China Yuchai International - Earnings Call - H2 2024

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to China Yuchai International Limited, second half and full year 2024 financing. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. If you wish to ask a question via the webcast, please use the Q&A box available on the webcast link anytime during the conference. Please be advised that today's conference is being recorded. I'd like now to turn the conference over to Kevin Theiss. Please go ahead, sir.

Kevin Theiss (Head of Investor Relations)

Thank you for joining us today, and welcome to China Yuchai International Limited's conference call and webcast for the second half and fiscal year of 2024 ended on December 31, 2024. Joining us today are Mr. Weng Ming Hoh and Mr. Choon Sen Loo, President and Chief Financial Officer of CYI, respectively. In addition, we also have in attendance Mr. Kelvin Lai, General Manager of Operations of CYI and Chairman of MTU Yuchai Power Company Limited, MTU Power Company. Before we begin, I will remind all listeners that throughout this call, we may make statements that may contain forward-looking statements within the Private Securities Litigation Reform Act of 1995. The words believe, expect, anticipate, project, target, 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 20-F 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. Loo will provide the financial results for the second half and full year ended December 31, 2024. Thereafter, we will conduct a question-and-answer session. For purposes of today's call, the 2024 results are unaudited, and the 2023 financial numbers are audited, and they will be presented in RMB and US 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.

Weng Ming Hoh (President)

Thank you, Kevin. We are pleased to report that our units still outperform the Chinese truck and bus vehicle markets in the second half and for the full year 2024. According to data from China Association of Automobile Manufacturers, CAAM, compared with a 9.9% year-over-year decline in truck and bus vehicle sales in the second half of 2024, our truck and bus engine sales are up by 1.6% year-over-year. For the full year 2024, our truck and bus engine sales rose by 17.2% year-over-year, compared with a 2.6% year-over-year decline in truck and bus vehicle sales. Our off-road engine sales rose by 12.6% year-over-year in the second half of 2024, and by 9.1% year-over-year for 2024 full year. Agricultural engine sales were flat in 2024, while industrial engine sales were up by 11% year-over-year. Marine and genset engine sales increased by 25.5% year-over-year.

Revenue in the second half of 2024 was flat compared with the same period last year. Revenue in 2024 rose by 6.6% year-over-year to RMB 19.1 billion or $2.7 billion. Gross profits increased faster than revenue, rising by 14.3% year-over-year in the second half of 2024 and 10.8% year-over-year in full year 2024 to RMB 2.8 billion or $392.1 million, compared with RMB 2.5 billion in FY 2024. Gross margin increased to 14.7% compared with 14.1% in FY 2023. The increase in gross margin was mainly attributable to higher revenue and continuing cost reduction initiatives. Although our operating profit decreased slightly in FY 2024, our investment in associated companies and ventures delivered higher profits, growing by 80.2% year-over-year in the second half of 2024 and by 63.6% year-over-year for full year 2024.

Our 50/50 joint venture, MTU Yuchai Power, which sells large power generator engines, achieved higher profits than the previous year. Our Y&C engine and Guangxi Yuchai Automotive Energy Company Limited businesses achieved profitability in FY 2024 compared to losses last year. Generator engine sales remained robust. Additionally, Yuchai's Marine and Genset Power Subsidiary and Rolls-Royce Power Systems Division have entered into a second phase of cooperation and development for MTU Yuchai Power Venture. As part of this development, production and sales of MTU Series 4000 oil and gas engines is expected to begin shipment in late 2025. Manufacturing capabilities will be enhanced accordingly to cater to the expanded engine product portfolio. In 2024, Yuchai Machinery Power Systems Thailand Company, or Yuchai Thailand, commenced production operations. Yuchai Thailand will mainly produce a range of diesel engines and other products for on- and off-road applications.

Additionally, we entered into a comprehensive strategic cooperation agreement with Kim Long Motor Group, a subsidiary of Vietnam's Futa Group. This strategic cooperation consists of the grant and provision of technology licenses, component supply, and related support, and services for the construction of a factory in Kim Long Motor's designated site in Vietnam. Kim Long Motor obtained technology licensing rights from certain Yuchai engine models to be manufactured primarily for trucks, buses, and other commercial vehicles. Kim Long Motor will have exclusive sales rights for the licensed engines in the Vietnam market, along with priority sales rights in other ASEAN countries and South Korea. These licenses are valid for 15 years, with a total licensing fee of $28 million. The operations in China was challenging in 2024. According to the National Bureau of Statistics, Chinese GDP increased by 5 percentage points year-over-year in 2024.

