I would like now to turn the conference over to Kevin Theiss. Please go ahead, sir..

Thank you for joining us today and welcome to China Yuchai International Limited’s Second Quarter 2020 Conference Call and Webcast. Joining us today are Mr. Weng Ming Hoh; and Dr. Thomas Phung, President and Chief Financial Officer of CYI, respectively. In addition, we also have in attendance Mr. Kelvin Lai, VP of Operations of CYI.

Before we begin, I will remind all listeners that throughout this call, we may make statements that may contain 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 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 and financial performance and conditions, 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 forums 20-F under the headings, the risk factors, results of operations and business overview, and another reports filed with the Securities and Exchange Commission from time to time.

If the COVID-19 pandemic is not effectively controlled, our business operations and financial conditions may be materially and adversely affected due to a deteriorating market for automotive sales and economic slowdown in China and abroad, potential weakening of the financial condition of our customers, potential adverse impacts to our suppliers and supply chains are other factors that we cannot foresee.

Our 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 at information whether the matrix contains in the release have made during today's call or otherwise in the future. Mr.

Hoh will provide a brief overview of summary and then Dr. Phung will review the financial results for the second quarter ended June 30, 2020. Thereafter, we will conduct a question and answer session.

For the purposes of today's call, the financial results for the second quarter ended June 30 2020 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. In the second quarter, Chinese economy resumed grow as GDP increased by 3.2% far below historical trends, but a strong rebound from the 6.8% economy contraction of the first quarter 2020. This was severely impacted by the COVID-19 pandemic.

The aftermath of the COVID-19 pandemic created major interruptions in the Chinese economy and automotive industries at it affected customers, suppliers, worker, distributor, service networks and other auto related occupations. The national and interprovincial travel restrictions negatively impacted many supply chain in the automotive industry.

Following the reopening of the Chinese economy, the government and economic growth catalyst, including higher fiscal spending, more approved infrastructure projects, and lowering lending rates and bank reserve requirements.

Manufacturing activity increased since May and China's export grew partially because China was among the first to ease lockdown action.

According to data reported by the China Association of Automobile Manufacturers, CAAM, in the second quarter of 2020, sales of commercial vehicles, excluding gasoline-powered and electric-powered vehicles, increased by 50.5%, truck sales increased by 56.1% with heavy-duty trucks sales up by 64.9%, medium-duty truck sales rose by 32.5% and bus sales increased by 1.8%.

Part of this growth was attributable to the pent up demand from the first quarter of 2020 as much of the economy was essentially shut down, with lockdowns and travel restrictions implemented to inhibit the spread of the COVID-19 infections.

Our operational and financial results during the second quarter reflected the rebound from the disruptions in the first quarter of 2020 due to the COVID-19 outbreak.

Our total unit sales improved by 32% year-over-year, our overall truck engines and bus engine units sales grew by 23.3% in the second quarter of 2020 with heavy-duty trucks reduced sales rising by 14.3% and medium-duty cost is up by 33.3% year-over-year.

Our gross engine sales increased an impressive 51.7%, led by a 78.5% growth in this seasonal agriculture machinery market. As a result, our revenue increased by 34.7% to RMB6.5 billion or $935.2 million.

The growing sales of our National VI engines in Chinese heavy-duty truck engine market, is directly related to the growing acceptance of a natural gas engine product. We have already established a position as one of the leading suppliers of heavy-duty National VI engines to the truck and bus market in China.

Operating profit increased by 53.6% to RMB448.7 million or $63.4 million and basic and diluted earnings per share rose by 66.4% to RMB5.99 or $0.85.

In the second quarter of 2020, the total R&D expenditure including capitalized costs was RMB218.3 million or $39.6 million and for the six months ended June 30, 2020 total R&D was RMB402.7 or $56.9 million. R&D represent a 4.3% of net revenue in the second quarter of 2020 and 4% of net revenue from for the six months ended June 30, 2020.

We continue to improve our National VI and Tier-4 technologies and production technique, as we are progressing on our products for the new energy markets.

We see continuing national implementation of these more stringent National IV emission standards, our portfolio of National VI compliance engines including products powered by natural gas positions us well with our existing customers and attract new ones as well.

