Now trading below cash
- China Yuchai’s 1H22 NP of Rmb94m (+394% hoh, -63% yoy) was below our expectations as volume recovery was dragged by China’s slowdown.
- We expect volume recovery in 2H22F to remain gradual on macro concerns, but margin improvement should continue, aiding 2H net profit to jump 6x yoy.
- Maintain Add given CYD’s undemanding valuation, with the stock currently trading below its net cash position of US$11.90/share.
1H22 results below expectations
China Yuchai (CYD) reported a 1H22 PATMI of Rmb94m (+394% hoh, -63% yoy), below expectations at 20% of our FY22F forecast. The key drag was weaker revenue (-32% yoy), off a high base in 1H21 which benefited from strong pre-buying on new engine standard implementation. While GPM expanded, CYD’s OPM contracted 0.6% pts yoy to 3.4% as a result of weaker sales volume which led to operating deleverage. Lowering volume recovery expectations on China’s slowdown
Engine unit sales in 1H22 fell 37% yoy to 181k engines but improved 6% hoh as accumulated distributors’ inventory were better digested. In view of China’s economic slowdown and disruptions from ongoing Covid restrictions, we think the market conditions could remain challenging in 2H22F. As such, we lower our revenue growth forecast to 5% yoy for the period. CYD continues to invest heavily in R&D to develop Tier-4 compliant off-road engine units and new energy powertrains (hydrogen, fuel cell, electric and hybrid) as China transitions towards a more stringent emission standard.
Margins recovering off a low base
CYD’s GPM continued to show sequential improvements to 15.9% in 1H22 (+0.5% pts hoh, +3.0% pts yoy) with 1) ramp-up of National VI (N6) engine sales enabling CYD to reach volume commitments needed to negotiate further cost reductions on required parts, and 2) increase in sales mix in the off-road segment. We expect sequential margin improvement trend to continue (2H22F: 16.4%), though given the weaker sales volume expectations, pace of recovery to longer-term (FY10-20) average GPM of 20% could take more time amid weaker operating leverage gains near-term. Off a low comparison base for 2H21, we forecast CYD to post a net profit of Rmb121m in 2H22F, a 6x jump yoy.
Maintain Add with a lower TP of US$13.60
Maintain Add as we think CYD’s earnings have bottomed out, and valuation is undemanding as it is currently trading below its end-1H22 net cash balance of US$488m (US$11.90/share), while having a strong profitability and operating cash flow generation track record. We lower our FY22-24F EPS by 27-54% on lower sales volume assumptions. This lowers our TP to US$13.60, which is based on a 40% discount to FY22F net cash per share plus 6x FY23F P/E given our expectations of a slower recovery. Potential rerating catalysts include Chinese government’s stimulus measures catalysing diesel engine sales. Key risks include supply chain disruptions further dampening business sentiment in China.