Partnership With Kim Long Motor Will Expand ASEAN Market Presence

Key Takeaways

• Strong engine sales in trucks, buses, off-road, marine, and genset sectors indicate resilience and potential revenue growth amidst a declining market.
  
• Joint ventures' profitability and strategic R&D in new energy products can boost earnings, with international expansion driving diversification and reduced domestic reliance.
  
• Economic challenges, regulatory uncertainties, and competition in key markets may pressure China Yuchai's revenue growth and margins amidst heavy reliance on government incentives.

Catalysts

Through its subsidiaries, manufactures, assembles, and sells diesel and natural gas engines for trucks, buses and passenger vehicles, marine, industrial, construction, agriculture, and generator set applications in the People’s Republic of China and internationally.

• The company's strong performance in engine sales for trucks and buses, despite a declining overall market, indicates a potential for increased revenue growth as their products demonstrate resilience and competitiveness in tough market conditions.
  
• The robust growth in off-road engine sales and significant increase in marine and genset engine sales highlight potential expansion areas where the company can continue to increase revenue and possibly improve gross margins due to scale.
  
• The joint ventures, particularly MTU Yuchai Power, have become more profitable, contributing to an 80.2% increase in profit from associates and joint ventures. This can significantly boost net earnings as demand from sectors such as data centers increases, driving higher revenue and profit margins from these collaborative efforts.
  
• Ongoing R&D investments into next-generation engines and new energy products, such as hydrogen technologies, position the company to increase revenue by offering innovative and environmentally sustainable solutions, possibly expanding into new markets with higher-demand products.
  
• The strategic cooperation agreement with Kim Long Motor in Vietnam for technology licensing and sales rights in ASEAN countries provides potential international revenue streams and market diversification, ultimately improving earnings and reducing reliance on the domestic market.

China Yuchai International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming China Yuchai International's revenue will grow by 8.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.7% today to 2.0% in 3 years time.
• Analysts expect earnings to reach CN¥489.1 million (and earnings per share of CN¥13.21) by about March 2028, up from CN¥323.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.0x on those 2028 earnings, down from 16.2x today. This future PE is lower than the current PE for the US Machinery industry at 22.2x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.3%, as per the Simply Wall St company report.

China Yuchai International Future Earnings Per Share Growth

Risks

• Operating in China presents challenges, such as regulatory uncertainties and declining property investment, which could impact revenue growth if the economic climate remains volatile.
  
• An increase in SG&A expenses and R&D expenditure could pressure net margins if not matched by a proportional increase in revenue.
  
• The company faces fierce competition in the genset market, which might limit the ability to increase prices and therefore suppress gross margins.
  
• Supply chain constraints, particularly concerning parts sourced from Germany for the MTU joint venture, may hinder production capacity and revenue growth.
  
• Heavy reliance on government grants and VAT rebates to bolster other operating income presents a risk if these sources become less predictable, potentially affecting earnings.

Valuation

• The analysts have a consensus price target of $17.618 for China Yuchai International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $21.97, and the most bearish reporting a price target of just $13.26.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥24.2 billion, earnings will come to CN¥489.1 million, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $19.12, the analyst price target of $17.62 is 8.5% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.