The total value of exports rose to $3.6 trillion, both of goods and services, creating a trade surplus of almost $1 trillion last year for 2024. However, property investment continued to decline in 2024. In the second half of 2024, our total R&D expenditure, including capitalized costs, increased by 21.2% to RMB 726 million, or $101 million, representing 8.2% of revenue in the second half of 2024, as compared to RMB 599.2 million, representing 6.8% of revenue in the second half of 2023. For FY 2024, total R&D expenditures, including capitalized costs, were RMB 1.2 billion, or $165.4 million, representing 6.2% of revenue, compared with RMB 1.1 billion, representing 5.9% of revenue in FY 2023.

We continue to improve the efficiency and performance of our National VI and Tier 4 engines and initiated the development of the next generation emission-standard engines for the on-road and off-road engine markets. We continue the development of new energy products, including products using alternative fuels such as hydrogen technologies. Our innovative new energy power trains include two hydrogen-powered combustion engines, an off-gas power generation system, and a production plant which utilizes off-gas discharges to generate power and eliminate greenhouse gas emissions. The model YCA07N hybrid engine, which was chosen to power 10-liter gas-electric hybrid buses in Nanjing. The first 50 Suzhou King Long buses using our hydrogen fuel cells has commenced commercial operations in Beijing, and most recently, a new foray into enhancing wind power with the launch of the high-strength QT 700-10 turbine fan main shaft to improve wind turbine performance.

In recognition of our innovative achievements with the Hydrogen Combustion Engine which utilizes hydrogen, Guangxi Yuchai Machinery Company Limited, our main operating subsidiary in China, was appointed as a committee member of the new Hydrogen Combustion Engine Innovation Consortium Division of China Internal Combustion Engine Society. To encourage improved performance, selected senior leaders and key employees of Yuchai's subsidiary have participated in incentive plans beginning in 2024. The plans are both a reward and an incentive to motivate these senior leaders with key talents for their continued contributions and their dedication and loyalty to enhance long-term growth of the company. In early June, we adopted our first share buyback plan, whereby we repurchased a total of 3.3 million shares, amounting to a total cost of $39.8 million. In addition, the company paid a cash dividend of $0.0038 per ordinary shares on August 28, 2024.

These share repurchases and dividend distributions demonstrate the company's confidence in our future revenue, profit, and cash flow generation, and to show our commitment to building shareholder value. Despite the share repurchase and cash dividends, our cash and bank balances were RMB 6.4 billion or $895 million as at 31st December 2024. With that, I would now like to turn the call over to Mr. Choon Sen Loo, our Chief Financial Officer, who will provide more details on the financial results. Choon Sen, you may begin your remarks.

Choon Sen Loo (CFO)

Thank you, Wei Ling. Now, let me review our unaudited six months' results ended December 31, 2024. Revenue was RMB 8.8 billion or $1.2 billion, compared with RMB 8.9 billion in the second half of 2023. The total number of engines sold in the second half of 2024 increased by 10.9% to 163,843 units, compared with 147,700 units in the second half of 2023. The increase was mainly due to higher sales in truck, bus, industrial, and marine and power generation markets. The better performance in truck and bus engine sales was achieved despite a decline by 9.9% in sales of commercial vehicles, excluding gasoline and electric power vehicles, compared to the second half of 2023, as reported by the China Association of Automobile Manufacturers, CAAM.

Gross profit increased by 14.3% to RMB 1.4 billion or $195.7 million from RMB 1.2 billion in the second half of 2023. The increase was mainly due to higher unit sales volume combined with lower material costs. Overall, gross margin was 15.9% in the second half of 2024, compared with 13.9% in the second half of 2023. Other operating income increased by 31.2% to RMB 401.5 million or $55.9 million, compared with RMB 306.2 million in the second half of 2023. The increase was mainly due to higher government grants, higher rebate on value-added taxes, and recognition of technology licensing fees. Research and development (R&D) expenses increased by 25.6% to RMB 591.1 million or $82.2 million, compared with RMB 470.5 million in the second half of 2023, due to higher mold costs and impairment of a discontinued R&D project.

Total R&D expenditures, including capitalized costs, were RMB 726 million or $101 million, representing 8.2% of revenue in the second half of 2024, as compared to RMB 599.2 million, representing 6.8% of revenue in the second half of 2023. Selling, general and administrative SG&A expenses increased by 25.1% to RMB 1.1 billion or $147 million from RMB 844.6 million in the second half of 2023. This increase was mainly due to higher travel, personnel and selling expenses compared with the same period last year. SG&A expenses represented 12% of revenue for the second half of 2024, compared with 9.5% for the second half of 2023. Operating profit declined to RMB 160.1 million or $22.3 million from RMB 221.8 million in the second half of 2023.

