in the second half of 2022. Truck sales was 33.2% lower and bus sales declined by 32.1%. GYMCL heavy-duty bus sales increased by 16.9%, far exceeding their market growth. GYMCL's engine sales in the off-road segments experienced a more modest unit sales reduction of 5% year-over-year in the second half of 2022. Both industrial and agricultural engine unit sales growth in the second half of 2022 on a year-over-year basis.

On a more positive note, our new energy product segment has reported sales of over 5,300 units in the second half of 2022. For the 2022 fiscal year, GYMCL reported sales, unit sales of trucks and buses down by 47.8% year-over-year. Truck sales declined by 49.6%, and bus unit sales were down 33.2%. Off-road unit sales declined by 9.8% year-over-year. New energy product unit sales were over 6,300 units from a low base for this product, new product. Our revenue for second half of 2022 was RMB 7.5 billion or $1.1 billion, a 13.6% decline compared with RMB 8.6 billion in the same period of 2021.

For fiscal year 2022, revenue was RMB 16 billion or $2.3 billion, compared with RMB 21.3 billion in 2021. Gross profit was flat at RMB 1.3 billion or $182.4 million in the second half of 2022, compared with the same period last year. The gross margin rose to 17% as compared with 16.4% in the second half of 2021. The increase in gross margin was mainly attributable to the change in revenue mix with higher off-road revenue cost reductions, especially materials and production related expenses and lower sales rebate. For 2022 year, gross profit decreased by 10.9% year-over-year to RMB 2.6 billion or $377.7 million.

The gross margin increased to 16.4% compared with 13.9% in 2021. We are especially pleased to report a 41.2% year-over-year increase in operating profit to RMB 231.3 million or $33.2 million. At a higher operating margin in the second half of 2022, despite the lower sales. For 2022, operating profit was RMB 519.3 million or $34.6 million. As part of our cost savings initiative, Selling, General, and Administrative expenses were reduced by approximately 8.2% year-over-year to RMB 1.6 billion or $231.4 million.

R&D expenditures decreased by 1.5% year-over-year to RMB 836.4 million or $130.1 million for 2022. For the second half of 2022, our basic and diluted earnings per share of RMB 3.06 or $0.44 increased by 565.2% above the RMB 0.46 in the same period last year. For the 2022 fiscal year, basic and diluted earnings per share were RMB 5.35 or $0.77. In summary, our financial results once again demonstrated the strong resilience of our businesses and our presence in diversified engine markets. On the sales front, we had some notable new orders in 2022.

The City of Macau ordered more than 600 new energy buses equipped with Yuchai's range extender, which were fully delivered in 2022 and being operated by Macau Public Transit Services. GYMCL won an order for 100 heavy-duty truck engines from Jianghuai. Heavy-duty truck consisting of YC6, YCK08, YCK11, and YCK12 engines. These engines are recognized for their low fuel consumption, low noise, and high reliability. The partnership with Jianghuai heavy-duty truck has been extended to other Yuchai National VI compliant model engines. GYMCL's YC6GN 7.8 liter heavy-duty natural gas engines became the exclusive engine to power 800 Ankai buses shipped to Monterrey, Mexico, that country's third largest city. The YC6GN provides a more environmentally friendly bus solution. Below are some progress in the new energy segment in 2022.

Yuchai's model YCA07N hybrid engines are propelling the 10-liter gas electric hybrid buses produced by the largest bus producer in China, Yutong Group, and delivered to a bus operating customer in the city of Nanjing. Yuchai Xin-Lan New Energy Power Technology Company Limited, Yuchai Xin-Lan, successfully integrated the 3.5-ton electric axle, drive axle for the first time into a EV light bus from Guangxi Shenlong in the first quarter of 2022. Yuchai Xin-Lan 300-kilowatt high power range extender power train system was integrated into Inner Mongolia EasyMove Technology's 200-metric ton smart mining truck, the EM200, in the third quarter of 2022. The EM200 is China's first domestically made 200-metric ton smart mining truck, it features really improved payload management efficiency, low carbon emissions, and provides intelligent control.

After introducing its first hydrogen engine for commercial vehicles in 2021, GYMCL introduced a new heavy-duty hydrogen engine, the YCK16H engine, in the second quarter of 2022. Yuchai Xin-Lan has received a total of RMB 70 million capital from three new investors. These funds are targeted to expand working capital and to enhance development of high power full electric drive system and for hybrid and range extended drive system for both on and off-road applications. As at December 31, 2022, we have cash and bank balances of RMB 4.9 billion or $696.5 million, and we maintain a strong balance sheet.

