CYD - China Yuchai: Industry Data And Peer's Results Offer Positive Read-Throughs

2023-06-08 10:07:40 ET

Summary

• Recent heavy-duty truck sales in China and its listed peer's Q1 2023 results indicate that China Yuchai's financial performance for the current year should be reasonably decent.
• China Yuchai's current valuations remain attractive, even though the stock has done very well in the last two months or more.
• I reiterate my Buy rating for China Yuchai, after reviewing industry and peer metrics and assessing its current valuations.

Elevator Pitch

My Buy rating for China Yuchai International Limited's ( CYD ) shares stays unchanged.

I previously wrote about CYD's financial prospects and valuation metrics in my prior article for the company published on March 27, 2023.

Following an analysis of recent industry and peer data, I come to the conclusion that China Yuchai's near-term business outlook remains favorable. With the company's current shares being valued by the market at a consensus forward ex-net cash P/E multiple of below 1 times, it is reasonable to refer to CYD's stock as undervalued. In that respect, I choose to remain bullish on China Yuchai and retain my Buy rating for the company's shares.

May 2023 Industry Data

Based on data disclosed in China auto sector research portal CV World's May 31, 2023 article (translated using Google Translate), heavy duty truck sales in the Mainland Chinese market jumped by +42% YoY from roughly 49,000 units for May 2022 to approximately 70,000 units last month.

It is worthy of note that May 2023 was the fourth straight quarter running that China's heavy duty truck sales had witnessed positive YoY expansion. Also, heavy duty truck sales for Mainland China had gone up by +21% YoY to around 395,000 units in 2023 year-to-date. It is quite apparent that China's heavy duty truck industry had recovered strongly from the downturn last year driven by the country's zero-COVID policy to tackle the pandemic.

A bright spot for China's heavy duty industry in May 2023 was export sales. The number of heavy duty trucks exported to foreign markets outside Mainland China grew by more than +50% YoY to roughly 20,000 units in the prior month. It is reasonable to assume that made-in-China heavy duty trucks are grabbing market share away from similar offerings from other foreign brands. Given the relatively lower production costs in China, Chinese heavy duty truck manufacturers are able to price their products at a more attractive level as compared to their international competitors' products.

Listed Peer's Q1 2023 Sales Performance

Weichai Power Co., Ltd. ( OTCPK:WEICF ) ( OTCPK:WEICY ) [2338:HK] is a key peer comparable for China Yuchai.

The top line for Weichai Power grew by +18.2% YoY and +19.7% QoQ to RMB53,434 million in the first quarter of 2023. In addition, Weichai Power's actual Q1 2023 revenue surpassed the sell-side analysts' consensus first quarter sales forecast of RMB47,318 million (source: S&P Capital IQ ) by a substantial +12.9%. Q1 2023 also marked the second consecutive quarter of revenue growth for Weichai Power.

Moving ahead, the market's consensus financial projections for Weichai Power sourced from S&P Capital IQ imply that the company is expected to reverse from a -13.9% sales contraction for FY 2022 to deliver a positive +14.5% top line expansion in FY 2023.

Positive Read-Throughs From Truck Sales And Peer's Financial Performance

As a foreign company listed on the New York Stock Exchange, China Yuchai doesn't report its financial performance on a quarterly sales. Instead, CYD announces the company's financial results twice every year, and the company doesn't offer monthly or quarterly operating metrics as well.

As such, industry data like heavy duty truck sales and the quarterly results of China Yuchai's listed peer provide very useful information for investors to have a gauge of CYD's performance prior to its actual results disclosure.

As detailed in the prior sections of the article, heavy duty truck sales in China have grown for four consecutive months in YoY terms between February and March 2023, while CYD's peer Weichai Power achieved higher than expected sales for the first quarter of the current year.

At the same time, the analysts' consensus FY 2023 top line estimate for China Yuchai has been revised upwards by +11% from $2,352 million at the beginning of March this year to $2,621 million as of June 7, 2023 as per S&P Capital IQ data. This implies that the sell-side now sees China Yuchai's sales expanding by +12.9% for full-year FY 2023, as opposed to a -31.1% top line contraction last year.

Taking into account the above-mentioned factors, it is pretty realistic to think that China Yuchai should be able to record decent revenue growth this year.

CYD's Valuations Remain Appealing Despite Recent Outperformance

As per Seeking Alpha's price data, China Yuchai's stock price has gone up by +24.2% following the publication of my earlier March 27 write-up. During this same time period, the S&P 500 rose by a relatively more modest +7.3%.

On the surface, CYD's current headline consensus forward next twelve months' normalized P/E metric of 8.2 times (source: S&P Capital IQ ) doesn't appear to be very attractive. But as I indicated in my late-March 2023 article, China Yuchai had a net cash balance of $360 million as of December 31, 2022. In other words, China Yuchai's consensus forward ex-net cash P/E multiple is a mere 0.6 times.

While CYD's shares have performed well in both absolute and relative terms in the past two or months or so, China Yuchai's valuations are still appealing.

Concluding Thoughts

China Yuchai's valuations are undemanding based on the consensus forward ex-net cash P/E metric. In addition, the read-throughs from recent peer and industry data are positive. As such, I maintain a Buy rating for CYD.

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