Off-Road & Larger Engines Continue To Propel Yuchai

Trend Towards Off-Road and Larger Engines Continues In H2:23.  CYD reported second half results with Revenue of RMB 8.9 billion, an 18.9% increase from the year ago period, with total unit sales increasing 5.2%, from 140,345 to 147,700.  The increase in unit sales was led by continued growth in the higher price offroad markets, as well as a resurgence for its existing and new energy products in the truck and bus market, with these higher priced engines contributing to the larger revenue increase.  Gross margins were flat from the year ago period, at 16.2%, but better than the 15.2% we had estimated given the tougher market.  Opex of RMB 1.5 billion was well above the year ago period and our estimate, each of which stood at RMB 1.2 billion.  Prior to the close of 2023, the Company sold Yuchai Remanufacturing Services (Suzhou) Co., Ltd, to Beijing Liandong Jinyuan Management Technology Co., Ltd. for RMB 179.94 million, which netted to a RMB 113.0 million Other Income Gain in the period.  Net Profit for the first half was RMB 178.3 million, or 4.37 per share, in line with our estimate.  Net Profit for the second half was RMB 107.1 million, or 2.62 per share, in line with our estimate.

Fiscal 2023 Dividend.  The final dividend announcement for fiscal 2023 should come in mid-July.  While CYD does not have a formal dividend payout policy, we expect it to be around $0.30 per share.

Model Update.  We made a handful of adjustments to our model, including reducing our unit sales estimate, but increasing the contribution from larger engines and off-road engines.  We increased our Gross Margin estimate on better cost controls and operating efficiencies, but also increased our Opex estimate as these costs continue to grow with the topline.  The net impact is a decrease in Revenue from RMB 19.9 billion to RMB 18.30 billion, and a reduction in our 2024 Diluted EPS estimate from RMB 9.58 to RMB 7.87.

While the market is doing relatively well thus far in 2024, the rebound in the economy does not appear to be what we previously expected. Additionally, the value of the stock is hurt by the depreciation in the Renminbi against the US Dollar. As a result, we are reducing our target price from $15.00 to $12.50, but maintaining our Buy rating based on valuation. Our target price is based on the average of a P/E multiple of roughly 10 times our forward twelve month diluted EPS estimate of RMB 7.87 and an EV/EBITDA multiple of roughly 5 times our forward twelve month EBITDA estimate of RMB 1,120.6 million.