During the year, the board of directors declared a dividend, a cash dividend of $0.40 per ordinary share for the year ended December 31, 2021, which was paid on July 15, 2022. We are cautiously optimistic for 2023. Recent policy changes in 2023 have really reduced COVID-19 lockdowns and travel restrictions, which will improve the business and investment activities, including the supply chain. Any new policies introduced will help improve the investment environment for both domestic and export markets will enhance the operating environment. With that, I would like to turn the call over to Choon Sen Loo, our Chief Financial Officer, who will provide more details on the financial results. Choon Sen, you may begin now.

Choon Sen Loo (CFO)

Thank you, Weng Ming Hoh. Now let me review our unaudited 6 months results ended December 31st, 2022. Revenue was RMB 7.5 billion, or $1.1 billion, compared with RMB 8.6 billion in second half 2021. The total number of engines sold by GYMCL in second half 2022 declined by 18.1% to 140,335 units, compared with 121,449 units in second half of 2021. The decrease was mainly due to lower engine sales in the truck, bus, marine, and power generation application market, partially offset by higher sales in agricultural and industrial engines.

According to data reported by the China Association of Automobile Manufacturers, CAAM, in second half 2022, commercial vehicle unit sales, excluding sales of gasoline-powered and electric-powered vehicles, decreased by 26.3% compared to second half of 2021, as sales of trucks and buses declined by 27.5% and 18.4% respectively, reflecting weak demand in this market segment. Gross profit was RMB 1.3 billion, or $182.4 million, compared with the same amount of RMB 1.3 billion in second half 2021. Gross margin increased to 17% as compared with 15.4% in second half 2021. The increase in gross margin was mainly attributable to a change in revenue mix with an increase in off-road segment over the on-road segment, cost reductions, and lower sales rebates.

Other operating income increased by 22.9% to RMB 251.3 million, or $36.1 million, compared with RMB 204.5 million in second half 2021. The increase was mainly due to higher government grants. Research and development, R&D, expenses decreased by 19.7% to RMB 428 million, or $61.4 million, compared with RMB 533.1 million in second half of 2021 due to lower R&D expenses incurred in commercial vehicle engines that were partially offset by higher R&D expenses incurred in marine engines and power generation engines and new engine products.

Total R&D expenditures, including capitalized costs, were RMB 540.8 million or $77.6 million, representing 7.3% of revenue in second half 2022 as compared to RMB 712.2 million, representing 8.3% of revenue in second half 2021. Selling, general, and administrative, SG&A, expenses increased slightly to RMB 832.1 million or $123.8 million from RMB 835.9 million in second half 2021. The increase was mainly due to increased warranty expenses compared with the same period last year. SG&A expenses represented 11.6% of revenue for second half 2022 compared with 9.7% in second half 2021.

Operating profit rose by 41.2% to RMB 231.3 million or $33.2 million, from RMB 153.8 million in second half 2021. The operating margin was 3.1% compared with 1.9% in second half 2021. Finance cost decreased by 16.3% to RMB 40.2 million or $5.8 million from RMB 47.5 million in second half of 2021. The share of financial results of the associates and joint ventures was a profit of RMB 1.8 million, $0.3 million, compared with a loss of RMB 108.4 million in second half 2021.

This gain was largely due to higher profit at the MTU Yuchai Power Company Limited and a share of lower losses at Y&C Engine Company Limited.. Income tax expense was RMB 2.6 million or $0.4 million as compared with an income tax credit of RMB 42.4 million in second half of 2021. The change was mainly due to the higher tax rate income in second half 2022. Net profit attributable to equity holders of the company was RMB 124.9 million or $17.9 million compared with RMB 19 million, RMB 90 million in second half 2021. Basic and diluted earnings per share were RMB 3.06 or $0.44 compared with RMB 0.46 in second half 2021.

Basic and diluted earnings per share for second half 2022 and second half 2021 were based on the weighted average of 40,848,290 shares. We review the unaudited financial results for the 2022 fiscal year ended December 31, 2022. Revenue was RMB 16 billion or $2.3 billion compared with RMB 21.3 billion in full year 2021. The total number of engines sold by GYMCL in financial year 2022 decreased by 29.7% to 301,256 units compared with 456,791 units in financial year 2021.