The operating margin was 1.8% compared with 2.5% in the second half of 2023. Finance costs decreased by 20.4% to CNY 37.1 million or $5.2 million from CNY 46.5 million in the second half of 2023, primarily due to lower bills discounting. The share of financial results of the associates and joint ventures grew by 80.2% to a profit of CNY 58.5 million or $8.1 million, compared with CNY 32.5 million in the second half of 2023. The improvement was mainly driven by higher profits at MTU Yuchai Power Company Limited, MTU Yuchai. Additionally, Y&C Engine Company Limited, Y&C Engine, and Guangxi Yuchai Automotive Energy Company Limited, Guangxi Yuchai, achieved profitability in the second half of 2024, compared to a loss in the same period last year.

Income tax was RMB 26.4 million or $3.7 million, compared with RMB 37.9 million in the second half of 2023. Net profit attributable to equity holders of the company was RMB 82.7 million or $11.5 million, compared with RMB 107.1 million in the second half of 2023. Basic and diluted earnings per share were RMB 2.19 or $0.30, compared with RMB 2.62 in the second half of 2023. Basic and diluted earnings per share for the second half of 2024 and the second half of 2023 were based on the weighted average of 37,809,824 shares and 40,858,290 shares, respectively. Now, we will review the unaudited financial results for the fiscal year ended December 31, 2024. Revenue was RMB 19.1 billion or $2.7 billion, compared with RMB 18 billion in financial year 2023.

The total number of engines sold in financial year increased by 13.7% to 356,586 units, compared with 313,493 units in FY 2024. The increase was mainly due to higher sales in the truck, bus, industrial, and marine and power generation markets. The stronger performance in truck and bus engine sales was achieved despite a 2.6% year-on-year decrease in sales of commercial vehicles, excluding gasoline and electric power vehicles in financial year 2024, as reported by CAAM. Gross profit increased by 10.8% to CNY 2.8 billion or $392.1 million, compared with CNY 2.5 billion in FY 2023. Gross margin increased to 14.4% compared with 14.1% in financial year 2023. The increase in gross margin was mainly attributable to higher revenue from increased unit volume and continuing cost reduction initiatives, partially offset by higher labor and overhead expenses.

Other operating income increased by 13.1% to CNY 535.1, sorry, CNY 535.7 million or $80.1 million, compared with CNY 442.4 million in financial year 2023. The increase was mainly due to higher government grants, higher rebate on value-added taxes, and recognition of technology licensing fees. R&D expenses increased by 12.3% to CNY 984.7 million or $137 million, compared with CNY 876.6 million in financial year 2023, mainly attributable to higher mold costs and impairment of a discontinued R&D project. Yuchai has continued with its initiatives to enhance the engine efficiency and performance of its National VI and Tier 4 emission standard compliant engines, marine power generation applications, wow, and advancing new energy solutions.

Total R&D expenditures, including capitalized costs, were RMB 1.2 billion or $135.4 million, representing 6.2% of revenue for financial year 2024, compared with RMB 1.1 billion, representing 5.9% of revenue for financial year 2023. SG&A expenses were RMB 1.8 billion or $252.1 million, representing 9.5% of revenue in FY 2024, compared with RMB 1.5 billion, representing 8.3% of revenue in FY 2023. This increase was mainly due to higher trade receivables provision and higher traveling personnel and selling expenses, compared with financial year 2023. Operating profit was RMB 597 million or $83 million, compared with RMB 609.4 million in financial year 2023. The operating margin was 3.1%, compared with 3.4% in financial year 2023.

Finance costs decreased by 22.2% to RMB 78 million or $10.8 million from RMB 100.2 million in financial year 2023, primarily due to lower bills discounting. The share of financial results of the associates and joint ventures increased by 63.6% to income of RMB 101.5 million or $14.1 million, compared with income of RMB 52.1 million in financial year 2023. The improvement was mainly driven by higher profits at MTU Yuchai. Additionally, Y&C Engine and Guangxi Yuchai achieved profitability in financial year 2024, compared to a loss last year. Income tax expense declined by 13.3% to RMB 128.8 million or $17.9 million, as compared with RMB 148.5 million in financial year 2023. Net profit attributable to China Yuchai's shareholders was RMB 323.1 million or $44.9 million, compared with RMB 285.5 million in financial year 2023.

Basic and diluted earnings per share were RMB 8.21 or $1.14, compared with RMB 6.99 in financial year 2023. Basic and diluted earnings per share for FY 2024 and FY 2023 were based on the weighted average of 39,325,763 shares and 40,858,290 shares, respectively. As of December 31, 2024, the company's outstanding shares were, following a share buyback plan, reduced to 37,518,332 from 40,858,290 shares as of December 31, 2023. Now, we will go through our balance sheet highlights as of December 31, 2024. Cash and bank balances were RMB 6.4 billion or $895 million, compared with RMB 6 billion at the end of financial year 2023. Trade and bills receivables were RMB 8.8 billion or $1.2 billion, compared with RMB 7.8 billion at the end of financial year 2023.

