Weng Ming Hoh - President Thomas Phung - Chief Financial Officer Kelvin Lai - Vice President of Operations Kevin Theiss - Investor Relations.

David Raso - Evercore ISI.

Ladies and gentlemen, thank you for standing by. Welcome to the China Yuchai International Limited 2018 Second Quarter Conference Call and Webcast. At this time, all participants are in a listen-only mode. On the call with us today we have Mr. Weng Ming Hoh, China Yuchai International's President; Dr.

Thomas Phung, China Yuchai International's CFO; Kelvin Lai, China Yuchai International's VP of Operations; and Mr. Kevin Theiss, Investor 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 second quarter 2018 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, continue to, predict, intend, aim, will, or similar expressions are intended to identify forward-looking statements. All statements other than statements of historical fact are statements that may be deemed forward-looking statements.

These forward-looking statements including, but not limited to, statements concerning the Company's operations, financial performance and condition are based on current expectations, beliefs and assumptions, which are subject to change at any time.

The Company cautions that these statements by their nature involve risks and uncertainties and actual results may differ materially depending on 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 heading Risks, 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 within the nature contained in the press release made to-date during the conference 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 second quarter and six months ended June 30, 2018. Thereafter, we will conduct a question-and-answer session.

For the purposes of today's call, the financial results for the second quarter and six months ended June 30, 2018 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, Kelvin. For the second quarter of 2018, China's GDP grew at 6.7%, slightly below the 6.8% of the fourth quarter of 2018. However, China factory output growth in June began to a two year low and the prospect of trade war with the United States has created some bit of uncertainty.

According the data reported by the China Association Automobile Manufacturers CAAM in a second quarter 2018, sales of commercial vehicles, excluding gasoline power and electriced vehicles increased by 10.3%. The 12 month unit sales grew by 12.1% so that’s by 15.3% increase in heavy-duty trucks sales.

The bus market decrease by 3.1% with the significant declines in both heavy-duty and medium-duty bus sales. The life of EV bus sales negatively affected by this followed by internal combustion engine.

Our net revenue for the second quarter of 2018 improved by 3.2% to RMB12.2 billion, or US$635.5 dollars million compare to RMB4.1 billion in a second quarter of 2017. The total number of engine sold by GYMCL during the second quarter of 2018 increased by 11.1% to 100,675 unit compared with 90,638 units in the same quarter last year.

Our higher engine unit sales in the second quarter of 2018 were generated by increased truck sales across the board led by high and medium-duty engine sales and increases several off-road markets including Agricultural, industrial engine and [indiscernible] gen-set. Our off-road unit engine sales has been a growing fast for our engine sales.

For the first six months of 2018, our engine sales grew slightly with increasing in medium and heavy-duty truck engine and industrial engine. Net revenue was RMB8.5 billion or US$1.2 billion dollars compared with RMB8.6 billion in the same period last year.

Our gross profit in the second quarter of 2018 increased by 6.2% year-over-year to RMB 769 million or US$116.2 million dollars and gross margin grew to 18.3% compared with 17.8% in the same quarter last year.

Operating profit increased by 12.2% year-over-year to RMB 274.5 million or US$41.5 million dollar due to operating margin higher at 6.5% compared with 6% in the second quarter of 2017. We continue our strong engine sales into international markets in the second quarter of 2018.

GYMCL once a sole engine supplier of heavy duty hinges for 800 busses manufactured by Anhui Ankai Automobile Company Limited and exported to Saudi Arabia. 600 of the busses were also powered by our 10.2 liter YC6 engines and the remaining 2200 buses were equipped with our 8.4 liter engine model YC6L, this is a more compact and lightly designed.

Our engines have achieved a premium market position in Saudi Arabian bus market, performance, high quality and support. During the second quarter of 2018, GYMCL subsidiaries and MTU Yuchai Power completed the construction of its production line in its new facility in Yulin City, China.

That thing was completed and production of the MTU S4000 engine next comment. This inline of high end product is now entering into the higher horse power domestic Chinese market. The S4000 series engines are initially firing the power generation and oil and gas markets in China.