The decrease was mainly due to weakness in the truck and bus market and the market of marine and power generation engines. According to CAAM, commercial vehicle unit sales, excluding sales of gasoline power and electric power vehicles, decreased by 41.4% in financial year 2022 as sales of truck declined by 42.9% while sales of buses declined by 27.1%. The impact of COVID-19 restrictions and related supply chain disruptions impacted market conditions in China and in foreign markets. Gross profit decreased by 10.9% to RMB 2.6 billion or $37.7 million compared with RMB 3 billion in financial year 2021. Gross margin increased to 16.4% compared with 13.9% in F1 2021.

The increase in gross margin was mainly attributable to a change in revenue mix with higher off-road revenue as a greater proportion of the total revenue and lower sales rebates. Other operating income increased by 6.5% to RMB 3,336.8 million or $48.4 million compared with RMB 316.2 million in financial year 2021. The increase was mainly due to higher government grants. R&D expenses decreased by 1.4% to RMB 836.4 million or $120.1 million compared with RMB 848.8 million in F1 2021.

GYMCL continue with its initiatives to improve engine performances and the prices of its engines compliant with China's National VI and Tier 4 emission standard, and to develop new energy products. In FY 2022, total R&D expenditures including capitalized costs were RMB 1 billion, $146.1 million compared with RMB 1.2 billion in financial year 2021. Representing 6.4% of the revenue compared with 5.5% in financial year 2021. SG&A expenses were RMB 1.6 billion, $231.4 million, representing 10.1% of the revenue compared with RMB 1.2 billion, RMB 1.8 billion, representing 8.3% of the revenue in full year 2021.

This decrease was mainly due to lower freight, personnel and warranty expenses. Operating profit was RMB 519.3 million or $74.6 million, down from RMB 633.5 million in financial year 2021. The operating margin was 3.2% as compared with 3.1% in FY 2021. Finance cost decreased by 13.6% to RMB 95.5 million or $13.7 million from RMB 115.9 million in FY 2021. The share of financial results of the associates and joint ventures was a loss of RMB 39.1 million or $4.2 million, compared with a loss of RMB 95.9 million in financial year 2021.

The decreased loss was primarily attributable to higher profit at the MTU Yuchai Power Company Limited and the share of lower losses at Y&C Engine Company Limited. Income tax expense was RMB 59.1 million or $8.5 million as compared with RMB 43.8 million in FY 2021. Net profit attributable to China Yuchai shareholders was RMB 218.6 million, or $31.4 million, compared with RMB 272.7 million in FY 2021. Basic and diluted earnings per share were RMB 5.35 or $0.77 compared with RMB 6.67 in FY 2021. Basic and diluted earnings per share for FY 2021.

For FY 2022 and FY 2021 were based on a weighted average of 40,858,290 shares. Now let me walk you through our financial highlights as of December 31st, 2022. Cash and bank balances were RMB 4.9 billion, $696.5 million, compared with RMB 5.3 billion at the end of FY 2021. Trade and bills receivables were RMB 6.8 billion, $975.4 million, compared with RMB 6.8 billion at the end of financial year 2021. Inventories were RMB 4.9 billion, or $709 million, compared with RMB 5.2 billion at the end of FY 2021.

Trade and bills payables were RMB 6.9 billion, or $993.5 million, compared with RMB 7.4 billion at the end of financial year 2021. Short-term and long-term bank borrowings were RMB 2.3 billion or $266.3 million compared with RMB 2.2 billion at the end of financial year 2021. I will now turn the call over to Kevin for a comment before we begin our Q&A.

Kevin Theiss (IR Representative)

Thank you. Please note 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 are now ready to begin the Q&A session.

Operator (participant)

Thank you. As a reminder, to ask a question you need to press star one one on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star one one again. Alternatively, you can submit your questions via the webcast. Please stand by while we compile the Q&A roster. This will take a few moments. Dear participants, as a reminder, if you wish to ask a question, please press star one one on your telephone keypad. You're more welcome also to submit any questions via the webcast. Dear speakers, there are no questions at this time. Please continue.

Choon Sen Loo (CFO)

Okay, we have.

Kevin Theiss (IR Representative)

Okay. 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. Goodbye.

Operator (participant)

That does conclude our conference for today. Thank Thank you for participating. You may now all disconnect. Have a nice day.