Kevin Theiss - Investor Relations Weng Ming Hoh - President Thomas Phung - Chief Financial Officer

David Raso - Evercore ISI

Thank you for joining us today and welcome to China Yuchai International Limited first quarter 2018 conference call and webcast. Before we begin, I will remind all listeners that, throughout this call, we may make statements that may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

The words believe, expect, anticipate, project, targets, optimistic, confident that, continue to, predict, intend, aim, will, or similar expressions are intended to identify forward-looking statements. All statements other than statements of historical fact are statements that may be deemed forward-looking statements.

These forward-looking statements including, but not limited to, statements concerning the company's operations, financial performance and condition are based on current expectations, beliefs and assumptions, which are subject to change at any time. The company cautions that these statements by their nature involve risks and uncertainties and actual results may differ materially depending on a variety of important facts, such as government and stock exchange regulations, competition, political and economic and social conditions around the world and in China, including those discussed in the company's Form 20-F under the heading Risks, Results of Operations, and Business Overview and other reports filed with the Securities and Exchange Commission from time to time.

All forward-looking statements are applicable only as of the date they are made and the company specifically disclaims any obligation to maintain or update the forward-looking information within the nature contained in the release made today or today's call or otherwise in the future. Mr.

Hoh will provide a brief overview and summary. And then, Dr.

Phung will review the financial results for the first quarter ended March 31, 2018. Thereafter, we will conduct a question-and-answer session.

For the purposes of today's call, the financial results for the first quarter ended March 31, 2018 are unaudited and they will be presented in RMB and US dollars. All the financial information presented is reported using International Financial Reporting Standards as issued by the International Accounting Standards Board.

Mr. Hoh, please begin your prepared remarks.

Thank you, Kelvin. For the first quarter of 2018, China's GDP growth grew at 6.8%, slightly exceeding analyst expectation of 6.7% and consistent with the fourth quarter 2017.

However, fixed asset investment slowed to 7.5% in the first quarter of 2018 from 29.2% in the same quarter last year. According to data reported by China Association of Automobile Manufacturers, in the first quarter of 2018, sales of commercial vehicles excluding gasoline-powered and electric-powered vehicles increased by 3.6%.

The market was led by a 13.8% increase in heavy-duty truck sales. The bus market increased by 4.1%, led by an 8.7% increase in light-duty buses, partially offset by lower heavy and medium-duty bus sales.

Our net revenue for the first quarter of 2018 decreased by 4.7% to RMB 4.3 billion or US$689.7 million compared with RMB 4.6 billion the first quarter of 2017. The total number of engines sold by GYMCL in the first quarter of 2018 decreased by 8.2% to 110,113 units compared with 120,010 units in the same quarter a year ago.

Our higher unit sales of engines for heavy-duty trucks and heavy-duty buses, industrial engines and certain other off-road engines combined to generate a higher average selling price, which helped to mitigate the impact of the overall lower unit sales on net revenue. Additionally, a higher percentage of engines sold were compliant with National V emission standards than in the first quarter of 2017.

Our gross margin rose to 19.7% from 18.8% in the first quarter of 2017, mainly due to a better product mix. And our operating margin increased to 9.8% from 9.4% in the same quarter last year.

Our international bus sales achieved a new record high in 2017, with over 12,000 engine units sold in the first quarter. In the first quarter of 2018, we again won a large international bus order.

800 buses manufactured by Anhui Ankai Automobile Company Limited and exclusively powered by GYMCL engines were exported to Saudi Arabia. We were the sole supplier for the heavy-duty engines used to propel these 800 buses, 600 of which will install the GYMCL's YC6MK engines and 200 buses were equipped with our model YC6L.

The performance and reliability of our engines supported by our international service capability has made our engines the preferred propulsion unit for the Saudi Arabian bus market, among others. During the first quarter of 2018, we launched 40 new engines compliant with China's most stringent National VI emission standards.

One of our key strategy is to be the first in China with engines compliant with the National emission standards to create a technological advantage and enhance our market leadership in the Chinese commercial vehicle market. The most stringent National VI emission standards are expected to be implemented in 2020 according to the Ministry of Environmental Protection requirements and we expect to be able to ship our National VI engines sooner.

GYMCL's new National VI engines include 10 diesel and 4 natural gas engines with the power range from 100 to 650 horsepower among three platforms, namely S, K and Y. The S platform engine models address the market for medium and light-duty engines.

The K platform engine models address the medium and heavy-duty markets. And the Y platform engine models are for light-duty engine markets.

At the launching ceremony, GYMCL signed strategic partnership agreements with 22 truck OEMs and 8 bus OEMs as well as 52 key component suppliers. Another important milestone for our future growth that occurred in the first quarter of 2018 was the announcement that GYMCL subsidiary, MTU Yuchai Power Company Limited, has delivered the first MTU S4000 Series engines in its new facility and the preparation for the start of fresh production is proceeding to its final stage.

