CHUNYIP WONG
Elevator Pitch
My investment rating for China Yuchai International Limited’s (NYSE:CYD) shares is a Hold.
In my earlier write-up for China Yuchai published on August 12, 2022, I evaluated CYD’s financial results for the first half of this year. The company’s media releases and its peer’s third quarter operating data have drawn investors’ attention, as they provide clues as to how China Yuchai actually performed in Q3 2022.
Note that China Yuchai is a foreign company which only reports its financial results on an semi-annual basis, so there will only be a confirmation of CYD’s actual financial performance when it announces its 2H 2022 and full-year FY 2022 earnings in February 2023.
On the negative side of things, the recent sales for China Yuchai’s peer, Weichai Power Co., Ltd. (OTCPK:WEICF) (OTCPK:WEICY) [2338:HK] weren’t good. On the positive side of things, China Yuchai appears to be gaining traction with its customers with regards to its new products, and it is still winning new orders. As such, I have a Neutral view and Hold rating for China Yuchai’s stock.
Peer’s Operating Data
According to information (paid data that is not publicly available) provided by the China Internal Combustion Engine Industry Association, Weichai Power, one of China Yuchai’s key peers, performed poorly in the recent quarter and the prior month.
Weichai Power sold approximately 136,000 diesel engines in the third quarter of 2022, and this represented a -32% drop on a YoY basis.
The most recently monthly sales data for Weichai Power wasn’t encouraging as well. Diesel engine sales for Weichai Power contracted by -16% YoY to around 46,000 units (rounded up to the nearest thousand) in September 2022 based on the latest monthly statistics available. Specifically, flattish YoY off-road vehicle engine sales at approximately 27,000 units couldn’t offset a -32% YoY fall in commercial vehicle engine sales to roughly 19,000 units in the previous month for Weichai Power.
The recent operating data for Weichai Power is consistent with China Yuchai’s management comments at its 1H 2022 earnings briefing in August 2022. CYD had previously highlighted at its most recent interim results investor call that the company’s engine sales were negatively impacted by “lower commercial vehicle demand due to less logistical activities and fewer infrastructure and construction projects.”
Therefore, it is reasonable to assume that CYD’s revenue contracted in the most recent quarter based on a read-through from its peer’s operating data
China Yuchai’s Press Releases
Two of China Yuchai’s media releases issued in mid-September 2022 suggest that there are still bright spots within the company.
On September 14, 2022, CYD announced that its “3.5-ton electric drive axle” was “successfully integrated for the first time into an EV light-duty bus from Guangxi Shenlong”, which signified “the first successful entry of” its “new energy electric drive axle products into the full electric light-duty EV bus market.”
I noted in my earlier August 12, 2022 update for CYD that “China Yuchai’s Research & Development or R&D costs rose by +29% YoY from RMB316 million in 1H 2021 to RMB409 million in 1H 2022.” China Yuchai’s September 14, 2022 press release implies that the company’s investments are starting to pay off, given that CYD is penetrating into high-growth market segments (like the “light-duty EV bus market”) with its new products.
Separately, China Yuchai disclosed in a press release dated September 15, 2022 that “won an order for 100 heavy-duty truck engines from Jianghuai (JAC) Heavy Duty Truck.” In this press release, CYD also revealed that “JAC’s heavy-duty trucks powered by Yuchai engines have been particularly well received by their customers in northern China.”
I have a favorable view of CYD’s new order win and its positive comments regarding end-customer satisfaction. Even though truck and engines sales in China are on the decline in the short term as highlighted earlier, China Yuchai might possibly be doing relatively better than its peers and gaining market share at the expense of its rivals due to its superior product quality. In the September 15, 2022 media release, China Yuchai specifically mentioned that the company’s engines have a good reputation for boasting characteristics such as “low fuel consumption, low noise, and high reliability.”
Closing Thoughts
I still rate China Yuchai as a Hold.
According to the sell-side’s consensus financial projections taken from S&P Capital IQ, analysts are forecasting that CYD’s revenue will decline by -2% YoY to $1,269 million in the second half of 2022, and I think the market’s consensus top line estimate appears to be reasonably fair.
On one hand, the operating environment for China Yuchai is tough as evidenced by the recent Q3 2022 and September 2022 sales data for its peer. On the other hand, China Yuchai could possibly be in a good position to outperform its peers judging by its recently announced orders and clients’ acceptance of its new products.
In other words, I expect China Yuchai’s 2H 2022 performance to be in line with the market’s expectations after analyzing its peer’s operating data and the company’s recent disclosures. This provides justification for my decision to maintain a Hold rating for CYD.
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