Ladies and gentlemen, thank you for standing by and welcome to the China Yuchai second quarter 2016 financial results conference call. At this time, all participants are in a listen-only mode. [Operator Instructions] Now, I would like to hand the conference over to your first speaker for today, Mr. Dixon Chen. Please go ahead, sir.

Thank you. Thank you for joining us today. Welcome to the China Yuchai International Limited 2016 second quarter earnings conference call and webcast. Joining us today are Mr. Weng Ming Hoh and Dr. Thomas Phung, 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 will remind all listeners that throughout this call we may make statements that may contain forward-looking statements within the meaning of 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 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 these 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 Dr. Phung will review the financial results for the second quarter and six months ended June 30, 2016. Thereafter, we will conduct a question-and-answer session. For the purpose of today’s call, financial results for the second quarter 2016 are unaudited and they will be presented in RMB and US dollars. All financial information presented is reported using International Financial Reporting Standards, IFRS, as issued by the International Accounting Standards Board. Mr. Hoh, please start your presentation.

Thank you, Dixon. Sales in the second quarter of 2016 continues to reflect slower economic growth in China as GDP grew 6.7%, the same as in the first quarter, which is the slowest growth since 2009. This slowdown combined with increased competition and the resultant impact from the transition to the most stringent Tier 3 emission standards in the off-road segment caused the decline in our sales volume. The total number of engines sold by GYMCL during the second quarter of 2016 was 87,791 units compared with 115,208 units in the same quarter of 2015, a reduction of 23.8%. Our revenue for the second quarter of 2016 declined 11.1% to RMB 3.7 billion or $552.4 million compared to RMB 4.1 billion in the second quarter of 2015. The decline in net revenue was less than the decline in units sold due to a higher average selling price from a greater proportion of higher-priced National IV and V engines sold in the second quarter of 2016. According to data reported by China Association of Automobile Manufacturers, CAAM, excluding sales of gasoline powered and electric vehicles, in the second quarter of 2016, sales of buses declined by 8.5%, led by a 21.8% decrease in heavy-duty bus sales, while truck sales increased by 6.7%. Sales of electric commercial vehicles continued to grow strongly year-on-year, which impacted our sales in the bus market. In the first half of 2016, the total number of engines sold by Guangxi Yuchai Machinery Company Limited, GYMCL, was 178,562 units compared with 220,254 units in the same period of 2015, a reduction of 18.9%. Sales of electric commercial vehicles in the first half of 2016 recorded strong growth, which affected our bus sales. Lower diesel fuel prices also impacted sales of our natural gas engines. Furthermore, the nationwide transition…

Thank you, Weng Ming. As this is my first earnings call with China Yuchai shareholders and analysts, I would like to take the opportunity to express my confidence in the future of this company and I look forward to working with everyone as we grow the company further. Now, let me review our second quarter results. Revenue for the second quarter of 2016 declined 11.1% to RMB 3.7 billion or $552.4 million compared to RMB 4.1 billion in the second quarter of 2015. The total number of engines sold by GYMCL during the second quarter of 2016 was 87,791 units compared with 115,208 units in the same quarter of 2015, a reduction of 23.8%. The decrease was due to the general slowdown in the Chinese economy, increased competition as well as the resultant impact from the transition to Tier 3 emission standards in the off-highway segment. The company's sales in marine segment increased as compared with the same quarter of 2015. The company's decline in net revenue was less than the decline in unit sales due to a higher average selling price resulting from a greater proportion of higher-priced National IV and V engines sold in the second quarter of 2016. According to data reported by the China Association of Automobile Manufacturers or CAAM, excluding sales of gasoline powered and electric vehicles, in the second quarter of 2016, sales of bus declined by 8.5%, led by a 21.8% decrease in heavy-duty bus sales, while truck sales increased by 6.7%. According to CAAM, in the second quarter of 2016, the sales of commercial vehicles, excluding sales of gasoline powered and electric vehicles, increased by 4.5% compared to the same quarter in 2015 and sales of electric commercial vehicles continued to grow strongly year-on-year, which impacted GYMCL's sales in the bus segment.…

Thank you, sir. [Operator Instructions]

We have a question here from the audience. Will the company profit from One Belt, One Road?