Formed by MTU Friedrichshafen, a subsidiary of Rolls-Royce Power Systems Company Limited, and GYMCL through a 50-50 joint venture, MTU Yuchai Power is producing the world's leading high-end, high-speed, high-powered engines for the domestic Chinese and export markets. The S400 Series MTU engines are primarily targeting power generation and oil and gas sectors in China.

The S4000 engines produced newly are meeting the growing need for domestically-produced diesel engines [indiscernible] 1400 kilowatts. This series of engines broadens our high horsepower product lines, better positions us in this market and creates new growth opportunities.

We have maintained our strong financial position. Cash and bank balances were RMB 4.8 billion or US$717.2 million at March 31, 2018.

Inventory was down slightly to RMB 2.5 billion or US$405.4 million compared with RMB 2.6 billion at the end of 2017. Short and long-term borrowings were unchanged at RMB 1.6 billion or US$258.1 million.

We continue to focus on improving our financial strength and maintaining a strong balance sheet with an emphasis on cash flow generation and return on invested capital. We achieved solid growth in the first quarter of 2018 and we believe our broad engine product portfolio is well positioned in different market segments.

With that, I would now like to turn the call over to Dr. Thomas Phung, our CFO – Chief Financial Officer – who will provide more details on the financial results.

Thank you, Weng Ming. Now, let me review you our first quarter results for 2018.

The competitive figure for the unaudited first quarter of 2017 has been restated due to the adoption of IFRS 15 Revenue from Contracts with Customers with a full retrospective application. An explanation of the IFRS 15 restatement has been included at the bottom of the press release.

Our net revenue for the first quarter of 2018 decreased by 4.7% to RMB 4.3 billion( US$659.7 million) compared with RMB 4.6 billion in the first quarter of 2017. This decrease was mainly due to a decline in the number of units sold, which was mitigated by a higher average selling price from a better product mix.

The total number of engines sold by GYMCL in the first quarter of 2018 decreased by 8.2% to 110,113 units compared with 120,010 units in the same quarter last year. Lower unit sales primarily reflect a reduced sales of agricultural engines during the first quarter of 2018.

According to data reported by the China Association of Automobile Manufacturers, in the first quarter of 2018, sales of commercial vehicles, excluding gasoline-powered and electric-powered vehicles, increased by 3.6%. The market was led by a 13.8% increase in heavy-duty truck sales.

The bus market increased by 4.1% led by 8.7% increase in light-duty buses, but partially offset by lower heavy- and medium-duty bus sales. Our gross profit was RMB 853.5 million (US$135.7 million) compared with RMB 856.0 million in the first quarter of 2017.

Gross profit margin rose to 19.7% from 18.8% in the first quarter of 2017. The gross profit margin increase was mainly attributable to a better product mix.

Other operating income increased by 27.5% to RMB 50.5 million (US$8.0 million) from RMB 39.6 million in the first quarter of 2017. The increase was primarily due to higher interest income from bank deposits.

Research and development expenses decreased by 3.8% to RMB 119.9 million (US$19.1 million) compared with RMB124.6 million in the first quarter of 2017. As a percentage of revenue, R&D spending was 2.8% for the first quarter of 2018 and 2.7% for the same quarter last year.

The lower R&D expenses was due to lower consultancy fee in the first quarter of 2018. R&D expenses continued to reflect the further development and testing costs of new engines to meet higher emission standards and ongoing efforts to improve engine quality.

Selling, general & administrative (SG&A) expenses increased by 5.6% to RMB 359.9 million (US$57.2 million) compared with RMB 340.8 million in the first quarter of 2017. SG&A expenses represented 8.3% of net revenue compared with 7.5% in the first quarter of 2017.

The increase was primarily related to higher personnel costs. Operating profit was RMB 424.2 million (US$67.5 million) compared with RMB 430.2 million in the first quarter of 2017.

The operating margin increased to 9.8% from 9.4% in the same quarter last year. The margin increase was primarily due to higher gross profit margin during the first quarter of 2018.

Finance costs decreased by 15.9% to RMB 22.5 million (US$3.6 million) compared with RMB 26.8 million in the first quarter of 2017. Lower finance costs mainly resulted from lower bills discounting during the first quarter of 2018.

Our net profit attributable to China Yuchai's shareholders was RMB 242.8 million (US$38.6 million) compared with RMB 248.5 million in the same quarter last year. Basic and diluted earnings per share were RMB 5.94 (US$0.95) and RMB 9.53 (sic) [RMB 5.93] (US$0.94) respectively compared with basic and diluted earnings per share of RMB 6.10 in the same quarter last year.

Basic earnings per share in the first quarter of 2018 was based on a weighted average of 40,858,290 shares and diluted earnings per share was based on a weighted average of 40,916,810 shares compared with 40,712,100 basic and diluted shares in the same quarter last year. Balance Sheet Highlights as at March 31, 2018.

