China Yuchai International Ltd. Q4 FY2021 earnings call

• Chinese economy had different growth in 2021; second half saw economic slowdown with construction and manufacturing issues. Truck sales declined due to pre-buy of National V and chip shortages. - GYMCL had growth in bus, off-road (agriculture, marine, power generation), and new energy segments. - 2021 R&D investments were RMB1.2 billion (US$182.3 million) for National VI and NEV technologies. National VI engines adaptable to stricter National VIb. - Partnerships for NEV development, hydrogen engine announcement, and initiatives in GYMCL for NEV capabilities and other technologies.

Second half of 2021: Revenue was RMB8.6 billion (US$1.4 billion), a 18.7% year-on-year decline. Gross profit was RMB1.3 billion (US$208.3 million), with a gross margin of 15.4%. The total number of engines sold by GYMCL decreased by 21% to 171,449 units. Bus engine sales rose 55.6%, off-road engine sales increased 31.8%, and new energy sales grew. Fiscal year 2021: Revenue reached RMB21.3 billion (US$3.3 billion), a 3.3% year-on-year growth. The total number of engines sold by GYMCL increased 6.2% to 456,791 units. Gross profit decreased 7.4% to RMB3 billion (US$463 million) with a 13.9% gross margin.

• Expect margin improvement in 2022 due to continued National VI engine sales and cost reduction efforts. - R&D to remain at similar levels in 2022 for Tier 4 emission standards and NEV development. - Hydrogen engine commercialization expected to take more time. - Chip shortage impact expected to be less severe in 2022 depending on market demand.

• COVID-19 impact on business operations and financial conditions due to economic slowdown, competition, government regulations, and supply chain disruptions. - Potential weakening of customer financial conditions. - Warranty costs related to a gas engine quality issue, though under control.

Q: You mentioned that you saw a gross margin improvement from the first half due in part to the economies of scale from the National VI engines. Is that something we can expect to see in 2022 continued margin improvement?

A: Yes. In 2021, National VI engines' margin improved month over month, and in 2022, we'll continue cost reduction initiatives and expect further margin improvement as we sell more National VI engines.

Q: The press release mentioned higher warranty costs. Was that any kind of significant issue? And what did that relate to?

A: The higher warranty cost related to one of our gas engines with quality issues. It's under control now, though some will still be present in 2022 but much less than in 2021.

Q: On the R&D side, it was quite a bit higher than it's been in the past whether you're talking just the expense or the capitalized. Can you break out what is towards the traditional engines and how much is for your new energy platforms?

A: We spend on traditional engines for Tier 4 emission standards and on new energy vehicles. In 2022, we expect similar R&D levels due to emission upgrade to Tier 4 and NEV development, with some capitalized items.

Q: At the end of December, you announced the hydrogen engine. Is there any update on when that's going to be commercially ready for sale?

A: It's early stage. We're focusing on development now, and commercialization will take more time as the market isn't quite ready yet.

Q: At the end of December, you announced the hydrogen engine. Is there any update on when that's going to be commercially ready for sale?

A: It's early stage. We're focusing on development now, and commercialization will take more time as the market isn't quite ready yet.

Q: What kind of impact did the chip shortage have on you guys in the second half? And what do you expect for this year?

A: The chip shortage had a severe impact in mid-2021, with a full-year impact of 16-18k units of engine. In 2022, depending on demand, the impact should be less severe than in 2021 though there will still be some impact.