Inventories were CNY 4.7 billion or $647.5 million, compared with CNY 4.6 billion at the end of financial year 2023. Trade and bills receivables were CNY 8.5 billion or $1.2 billion, compared with CNY 7.6 billion at the end of financial year 2023. Short-term and long-term loans and borrowings were CNY 2.5 billion or $349.1 million, compared with CNY 2.5 billion at the end of financial year 2023. I will now turn the call over to Kevin for a comment for Q&A section.

Kevin Theiss (Head of Investor Relations)

Thank you, Choon Sen Loo. 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 ready to begin the Q&A.

Operator (participant)

Thank you. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. If you wish to ask a question via the webcast, please type it into the box and click submit. Please stand by while we compile the Q&A roster. One moment, please, for our first question. We will now take our first question from the line of Yiming Liu from Haitong Securities. Please ask your question, Yiming.

Yiming Liu (Analyst)

Hello, this is Yiming from Haitong Securities. Thank you very much for having me. So I have two questions. Number one is about your data center generator business. So it looks like your JV with MTU got a very good result in 2024. So I'm just wondering, how many units did you sell from both sides? I mean, from both GYMCL, your controlling interest, and from the MTU JV? Yeah, this is my question number one. Thanks.

Weng Ming Hoh (President)

Okay. Can Kelvin Lai take the question, please?

Kevin Lai (General Manager of Operations)

Hi. Regarding on the GenSet sales and GenSet Engine sales and then from 2024, the MTU joint venture sales is about more than 700 units. But this is including not all for data centers. It's including the other applications as well. And for the GYMCL, the high horsepower we sell last year is about 1,000 no, no, no, it's about 800, yeah, altogether. Yeah. But that is, again, it will be including other applications. Yeah.

Yiming Liu (Analyst)

Okay. All right. Thank you. So just a continuation of this question. So it looks like MTU JV was very profitable. I wonder what the profitability is of this type of generators in the GYMCL, either in terms of gross margin or net margin or something like that. Thanks.

Kevin Lai (General Manager of Operations)

I'm sorry that we cannot quote the margin of the two different types of engines because in terms of the output or in terms of the performance, and then both engines can meet with the requirement of the data center requirement. And they have very similar power range and suitable for the mainstream of the data center construction. And so I would take it this way. And then the MTU is because of international branding, and then there will be some premium that the end user would like to buy them. But for price-wise, and then I cannot make any comment. Yeah.

Yiming Liu (Analyst)

Okay. Okay. Understood. Thank you. So my question number two is, what is the expected growth rate on the data center generator business in 2025? If possible, could you describe separately for GYMCL and the JV business? I wonder if there's any difference and what is the expected growth rate in 2025? Thanks.

Kevin Lai (General Manager of Operations)

I would take it this way. No matter the GYMCL or the MTU joint venture, and our order book for 2025 is already full. And then we are actually refusing further order because we cannot take any due to the capacity constraint or due to the component supply. But I would say in 2025, it's a very significant growth in comparison to last year. It's at least 30%. Yeah.

Yiming Liu (Analyst)

Okay. Great. Thank you. So just one more additional question. So it looks like the profit attributed to the minorities in the second half of 2024 was pretty high. I just calculated. It looks like it was like 47% of the total profit. So would that be a constant value in the future? Because in the past, it looked like it was like 30% or so. Thanks.

Weng Ming Hoh (President)

Okay. Let me answer that question. Compared to the past, I think the performance of our associate companies has been significantly better, in particular MTU because I think I asked you earlier where there's a big growth and demand for the data centers, which fits right into our product offering. And at the same time, our other associate companies, joint ventures, there are a couple of most significant ones that turn from losses to profitability. So that's why this year we're seeing a larger share number for our share associate companies. Does that answer your question? Okay. All right. Thanks.

Yiming Liu (Analyst)

I'm sorry. Just one more question. So look, there's an item called other operational profit or something, which is pretty big. It was like CNY 500 million in 2024. So I wonder how to expect that in the future. So is that going to be proportional to your revenue or something like that? Thanks.

Weng Ming Hoh (President)

Sorry. Can you repeat the question? I missed that. Sorry. Can you repeat your question?

Yiming Liu (Analyst)

Pretty big item [on the] income statement called other operating.

Operator (participant)

All right. We have lost [the] line of Yiming. So we'll take our next question from Peng Yubai from Pinpoint Asset Management. Please ask your question, Peng Yubai.

