Ladies and gentlemen, thank you for standing by. Welcome to the China Yuchai International Limited Fourth Quarter and FY 2017 Earnings Webcast. At this time all participants are in a listen-only mode. [Operator Instructions] On the call with us today, we have Mr. Weng Ming Hoh, China Yuchai International President; Dr.

Thomas PHUNG, China Yuchai International CFO; Kelvin LAI, China Yuchai International VP of Operations; and Mr. Kevin Theiss, Investment Relations. I would now like to turn the conference over to Mr. Kevin Theiss. Please go ahead sir..

Thank you for joining us today, and welcome to China Yuchai International Limited's fourth quarter 2017 conference call and webcast. 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, continued to, predict, intend, aim, will or similar expressions are intended to identify forward-looking statements. All statements other than statements of historical facts 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 a variety of important factors, such as government and stock exchange regulations, competition, political and 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 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 and 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 fourth quarter and 12 months ended December 31, 2017. Thereafter, we will conduct a question-and-answer session.

For the purposes of today's call, the financial results for the fourth quarter and 12 months ended December 31, 2017, 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..

Thank you, Kevin. Net revenue for the fourth quarter of 2017 increased by 1.2% to RMB3.8 billion, or US$578.6 million, compared with RMB3.7 billion in the fourth quarter of 2016.

The total number of engines sold by our mid operating subsidiary, Guangxi Yuchai Machinery Company Limited, in short GYMCL, in the fourth quarter of 2017 decreased by 3% to 73,610 units compared with 75,849 units in the same quarter a year ago.

Our overall average selling price increased primarily due to double-digit sales growth of heavy-duty engines and higher sales engine for markets as well as higher percentage of engines sold will comply with National V emission standards than in the fourth quarter of 2016.

According to data reported by the China Association of Automobile Manufacturers, CAAM, in the fourth quarter of 2017, initial sales of commercial vehicles, excluding gasoline-powered and electric-powered vehicles, decreased by 0.4%.

Truck sales decreased by 1% with heavy-duty truck sales increasing by 0.6% and bus market went up 4.3% with heavy duty unit sales up 2.4%. GYMCL's heavy-duty truck engine sales in the fourth quarter of 2017 increased by 22.5%. Our sales in the bus segment continue to be expected by commercial electric vehicle bus sales in the fourth quarter 2016.

Sales to the off-road segment improved in the fourth quarter of 2017 as well. According to data reported by CAAM, commercial vehicles in sales, excluding gasoline-powered and electric-powered vehicles, in the 2017, year grew by 16.9%.

In 2017, the total number of orders off-road engines sold by GYMCL rose 14.6% to 367,097 units compared with 320,424 units in 2016. The increase was primarily due to growth in on-road heavy-duty and light-duty engines, industrial engines and agriculture engines.

In for the year 2017, GDP growth increased to 6.9% from 6.7% in 2016 and achieving the government target of 3.5%. Our natural gas engine sales grew significantly in 2017 on a year-over-year basis. In 2017, we spill over 20,000 and 6,000 units of natural gas engine.

Our international sales achieved a new record high in 2017 as GYMCL exported over 12,000 engine units to the global mark to market and natural gas engine export sales grew 300% year-over-year to more than 2,500 units. In relation to the Chinese government one belt one road initiative, the growth of our export sales continues to be a priority.

During 2017, we penetrated the Cambodian bus market for the first time with the export of 98 Yutong buses powered by GYMCL's engines for use in Cambodia's capital, Phnom Penh. 598 school buses manufactured by Changan Bus Manufacturing Company powered by GYMCL's engines were delivered to the Kuwait Public Transport Company Limited in 2017.

These shipments followed other international bus orders where the vehicles were also propelled by Yuchai engines including buses used in Myanmar and Saudi Arabia. In addition to diesel and natural engines, we also won orders for our hybrid engines to propel buses in China.

GYMCL was the exclusive supplier of 100 diesel-electric hybrid engines by Liuzhou Hengda Bus Company and another 76 buses were powered by GYMCL's diesel-electric hybrid engines were delivered to Siweimei Motor Transport Company Limited in Shenzhen City.

Our hybrid engines provide an alternative to electric vehicles by offering the advantage of high fuel efficiency, significant emissions reductions and easy plug-in charging system. Government incentives continue to enhance sales of electric buses and expect GYMCL's bus engine sales.

