Ladies and gentlemen, thank you for standing by, and welcome to the China Yuchai International Limited Third Quarter 2014 Conference Call and Webcast. [Operator Instructions] I must advise you that this conference is being recorded today, Tuesday, 11th of November 2014. I would now like to turn the conference over to Kevin Theiss. Please go ahead, sir.

Thank you for joining us today, and welcome to China Yuchai International Limited's Third Quarter 2014 Conference Call and Webcast. My name is Kevin Theiss, and I'm Grayling, China Yuchai's U.S. investor relations advisor. Joining us today are Mr. Weng Ming Hoh and Mr. Kok Ho Leong, President and Chief Financial Officer of CYI, respectively. In addition, Mr. Kelvin Lai, VP of Operations of CYI, is joining us today. Before we begin, I want to 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, 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 are based on current expectations or beliefs, including, but not limited to, statements concerning the company's operations, financial performance and conditions. 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 factors, including those discussed in the company's reports filed with the Securities and Exchange Commission from time-to-time. The company specifically disclaims any obligation to maintain or update the forward-looking information, whether of the nature contained in the script or otherwise in the future. Mr. Hoh will provide a brief overview and summary, then Mr. Leong will review the financial results for the third quarter and 9 months ended September 30, 2014. Thereafter, we will conduct a question-and-answer session. For the purposes of today's call, the financial results are unaudited, and they will be presented in RMB and U.S. dollars. All of the financial information presented is reported using International Financial Reporting Standards as issued by the International Accounting Standards Board. Mr. Hoh, please start your presentation.

Thank you, Kevin. Our higher revenues in the third quarter of 2014 are a direct result of our strategy of supplying advanced engines to multiple markets. By not being dependent on one or only a few segments, we counteracted the volatility across different markets. In the third quarter of 2014, our highest sales to the bus, agriculture, marine and natural gas engine markets offset the slow demand in the truck industrial markets. The continuing sales of higher-priced natural gas and National IV-compliant engines enhanced our revenues despite slightly lower total unit sales compared with the third quarter of 2013. Our growth in revenues in the third quarter of 2014 compared favorably against a 19.4% decline in the overall commercial vehicle industry unit sales in the third quarter of 2014, excluding gasoline-powered engines as reported by China Association of Automobile Manufacturers, CAAM. The imported heavy-duty truck market experienced only a 6.8% decline in the third quarter of 2014. Our overall on-road and off-road unit sales declined 6.1%. For the 9 months of 2014, our unit sales increased slightly on a year-over-year basis versus a 9.5% decline in commercial vehicle unit sales as reported by CAAM. The market decline for commercial vehicle sales reflected the diminished effect of the prebuy prior to the strict enforcement of the National IV emission standards in China with the effect from January 1, 2015, and increased uncertainty over the strength of China's economy. According to China's National Bureau of Statistics, GDP growth slowed to 7.3% in the third quarter, the lowest growth rate in the past 5 years. This is a direct result of lower property investments, weakening industrial demand and slowing credit growth. We maintained market leadership for bus engines as we continue to be a major supplier in the third quarter of 2014. We…

Thank you, Weng Ming. I will now provide some more details on the third quarter and 9-month financial performance. Net revenue for the third quarter of 2014 was RMB 3.75 billion, USD 609.9 million, compared with RMB 3.70 billion in the third quarter of 2013. The total number of engines sold during the third quarter of 2014 was 111,023 units compared with 118,282 units in the same quarter a year ago, representing a decrease of 6.1%, which compared favorably with the industry decline of 19.4% in unit sales of commercial vehicles, excluding gasoline-powered vehicles, in the third quarter of 2014 as reported by the China Association of Automobile Manufacturers, CAAM. Gross profit was RMB 715.7 million, USD 116.3 million, compared with RMB 740.4 million in the same quarter of 2013. Gross margin was 19.1% in the third quarter of 2014 compared with 20.0% in the same quarter last year. Other operating income was RMB 39.6 million, USD 6.4 million, an increase of RMB 10.7 million from RMB 28.9 million in the same quarter last year. R&D, research and development expenses were RMB 134.9 million, USD 21.9 million, compared with RMB 111.6 million in the same quarter of 2013, an increase of 20.9%. As a percentage of net revenue, R&D spending was 3.6% compared with 3.0% in the same quarter of 2013. The increase in R&D percentage was mainly due to higher development and testing costs as we introduced new engines to the market. Selling, general and administrative, SG&A, expenses of RMB 392.7 million, USD 63.8 million, declined from RMB 404.9 million in the third quarter last year, a decrease of RMB 12.2 million or 3.0%. SG&A expenses represented 10.5% of net revenue compared with 10.9% in the third quarter of 2013. The decline in the SG&A percentage was mainly due…

[Operator Instructions] Your first question comes from the line of Alex Potter from Piper Jaffray.

