CGS International’s Ong Khang Chuen has maintained his “add” call on NYSE-listed China Yuchai at a raised target price of US$13.20 ($17.20) from US$11.70 previously following the company's healthy 1HFY2024 ended June results. China Yuchai is a subsidiary of SGX-listed Hong Leong Asia H22 .
China Yuchai’s 1HFY2024 profit after tax and minority interests (patmi) of RMB240 million ($43.9 million) formed 71% of Ong’s FY2024 forecast, beating his expectations.
He writes in his Aug 23 report: “[The] key surprise was strong unit engine sales growth of 16% y-o-y, which outpaced industry growth of 4% y-o-y in 1HFY2024.”
This was due to improved product price competitiveness, the launch of new gas engine models, and stronger export sales. Improved economies of scale and cost reduction efforts also drove a 0.6 percentage point (ppt) y-o-y improvement in gross profit margin to 16.8%.
“Its share of profit from associates and joint ventures (JV) also grew 45% y-o-y, led by MTU Yuchai (JV with Rolls Royce for production of power generators),” adds Ong.
Ong also sees the policy launched in July by China’s National Development and Reform Commission (NDRC) as a driving factor for Yuchai in the 2HFY2024, although its effectiveness could be constrained by the weak economic backdrop in China.
The stimulus programme encourages the scrapping of older commercial vehicles and equipment in favour of newer, more environmentally-friendly models, with rebates of up to RMB140,000 ($25,571) per truck provided to owners who scrap existing heavy-duty trucks and replace them with new energy trucks.
In June, Yuchai announced a US$40 million ($52.1 million) share buyback plan. As at Aug 14, 3.2 million shares have been repurchased for US$38.5 million.
In June, the company introduced equity incentive plans involving 6.54% of the expanded equity in its subsidiary, Guangxi Yuchai Marine and Genset Power (MGP), which specialises in power generators and marine engines.
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On this, the analyst writes: “We see potential for MGP to pursue an initial public offering (IPO) in the next five years. An independent valuation by Zhongming Valuer as at December 2023 estimates MGP’s fair value at around RMB2 billion. As at end-FY2023, MGP has a net asset value of RMB1.3 billion, versus China Yuchai’s RMB12 billion.”
Overall, the analyst expects FY2024 to be a year of recovery for Yuchai, with its undemanding valuations of 0.3 times price-to-book value (P/BV).
Potential re-rating catalysts noted by Ong include stronger sales volume leveraging on China government’s stimulus measures and further corporate actions to unlock shareholder value.
Conversely, key downside risks include a slower-than-expected recovery in China’s economy dampening demand for commercial vehicles, and intense price competition hurting margins.
Shares in China Yuchai closed 15 US cents higher or 1.39% up at US$10.97 on Aug 28.
