Ladies and gentlemen, thank you for standing by, and welcome to the China Yuchai International First Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I must advise you that this conference is being recorded today, May 12, 2016. I would now like to hand the conference over to your first speaker today, Mr. Dixon Chen. Thank you. Please go ahead.

Thank you. Thank you for joining us today, and welcome to China Yuchai International Limited’s 2016 first quarter earnings conference call and webcast. Joining us today are Mr. Weng Ming Hoh and Mr. Kok Ho Leong, President and Chief Financial Officer of CYI, respectively. In addition, we also have in attendance Mr. Kelvin Lai, VP of Operations of CYI. Before we begin, I’d like 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, target, 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 condition. 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 this script or otherwise in the future. Mr. Hoh will provide a brief overview and summary, and then Mr. Leong will review the financial results for the first quarter ended March 31, 2016. Thereafter, we will conduct a question-and-answer session. For the purposes of today’s call, the financial results for the first quarter of 2016 are unaudited, and they will be presented in RMB and US dollars. All the financial information presented is reported using International Financial Reporting Standards, IFRS, as issued by the International Accounting Standards Board. Mr. Hoh, please start your prepared remarks.

Thank you, Dixon. Our sales in the first quarter of 2016 continued to reflect the slowest economy growth with China’s GDP growth rate coming in at 6.7%, which is the slowest growth since 2009. Upgrades in emission standards in both the on and off-road commercial vehicle market and government incentives and subsidies to encourage purchases of electric vehicles has affected our sales. We sold 90,771 units of engines in the first quarter of 2016 compared with 105,046 units in the same quarter in 2015, representing a decrease of 13.6%. According to data reported by CAAM, China Association of Automobile Manufacturers, excluding sales of gasoline powered and electric engines, in the first quarter of 2016, there was a 2% reduction in bus sales led by a 7.9% decrease in heavy-duty bus sales, while there was a 3.3% increase in truck sales. The increase in truck sales comprised mainly engine sales for mini-trucks and trailers. According to CAAM, sales of commercial vehicles recorded an increase of 2.6% in the first quarter of 2016, compared to the same quarter in 2015. The 2.6% in commercial vehicles sales follows a 4.7% decline in sales volume in the fourth quarter of 2015 and a 14.4% decrease for the full year 2015, excluding gasoline and electric powered vehicles. The growth in commercial vehicles sales came mainly from the truck segment, in particular from trailers and mini-trucks. Off-road segment, especially industrial engines, continued to struggle in the first quarter of 2016. The demand for engines in the agriculture segment declined due to the transition to Tier 3 emission standards. Revenue for the first quarter of 2016 decreased 8.1% to RMB 3.4 billion or US$523.1 million from RMB 3.7 billion in the first quarter of 2015. While our sales volume has declined, our average selling price has increased…

Thank you, Weng Ming. I will now proceed to report on our financial performance for the first quarter of 2016. Revenue for the first quarter of 2016 was RMB 3.4 billion, US$523.1 million, a decrease of 8.1% compared with RMB 3.7 billion in the first quarter of 2015. The total number of engines sold by GYMCL in the first quarter of 2016 was 90,771 units compared with 105,046 units in the same quarter in 2015, representing a decrease of 14,275 units, or 13.6%. Gross profit was RMB 604.3 million, US$93.5 million, compared with RMB 674.4 million in the first quarter of 2015, representing a decrease of 10.4%. Gross margin was 17.9% compared with 18.3% in the same quarter last year. The lower gross margin was mainly attributable to the decline in unit sales by 13.6% compared with the same period in 2015. Other income was RMB 23.3 million, US$3.6 million, compared with RMB 1.5 million in the first quarter of 2015, representing an increase of RMB 21.8 million. This increase was mainly due to unrealized foreign exchange revaluation gains and higher interest income from bank deposits. Research and development, R&D, expenses were RMB 99.6 million, US$15.4 million, compared with RMB 113.3 million in the first quarter of 2015, representing a decrease of 12.1%. R&D expenses were mainly related to the development of new and existing engine products compliant with National V emission standards for the truck and bus segments, and expansion of our off-road product offerings. As a percentage of revenue, R&D spending decreased to 2.9% compared with 3.1% in the first quarter of 2015. Selling, general and administrative, SG&A, expenses were RMB 344.1 million, US$53.3 million, an increase from RMB 334.5 million in the first quarter of 2015. SG&A expenses represented 10.2% of revenue compared with 9.1% in the…

[Operator Instructions] Your first question comes from the line of Mohit Khanna from Value Investment Principals.

Just wanted to – need more detailed definition about the doubtful debts that has increased the expenditure in the current quarter, how do you see that, do you see that as a trend in the overall industry? And the second question I have regarding, how do you see the bus market moving in certain bigger cities? That’s about it right now.

