China Yuchai International Limited — FY2021 Form 20-F Summary
Business context and reporting period
China Yuchai International Limited is a Bermuda holding company whose principal asset is a 76.4% controlling interest in Guangxi Yuchai Machinery Company Limited. Yuchai manufactures and sells diesel, natural-gas, hybrid and other powertrain products, primarily in China. The Group also consolidates HL Global Enterprises Limited, which operates hospitality and property businesses. The filing covers the fiscal year ended December 31, 2021, with comparative FY2019 and FY2020 data. Financial statements are prepared under IFRS and reported in RMB; U.S. dollar amounts are convenience translations.
Key financial metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | RMB21.266bn | RMB20.581bn | +3.3% |
| Gross profit / margin | RMB2.952bn / 13.9% | RMB3.190bn / 15.5% | Profit -7.4%; margin down 160 bps |
| Operating profit / margin | RMB663.5m / 3.1% | RMB1.182bn / 5.7% | Profit -43.9% |
| Profit before tax | RMB451.7m | RMB971.9m | -53.5% |
| Profit attributable to equity holders | RMB272.7m | RMB548.9m | -50.3% |
| Basic and diluted EPS | RMB6.67 | RMB13.43 | -50.3% |
| Operating cash flow | RMB504.6m | RMB1.415bn | -64.4% |
| Cash and cash equivalents | RMB4.788bn | RMB5.878bn | -18.5% |
| Loans and borrowings | RMB2.203bn | RMB2.230bn | -1.2% |
| Total assets | RMB25.101bn | RMB26.291bn | -4.5% |
Working capital was RMB5.348 billion, down from RMB6.209 billion. Cash and bank balances, including deposits and restricted cash, totaled RMB5.332 billion. Available undrawn borrowing facilities were RMB474.2 million. The Group reported net debt, defined to include borrowings, lease liabilities and trade and other payables less cash and bank balances, of RMB6.740 billion.
Investing cash outflow was RMB738.8 million, including RMB572.0 million for property, plant and equipment and RMB287.5 million for technology development. Financing cash outflow was RMB838.6 million, including RMB448.7 million of dividends paid to Company shareholders and RMB223.9 million paid to non-controlling interests.
Material changes versus the prior comparable period
- Revenue increased modestly despite a 6.9% decline in China commercial vehicle sales. Total engine sales rose 6.2% to 456,791 units, supported by bus, passenger-vehicle, agricultural, marine and power-generation applications.
- Truck engine sales declined 16.2%, while commercial-vehicle engine sales declined 11.9% to 241,325 units. Natural-gas engine sales fell to approximately 7,934 units from 18,969.
- Gross margin contracted because of product-mix changes, the transition to National VI-compliant engines and higher material costs. Materials consumed increased 6.2% and represented 77.4% of revenue versus 75.3% in FY2020.
- Research and development expense increased 35.5% to RMB848.8 million. Total R&D spending, including capitalized costs, was RMB1.162 billion, or 5.5% of revenue.
- Share of losses from associates and joint ventures increased to RMB95.9 million from RMB59.0 million, mainly reflecting higher development expenses and warranty costs at a joint venture. Y&C Engine contributed a RMB125.9 million loss.
- Operating cash flow declined sharply, partly because of lower earnings, higher inventories and lower trade payables and contract liabilities, although trade and other receivables decreased.
- Cash declined by RMB1.073 billion during the year. Capital expenditures decreased to RMB766.4 million from RMB1.055 billion, while committed capital expenditures at year-end were RMB731.3 million.
Guidance, outlook, management commentary and risks
The filing does not provide clear numerical revenue, earnings or unit-sales guidance for FY2022. Management stated that existing production capacity should meet expected demand and that liquidity should be sufficient for the next twelve months, subject to market conditions and operating cash generation.
Yuchai completed the transition of on-road products to National VI(a) standards in 2021 and had National VI(b)-compliant products available ahead of the July 2023 implementation date. Tier-4 standards for smaller off-road machinery begin phasing in from December 2022. The Company expects these standards to create opportunities but also require significant R&D, equipment investment and potentially higher component costs.
Yuchai is expanding into fuel-cell systems, hybrid power, electric drive systems, range extenders and hydrogen engines. A new 65-35 Beijing Yuchai Xingshunda New Energy Technology joint venture was incorporated in March 2022. These initiatives remain subject to commercialization, customer acceptance and profitability risks.
- COVID-19 restrictions, supply-chain disruption, logistics costs, semiconductor shortages and production interruptions remained material uncertainties; the filing states that the first quarter of 2022 experienced renewed lockdowns and supply-chain disruption.
- China’s energy-transition, emissions and new-energy-vehicle policies could reduce long-term demand for diesel engines, although new-energy vehicle purchase subsidies were scheduled to be reduced and eliminated at the end of 2022.
- The top five customers represented 49.1% of FY2021 revenue; the largest customer group represented 25.1%. Customer concentration and collectability are significant risks.
- Trade and bills receivable totaled RMB7.538 billion. Yuchai reported net trade and bills receivables of RMB7.032 billion, and a large portion consisted of bills receivable. Recourse obligations remained on discounted and endorsed bills.
- Yuchai’s preferential 15% corporate tax rate depends on continued qualification. The filing states that the standard rate would be 25% if the preferential treatment were lost.
- The Group capitalized RMB313.6 million of development costs in 2021; accumulated capitalized development costs were RMB992.3 million. This was identified as the critical audit matter and is sensitive to commercialization assumptions, demand, discount rates and growth rates.
- Hong Leong Asia indirectly controlled approximately 44.7% of the ordinary shares and held the special share that allows it to elect a majority of directors and veto shareholder resolutions.
- The Company disclosed historical difficulties concerning governance and cooperation with Yuchai’s Chinese shareholders and continued reliance on the Reorganization Agreement and Cooperation Agreement.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded controls were effective as of December 31, 2021.
Important facts for investors to verify
- Whether National VI and Tier-4 products can restore margins after the 2021 cost and mix pressure.
- Current aging, collectability and customer concentration of trade receivables and bills receivable.
- Cash availability at the parent level versus cash held in PRC subsidiaries subject to exchange-control restrictions.
- Debt maturities, facility covenants and any borrowing needed to fund working capital and committed capital expenditures.
- Commercial progress, capital requirements and expected returns from fuel-cell, hybrid, hydrogen and electric-powertrain programs.
- Continued qualification for Yuchai’s 15% tax rate and the effect of any future tax examination.
- Recoverability of RMB992.3 million in capitalized development costs and the sensitivity of goodwill and technology assets to lower demand or higher discount rates.
- Dividend capacity and timing: the Company paid US$1.70 per share for FY2020, while Yuchai’s FY2021 dividend of RMB151.8 million was approved for payment subject to issuance of audited financial statements and shareholder approval.