In 2019, we have established strategic partnership with Guangxi Automobile Holding Company -- Holding Group, a leading producer of heavy-duty trucks in China and the Foton Motor Group, a market leader in the on-road vehicle segment.

We also entered into a new strategic partnership in the second quarter of 2020 to become a strategic OEM supplier to Sany truck part of the Sany Group Company Limited, which is China's leading machinery equipment maker and has a worldwide presence. This new partnership will further improve our market position in the future.

We have used newly developed and use technologies to build or modify engines for specific market. During the 2020 first quarter, an advanced high power marine engine was introduced to penetrate the growing demand for vessels in the yacht class. This segment has historically been dominated by imported engine models.

Innovative technologies have increased the engine power and reduced the dry engine, dry weight of the YC6MJ marine engine to make it competitive for the engine.

During the first half of 2020, GYMCL announced that that its YCA05175-S500 engine has European Stage V emission standards and this Yuchai engine can now be marketed in the European Union for off-road application.

We retained our financial strength despite the disruptions in sales and operations for the first half of 2020 with cash and bank balances of RMB6.6 billion or $931.5 million at June 30, 2020, and we paid the cash dividend of $0.85 per share on July 31, 2020. Similar to the rest of the world, China economy still faces significant uncertainty.

However, as China successfully reopened its economy and automobile industry already experienced the products rebound beginning in April, we remain cautiously confident that Chinese economy is on the recovery path for the remainder of 2020. With that, I turn to Thomas to go over the financials..

Thank you, Weng Ming. Now let me review our second quarter results for 2020. Revenue for the second quarter of 2020 has increased by 34.7% to RMB6.5 billion, $925.2 million compared with RMB4.9 billion in the second quarter of 2019.

The total number of engine sold by GYMCL during the second quarter of 2020 was 145,278 units, an increase of 32.0% compared with 110,059 units in the second quarter of 2019.

The increase was mainly due to higher engine sales to the market and off-road segment, practically unit sales to both the heavy-and medium-duty trucks market, which more than offset an overall sales decline in the bus engine segment.

According to data reported by the China Association of Automobiles, CAAM, excluding sales of gasoline-powered and electric-powered vehicle, in the second quarter of 2020 sales of buses increased slightly by 1.8% while truck sales rose by 56.1%.

According to CAAM in the second quarter of 2020 commercial vehicle, excluding sales of gasoline-powered and electric-powered vehicles increased by 50.5% compared to the second quarter of 2019 while GYMCL sales to the on-road commercial vehicle market increased by 23.3% GYMCL's unit sales to the off-road market increased by 51.7% compared with the second quarter of 2019.

Gross profit increased by 33.0% to RMB948.1 million, $133.9 million compared with RMB712.9 million, in the second quarter of 2019. Gross margin was 14.5% compared with 14.7% in the second quarter of 2019. Other operating income was RMB61.8 million, $8.7 million, compared with RMB98.8 million in the second quarter of 2019.

The decrease was mainly due to lower government grants in the second quarter of 2020. Research and development, R&D, expenses increased by 24.0% to RMB137.0 million, $19.4 million compared with RMB110.5 million in the second quarter of 2019.

Higher R&D expenses in the second quarter of 2020 were mainly due to higher development costs for National VI and Tier 4 engines on testing and experimental costs. In the second quarter of 2020, the R&D capitalization amount was RMB143.3 million, $20.2 million.

The Company continues to further develop its new National VI and Tier 4 engines for the on- and off-road markets, respectively. In the second quarter of 2020, the total R&D expenditure including capitalized costs was RMB280.3 million, $39.6 million, and it represented 4.3% of net revenue compared with 3.6% in the second quarter of 2019.

Selling general administrative, SG&A, expenses increased by 3.7% to RMB424.1 million $59.9 million from RMB408.9 million in the second quarter of 2019. The increase primary result from higher warranty expenses and our freight expenses in the second quarter of 2020.

SG&A expenses represent 6.5% of revenue compared with 8.4% in the second quarter of 2019. Operating profit increased by 53.6% to RMB448.7 million $63.4 million from RMB292.2 million in the second quarter of 2019. The operating margin was 6.9% compared with 6% in the second quarter of 2019.

Finance costs decreased by 17.4% for RMB26.7 million $3.8 million from RMB32.4 million in the second quarter of 2019. Lower finance cost was mainly result from reduced deal discounting amount compared with the second quarter of 2019.