Pengyu Bai (Equity Hedge Analyst)

Hi. Actually, I have a question. Are we going to raise our price since the demand for, I think, two megawatt generators in China AIDC is very strong? And as we know, the supply is fixed. So in the future, both regarding 2025 and also 2026, are we going to raise our price for the generator? That's my first question.

Weng Ming Hoh (President)

Well, it does raise in price. I think we will, of course, there'll be some improvement in the pricing. But at this stage now, we haven't had any significant plans to increase in any big way. But we believe there'll be some improvement in pricing.

Pengyu Bai (Equity Hedge Analyst)

Okay. Okay. Got you. So as I understand, we are going to increase our price, but it's not right now. Maybe in the future. Okay. My next question is, are we going to produce the generator set or the module by ourselves since we only produce generators right now? So are we going to do the set in the future if the demand is very strong?

Weng Ming Hoh (President)

There's no plan for that. We are actually an engine manufacturer. So we produce the engines mostly for our OEM customers. If there is any customer specifically wants us to produce a GenSet, we can work on that. But that would not be our main business.

Pengyu Bai (Equity Hedge Analyst)

Okay. Okay. Got you. Got you. So my last question is, as I just heard, that we already produced anyway 700 or 800 generators in the last year. So what is our capacity plan for 2025 and also for 2026? Are we going to increase it by a very strong number, for example, above 100%? Can you actually give us some color in this question? Yeah.

Weng Ming Hoh (President)

Kevin, you want to take that question? Kelvin Lai?

Pengyu Bai (Equity Hedge Analyst)

So are we going to expand our capacity for a very large number in the future, in this year and also for next year?

Weng Ming Hoh (President)

Kevin, please.

Kevin Lai (General Manager of Operations)

Actually, we had a planning and then to increasing to expand our capacity since last year. But you know the two I mean, there's two different major categories and then we had to consider. First is regarding how can we increase our supply of the casting for the big engine on the lighter cylinder engine block and engine heads. And then that machining capacity. So we have a planning in the future. Majority of the machining center and then will be arrival by Yuchai and then by mid this year. So likely and then by end of this year, and then we can increase our capacity. And we will be gradually ramping up. And so the next year and then we will be about 35%-40% increase. And then we'll be another further up on the 2027. So this is our current planning on trying to meet up with the market demand.

Pengyu Bai (Equity Hedge Analyst)

Oh, okay. Okay. Got you. So you just mentioned that the growth rate is about 30%-40%. So at least for this year, we are going to have more than 1,000- to 2-megawatt generators capacity in this year, right? It's more than 1,000.

Kevin Lai (General Manager of Operations)

Yeah. Yeah.

Pengyu Bai (Equity Hedge Analyst)

All right. All right. Got you. Got you. And I believe that's all my questions. Thank you. Thank you.

Operator (participant)

Thank you. For the benefit of all participants, please limit yourself to three questions at a time. If you have follow-up questions, please request to rejoin. We will now take our third question from the line of Andy Lee from Daiwa. Please ask your question, Andy.

Andi Li (Associate Director)

Hi. Thank you, Madam, for taking my question. This is Andy Lee from Daiwa. Yeah. I just want to quickly clarify. I think I heard another 30% capacity up in 2027, right?

Weng Ming Hoh (President)

Yeah. By 2026. Yeah. Hello? Hi. I mean, we are starting building capacity now. The capacity will come up upstream by 2026. Can you hear us, Andy Lee?

Kevin Lai (General Manager of Operations)

We lost it.

Weng Ming Hoh (President)

Daiwa, Kevin, can you hear us?

Kevin Lai (General Manager of Operations)

No, I can't hear anything. Yeah.

Weng Ming Hoh (President)

Yeah. We have lost it there.

Operator (participant)

We have lost the line of Andy. If you have further questions, please request to rejoin the queue. I'll be turning back to the presenters in the room for webcast questions.

Weng Ming Hoh (President)

Okay. There are a few questions for our webcast. The first one we'll read out now is the surge in demand for diesel engines driven by AI data centers. Will that have impact on the revenue growth? Could you give us some color on both revenue and net profit impact from AI? Now, yes, there's a big demand now for data centers, what's called segment of business. We expect to see growth in it, significant growth, as we discussed earlier. So yeah, that will definitely have an impact on our revenue growth, particularly for that particular segment. Now, how is that going to impact our overall business revenue or our whole group revenue? That, I don't think we are ready to release that part of the information. And unfortunately, I can't tell you exactly how much revenue it is for this segment, nor the net profit impact for this segment. So the next question is from Jack Xiao. Congratulations on your great performance currently. An explosive growth in the CapEx of major Chinese internet companies leads to significant shortage of power generators. Have you entered domestic data center market with major clients?