We had a number of one-time and extraordinary events in the fourth quarter of 2017, which net benefited our fourth quarter and annual profit.

We incurred a one-time gain for the completion of engineering design services for the YC6K heavy-duty engine platform for our joint venture, Y&C Engine Company Limited, and a one-time gain on the sale of hotel profit is by our HL Global Enterprises Limited, HLGE, subsidiary.

We also incurred a charge due to the impairment of intangible assets related to the intellectual property for the 4Y20 engine platform and staff severance cost. We will discuss in more detail in the script. Research and development, R&D, expenses increased by 23.3% to RMB231 million, or US$35.4 million, in the fourth quarter of 2017.

We are committed to develop our full portfolio of National VI equivalent to Euro VI diesel and natural gas engines for on-road vehicles and Tier 4 engines for off-road vehicles well before the expected mandated date.

In January 2018, 14 new engines were introduced that complied with the more stringent National VI emission standard, which is expected to be implemented by mid-2020 according to the Ministry of Environmental Protection requirement.

We continue to focus on the advancing our engine technology to increase engine performance and especially to be among the early leaders in China if engines meeting emission standards exceeding the existing emission standards. The high performance, quality and durability of our engine all begin at the R&D stage of development.

Operating profit increased by 96.5% to RMB745.3 million, or US$ 114.1 million, from RMB379.3 million in the same quarter last year primarily due to the net benefit from a one-time extraordinary event.

Total net profit attributable to China Yuchai's shareholders for the fourth quarter of 2017 increased by 80.4% to RMB407.9 million, or US$62.4 million, and basic and diluted earnings per share were RMB9.99, or US$1.53, and RMB9.97, US$1.53, respectively.

Net profit attributable to China Yuchai's shareholders net benefitted from the one-time and extraordinary events in the fourth quarter end of the year. Our balance sheet remains strong. Cash and bank balances were RMB6 billion, or US$922.7 million, compared with RMB4.1 billion at the end of 2016.

In January 2017, aggregate dividends of approximately US$34.7 million in cash and 99,790 newly issued shares based on a shareholders election. Dividends continue to be our preferred method to return value to shareholders and let them to participate in our success.

HLG completed the disposal of its hotel in the fourth quarter of 2017 and China Yuchai reported a net profit attributable to equity holders of the parent of RMB162.6 million, or US$24.9 million. HLG utilized a portion of the proceeds to repay the outstanding loan of SGD68 million extended to it by China Yuchai's wholly-owned subsidiary.

For 2017, our general sales subsidiary won a prestigious award Chinas Export Quality and Safety Demonstration Enterprise Award in 2017. This however by the general administration of quality supervision in inspection and – of People’s Republic of China is the highest credit rating and honor for company that sells their product internationally.

Additionally, YC4A series products and YC6J series products won the Gold Award, Product of the Year, 2017 and the Market Performance Award, 2017 respectively. These awards are an acknowledgement of our commitment, producing the highest quality engine and reflect the markets perception of our value.

2017 was an exceptional growth year, as we experienced robust unit sales growth in on-road heavy-duty and light-duty engines, and in industrial and agricultural engines. We continue to improve on our core markets after a year of strong market growth in China engine markets we still expect some markets that will continue growing into 2018.

Given our strategy of providing a light, medium and light-duty diesel and natural gas and hybrid engines for on-road and multiple off-road markets applications, we are better positioned to serve the needs of the market. With that, I will now like to turn the call over to Dr.

Thomas PHUNG, our Chief Financial Officer, who will provide more details on the financial results..

Thank you Weng Ming, now let me review the fourth quarter results. Our net revenue for the fourth quarter of 2017 increased by 1.2% to RMB3.8 billion, US$578.6 million, compared with RMB3.7 billion in the same quarter last year.

The total number of engines sold by GYMCL in the fourth quarter of 2017 decreased by 3% to 73,610 units compared with 75,849 in the fourth quarter of 2016.

According to data reported by the China Association of Automobile Manufacturers CAAM, in the fourth quarter of 2017, sales of commercial vehicles excluding gasoline-powered and electric-powered vehicles decreased by 0.4%. Truck sales decreased by 1.0% with heavy-duty truck sales increasing by 0.6%.

GYMCL's heavy-duty truck engine sales in the fourth quarter of 2017 increased by 22.5%. Gross profit increased by 6.1% to RMB1.1 billion, US$165.4 million, with compared with RMB1.0 billion in the same quarter last year. Gross margin rose to 28.6% in the fourth quarter of 2017 compared with 27.3% in the same quarter last year.

