CYD - China Yuchai: Eyes On Potential Buybacks And Key Metrics

2023-08-18 12:28:25 ET

Summary

• Potential buybacks by China Yuchai International Limited are likely to be accretive considering the company's current valuations, and they could act as a potential catalyst for the stock.
• The sell-side's consensus forecasts and recent industry numbers suggest that China Yuchai's 2H 2023 financial performance is likely to be strong.
• I retain my Buy rating for China Yuchai International Limited, following an analysis of key industry and corporate metrics and the potential for share repurchases.

Elevator Pitch

I have a Buy rating for China Yuchai International Limited (CYD) stock. With my earlier June 8, 2023, update , I reviewed the Q1 2023 financial performance of China Yuchai's peer, and the heavy-duty truck sales numbers in China for May 2023.

My current article is focused on analyzing the potential for China Yuchai to do share buybacks, and the company's key industry and corporate metrics. Share repurchases might be a potential re-rating catalyst for CYD, while key metrics for China Yuchai suggest that the company's 2H 2023 results are likely to be reasonably decent. In that respect, I don't see any reasons to change my existing Buy rating for China Yuchai.

CYD's Potential Share Repurchases

In early August, China Yuchai revealed that "all the resolutions as set out in its Notice of Annual General Meeting (or AGM) dated July 6, 2023, were duly passed."

One particular amendment to CYD's Bye-laws relating to share repurchases, as highlighted below, is worthy paying attention to.

China Yuchai's Amendment To Its Bye-laws Which Has Been Approved At Recent AGM

At the company's 1H 2023 earnings briefing on August 10 this year, CYD commented on this specific amendment to its Bye-laws by noting that it has to "comply with US equity law for this (potential) buyback," and mentioned that "if there is any (share repurchase) plan we will make announcement to that effect."

In my view, China Yuchai's decision to obtain shareholders' approval for the change to the company's Bye-laws associated with share buybacks increases the probability of CYD executing on share repurchases in the near future.

CYD's shares have gone up by around +30%, since I upgraded my investment rating for the stock from a Hold to a Buy on January 10, 2023. But China Yuchai's valuations are still inexpensive. As per S&P Capital IQ's valuation data, the market is now valuing CYD at consensus forward next twelve months' Enterprise Value-to-Revenue, EV/EBITDA, and EV/EBIT valuation metrics of 0.19 times, 2.7 times and 5.0 times, respectively.

More importantly, China Yuchai is cash rich, and share repurchases will be one of the key options for the allocation of excess capital. As of end-June 2023, CYD had cash amounting to RMB 5.6 billion or $777 million on its books, which is equivalent to 173% of its current market capitalization.

Therefore, it won't be surprising if China Yuchai is considering a new share buyback plan in the short term to take advantage of the stock's depressed valuations leveraging on its strong financial position.

Key Metrics For China Yuchai

There are key industry and corporate metrics implying that China Yuchai's financial performance for the second half of 2023 will be reasonably good.

China's sales of heavy-duty trucks grew by +44% YoY to approximately 65,000 units in July 2023 as per Chinese automotive research website CV World's July 23, 2023, report . For the first seven months of this year, heavy-duty truck sales in China rose by +30% YoY to roughly 553,000 units.

Looking ahead, strong overseas (outside of China) demand is most likely going to be the main growth driver for the Chinese heavy-duty truck industry in the remaining months of 2023. Last month, Chinese heavy-duty truck exports expanded by +55% YoY to 24,000 units and accounted for around 38% of the total heavy-duty truck sales for China.

The near-term sales outlook for China Yuchai's heavy-duty engines is favorable, taking into account the recent industry metrics pertaining to heavy-duty trucks.

Separately, China Yuchai's recent interim results were pretty good, and the analysts expect CYD to perform well in the second half of the year.

CYD's revenue and pre-tax earnings for 1H 2023 came in +4% and +23% above the sell-side analysts' consensus financial estimates, respectively according to data taken from S&P Capital IQ .

The market sees China Yuchai's top line and EBIT increasing by +13.5% YoY and +8.6% YoY to $1,226 million and $36 million, respectively in 1H 2023.

China Yuchai's revenue is expected to be higher on a YoY basis for the second half of the current year, taking into consideration the robust heavy-duty truck sales expansion for the Chinese market in July as mentioned above.

With respect to profitability, CYD revealed at its 1H 2023 results call that it continued to "restructure our operations", "focus on greater sales of (higher-margin) larger engines" and "ongoing cost reduction efforts." I believe that China Yuchai's profitability improvement initiatives in these areas will have a positive effect on the company's profit margins in 2H 2023 and beyond.

Closing Thoughts

China Yuchai International Limited's low single-digit EV/EBITDA and mid-digit EV/EBIT valuations multiples provide support for the view that the company's shares are still very cheap. I expect China Yuchai to deliver a good set of results for 2H 2023, while potential share buybacks could help to push up CYD's stock price. This explains why I think that CYD still warrants a Buy rating.

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