Is there room for price increase? What's your future expansion plan? Can you share your overall outlook for data generator business of IDC sector this year? Kevin, you want to take that? Kelvin Lai?

Kevin Lai (General Manager of Operations)

Sorry?

Weng Ming Hoh (President)

You want to answer this question?

Kevin Lai (General Manager of Operations)

Can you repeat the question?

Weng Ming Hoh (President)

Oh, you can't see it. Okay. Let me answer it then. Okay?

Kevin Lai (General Manager of Operations)

I can't see it. Yeah.

Weng Ming Hoh (President)

Okay. All right. So sorry. Kevin is calling from China, so he probably can't see the question. Okay. Let me answer some of it, right? So have you entered domestic data center market with major clients? Yes, we have. We have entered the China domestic market, and we have orders from some of the big data centers operators in China. Not only that, we have also expanded to the Southeast Asian market as well. So yes. Is there room for price increase?

We think there'll be improvement. But again, a lot of these data centers for sales are achieved through tenders. So in the case of tenders, the price is actually quite transparent, right? So we do expect to see some improvement, but I don't think it's going to be a huge improvement unless everybody also increases the price accordingly. So it's still a very, very competitive industry out there for GenSets. What is your future expansion plan? We are building capacity to cater to the huge demand that we saw this year. So we expect the capacity to come on stream next year in 2026 for both ourselves, GYMCL, as well as the MTU. And can you share your overall outlook for diesel generator business of IDC sector this year? We believe this year is going to be significant growth. There's a lot of demand out there still.

This demand has not been satisfied as of this year. As Kevin mentioned earlier, our order book is full for the year. We will expect to see more demand next year, I would think. But by then, the capacity for most of the diesel engine manufacturers and the GenSet manufacturers OEMs would have also increased accordingly. We believe that a lot of the demand will be satisfied next year or in the next two years. R&D. The next question is from Jay Chan. Your R&D expenses grew meaningfully in 2024 in excess of revenue. What sort of R&D expense growth should we expect in 2025? Will it moderate? Okay. Mr. Wu, answer this question.

Choon Sen Loo (CFO)

Hi. Jay Chan. Thank you for the questions. Yeah. We expect the 2025 will remain pretty much the same or slight increase. Why? But we are balancing the market demand, right? So we have commercial reserve, and then we have an off-road, marine power generation, and industrial, and so forth. So we are balancing the spend. But overall, our spend will continue to maintain that to improve our engine efficiency and performance. That we will not slow down. We'll continue to do that. But overall, a spend perspective, we will still maintain and will have a moderate increase in that sense. Okay.

Weng Ming Hoh (President)

So the next question again from the same person. Does management expect a growth acceleration in 2025 on the back of a National VI for trucks trading policy? Yes. We do hope to see some acceleration. But it's very hard to determine how much there will be for now. Yeah. The last question on the website page is, your SG&A expense increased a lot in second half 2024. Could you please give us some guidance for the trend going forward?

Choon Sen Loo (CFO)

Okay. I will take this question. Leslie Lee, thank you for the question. Yeah. In fact, our second half of 2024, our SG&A expenses mainly the increase mainly caused by the trade receivables provision, right? So that we have accounted for that in 2024. Of course, the market is still challenging. We expect that will be better in 2025 in terms of our trade receivables provisions. So other than that, the spending, the SG&A spending will pretty much remain the same as the 2024 level. But of course, when we continue to expand our market footprint and overseas market, that we expect will have slight increase from that perspective.

Right. Thank you. We will now take our next phone question from the line of Andy Lee from Daiwa. Please ask your question, Andy.

Andi Li (Associate Director)

Hi. I'm back. This is Andy. My line was cut off. Hope my phone worked properly this time. Yes. Thanks for the clarification before. So my question is on the associates and JV profit. It's accounted for around over 30% of your second half profit. So I was just wondering, could you please break down how much is from MTU Yuchai? And I also know you have different lines of production lines for MTU. So can you walk us through which lines are for the large power generators applicable for data centers, please?

Weng Ming Hoh (President)

Okay. Kevin, you want to take that question?

Kevin Lai (General Manager of Operations)

I mean, regarding on the product-wise, the MTU product at the moment, and then we had different cylinder configurations. So we had the 12V, 12 cylinder, and the 16V, 16 cylinder, and also the 20V. That's the 20 cylinder. I mean, I would say this way, the bigger the engine, and then the better the return because of the limited, I mean, the competition because of the high horsepower engine. I mean, but it will always and that depends on the customer requirement. So at our joint venture, we will manufacturing then according to the customer spec. But of course, and then if we can have the product mix and then can have a more high-power engine, and that will be more benefit to the operation.