The gross profit increase was mainly attributable to better product mix. Other operating income was RMB485.8 million, US$74.3 million compared with RMB43.6 million in the same quarter last year.

The increase was mainly due to higher bank interest income, and a one-time gain of RMB115.2 million, US$17.6 million on the completion of engineering design services for the YC6K heavy-duty engine platform for our joint venture, Y&C Engine Company Limited Y&C, and a one-time gain of RMB324.1 million, US$49.6 million on the sale of HL Global Enterprises Limited's, HLGE hotel assets, compared with the same quarter last year.

Excluding these one-time items, the other operating income was RMB46.5 million, US$7.1 million compared with RMB43.6 million in the same quarter last year. Research and development R&D expenses increased by 23.3% to RMB231.0 million US$35.4 million, from RMB187.3 million in the same quarter last year.

As a percentage of net revenue, R&D spending was 6.1% compared with 5.0% in the same quarter last year. R&D expenses reflected increased development and testing costs for new engines to meet higher emission standards and GYMCL's continued initiatives to improve engine quality.

In January 2018, 14 new engines were introduced that complied with the more stringent National VI equivalent to Euro VI emission standard, which is expected to be implemented by mid-2020 according to the China Ministry of Environmental Protection requirement.

Selling, general & administrative SG&A expenses increased by 19.0% to RMB590.0 million US$90.3 million from RMB495.7 million in the same quarter last year. SG&A expenses represented 15.6% of net revenue compared with 13.3% in the same quarter last year.

SG&A expenses in the fourth quarter of 2017 included an impairment charge of RMB40.0 million, US$6.1 million related to the intellectual property for the 4Y20 engine platform, and also included a staff severance cost of RMB31.5 million US$4.8 million in the fourth quarter of 2017, which are extraordinary events.

In the same quarter last year, a staff severance cost of RMB1.8 million was recorded. Excluding these extraordinary events, the SG&A expenses increased by 5.0% to RMB518.5 million, US$79.4 million from RMB493.9 million in the same quarter last year. These expenses represented 13.7% of net revenue, compared with 13.2% in 2016.

Operating profit increased by 96.5% to RMB745.3 million, US$114.1 million from RMB379.3 million in the same quarter last year. The increase included a net gain of RMB367.8 million, US$56.3 million from one-time and extraordinary events. The operating margin was 19.7% compared with 10.2% in the same quarter last year.

Excluding the one-time and extraordinary events, the operating profit decreased by 1.0% to RMB377.4 million, US$57.8 million from RMB381.1 million in the same quarter last year. Finance costs increased to RMB24.5 million, US$3.8 million from RMB11.3 million in the same quarter last year.

Higher finance costs were mainly due to higher bank borrowings and higher trade bills discounting. In the fourth quarter of 2017, total net profit attributable to China Yuchai's shareholders increased by 80.4% to RMB407.9 million, US$62.4 million from RMB226.0 million in the same quarter last year.

Basic and diluted earnings per share were RMB9.99, US$1.53 and RMB9.97, US$1.53 respectively compared with basic and diluted earnings per share of RMB5.55 in the same quarter last year.

In the fourth quarter of 2017, net profit attributable to China Yuchai's shareholders included a net gain of RMB179.8 million, US$27.5 million from one-time and extraordinary events.

Adjusted total net profit attributable to China Yuchai's shareholders in the fourth quarter of 2017, excluding the one-time and extraordinary events, was RMB228.1 million US$34.9 million, compared with RMB227.2 million in the same quarter last year.

Adjusted basic and diluted earnings per share were RMB5.59, US$0.85 and RMB5.58, US$0.85 respectively compared with adjusted basic and diluted earnings per share of RMB5.58 in the same quarter last year.

A reconciliation table reflecting the impact of the one-time and extraordinary events on the fourth quarter of 2017 results is attached at the end of the press release.

Basic earnings per share in the fourth quarter of 2017 was based on a weighted average of 40,832,405 shares, and diluted earnings per share based on a weighted average of 40,889,954 shares compared with 40,712,100 basic and diluted shares in the same quarter last year.

In July 2017, 99,970 new shares were issued to shareholders who elected to receive shares in lieu of a dividend in cash. Now I will review the end year result for 2017. Net revenue was RMB16.2 billion, US$2.5 billion, compared with RMB13.7 billion in 2016.