Net profit attributed to China Yuchai shareholder increased 66.4% to RMB244.7 million $34.6 million compared with RMB147 million in the second quarter of 2019. Basic and diluted earnings per share rose 66.4% to RMB5.99, $0.85 compared with RMB3.60 in the second quarter of 2019.

Basic and diluted earnings per share in the second quarter of 2018 and 2019, were based on an average of 14,858,219 share. Now, I will go over the first six months result of 2020. Revenue was RMB10 billion $1.4 billion compared with RMB9 billion in this same period last year.

Total number of engines sold by GYMCL in the first half of 2020 was 213,182 units compared with 211,359 units in the same period last year. The increase was mainly due to higher engine sales in the heavy-duty truck and off-road segments, particularly agricultural engines, which more than offset the sales decline in the bus segment.

Gross profit was RMB1.5 billion $208.8 million, compared with RMB1.5 billion in the same period last year. Gross margin decreased to 14.8% as compared with 16.3% a year ago. The decline in gross margin was mainly attributable to product mix.

Other operating income declined by 26.0% to RMB105.7 million $14.9 million compared with RMB142.8 million in the same period last year. The decrease was mainly due to lower government grants compared with the same period last year.

R&D expenses increased by 16.8% to RMB213.0 million, $30.1 million compared with RMB182.4 million in the same period last year. Higher R&D in the first half of 2020 was mainly due to higher development costs for National VI and Tier-4 engine from testing and experimental costs.

In the first half of 2020, the R&D capitalization amount was RMB189.7 million or $26.8 million. The Company continued with its initiative to development new engine compliant with China's next emission standards, National VI and Tier-4, and to improve engine performance and quality.

In the first half of 2020, the total R&D expenditure including capitalized costs was RMB402.7 million, $56.9 million, representing 4% of the revenue compared with 3.3% in the same period last year. SG&A expenses decreased by 3.5% to RMB757.4 million $107.0 million from RMB785.1 million in the same period last year.

The decrease was mainly due to lower warranty expenses and reduced outward freight costs, particularly in the first quarter of 2020 compared with the same period last year. SG&A expenses represented 7.6% of revenue for the first half of 2020 compared with 8.7% in the same period last year.

Operating profit decreased by 5.6% to RMB613.2 million, $86.6 million, from RMB649.4 million in the same period last year. The operating margin was 6.2% compared with 7.2% in the same period last year.

Finance cost increased to RMB63.2 million, $8.9 million from RMB57.6 million in the same period last year, the increase of approximately RMB5.5 million. Higher finance costs mainly result from an increase in borrowing compared with the same period last year.

Net profit attributed to China Yuchai high shareholder was RMB305.7 million, $43.2 million, compared with RMB345.0 million in the same period last year. Basic and diluted earnings per share were RMB7.48, $1.06, compared with RMB8.44 in the same period last year.

Basic and dilute earnings per share for the first six months of 2020 and 2019 were based on with average of 40,858,290 shares. Now, let me walk you through our balance sheet highlight as of June 30th. Cash and bank balance were RMB6.6 billion, $931.5 million compared with RMB6.4 billion at the end of 2019.

Trade and bills receivable were RMB9.2 billion, $1.3 million, compared with RMB7.8 billion at the end of 2019. Inventories were RMB4.0 billion, $565.0 million, compared with RMB2.8 billion at the end of 2019. Trade and bill payable were RMB7.9 billion, $1.1 billion, compared with RMB6.2 billion at the end of 2019.

Long-term and short-term bank borrowing were RMB2.7 billion, $377.4 million compared with RMB2.1 billion at the end of 2019. Now, I'll turn the call over to Kevin for the comments before we begin our Q&A..

Thank you, Thomas. Please note that due to the COVID-19, the officers of the China Yuchai are remotely calling into the conference. 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're ready for the Q&A session..

[Operator Instructions] Your next question comes from the line of Don Espey from Shah Capital. Doe, the line is now open..

Good morning. Nice quarter. A few questions here.

Please provide more color on GYMCL's EV powertrain, both current sales and future prospects and fuel cell development program?.