Andi Li (Associate Director)

Yes. And let's see, for example, any number or percentage that MTU Yuchai contributed to our profit?

Kevin Lai (General Manager of Operations)

Sorry, I cannot. I think I gave you the figure. Yeah.

Andi Li (Associate Director)

Okay. Okay. So do you start to negotiate with data center clients? And what does the competition look like? Did you encounter any Chinese peers in the bidding or kind of competition?

Kevin Lai (General Manager of Operations)

I mean, the GenSet market is very, very competitive because in China, and then it's always an open tender. And then from the telecommunication operator or from the AI, and then, for example, from ByteDance. And then so it's transparent. I mean, everyone and then we understand the winner and what the price is at the end of the day. So I would like to say it's very fierce competition. And that's why then I mean, it's very difficult and then to raise the bar of the pricing at this stage, even though there's very high demand because then we have to make sure and then we can win the bid of the major projects and then from those key players because in one single tender, it could be up to 200, 300, or 500 engines.

So that's just a very careful and then regarding on the pricing. So competition is too fierce for yeah.

Andi Li (Associate Director)

Got it. Thanks for the color. Maybe lastly, on your capacity expansion, what keeps you up at night? Any bottleneck you spend most of your time addressing on, like maybe Super Alloy, Inconel, Hastelloy? Yeah. Appreciate if you can share any color on this. Thanks.

Kevin Lai (General Manager of Operations)

It's a little bit different between the GYMCL and the MTU joint venture. MTU joint venture, actually, we had the problem of the supply chain because there's still some component we have. I mean, we import from Germany. And I mean, there's a shortage of some of the key components from our partners. And this has handicapped the overall assembly of the engine.

So I mean, our partner, MTU, and then they are also doing some more investment, and then they also work with their supplier and then try to ease up the supply chain issue. Hopefully, by next year, and then we can have more available resource, and then we can take more engine orders.

Andi Li (Associate Director)

I see. Any chance you can use the Chinese domestic supplier in place of those imports?

Kevin Lai (General Manager of Operations)

Actually, we have what we call the localization program, and so we will localize and then the majority of the key majority of the engine component in China, but there's some of the very key component and then our partner, and then we said, "Right," and then not to localize, and then we had to buy from them anyway, so this is some of the bottleneck sometime. Yeah.

Andi Li (Associate Director)

Got it. Got it. That's all from me. And also congratulations on the result.

Kevin Lai (General Manager of Operations)

Thank you. Thanks.

Operator (participant)

Thank you. Our next question comes from the line of Yiming Liu from Haitong Securities. Please go ahead, Yiming.

Yiming Liu (Analyst)

Hello. This is Yiming again. Thank you very much for having me again. So I was cut off. So I'm trying to continue with my question. So from your income statement, there's a big item called other operating income, which is CNY 576 million in the fiscal year of 2024. So I wonder if this value is proportional to your revenue or if there's other factors that are impacting that. So how do we expect that in 2025 or in the future? Thanks.

Choon Sen Loo (CFO)

Hi, Yiming. Thank you for the questions. Yeah. In that line, we have this government grant income, right, as I mentioned earlier, right? That's based on the revenue, the income that we recognize according to the projects that we earned during the period. That is due to the timing. The second part is the VAT rebate, right? There's a tax policy that for us, we are in this advanced technology zone that we are qualified or we are eligible for that incentive. Basically, we get the rebates for the VAT tax, right? That is another big part contributed the income for 2024. From our understanding, that will be subject to the applications each time. Once we are successful, that will continue in 2025 if we are successfully applied. That another part is the licensing fee, right, for that, right, non-GM loan, right? We have recognized half of that, $28 million, in 2024. Yeah. So that contributed the big increase in our other income.

Yiming Liu (Analyst)

So can we treat the majority of this value as recurring? Or I mean, what is the percentage of this value which is not recurring in the future?

Choon Sen Loo (CFO)

Okay. The joint income is subject to how much you can recognize based on what we earned for the project. So that is probably may remain pretty much flat, right? But VAT rebate is subject to the applications and also subject to the VAT input, output, offset, right? That is still yet to be determined. Yeah. Of course, that licensing fee income, as I mentioned, we recognize that half of it from what we have awarded, right, CNY 28 million. So that we shall see some in 2025.

Yiming Liu (Analyst)

Okay. I guess I see. Thank you very much.

Choon Sen Loo (CFO)

Thank you.

Operator (participant)

Thank you. I'll now turn to the room for webcast questions. Okay.