Was wondering if you could, first, give an update regarding the percentage of your volume right now that is NS IV compliant and the degree to which you think there's going to be, I guess, a change in that over the next several months, and then into next year.

Alex, this is Weng Ming. Okay. Now I think right now, in fact, up to this point, I wouldn't go back to the earlier month -- I'll answer that question in 2 areas, 1 is in the bus market. The bus market, our National IV or V-compliant engine accounts for close to 70%, 80% -- 80% of the bus engines sold in the bus market, whereas in the truck market, it's right now about 30%. Now as you know, the government has stated that they will strictly enforce the National IV compliance standards by the end of this year or 1st of January 2015. So going forward into 2015, we expect to be all our vehicles to be fully compliant.

And that will be the case for heavy, medium, light-duty engines right across the entire range, everything should be NS IV compliant. Is that right?

We probably believe, yes.

Okay. And then that leads to my next question, as to the -- my understanding at least is that in the light-duty space, there's a particularly high level of noncompliance among your competitors. There's lots of smaller companies that perhaps aren't able to reach the new standard. So in your opinion, in that light-duty space, will this new emission standard end up being a catalyst for Yuchai to win more market share?

Well, I mean, the government is going to enforce strictly and it's going to be across the country. Yes, we hope that, that will happen.

Okay. And then this, I guess, is maybe a related question. Obviously, it depends maybe on the extent to which we get some prebuy demand in Q4. But I'm just wondering what your updated view is for maybe the heavy, medium and light-duty truck market in 2015?

Okay. I mean, to be honest with you, I think right now up to this point, we haven't seen -- I mean, the prebuy effect has diminished significantly. So in the fourth quarter of this year, we do not expect to see some, but I'm sure there will be some, but we don't expect to see a very significant prebuy effect now. Especially for the OEMs with the strict enforcement of this National IV, they are probably very cautious in producing National III engines now, right? So we expect that next year, going into next year, the demand for the truck engine, because of the what I call the prebuy effect over the year, okay, to have an impact on next year's sales at least in the short term, okay? So we think that next year, in the early part of next year, it's going to be quite challenging. There's a lot of uncertainties there only for the truck market. But for the other markets, like the bus market, I think that should be okay. I think we think they will have some moderate growth. In other segments, like the marine engine and even maybe the agriculture engine, I expect to see some growth there. The natural gas engine especially, we think the growth will continue, it's still very healthy.

The next question comes from the line of David Raso from Evercore ISI.

So I was curious, what is the average price increase for the new emission engines versus the prior engines? And then a follow-on is how does that mix next year impact your margins with a greater shift toward the NS IV engines?

Okay. Our growth is about -- the price difference in terms of average sales relating to the National IV is about close to 20% increase. Now the overall impact for next year in terms of margin if the National IV engines -- I would call the markets will be so uncertain because of prebuys in this year, and then enforcement of National IV, we'll probably see some challenging times ahead. I think for next year, however, we believe that next year with the improvement in the bus market, that may mitigate the effect of the truck market challenges.

That's helpful. So the margin -- I know you're not going to give us the exact. But the margins for the buses relative to the on-highway trucks, can you give us a rough idea of the margin difference?

I won't give you specifically, but it will be higher.

Okay. But overall, that sort of a bit of a negative mix shift with NS IV next year as you ramp up, but again the bus outgrowth should mitigate, so we should think about margins, of course, volume-dependent. But at this stage, you expect your margins to generally hold next year versus this year is a decent base case for right now?

Yes. Well, we think probably about the same. We do not expect to see a big growth in the margin in the next year, particularly because of probably some changes in the shift and also the challenges of the truck market, in particular, the heavy truck market.

Your next question comes from the line of Mohit Khanna from Value Investment.

Could you please talk a bit more about the working capital management? And do you see some of the bill receivables converting to cash early next year?

Yes, maybe we talk under the overall market conditions. China market, as everybody knows, has heightened [ph] a little. We can see that smaller players [indiscernible] liquidity. The good thing about us is we are dealing with the major OEMs. They'll either give us bills or cash. So that help us a lot. But it is evident that the AR are stretched slightly more in the coming months. That is what we are seeing. Anyway, the strength of our company is that we have a hold on to the comfortable cash flow. We can choose to enter into the market to do borrowing or bill discounting, when the market is better. That is the strategy we have been adopting in the past years. So that's helped us to be on our balance sheet to support the operation.

Okay. And also could you please, if you can give the exact number or so, what is the margin for the natural gas engines? I mean, out of total engines that you sold, how much were the natural gas engines in the total lot?