Our cash and bank balances were RMB 4.8 billion (US$770.2 million) compared with RMB 6.0 billion at the end of 2017. Trade and bills receivables were RMB 8.9 billion (US$1.4 billion) compared with RMB 7.0 billion at the end of 2017.

Inventories were RMB 2.5 billion (US$405.4 million) compared with RMB 2.6 billion at the end of 2017. Trade and bills payables were RMB 5.4 billion (US$865.1 million) compared with RMB 5.2 billion at the end of 2017.

Short and long-term bank borrowings remained unchanged at RMB 1.6 billion (US$258.1 million). With that, operator, we're ready to begin with the Q&A session.

Thank you. I was on mute.

My apologies. I wanted to get your updated thoughts on the impact of the National VI emission standard roll out.

How do you think it's impacting current demand? Any thoughts on a prebuy?

And any thoughts on how will it be implemented? Will be firmly implemented?

Will it be something that sort of gradually gets implemented? If you could just give us your updated thoughts on the heavy truck market related to the new emissions?

Hi, David. It's Weng Ming here.

I think recently there has been some announcement that says some cities are already considering some early implementation. Although the targeted date was 2020, some are looking at implementing it in 2019 – starting in 2019.

So, I think some bigger cities will probably do that. I think only a couple of cities that have already made some form of announcement or something along the line.

I believe there will be other cities that might follow suit going forward. Now, I think the implementation date of 2020 is quite solid.

I think now we don't have a lot of color yet as to – whether or not there's going to be one date and everybody comply or it's going to be phased in. I think it's more likely – my personal view [indiscernible] the path is more likely to be phased in than one solid deadline.

And the impact on demand, can you give us some sense on the impact on – any pricing with the new model, so we can think through if it does make sense to pull forward demand or so forth?

Okay. Now, in terms of demand, I think, like in the past for any new emission upgrade, it's likely to trigger some prebuys, okay?

And because National VI, the technology is – it's more advanced than the National V and it's going to be quite a leap in technology. The pricing of the new National VI engine is likely to be higher.

So, that would definitely trigger a prebuy effect even for the heavy-duty trucks. I think – yeah.

Does that answer for your question?

Yeah, I think it does. I was also trying to think through the demand this year has been a little better than some folks feared.

And I was just curious if there was any feedback from customers, dealers that maybe there is already some impact from National VI down the road that's causing some buying this year above expectations or would you argue it's too early, this is more pure demand, this is not anything related to a prebuy?

Well, my personal thinking is, I think, the growth in the – what's called the heavy-duty engines has slowed. If you look at last year, you are seeing over 50% growth rate for heavy-duty engine.

In the first quarter, I think it dropped about 13%. So, my view is that, no, I still think that the heavy-duty engines aren't going to grow too much this year.

You might even still see a slight drop in the heavy-duty engines market. This is for trucks, right?

So, for other markets, I think we've seen some growth in the high horsepower, especially power generation side of the business. I think that's growing.

We still see some strong growth this year. The industrial engines and construction – those used in construction applications, infrastructure, those are still growing quite strongly this year.

Thank you very much.

Thank you.

We have a question here. It says what can you tell us about dividends.

At this stage, we have not discussed that yet. I think when we make a decision, we will definitely make an announcement on what we're going to do with the dividends.

So, for now, not much I can talk about at this point in time.

Thank you. I had a follow-up on the farm equipment market in China.

And my apologies if you've said this in your prepared remarks and I missed it. The government with a delayed budget for ag, was that something you saw in the market?

Is that a main reason that you're seeing the weakness in farm equipment sales and do you have any update on the government budget for agriculture?

No, I don't think so. I think the emission upgrade from T2 to T3 took place in the year 2016, I think, lastly.

All right? There was a kind of a phase-in upgrade.

And then, in the year 2017, this last year – they were prebuying for that, right? In the year 2016, we were not allowed to produce T2 engine, but only T3 engines.

So, come the year 2017, there was some kind of inventory replenishment in the channel for the agriculture engine. So, that's what drove our agri sales for the year 2017.

But now that this happened, I think we are still digesting the prebuy. So, the first quarter, I think, the growth is not there compared to the same period last year due to the replenishment of the channel.

But this year, I think the whole agri business – agri engines will come back to normal this year. I think probably next two, three quarters, you'll probably see some improvement there.

Okay, thank you. Somebody else prominent in the industry noted the Chinese subsidy budget for agriculture had not yet been put out.

It was sort of delayed that maybe that was having some impact on demand, but you're saying it's more of a tough comparison after 2017 and the replenishment last year. So – okay.

I appreciate it. Thank you for the color.

Thank you all for participating in our conference call. We look forward to speaking to you again in the next quarter.

Bye-bye.