Weng Ming Hoh (President)

We'll answer some of the questions from the webcast. The next question down is from Robin Xiao. For data center generator, is there any particular part source or third party could be any bottleneck? I think Kelvin Lai answered that for MTU. So there's a part that we buy from Germany, which will cause a bottleneck. So I think it's a direct question. The next one, go down to what is your capacity CapEx plan this year and next year given the strong demand? Would there be new share repurchase? Our CapEx plan this year and next year will probably still remain about the same. There'll be more, of course, of resources that will be channeled towards the data centers since there's a big demand for it. But that has already started, right?

So we have to see what the demand is going forward and how much capacity there are in the whole industry before we decide on more capacity expansion or more CapEx on that area. Will there be a new share repurchase plan? I can't see that. We haven't discussed this since the last plan that was implemented. So yeah, for now, this has not been discussed. Can you share your revenue breakdown by domestic sales and export sales? Can you help us to understand how product mix will shift in 2025 and the impact on AST profit gross margin? I will answer the top half, but probably not the second half. It's probably too sensitive for us, right? So in terms of domestic sales and export sales, about close to more than 20%, between 20% and 25% of engines in terms of unit sales are exported.

So it has grown quite rapidly in the last few years. In the case of how the product mix will shift, the entire group, it will shift slightly more towards the marine and biogas generation, which is adjacent because of the big demand that we're facing now from the data centers. So that will have an impact on the ASP for sure and also across profit margin. Do you consider more share buyback programs and what's the dividend policy? Okay. We have addressed the share buyback program. The dividend policy, we do not have a formal dividend policy. But if you look at the dividend payout in the past, you'll get an idea as to how we decide on the dividend payout. But we do not have a formal dividend policy.

Operator (participant)

Thank you. We will now take our next phone question from the line of William Grzegorzewski from Greenridge Global. Please ask your question, William.

William Gregozeski (President and Director of Research)

Hi. I'm William. When is the expected start date that you'll ship the engine kits? And do you have a number of units you expect to sell and a rough margin profile for those?

Weng Ming Hoh (President)

Sorry, I didn't quite catch that. Can you repeat that again?

William Gregozeski (President and Director of Research)

Yeah. I'm William. When do you expect to start shipping the engine kits? And then do you have an estimate on the number of kits and margin profile for those?

Weng Ming Hoh (President)

Kevin, is that a direct question?

Kevin Lai (General Manager of Operations)

So we need to help them and then to build up the whole plan. And also we need to assist them and then to purchasing all the equipment for the factory. So I would expect and then after all, and then all this, I mean, the installation commissioning and then it's done. And then also carry on further testing of the whole line. And then it will take at least about nine to 10 months. So by the end of this year, if everything's smooth, and then we may start shipping the parts. Yeah. This is my estimation. Yeah.

William Gregozeski (President and Director of Research)

Okay. Do you have an idea of how big this plant is going to be or how many units they expect to do a year?

Kevin Lai (General Manager of Operations)

In fact, the market is quite a good-sized market. I mean, because from GYMCL, our export to Vietnam is about 20-25 thousand tons. And then so I mean, if they take out most of those and then they order from previously, and then we ship from China, and then there will be around this number. But of course, and then it will depend on how is the competitive landscape of the Kim Long Motor in the Vietnam market. So I mean, we didn't have any concrete sales number because our agreement with them is only a licensing agreement. And so that we will help them and then to build up the whole plan. Then we will provide the component according to their actual demand.

William Gregozeski (President and Director of Research)

Okay. All right. And then my last question is, do you have expectations for this year for the in-vehicle engines just in general?

Kevin Lai (General Manager of Operations)

Can you repeat that again? But the line is not quite clear today.

William Gregozeski (President and Director of Research)

Yeah. I was just looking for if you can provide any expectations for in-vehicle engines for this year.

Kevin Lai (General Manager of Operations)

You mean the total engine sales for the year?

William Gregozeski (President and Director of Research)

Yes.

Operator (participant)

Talking about EV, are you? Are you talking about electric vehicles?

William Gregozeski (President and Director of Research)

I mean, if you can break out the new energy versus the traditional, that would be even better.

Oh, I see. No, I think this year we sold about 356,000 engines, right? So I think segment by segment, we expect the vehicle engines to move within -5% to 5%, maybe even 10%. So it's pretty for the domestic market. So as for the marine and biogas generation, we expect it to perhaps increase by about 10% this year. As far as the industrial and agricultural machinery, the agricultural machinery I was expecting to have a slight growth. And the industrial machinery, I think for the market, it'll be quite flat, but we expect to see some growth in there as well. But sorry, I can't give you a number, but generally, that's how the market is.

Operator (participant)

Thank you.We have now reached the end of our question and answer session, and I'll turn the call back to Kevin Theiss.

Weng Ming Hoh (President)

Okay. Thank you very much all for participating in the conference call. We wish each of you good health, and we look forward to speaking with you again next time. Thank you.