Okay, we launched the NAV we call the product last year. The products are still in development stage, except for the rate extender. So the rate extender, we have sold very few, about 17 sets. The amount in term dollar value is quite-- it's not material. So as far as the fuel cell is concerned, yes, it's still in development stage.

We have got that out one prototype, which for 35 kilowatts fuel cell and then we're looking at one of OEM partners to have that installed in their vehicle..

GYMCL was number three in market share in National VI HD truck engine market in the first half of 2020.

How long before you see this metric improvement to number two?.

That's a good question. We'll do our best. As you know, this industry in China is a highly competitive industry, right, and there are many players in there. So I think you have to wait and see. I'm sorry -- I can't give you a definite answer or even any indications of that..

Okay. Switching gears, does the current U.S.

administration's accounting and audit proposal affect CYD assuming the Company does not move its main listing to China or Hong Kong?.

Well, we're monitoring the development in the U.S. very closely. So, we will update our investors as to when there's further development. And as in when we have recall further thoughts on it, which where we believe that if it's appropriate to share with our shareholders, we will do so that. As it is, all we can do is to wait, how the U.S.

situation right now and monitor the U.S. closely..

Okay. As a long-term shareholder, we're curious why Yuchai and Cummins have so massively outperformed CYD over the last 1, 3, 5 and 10 years.

Would like to hear your view on this dynamic and maybe how you plan on changing this?.

Well, I mean, Yuchai has its own right. I mean, it's enough help. Cummins is a huge -- it's multinational with a global presence. Yuchai, they are very strong in certain segments and they also have their OEM plants as well. We operate a bit differently from both of them.

In our case, we have a very broad range of products that we sell and our sales are mostly from the domestic market in China. Although, we will, of course, explore export market, which we have done a bit in the last couple of years. This year, we are affected by the COVID-19 pandemic. So, going forward, I think our strategy will still be the same.

We will of course move on to explore more export markets, which is a big market out there and have a better product than we currently develop in with our National VI and in fact right now, our net service -- asset sales service network is still huge advantage to us right now still. And so, we're seeing our end users right now in China.

So, we will do what we can to maintain or to compete with our customers in both domestic market as well as the international market..

[Operator instructions] And your next question comes from the line of William Gregozeski from Greenridge. William, your line is now open..

Just kind of going off down the last thing about the export, are you guys seeing I mean much demand, COVID or non-COVID environment on the export side? And is there any, are you guys having any issues with your supply chain?.

Okay, now, we have no issue with our supply chain, but I think the core market has been affected COVID-19, as I mentioned earlier. So, we actually saw a decline -- a drop in our export sales for this year so far..

Okay, can you quantify about what percentage of your sales are exports?.

Now, it dropped to perhaps about less than 10% -- about 10% or less than 10%..

And where do you think that was about a year -- same period last year?.

Last year, it was about 12% to 14%..

Okay. On the margin side, it looks like gross margins were down quite a bit.

How do you see that trending for the remainder of the year?.

Okay. I think this one, if you look at the second quarter, it's basically similar to last year same quarter. So, it's actually due to product mix.

And also, I think with the National VI that we're starting to sell initially, the National VI engines that we're starting to sell, as the -- if and when the unit of National VI sales goes -- go up, we will see an improvement in the gross margins when you get the -- what we call economy of scale.

And also, we are now working hard to bring out the cost of the new product to a level where we have now for those produce -- products that have already matured. So, we hope to see that in the next half of this year and hopefully next year some improvements..

Okay, so do you think you know getting to around 18% next year is still feasible?.

Yes, we are looking to work on that. I don't think we will be too far away..

Okay. And the last question was obviously, sales have been very strong since the kind of the restart in China.

How are you seeing that trending the rest of the year?.

I believe for the rest of year, it will be better for us compared to similar to last year. We are actually seeing quite good numbers coming in for the month of July for ourselves, okay.

So, we think the second half, auto will be slower than last first half, which is normal in our business, is essentially lower, but we believe we will be better than the previous year second half..

[Operator instructions].

Okay. There's a question here from the webcast. Can you please give us more color on the Sany strategic partnership? Any guidance on the number of incremental units this will bring? The strong second Q 2020 results benefited from the Sany partnership? Now, the Sany partnership is a very new partnership.

