China Yuchai International’s 1HFY2021 results were below expectations and topline weakness could extend into the second half, says CGS-CIMB Research analyst Ong Khang Chuen.
That said, margins are set to improve in 2HFY2021F, as the New York Stock Exchange-listed company charges towards “an electrified future”, adds Ong.
Hence, while Ong is maintaining “add” on China Yuchai International, he is cutting the target price to US$19 from $21.50, which still represents a 34.8% upside.
Despite strong engine unit sales growth of 34% y-o-y in 1HFY2021, China Yuchai International’s (Yuchai) 1HFY2021 net profit fell 17% y-o-y, below Ong’s expectations. “We deem this set of results below expectations, with 1HFY2021 net profit coming in at 36% of our FY2021F forecast,” writes Ong in an Aug 23 note.
See: China Yuchai to pay dividend of US$1.70 per share for FY2020
Engine unit sales grew to 285k in 1HFY2021, benefiting from strong pre-buying as China transitioned to National VI (N6) engines on July 1. However, key disappointment lies in the weaker gross profit margin (GPM), which fell 1.9% pts to 12.9%, hurt by rising input costs and rectification cost for an engine model, says Ong.
“We see temporary topline weakness in 2H21F post strong pre-buying in 1H, but margins should start improving with N6 engines’ better production scale,” Ong adds.
After 12 months of strong commercial vehicle demand on the back of policy tailwinds, and subsequent pre-buying ahead of new engine standard implementation, Ong sees near-term topline weakness ahead for Yuchai. “We forecast a 16.6% sales decline in 2HFY2021F as channel inventories of on-road commercial vehicles fitted with National V engines are being digested; sales should return to a more normalised level by 1HFY2022F.”
Meanwhile, with China’s implementation of N6 emission standards by mid-2021, Ong expects a higher sales mix of N6 engines in 2HFY2021F, allowing Yuchai to achieve better production scale and improving its product margin for N6 engines.
“We also expect lower rectification costs to be incurred in 2HFY2021F. We conservatively forecast operating profit margin to recover to 4.8% in 2HFY2021F and 6.0% in FY2022F… Yuchai continues to invest in developing new energy powertrains and has entered into a strategic partnership with Sunlong Bus to develop electric vehicles in June 2021,” writes Ong.
“We believe downside is capped, as Yuchai’s net cash stood at US$509 million (US$12.50 per share) as of end-June 2021. Potential re-rating catalysts include continued faster-than-expected margin recovery and a potential secondary listing.”
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Shares in China Yuchai International closed 26 US cents lower, or 1.81% down, at US$14.08.