Okay. Yes, we have been. Our exports have been doing quite well in the last couple of years, last two or three years. Last year, our exports grew about 22%. And this year – so far this year, we continue to grow about 4%. Okay? So we have been selling quite a fair bit to our surrounding regions, specifically in the Southeast Asia regions plus the Middle East.

Operator, let’s go to take some questions from those people who have dialed in. Can you please put Mr. Paul Gong from Citibank on the line?

Sure. Sure. Mr. Paul Gong, your line is open.

Hi. Good evening, Weng Ming and Thomas and management members. Please, I have two questions. The first one is, it seems that to me that the truck and bus numbers year-to-date has been relatively okay, especially on the truck side. For medium and heavy-duty parts, I think in the first half, it was double-digit growth. And on the bus side, large bus and medium bus combined together also kind of double-digit growth. Although I understand part of this bus growth is driven by the electric bus, so you may not benefit from that, but when I see the volume was almost like 20% decline, I almost feel -- I find it difficult to understand what has been behind in terms of the decline in the volumes. Is it because of market share loss or is it because of something like a switch of the different moving parts within this engine sales number? And my second question would be, it seems that the electrification is the kind of megatrend. And, obviously, when we’re doing these diesel engines, we’re kind of not in the good position. I also noted that you still spend 4% of the revenue as R&D. May I get a little bit idea of what is major R&D direction in terms of your R&D spending? Thank you.

Thank you, Paul. Okay, this is Weng Ming here. Yeah. Well, for this year, I think the growth in the truck market is mainly in the mini trucks as well as in the trailer segment. Unfortunately, for us, trailer segment is not our strength, so we have not been able to capitalize on the growth in the trailer segment, which has been quite significant this year, especially for the heavy-duty truck. And also, for this year, we noticed that the growth for this year came mainly from the Northern China region, again, which is a region which we are not very strong in, which is where our competitors are strong in. So that has affected our sales. And the third element that also affected us is because, I think, the growth is mainly driven by the OEM engines – OEMs using their old engines, so people like [indiscernible] old engine plan. And they also try to use as many of their own internal engines as possible. And that was – that contributed to the growth so far this year. For the bus market, yeah, it has been growing. Yeah, we have been affected by the electric vehicles significantly, in particular, in the 7 to 8, 9 meter range. It’s where the electric vehicles is growing at its fastest. And that happens to be our strongest segment of the bus market. As a result, there, we have suffered more than – most in that sense. Okay? Now, for the question in relation to R&D, now, as you know, the National V standard is going to be implemented and enforced next year. We already have our engines ready for that, so we’re not worried about that one. But we have to prepare ourselves for the future. We believe that National VI engines emission standards will come in within the next five years. So we have to start – we will invest more to build out our product offerings or platforms for the National VI engines. And that’s the main driving force for R&D this year. And also, again, last year, the government has implemented Tier 3 off-road engines. We also are, again, spending some money on that area to improve our engines and improve our product portfolio and also improve the performance of our engines. Okay? Hope that answers your questions.

That’s helpful. May I have a quick follow-up? You mentioned about the – that was doing relatively well in terms of truck sales, while the construction side, I guess, that is relatively a weak part for the truck sales year-to-date. But, recently, we’re seeing from commerce that the machinery utilization hours in China had a rapid improvement. So does that give you confidence in terms of the second half and next year’s outlook?

This is in relation to the industrial engines, you’re talking about?

The machinery.

Machinery, okay, okay. Well, we’re not seeing the improvement so far this year in our business. My personal view is that it’s probably flat for the rest of the year. It might even reduce a little bit.

Okay, thank you very much. I’ll get back to the queue.

Thank you. Your next question comes from the line of Mr. David Raso from Evercore. Please ask your question.

Hi. Good morning, good evening, everybody. My question relates to the inventory in the channel. What are you seeing – if you can maybe take us through the off-highway markets and on-highway markets. Where are we on the channel? I spoke some of the component suppliers, the gap is some of the better retail activity we see isn’t necessarily flowing back to the components suppliers. So can you help us gauge better the gap between some of the retail activity and some of the component sales? What is the inventory level?

Hi, David. This is Kelvin. So far, in the truck market, the inventory level is quite healthy at this stage. And as you can understand, the sales of the heavy-duty and medium-duty trucks in the first half is pretty good because of the – especially in the trailer segment. But, unfortunately, we have not benefit from the trailer because our engine is not that strong in that particular market. Regarding on the off-road segment, the inventory is also quite healthy because we are now in a transition period between the T2 to T3. So most of the OEM, they are actually in the stock clearings and then try to sell – to clear all the T2 machinery they have and also in the transition to T3. And we’re also commencing receiving order for the T3 machinery engine as well.