No sales that -- we have not had any sales from them and not much sales from them yet. So I'm sorry, I can't give any guidance. But going forward, we expect it to improve maybe in the near year or so..

And your next question comes from the line of David Raso from Evercore. David, your line is now open..

Hello. I'm sorry. It's hard to hear you.

Can you hear me?.

Yes, perfectly.

David, how are you?.

Oh, wonderful. And I apologize. I was on another call. So I might be asking a question that was already asked. Can you give us a little bit of a timeline of the NS VI rollout and some sense of the price points of the NS VI product versus the existing product? Thank you..

The rollout, I think, the gas engine for National VI was implemented in the middle of last year. In the middle of this year, the government vehicles have to be National VI and will fully implement by middle of next year, okay.

So, in terms of price point, we are having a higher unit selling price for Notional VI, somewhere in the region of maybe over 10% so far. You'll see. So, it's still -- a lot of it is still under negotiations with our customers right now..

Thank you. In the past, as you know, some of the deadlines sort of get moved around especially in some of the non-major cities. But at this stage, you're not seeing any change in the application of the deadlines.

Is what I'm hearing?.

Yes, not for National VI, not that we’re aware of any..

And when, do you think the majority of the trucks will have NS VI for your sales? Do we need to get to end of 21, middle of 21?.

I think by the middle of 21, you should be -- the new sales truck should be mostly National VI especially for heavy-and medium-duty trucks..

And given the 10% higher price point, would you argue even at the initial ramp up the transition that the margins are higher for those engines for you than the existing? Or does it take a little while the typical higher warranty expense on a new engine? Does the margin help not show up until say, 2022? Just for a sense of mixed modeling..

Okay. You're right. Right now, we are not seeing -- we are not having -- the margin is not as we had hoped for and it's not as good at the National V margin. We're seeing a lot of work that needs to be done to improve one of our costs base. So going for the rest of this year, second half of this year, we'll start to see improvement.

And then I would say until 2021, maybe with 2022 to reach the level of the marginal view hope to achieve..

Thank you so much. [Operator Instructions] And we have a follow-up question comes from the line as David Raso from Evercore. David, you may ask question..

Thank you for the time for the follow up. And again, I apologize if this was asked earlier. Given the strength you're seeing on highway and obviously even off highway. What are your thoughts about next year? I know it's early, but obviously the strength this year has been fairly dramatic.

So, folks do get a bit nervous about the tough comparison '21 versus '20. Anything you're seeing in your order books offer on highway to least set some baseline for how we should think about '21 on an off highway? Thank you..

Yes, we don't have much visibility our order book for 2021. But for this year, I think there are few factors that we should talk about. One is that because of the COVID-19, especially in the first quarter where China had a kind of bad quarter, there was a pent up demand to the space for these -- for the business, right.

So that's why the second quarter turned out to be very strong for us. And in addition to that, due to stimulate the economy, the government came up with a few measures, which also helped in our case. So, some of these measures continue into the next quarter and hopefully for the rest of the year as well.

So, this year, we believe it will be better than last year overall. But going to the next year, if we had a good year this year then it's going to be very difficult to expect the same kind of growth or even the same kind of performance sequentially to next year.

Sorry, David, I can't give you a lot more specific answer, but it's really very hard to actually have visibility right now. I don't have too much visibility right now..

No, I appreciate that. I mean, I'm just trying to figure, if I'm modeling it down 10 to 15 off of a tough comp.

Is that just some sense of like that no one's expecting the same kind of growth, obviously, I think most people are figuring it's got to be flat sit down, unless new levels of stimulus specific, but people just get nervous when they see how high it is.

Could it drop 30%, now just wanted to give you a chance to level set people a little bit on how to think about it, but it just feels like your order book doesn't have enough visibility or there's enough conversations with customers to really know if this stays again..

Yes, right now, this year. And then next year, it's really the issue of the NS VI implementation nationwide as well. So that's the other factor that comes into play..

Thank you so much. [Operator Instructions] We have now reached the end of our Q&A session and I will turn the call back over to Mr. Hoh..

Thank you very much for joining us in our conference call. We wish you a good health and please be safe during this crisis. We look forward to speaking with you again. Good bye..

That does conclude the conference for today. Thank you for participating. You may all now disconnect. Speakers please stand by..