The export S4000 engine and [indiscernible] product portfolio and provide new product from [indiscernible] in this ruling off shore market before domestically produce [indiscernible] engine compliant with CO3 emission standard with a power level of 1400 kilowatts.

MTU Yuchai Power is a 50/50 joint venture formed by MTU for the [indiscernible] sales and MTU is a subsidiary of growth drive power system. In addition, our strong research and development capability enables us to be among the first tier engine manufacturers in China with engines compliant with the next emission standard.

This provides us with the opportunity to capture new orders and win new customers while we gain market share with technological [advantage] (Ph). [indiscernible], we launched 14 new hinges compliant with China more stringent National VI emission standard including 10 diesel engines and four natural gas engines.

We anticipate selling our new model throughout this fall, highly expect [indiscernible] the nationwide implementation date for the new more stringent national six emission standard. Our R&D investment increased 38.4% to RMB156.5 million or US$23.6 million in the second quarter of 2018.

Much of this increase was related to building our National VI and CO4 technology and production technique. R&D increased 16.3% for the first six months of 2018 to RMB276.4 million or US$41.8 million compared to the RMB237.6 million during the same period last year.

We continue to focus on our financial strength with cash and buying balances of RMB6.5 billion, or US$982.4 million at June 30th, 2018 compared with RMB6 billion at the end of 2017. Inventories declined to RMB2 billion or US$305.1 million compared with RMB2.6 billion at the end of 2017.

On [indiscernible] we paid a cash dividend of US$0.73 per ordinary share and the special division of US$1.48. So the ordinary share for the year ended December 31 2017. We continue to grow our unit sales in several markets through our broad portfolio of product.

We are positioning our self for future growth with our investment in R&D to enhance our engine quality and new technologies to meet the challenges of the upcoming National VI and CO4 emission standards.

In addition, we are leveraging our leading market position in China to attract world class partners to add new probabilities [indiscernible] of clients. With that, I would now like to turn the call over to Dr. Thomas Phung, our Chief Financial Officer, who will provide more details on the financial results..

Thank you, Weng Ming. The comparative figure for the second quarter and six months ended June 30, 2017 were restate the due to the adoption of IFRS 15 from January 1, 2008. And revenue from contracts with customer by a full respective application.

The financial impact on the adoption of IFRS 15 is [distracted] (Ph) and attached at the end of the press release. Now let me review the second quarter results for 2018. Our net revenue for the second quarter of 2018 increased by 3.2% to RMB42 billion, US$635.5 million compared with RMB4.1 billion in the second quarter of 2017.

The total number of engines sold by GYMCL during the second quarter of 2018 was 100,675 unit compared with 90,638 in the same quarter last year an increase of 11.1%.

The increase was mainly due to the increase in engine sales to the truck and forklift segment, particularly the agriculture application and was partially offset by the decrease in the [power] (Ph) segment. In addition, Company sales in the power generation and the industry equipment applications increase as compared with the same quarter last year.

According to the data reported by the China Association of Automobile Manufacturers CAAM, excluding sales of gasoline-powered and electric vehicle in the second quarter of 2018, sales of buses decreased by 3.1%, while truck sales increased by 12.1%.

According to CAAM, in the second quarter of 2018, sales of commercial vehicle excluding sales of gasoline-powered and electric vehicle increased by 10.3% compared with the same quarter last year. Gross profit increased by 6.2% to RMB769.0 million US$116.2 million compared with RMB724.0 million in the second quarter of 2017.

Gross profit margin was 18.3% compared with 17.8% in the same quarter last year. The increase was mainly attributable to the changes in the product mix. Other operating income was RMB33.7 million, US$5.1 million compared with RMB48.6 mi in the second quarter of 2017.

The decrease was mainly due to foreign exchange revaluation losses in the second quarter of 2018 compared with a gain in the second quarter last year and partly offset by higher bank interest income in the second quarter of 2018.