In total number of engines sold by GYMCL in 2017 was 367,097 units compared with 220,424 units in 2016, representing an increase of 14.6%. According to the CAAM, sales of commercial vehicles excluding gasoline-powered and electric-powered vehicles increased by 16.9% in 2017.

The truck market grew by 19.5% led by a 52.4% increase in heavy-duty truck sales. The bus market remained weak experiencing a 0.7% decline in overall sales with heavy-duty bus sales up 0.1%. Gross profit increased by 18.6% to RMB3.5 billion, US$537.9 million, compared with RMB3.0 billion in 2016. The gross profit margin was 21.7% in 2017 and 2016.

Other operating income was RMB624.6 million, US$95.6 million, compared with RMB95.4 million in 2016.

This increase was mainly due to higher foreign exchange gains and higher bank interest income and a one-time gain of RMB115.2 million, US$17.6 million on the completion of engineering design services for the YC6K heavy-duty engine platform for our joint venture, Y&C, and a one-time gain of RMB324.1 million, US$49.6 million from the sale of HLGE hotel assets in 2017.

Excluding these one-time items, the other operating income was RMB185.3 million US$28.4 million, compared with RMB95.4 million in 2016. R&D expenses increased by 3.4% to RMB608.2 million, US$93.1 million, compared with RMB588.0 million in 2016. As a percentage of net revenue, R&D spending was 3.7%, compared with 4.3% in 2016.

R&D expenses increased mainly due to the ongoing research and development of new and existing engine products as well as continued initiatives to improve engine quality.

The Company remains committed to its R&D programs and continues to introduce new engine models for both the on-road and off-road markets compliant with increasingly stringent emission standards. In January 2018, 14 new engine models were introduced that are compliant with the more stringent National VI, equivalent to Euro VI emission standard.

SG&A expenses increased by 20.7% to RMB1.8 billion, US$277.9 million from RMB1.5 billion in 2016. These expenses represented 11.2% of net revenue, compared with 11.0% in 2016.

SG&A included an impairment charge of RMB40.0 million, US$6.1 million related to the intellectual property for the 4Y20 engine platform, and also included a staff severance cost of RMB107.7 million, US$16.5 million in 2017, which are extraordinary events. In 2016, a staff severance cost of RMB12.9 million was recorded.

Excluding these extraordinary events, the SG&A expenses increased by 11.8% to RMB1.7 billion, US$255.3 million from RMB1.5 billion in 2016. These expenses represented 10.3% of net revenue, compared with 10.9% in 2016. Operating profit increased by 77.4% to RMB1.7 billion, US$262.6 million from RMB967.2 million in 2016.

The increase was mainly due to the net gain of RMB291.6 million, US$44.6 million from one-time and extraordinary events. The operating margin was 10.6% compared with 7.1% in 2016. Excluding the one-time and extraordinary events, the operating profit increased by 45.3% to RMB1.4 billion US$217.9 million from RMB980.0 million in 2016.

Finance costs increased by 26.0% to RMB100.4 million, US$15.4 million from RMB79.7 million in 2016. Higher finance costs mainly resulted from increased bank borrowings and higher trade bills discounting during the year.

The net profit attributable to China Yuchai's shareholders increased by 85.0% to RMB953.9 million, US$146.0 million, or earnings per share of RMB23.40, US$ 3.58, compared with RMB515.7 million, or earnings per share of RMB12.89 in 2016.

Net profit attributable to China Yuchai's shareholders in 2017 included a net gain of RMB130.3 million, US$19.9 million from the one-time and extraordinary events.

Adjusted total net profit attributable to China Yuchai's shareholders in 2017, excluding the one-time and extraordinary events, was RMB823.7 million, US$126.1 million, compared with RMB524.1 million in 2016.

Adjusted basic and diluted earnings per share were RMB20.21, US$3.09, compared with adjusted basic and diluted earnings per share of RMB13.10 in 2016. Basic and diluted earnings per share were based on a weighted average of 40,764,569 shares in 2017. Basic and diluted earnings per share were based on a weighted average of 40,016,808 shares in 2016.

In July 2017, 99,970 new shares were issued to shareholders who elected to receive shares in lieu of a dividend in cash. Next we will be going to review the balance sheet highlights as of December 31, 2017. Cash and bank balances were RMB6.0 billion, US$922.7 million, compared with RMB4.1 billion at the end of 2016.