Let me answer the question on doubtful debt, yes, in this quarter we have higher doubtful debt provision for Q1 2016 as compared with Q1 2015. Basically our doubtful debt is – we go through two exercise. One is we make general provisions based on certain parameters. The other one we go through the list of customers and look at the payment status and we make specific provision. Yes, we must say that in Q1 we have identified a couple of potential delinquent account and we have made specific provision. And that accounts for the increase in doubtful debt in Q1 2016. The related question will be will this increase in doubtful debt become a trend for the future? I can’t answer with specific commitment here, but what I can say is generally the market is slower now. We are more cautious in granting credit and also to review the credit. And if there is a need to, we will make provisions for accounts that we consider they have potential. Whether it will be a trend in the future or not, what I can only say is we are operating in a much more cautious environment.

For the bus part, Mohit, yes, it was strong a little bit in the first quarter compared to the same period last year. But the bus market though has been quite badly affected especially in 2015 by the very generous incentives [indiscernible] by the central government. The [indiscernible] but there may be new scheme come on board, but we don’t have the details right now. So I’d say for the bus market, yes, it’s quite a stable market right now, it’s quite mature. It will hover around [indiscernible] currently have within the 3,000, 4,000 quantity.

Your next question comes from the line of [Thein Muller] from CG Capital Markets.

I see that you have lost market share, but at the same time increasing your prices. Is this your policy right now that you’re trying to maintain profitability and willing to give up market share? And if so, is that a policy that you intend to continue this year?

No, the short answer is no, it’s not our policy to lose market share. But what is more important to us at the company is to ensure we achieve, if I call, adequate return for our shareholders. I think that’s one thing. Now, the market unfortunately has not been moving in our favor, if you look at it. Although it [swung together as] some growth in the truck market of about 3.3%, but if you look at it in detail, if you look at the various segment of the truck market, the growth actually come from two particular areas. One is the mini-truck which we don’t compete in and the other one is the trailers, which we [indiscernible] into that segment of the market. So that’s unfortunate for us. But if you look at it by segment, yes, we haven’t done too badly. But if you look at it in total, yes, I think we have lost some market share there for the truck. For the bus market, though, I don’t think we’ve lost, we’ve done too badly. The main reason for losing market share in the bus market is because of the EV vehicles. Now, if we remove the EV vehicles, electric vehicles from the equation, our whole market share is probably about the same, not too different.

And you do not intend to sacrifice market share in favor of profitability?

We have to try and balance still, depending on – I mean, we definitely would not sell our engine at a loss, no. But there may be some times where you may have to limit certain decisions to strike a balance. Overall, I think our aim is to try to maintain as much as market share as possible and maintain our profitability. That’s our goal.

[Operator Instructions]

We are getting some questions from the audience. One of them is if your share price strengthen at two times free cash flow and below IPO price for the years ago and below cash level balance sheet, why not buy back shares? I think if you have been listening to our webcast in the past, you know that we at the company have a view that we should money in the hands of investors, our shareholders, and let them decide whether they had to increase their investment and let them take a decision on what to do with the money rather than we decide for them. Now, there is another question, please talk about your April and May production schedules comparing your last year. Is it up compared to last year? We are now only in the beginning, we do not have a lot of long order periods. So our ordering period is only about 30 days. So we can’t do that, very much visibility in the case of May production schedule. In terms of our April production schedule, we have done a little bit, but not a lot. You’ll hear about our second quarter performance somewhere in August, we’ll give you more details then. Now, in terms of export market, there is another question about export market, our export market is still growing. Compared to the same period last year, first quarter 2016, we have grown by about 9.2%. So it’s still growing, last year we grew by approximately by more than 20%. So it’s still a growth area for us. We are [indiscernible] strategies of the government. Okay, now, again there is a question. Can you provide more color on why GYMCL diesel engine sales have [outperformed] general engine market in Q1, why sales growth of 13.6% still so much compared to least market growth of 2%? As I said earlier, if you segment it out, if you look into the details of the market segment, the growth in the first quarter came only from mini-truck that we do not participate in and trailers where we have – we do have a big part of share. But there are other respect to it as well. I mean, if you look at it, partly we have been selling quite a lot of engine into off-road markets, particularly in the agriculture segment. Now, if you remember during the last conference call, the government enforced Tier 3 emission standard for off-road market from Tier 2 on October 1, 2015. As a result, the engine manufacturers are not allowed to sell – to manufacture engines that are not Tier 3 compliant except for export purposes. So that in a way affected our sales, especially the off-road market for agriculture and industrial application. As a result, our overall – total sales unit was also affected substantially.

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

I was curious, the inventory in the channel for the heavy-truck market, how would you describe that? We’ve seen a little better retail sales data, I’m just curious how much could there be a lag between better retail activity and flowing through to suppliers with obviously then the question being how much of these sales do you think are being served by current inventory and how high is that inventory?