Research and development R&D expenses increased by 38.4% to RMB156.5 million, US$73.6 million compared with RMB113.0 million in the second quarter of 2017. The increase was primarily due to higher stock wages, consultancy fee and testing related expenses for new engine.

In the second quarter of 2015 the Company incurred higher R&D expenses to further develop engine product complying with China, National VI Emission Standard for truck and bus segment and here for products offerings. The Company also continued with its initiative to improve engine performance and quality especially in the area of emission control.

As a percentage of revenue, RMB expenses increased to 3.7% compared with 2.8% in the second quarter of 2017. Selling general and administrative SG&A expenses decreased by 10.4 % to RMB371.8 million US$56.2 million from RMB414.8 million in the second quarter of 2017.

The decrease primarily results from a lower warranty and freight charges, reverse of warrant allowance for the doubtful trade receivable and direct taxes in the second quarter of 2018. SG&A expenses represent 6.8% of revenue compared with 10.2% in the same quarter last year.

Operating profit increased by 12.2% to RMB274.5 million US$41.5 million from RMB244.7 million in the second quarter of 2017. The operating margin was 6.5% compared with 6.0% in the second quarter of 2017. Financial cost increased to RMB29.6 million, US$4.5 million from RMB16.5 million in the second quarter of 2017.

Higher finance cost mainly results from higher borrowings and build discounting compared with the second quarter of 2017. Net profit attributable to China shareholder was RMB132.1 million, US$50.0 million compared with RMB133.9 million in the second quarter last year.

Basic and diluted earnings per share were RMB3.23, US$0.49 compared with RMB3.29 in the same quarter last year.

Basic earnings per share in the second quarter of 2018 was based on EBITDA average of 40,858,219 share and diluted earnings per share was based on EBITDA average of 40,872,405 share compared with 40,712,100 shares in the same quarter last year. Now, I will review these first six months result for 2018.

Our net revenue was RMB8.5 billion US$1.3 billion compared with RMB8.6 billion in the same period last year. The total number of engine sold by GYMCL in the first half of 2018 was 210,788 units compare with 210,648 unit in the same period last year.

The increase was mainly due to increased engine sales in the trucks and off-road segment particularly in industrial engine and partly offset by the decrease in the bus segment and agricultural application. Gross profit was RMB1.6 billion, US$245.2 million same as the same period last year.

Gross profit increased to 19.0% as compared with 18.3% a year ago. This increase was mainly attributable to the changes in product mix. Other operating income was RMB84.2 million US$ 12.7 million compared with RMB88.2 million in the same period last year.

R&D expenses were RMB276.4 million, US$41.8 million compared with RMB237.6 million in the same period in 2017. The Company continue with it initiative to develop new engine complying with China mix emission standards National VI and CO4 as well as to improve energy performance and quality for the current portfolio of engines.

As a percentage of revenue R&D spending was 3.2% in the first six months of 2018 of every 2.8% in the same period last year. SG&A expenses decreased to RMB731.7 million, US$110.6 million from RMB765.7 million in the same period last year.

The decrease was mainly due to lower warrantee expenses and freight charges and a reversal of allowance product through trade receivables compared with the same period last year. SG&A expenses represent 8.6% of net revenue for 2018 period and 8.8% in the same period last year.

Operating profit increased to RMB698.7 million US$105.6 million from RMB674.9 million in the same period in 2017. The increase was mainly due to higher gross profit and lower SG&A expensive partly offset by higher R&D expenses. The operating margin was 8.2% compared with 7.8% in the same period last year.

Financial cost increased to R&D RMB52.1 million US$7.9 million from RMB43.3 million in same period last year, an increase of approximately RMB8.8 million. Higher finance costs mainly result from an increase in borrowing.

Net profit attributable to China [indiscernible] shareholder was RMB375.0 million US$56.7 million compared with RMB382.4 million in the same period last year.

Basic and diluted earnings per share were RMB9.18, US$1.39 and RMB9.17, US$1.3 million respectively compared with basic and diluted earnings per share of RMB9.39 million in the same period of last year.