Trade and bills receivables were RMB7.0 billion, US$1.1 billion, compared with RMB7.1 billion at the end of 2016. Inventories were RMB2.6 billion, US$393.7 million, compared with RMB1.7 billion at the end of 2016. Trade and bills payables were RMB5.2 billion, US$792.3 million, compared with RMB4.7 billion at the end of 2016.

Short-term and long-term borrowings were RMB1.6 billion, US$248.9 million, compared with RMB910.4 million at the end of 2016. We generated positive cash flow to enhance our strong cash position and finance strength.

A dividend of US$0.90 per share for fiscal year 2016, up from US$0.85 per share last year, was paid in July 2017 in cash or new share at the election of our shareholders. We are constantly monitoring our financial options and operating policy to ensure that we generate improved operational and financial performance.

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

Thank you, sir. [Operator Instructions] We have the first question from the line of Manas Tiwari [Value Investment Principals]. Please ask your question..

Hi, congratulations on really good set of numbers and I have three questions. My first question is that the company’s heavy-duty truck engine sales outgrew the market, where the market grew by 0.6%, the company’s sales grew by 22% in the fourth quarter.

Can you provide some color on that? Have you gained some market share?.

Okay, I think that competitors are little bit not accurate then the fact that the 0.6% in the whole market growth, whereas the 22% is our growth for the heavy-duty truck, so its not apples to apples comparison..

Okay.

But my question remains have you gained some market share in the fourth quarter?.

We did gain some market share in the heavy-duty truck market compared to the previous year. I think that you must bear in mind as the whole heavy-duty market has expanded quite considerably in 2017 compared to 2016. I’d say, if you look at in total 2017 the whole heavy-duty market, heavy-duty truck market still was above 1.1 million.

So that’s a lot higher than the previous year. As a whole there’s a lot of pressure includes our capital, we really gained some market share a little bit out there..

Okay, that’s helpful.

And my second question is that the inventory at December end grew 52% year-over-year, can you explain the reason behind the limited inventory levels?.

The increase of inventory is purely due to the Q1, we have long holiday season as the Chinese Spring Festival. So not to – to be able to deliver our commitment to our customer so that’s the reason why we have stuck-up at a year end to fulfill the requirement, the customer requirement in quarter one..

Maybe I will add on to that one, yes, note the Chinese New Year in China, the Chinese New Year is always fall to the month of January or February. And during that period, the whole country is closed. I’d say probably a week people are going back to their hometown and all that.

So in order to not to disrupt the supply, our customers – we still have some inventory..

Okay, and my last question is regarding your gross margins, so they were stable at 21.7% for both 2017 and 2016.

What do you expect in terms of margins going forward for 2018 and 2019?.

It should be flat as the market is very competitive and we are facing pressure from our supplier on the inflation impact. So we’ll maintain a flat growth on the gross profit margin..

Thank you, that’s very helpful..

We have the next question from the line of Ke Chen [Shah Capital]. Please ask your question..

Sure. Thanks. My question is regarding the agricultural engines. We know Yuchai is a number one in the market share in the agricultural engines.

Could you talk about your market share percentage in agricultural segment and also early this year, China number one policy regarding agricultural industry, again focus on agriculture development? So I’m wondering how this policy will further strengths our market share in agricultural engine..

Mr. Chen, this is Kelvin. First of all, I mean the GYMCL and then not the number one top share on the agricultural engine in the market. But we had quite strong in the certain segment, especially in the harvesting machine such as the wheat harvesting machine and other harvesting machine as we are doing quite well in the last couple of years.

And also in the year 2017, our sales had double-digit growth compared to our 2016 sales record. So we marked a quite good year in 2017 and we also a little bit quite optimistic regarding on that particular segment and then we will be still grow in the year 2018 forward.

Regarding on your comment, regarding on the number one priority of agriculture, of the rural investment, it doesn’t hire any particular interest for Yuchai engine sales because the government incentive will be applied to all the machinery across the industrial wise, agricultural machineries.

So we will benefit from them but also our competitor will be benefit from them as well. So we believe that the sales growth and we’ll continue in later of 2018 because of the – at the moment, its quite high inventory in the channel..

Okay. My second question is regarding your marine engines, we know U.S. became probably number one market leader in China in marine engines. So could you talk about your market share right now in marine engines? And please also talk about the gross update in 2018. We also read that you develop the marine engine for the U.S.

market actually or do you reach the U.S. EPA standard. So are you going to enter the U.S. market by yourself or you plan to work with your partners to come to U.S.

market?.