Regarding the inventory in the channel, as far as we know currently and handy is it’s quite healthy. What I can say, because of the – actually the end user, they are quite hesitating then to [indiscernible] this stage, particularly now in the transition from National IV to National V. So I think [indiscernible] and then wait and see, and then full implementation of Nat V and then so they buy the new trucks. So also the OEM, they are also holding up their production as well. So in general, the distributors, they are not priming up the vehicles in that sort of market. So really in the end we believe it is in the range of about three to four months of inventory in the channel at this stage.

And how would you describe the inventory a year ago, I’m just getting a feel for that three to four months?

If you look back to the 2015, because of the implementation of the Nat IV, it’s actually the beginning of 2015, so having it there is still quite substantial [indiscernible] in the channel before the full implementation. So I think that’s just a little bit high at that end, but the whole year of 2015 is actually – by just some of those overcapacity there and now it’s a more healthy situation.

And my other question, a little bigger picture, if you go back four or five years ago, the construction markets were a big part of the truck demand. That’s obviously a lot lower today. There is word of some fairly large infrastructure planned, it’s a little grey areas still on exactly how is that squared up with not having debt fuelled spending, so we’re not sure exactly how to read it. But just to put it in perspective for us, can you remind us, if you go back five years ago, what percent of the truck demand do you feel was construction oriented and where are we today, just trying to get a feel for that potential if it did get better, what would you expect from that part of truck demand?

That’s going to be very difficult, what percentage of the truck is construction related, it’s going to be very hard to say. But all I can say now is that the construction truck, whether trucks used in construction application, as of today or this quarter is probably very high. It’s one of the areas that we’re particularly strong in, but because of the reduction in construction activity, actually our truck sale has been affected as well. For the rest of this year, we don’t see that it’s going to be a lot more – additional activities there obviously, but whether that is going to go up back up to five years ago, five years ago we’re talking about 20 level, which is at its peak, it’s going to be – I don’t think it will get back to that level. Now, the reason why I say that is because if you remember back in 2011, one of the main drivers of the construction activities is the [indiscernible] government funding to incentivize the economy or to stimulate the economy of China after the financial crisis. I don’t think the government is going to come in again with a big stimulus package like that. Understand if there is any, it will be more targeted. But just to give you an idea as to how much the heavy-duty truck has shrunk from 2011 to now, in 2011, we had over 800,000 heavy-duty trucks sold in the year. In the year of 2015, if you exclude the EV, the total number of heavy-duty trucks sold is around about 550,000 units. So the market has actually come down or came down a lot. We haven’t seen a big pick up yet in the first quarter of 2016, although there is some improvement.

Is it fair to say your position in those heavier trucks, if we do have some improvement in the next couple of years, is stronger than it was back five, six years ago? Because I know we’re not going to go back anywhere near the old level. I’m just trying to get a feel is there a little construction play for you if it gets better because you’re better positioned to get some of that market when five or six years ago I believe you were very small in serving that larger sized engine?

Yes, you’re right. If the construction activities improve over the next couple of years, yes, we will benefit from it. That’s the short answer. Okay, there is a question from the webcast. Where Rolls Royce JV [indiscernible] profit?

The JV now is still in the establishing stage so far and we are doing the anti-trust lining to MOFCOM and also to set up the company in Q3 of this year. So hopefully in the end we can have the production in them by next year. So we don’t expand – there will be a profit, good profit generation in the first three years of operation anyway. So we will have to wait until the [indiscernible] quality until we can generate a proper profit for the current companies.

There’s another question here relating to marine [indiscernible] first quarter in growth both the gross margin and average selling price for this type of engine. Unfortunately for us, in the first quarter of this year compared to the same quarter in 2015, our marine engines have sold quite well, including power generation. We actually have a good growth of 15% over the same period last year. Now, the engine’s average selling price of marine engines is much higher than truck or buses. I won’t go to the details as to mile or the dollar value, the margin is obviously higher compared to the other segments. All right. Next question here, as for the impact of engine sales for off-road Tier 2 to Tier 3 transition, what’s the outlook there? When will [indiscernible] going forward? Okay, this is another difficult one to say. Although this standard is a trial implemented in phases, the engine manufacturers are not allowed to produce any more T2 engines from October 1. The OEMs are not allowed to produce T2 engines from April 1 for the industrial applications and for the agriculture is end of December. So the impact for us, I think just to answer your question quickly, you will see from maybe 2017 onwards. So this year is going to be quite weak for the off-road.

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

Thank you to all for participating in our conference call today. We look forward to speaking with you again. Thank you and good-bye.

Ladies and gentlemen that does conclude our conference for today. Thank you for participating. You may all disconnect.