Would you mind defining healthy a little bit more just so I understand how far we are into the process of clearing out the inventory?

Sorry?

When you say healthy, can you quantify a little bit what do you mean by healthy? You said the inventory is healthy in truck and off-highway.

In the truck market, it’s about two to three months’ inventory only.

And where was it four months ago? I’m just being hopeful that we have kind of gone through the transition. Where would you describe the inventory stayed at, say, at the start of the year?

At the beginning of this year, they are about four months and then something like that, so they are actually improving.

Okay, that’s helpful. So it’s only gone from four months down to two to three months. And this, you would argue, is sort of an appropriate level? There really shouldn’t be any longer any difference between retail activity and what the manufacturers and the component suppliers should see going forward? Is that a fair summary of the inventory level and production growth at retail?

If you recall, in the year 2015, the central government, they did approve quite a lot of the infrastructure projects. But, so far, we haven’t seen the signing of the – moving of those infrastructure projects. So there’s a lot – everybody put a lot of hope and they should be going on, if not later this year, maybe by beginning next year. So, I think, from the end-user side, there should be some of them and they are encouraging to buying the new trucks or replacing the old trucks in the process. But until the funding is available, we cannot imagine they will be picking pace [ph]. But this has quite put a lot of hopes on the market anyway. So I believe that the OEM, they will also picking up the powering [ph] and then to increasing the production, catching up the replacement cycle. But, again, we don’t have the magic stick and we cannot imagine when it will happen.

Okay. But, again, whatever one may think retail demand could be at the end of this year into next year, your business, a manufacturer selling the end machine, should not have much of a gap between their activity and what retail demand is. We’ve kind of gone through the inventory correction, just to clarify. That’s how you view the market going into next year? Whatever one forecasts the demand is is up to them, but there is no inventory overhang at all at this stage or at least, let’s call it, healthy, as you described it, is that fair?

Yeah, that’s a fair comment.

All right. Very helpful. Thank you so much.

Thank you. The next question comes from the line of Luang Wang [ph] now. Please ask your question.

Hello. Can you hear me?

Yes.

I have two questions. And the first question is that, when we look at Weichai [indiscernible] and other companies, that [indiscernible] is much better than you. And so, why is that? Because your [indiscernible] dropped by almost 24% in the second quarter. And the second question is that, you have almost RMB 3 billion cash – bank cash on your hand. And how will you use that cash? Thank you.

It’s Weng Ming here. Yes. [indiscernible] Weichai, yes, they are performing a little better than us in this quarter. I think Weichai trucks, as you probably know, is in the heavy-duty engines. I would think they are also quite strong in the segments that is growing quite strongly in the first half of this year. These are the segments they are strong in which we are not so strong in. So, as a result, I think Weichai has grown better than us in this year. But if you look at last year, the reverse has happened. We grew better than Weichai because of the cyclical nature of the business, whereby the segments that we are strong in grew stronger than them. So this year, unfortunately, it’s gone the other way. All right? Now, as far as the cash that we have, yes, we have a bit of cash. We’re trying to conserve cash. All right? The market is not so strong now. So we’re conserving cash and hope to reduce our borrowings, both short and long-term. And we expect that we can, hopefully, reduce our cost of financing, which, if you look at our numbers, there’s really a significant improvement in financing. For now, I think the cash is healthy, yes, but I think we’d like to conserve it for now and wait for opportunities in the future.

Okay. And one follow-up question is that, your RMB 3.6 billion cash, I want to know that, how much is in Guangxi and how much is in your parent company.

The most of it are held at the operating level, Guangxi Yuchai Machinery Company Limited.

[indiscernible] RMB 3.6 billion is in Guangxi?

Most of that, about – probably, you can say, it’s close to RMB 2 billion to RMB 3 billion there.

I want to know how much.

About RMB 3 billion.

RMB 3 billion. Okay. And the last RMB 0.6 billion is in your Singapore company?

Yeah, yeah.

Okay, okay. Thank you. Thank you.

[Operator Instructions]. As there are no further questions at this time, we have now reached the end of our Q&A session. And I will turn the call back to Mr. Hoh. Please go-ahead, sir.

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

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