Basic earnings per share in the six months of 2018 was based on a weaker average of 40,858,290 shares and diluted earnings per share was based with a average of 40,888,876 share s compared with 40,712,100 share in the same period last year. Next we will review the balance sheet highlight as of June 30, 2018.

Cash and bank balance was RMB6.5 billion, US$982.4 million compared with RMB6.0 billion at the end of 2017. [indiscernible] were RMB8.3 billion, US$1.3 billion compared with RMB7.0 billion at the end of 2017. Inventory were RMB2.0 billion, US$30 5.1 million compared with RMB2.6 billion at the end of 2017.

Share and bill pay over were RMB5.3 billion, US$806.2 billion compared with RMB5.2 billion at the end of 2017. Short-term and long-term borrowing were RMB1.8 billion, US$235.0 million compared with RMB1.6 billion at the end of 2017. With that operator, we are ready to begin the Q&A session..

Thank you sir. Ladies and gentlemen we will now begin the question-and-answer session. [Operator Instructions]. We have the first question from the line of David Raso. Please ask your question..

Thank you for the time. I was just curious, how you are seeing the development of the tariff situation, and how it's impacting your order book? The truck market obviously the weakness we are starting to see there, we have been waiting for that now for like six to seven months. So that was sort of due to the harder comparisons.

But I think curious if you could parcel out how much of the incremental weakness of rate on truck do you think actually is related to some concerns about a broader slow down and tariffs? And maybe also take that conversation over to the off-highway markets which is especially in agriculture still seen strong for you but be curious to hear your perspective on the tariff impact on off-highway markets as well?.

Okay. Hi David this is Weng Ming here. The tariff would not affect us directly, simply because we did not sell to America, we just sell our engines to America. It's mainly for domestic consumption and with about 50% this quarter to regions in Southeast Asia, Middle East and Latin America and [African nation] (Ph).

So we do have a direct impact probably, but and also result of most our raw materials components locally as well. Now however, if the economy of the China is expected than there will definitely the indirect impact on our business. You know as I said now, while we are still expect the heavy-duty truck markets to slowdown.

We haven't seen up to now at this point and time a nice little impact with our business yet. So certainly it’s very difficult to quantify the uncertainty that announced rounding the economy..

On-highway market, so the on-highway market before we discuss off-highway, again I know the expectations to start the year was on-highway was going to be down.

But have you seen in the last three months, maybe ask more directly, your forecast for on-highway truck three months ago versus today for the full-year how has that changed?.

At the beginning of year, we expected the heavy-duty truck markets too slow for this year. But I mean it still continue to grow. So we expect - the last year I think the whole market was up about 1.1 million unit of vehicles. This year for the first six months of the business growth there. So expect that the second half to start to slowdown.

But overall for the full-year it will probably be above the same level as last year, that is our assumption. And for the off-highly market which I mentioned earlier, we saw really very sales in India, not only in the industrial engines, but also in [indiscernible] application as well as marine and power generation segment as well.

So our off-market segments that we grew quite strongly in the second quarter..

So the off-highway markets are not showing any sentiment concern about the Chinese economy in the order books [indiscernible] healthy profile there?.

Yes, you are right..

And my last question, the commitment the government has to National VI, has there been any wavering in that at all, are we still which appears to be committed to an urban roll out in summer of 20 and at the country side roll out in summer of 21, is that still the base case?.

Yes..

And if so, how do we think about the cost increases trying to think through a potential partial or full kind of pre-buy?.

Okay. Now I think the government is pretty committed and in fact we will be sure at the right - not too long ago. With just the gas engine for us July, 2019 followed by the heavy truck in the rest of it. So obviously I think the cost for this National VI engine is sort of higher than National V or IV that we had. So yes we had sort of [indiscernible].

Okay..

Thank you very much..

[Operator Instructions]. We have now reached the end of our Q&A Session. I will now turn the call back over to Mr. Hoh..

Thank you all for participating in our conference call. We look forward to speaking with you again. Good bye for now..

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