We have not been disclosing such information because we believe that our strength does not come from one market segment, so we would not like to highlight a certain segment. The strength of Yuchai comes from that we are able to switch to these different segments according to the market condition.

Okay. That's understandable. And could you please talk about the export market? In the last quarter call, we had a good conversation about the export market that has been growing. So what are -- how it has been in the third quarter and how do you see it going forward?

Okay. This is Weng Ming here, Mohit. The export market has been going well. I think up to this point, we're still having a pretty good growth, double-digit growth, [indiscernible] also it's a very significant growth. Most of our growth is in what I call the packaged sales, where our engines are fitted into one of our OEMs who then sell it overseas. Now in terms of export market, the bulk of our engines are sold to the power station market, which [indiscernible] within our backyard. We also have received some good orders from Middle East as well.

[Operator Instructions]

There is a question by Martin Chou [ph]. The question is shall we have the financial figures of Q3 after the core? If you refer to the press release, the numbers are there. That's the usual format we share with shareholders at large.

We have a follow-up question from the line of David Raso from Evercore ISI.

I was curious, I know it's a little early, but your off-highway customers, this is when they start to think about and maybe begin to ramp production into Chinese New Year. And I was just curious, have you had many conversations yet with your off-highway customers to get a feel for, so to say, construction equipment? How are you viewing the typical production build into Chinese New Year this year versus last year?

Now the -- I mean, the off-market highway this year hasn't been going [ph] very well this year. It's fared quite badly for this segment. From our experience or from our -- I mean, we do talk to our customers a lot. We don't expect a significant uptake rather in the next -- in the short term rather for the construction segment. However, in off-market, our marine have been growing pretty well. And also the agriculture segment has been growing pretty well as well. But in the case of agriculture segment, it has been growing very well the last 2 years for us. So we will still see a moderate growth next year but probably not in the same magnitude as we have seen in the last 2 years, okay? Marine engines have been moving quite well.

Your next question comes from the line of Bill Nasgovitz from Heartland Funds.

Just trying to get an idea of your strategy here with so much cash on the balance sheet and at the same time, a little bit lesser amount in terms of short- and long-term borrowings. What is your overall strategy there? Why do you keep so much cash and debt at the same time?

Okay. If you look at our cash balance, we are holding about RMB 2.8 billion. But this number, if you look at the perspective of our total sales in the year, which is close to RMB 15 billion or RMB 16 billion. So that is value in 3 months of cash if you use shorthand calculation. If you look at the factory, a company of our size, especially we are in the manufacturing business and also especially we are working in China, where the money market has been easing and tightening even within the same year, it is prudent for the company to keep sufficient cash to buffer the operation and also to give us the ability to borrow when the market rates soften. This has been always our strategy for the past years and it will continue to be the strategy for us as well in the years forward. But adding to our flavor is you can see in the past year, we add on to some more financing instruments. As we start[ph] on with short-term notes and we move on to medium-term notes, there will be other instruments we continue to explore. That's how we keep our cash and borrowing position healthy.

Okay. I'll add to that part of it. I think also, as you know in China, I mean, the control of the monetary policy is quite different. And I think also for us, we have to also prepare for the early part of next year as we build up for the next year's business. Quite often in China, the liquidity is quite tight to just before the Chinese New Year. And Chinese New Year is coming up next year in sometime in February, so we hope to prepare for that.

Okay. Say, one other question then. With your stock selling at below stated book value and a relatively low multiple, why haven't you purchased/repurchased shares?

Okay. If you look at our history, I think we like to use our cash on operations. But as for the -- in terms of lower share market -- the price, I think we'll let the market decide what price is reasonable for us. However, if you look at our past performance in the last few years especially, you'll notice that we have been paying pretty high dividends and the yield, for our business is -- for our company is actually quite high compared to many, many companies.

And perhaps -- well, that's true, but also your earnings yield is abnormally high on your stock. If you're truly selling at 7x earnings, that's a 14% after-tax earnings yield. Wouldn't that make more sense?

Well, we have a quite small share base. I mean, if we were to go into that, I think there won't be very many shares out in the public arena. That's probably that's one option that we can think about. But however, I think from management and a board point of view, we prefer probably to [indiscernible] our shareholders in other ways, all right, even...

Okay. Well, it's worked well for Warren Buffett with Berkshire Hathaway if you check the price of their stock. Limited supply scarcity value sometimes puts the stock up in price.

Yes, thank you. We note your point.

We have now reached the end of our Q&A session, and I'll turn the call back over to Mr. Hoh.

Thank you, all, for participating in this conference call. We look forward to speaking with you again. Thank you, goodbye.