Weng Ming here, Mr. Chen. Firstly, we have not developed any marine engine for the U.S. market for now. We are not targeting the U.S. market for now. Now our focus is still going to be on – probably stay here, which is our backyard, and for the areas we are still have rooms to grow.

Now in terms of whether or not the number one in the marine market actually, we have seen some strong growth in the power generation segment of the market. But the marine market as a whole has not really grew in 2017, it doesn’t go to negative.

But we’ll relatively add up the power generation and marine together, which is probably look at it, there is growth in there and we have gained some market share there.

But the thing is that in terms of marine, I think we are also of high cost power – in case which we used a lot in for these segments, we have started to sell more debt in 2017 and that has improved the mix growth and also the contribution to all system..

Okay, my third question is recently, Hong Kong Stock Exchange is allowing different shares, cost of shares to listing. I’m wondering if the company is considered in potential listing in Hong Kong..

At the moment, we are still very happy with New York Stock Exchange, so we will continue to maintain our listing at where we are right now..

Okay, thanks. I’ll go back to the queue..

Yes, thank you..

We have the next question from the line of Andrei Morosanu [Lazard Asset Management]. Please ask your question..

Yes, good evening, gentlemen.

A couple questions, first can you kind of provide some overview of 2018 and your expectations for the market, obviously 2017 has been very strong from heavy-duty perspective but just kind of looking out in terms of visibility that you have into this coming year in respect to demand and perhaps, if you could talk a little bit about the mix that you see over the course of 2018?.

Okay. Now if you look back in 2017, the major growth is actually in the heavy-duty truck segment. Okay, and of course the industrial machinery as well. Now the heavy truck, if you look at a statistic, last year, I think the whole market sold about 1.1 million engine And that really was normal, that the market how many years that we saw.

So going forward into 2018, we don’t see that the business expect the same level of growth in fact we expect to see some decline in the heavy-duty market. But I think for the whole year Q1 was still probably okay, but going into the rest of the year, I think it was start to decline.

The medium-duty, I think it’s going to be okay, flat plus or minus two percentage point, that’s’ certainly growing and our view is the industrial engine, market that will continue to grow, I’d say, it has grown last year and it will continue to grow. But before 2017, not a decline so now it just starting to go back to pick up some growth here.

The agricultural engine, its what I call is, as mentioned earlier we expect that to continue to improve, simply because the implementation of the speed train which is better is now – it’s not been [indiscernible] impact since the implementation.

So we should expect the [indiscernible] CapEx to support normality there, okay?.

Yes, great. And then you mentioned before that your gross margins should remain fairly stable in 2018. But at the same time you kind of highlighted some of the risks surrounding the heavier competition and the pressure from your suppliers.

Can you maybe perhaps talk about what are the countering factors to that in respect to why margins should remain fairly flat? Is it pricing from your standpoint is – I guess, you just mentioned the heavy duty would be a little – the growth would probably decline in 2018.

So where’s the offsetting factor to those two points of pressure that you’ve highlighted before? Thank you..

Okay. Now we’ve – I mean, this industry is highly competitive, it always been for a number of years now. So, yes, I think in terms of pricing, in terms of margin there’s always pressure, every year there’s pressure.

But we have sort of programs that we put in place since the lean manufacturing where we have been able to pick out five significant amount from a manufacturing process that we are able to have us maintain the gross margin in the last two, three years. We think that we can continue to do that going forward.

And at the same time, I mean, whilst our OEM customers would like us to reduce price, kind of negotiated with us, we will do the same with our appliances as well.

So at the end of the day, net-net, we believe that we’re able – will be able to maintain the gross margin at the current level and probably about the same level as we have in the last couple of years..

Okay, okay. And then my last question, in respect to the other items such as SG&A and R&D, so R&D it was barely – this year it was a little less than the last year as a percentage of sales.

Can you talk about the expectation for R&D spend over 2018 and perhaps 2019? And then on the SG&A front, do you expect a similar level of as a percentage of sales?.

Well, okay, let’s talk about SG&A first. SG&A would be probably flat spending on the sales volume..

Okay..

R&D, you probably have read in our announcement that we have launched 14 new engine platforms, National VI engine platform this year, early this year. So in recent years from now – at the stage we’re now, let’s call, looking with our customers – OEM customers to design into the trucks or buses, and there we test run it.

