CYD - China Yuchai: Multiple Reasons To Stay Bullish

2023-10-26 13:04:43 ET

Summary

• China Yuchai's key peer, Weichai Power, recently announced a positive earnings alert.
• Heavy duty truck sales volume in China jumped by +66% YoY in September 2023.
• CYD's new powertrain is expected to allow the company to win more orders associated with the agricultural end-market.
• My Buy rating for CYD remains intact, as I think that there are many reasons to be bullish about the company's prospects.

Elevator Pitch

My rating for China Yuchai International Limited ( CYD ) shares stays as a Buy.

I touched on the possibility of China Yuchai engaging in share repurchases in the future, and analyzed certain industry statistics which have relevance for the company in my August 18, 2023 write-up .

My Buy rating for CYD is left unchanged in this latest update, as I have identified various factors supporting a bullish stance for the stock. Its peer's positive earnings alert, strong September 2023 heavy duty truck sales, and the company's new powertrain are all good reasons to maintain a Buy rating for China Yuchai.

Competitor's Favorable Earnings Growth Expectations

In the company's historical filings , China Yuchai highlighted that one of its key risk factors is that it won't be "able to compete successfully in the heavy-duty diesel engine market in China with the existing producers such as Weichai Power Co., Ltd. ( WEICF ) ( WEICY ) [2338:HK]" In other words, Weichai Power is among the key competitors for China Yuchai. Therefore, the expected financial performance of Weichai Power can offer clues about CYD's future financial results.

Weichai Power issued an announcement in the middle of this month noting that it "is expected to record an increase of approximately 80% to 100% in the net profit attributable to the shareholders" in the RMB5,961-6,624 million range for 9M 2023. In this announcement, Weichai Power cited "the recovery of demand in the heavy duty truck industry" as a key factor that led to its strong earnings growth for the first nine months of the current year. I will write about the Mainland Chinese heavy duty truck industry's key statistics in the next section.

As per my calculations, Weichai Power's 9M 2023 profit alert implies that the company's net income is projected to grow by +120%-200% YoY to between RMB2,035 million and RMB2,776 million in the third quarter of this year.

China Yuchai only reports its financials twice per year, so there aren't any Q3 2023 management guidance or sell-side analysts' consensus estimates for CYD. But it will be realistic to come to the conclusion that CYD's business performance for the third quarter of the year will be strong and similar to that of its rival, Weichai Power.

Chinese Heavy Duty Truck Sales Grew YoY And QoQ In September

China Association of Automobile Manufacturers' or CAAM's latest automobile sales figures sourced from S&P Capital IQ indicate that the number of heavy duty trucks sold in Mainland China increased by +66% YoY and +20% MoM (Month-on-Month) to approximately 86,000 units for September 2023.

It isn't merely a recovery from the 2022 lows (China was suffering from COVID-19 lockdowns last year) that is responsible for the robust heavy duty truck sales in the country this year. There are certain categories of heavy duty trucks that are benefiting from structural growth drivers. In specific terms, natural gas heavy duty trucks have been selling very well, and this contributed to the overall growth in heavy duty truck sales for Mainland China.

Based on a recent October 24, 2023 research report issued by CMB International , natural gas heavy duty truck sales expanded by +7.4 times YoY last month and accounted for 31% of total heavy duty truck sales. As per CMB International's analysis, heavy duty trucks in the natural gas category have become increasingly popular with Chinese drivers because the estimated time frame to earn back the cost of a natural gas heavy duty truck is reasonably short at less than three years.

In a nutshell, China Yuchai is likely to achieve healthy heavy truck duty engine sales in the near term, considering that the number of heavy duty trucks sold in China continues on an upward trajectory.

New Powertrain Will Boost CYD's Future Revenue

Top line for China Yuchai increased by +7% YoY from RMB8,568.5 million in the first half of last year to RMB9,171.0 million for the first half of the current year. CYD's revenue expansion for the 1H 2023 period would have been even better, if not for "reduced agricultural unit sales" as disclosed at the company's most recent interim results call .

CYD is putting in efforts to ensure that its sales generated from the agriculture end-market will be higher going forward. Earlier on October 20, 2023, China Yuchai announced that its new "350-horsepower hybrid electric drive continuously variable transmission powertrain system" is now utilized in tractors sold by "Liugong Agricultural Machinery, the farming equipment division of global construction equipment powerhouse, Liugong Machinery."

In the company's October 20 announcement, China Yuchai emphasized that the company's new "drawn interest from potential agricultural and industrial equipment OEM customers." This sends a clear message that lower than expected agriculture-related revenue will likely be less of a drag for CYD in subsequent financial reporting periods.

Concluding Thoughts

There are favorable read-throughs from its competitor's positive profit alert, the recent monthly industry sales data, and the company's new product announcement. This explains why I remain bullish on CYD.

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