So for next two years we will curl – probably curl a bit more R&D cost, make sure that the engine is properly functioning, tested before the implement in 4Y20, okay?.

Okay, thank you..

We have the next question from the line of Ke Chen [Shah Capital]. Please ask your question..

Okay. The first question will be about operation cash flow. You mentioned that you have positive operation cash flow.

Could you talk about a rough number? Is that roughly US$100 million?.

Ke Chen, it’s Thomas. It’s in the range about RMB1.5 million R&D – RMB1.5 billion R&D..

Okay, great. Thanks. My second question is regarding the National VI engines like Yuchai first launched 14 different models in National VI which is Euro VI engines in China.

Could you talk about the – elaborate the advantage, particularly I mean how you stand up before all of your competitors? And also about new engines from MTU JV and the engine you just mentioned 4Y20.

Will this National VI engine requirement make the engine business be at less competitive because it require higher standard and makes this business more oligopolistic going forward?.

Mr. Chen, Kelvin again. Early in January and then we're launching 14 models and then we’re costing – our cost of full portfolio of the engine platform for the different market including the on-road and off-road.

So it doesn’t mean we would definitely enter the market by launching these products because we’re not the only one agent supplier launching the National VI or TFO engine product to the markets. Some are competitor and then they keep the same thing and then last year or in the coming months or coming years and then we do the same.

So in this stage and then if to say we are in advantage for us in launching all the full platform of the engine to the market. But it does mean we had commitment and then to the National VI MTU full products for coming demand.

And also we work with our OEM together and then make sure that they have the right product by the time of implementation of the new emission standards.

So regarding on those new products, are they also more conducted or not? It’s difficult to say at this stage because we had to prove the bottom one once it’s available for the market and then have the [indiscernible] into the OEM machinery. So I think that we had to wait and see.

But of course, and then the – from Yuchai point of view and then we are quite confident about our environment.

And also we would like to see those products that we will be using in different OEM in the market in future, okay?.

Okay, thank you. That’s all..

We have the next question from the line of Andrei Morosanu [Lazard Asset Management]. Please ask your question..

Yes, thank you. I have one last question if I may. Can you provide some updates on the JV with MTU? And just kind of your expectations for that business once it starts up? What are you targeting from that JV? Just pretty much I’d say any guidance you could provide on that that would be great. Thank you..

Hi, Andrei, Kelvin again. Regarding our joint venture with MTU, we are now in the final stage of the factory setting ups, and so we actually have the structure building ready and then we’re now installing all the necessary assembling and also building up the testing stand out of the facility for the engine building.

So we target MTU production by in Q2 of this year. And we also had already informed almost of the distributor in the China and then regarding the product launching programs. And we expect and then we will have the right product deliver to the end user by end of Q2 or maybe beginning of the Q3, something like that.

So we have some preliminary order already in hand. So we’re quite optimistic about the products how they learn official launching.

And regarding on the joint venture product we will first we will be available to the domestic market in China first and then maybe pick a year or four years later and then we will go into to our international sales channel and then to the Asia country or other countries as well.

So we are pretty optimistic regarding on this particular JV product because of the value of adopted productions in both China and also international markets..

Currently who are you competing with in China? I mean, are there other similar producers or suppliers of these large engines?.

Yes, definitely. And then our competitor something like, I mean, the Commands, Caterpillars….

Command, okay..

Yes. So they’re our major competitors..

And just I was trying to scare the Internet I guess for pricing on these units or – obviously there is going to be variations in it but kind of looking at some of the used equipment or the size engines that you’re going to be selling there.

And just whether or not if you could confirm these numbers, but is it right that these engines probably sell for as new between RMB300 and RMB4,000 per unit..

Well, it depends on the rating of the engine, I think there’s a border price. And the engine, I mean, the product you sell for us not so many supplier available to that and then so there’s – I mean, it will be a little bit more expensive in terms of what we're doing in new China anyway..

Okay. But I'm in the right ballpark, I guess..

Yes. I have no further comments..

All right. All right, thank you..

Ladies and gentleman, as there are no further questions at this time, I'd like to hand the call back to your speakers..

All right, thank you all for participating in our conference call. We look forward to speaking with you again soon. Bye-bye..

Thank you, sir. Ladies and gentlemen that does conclude our conference for today. Thank you for participating. You may all disconnect..