Ladies and gentlemen, thank you for standing by. Welcome to the China Yuchai International Third Quarter Earnings Conference Call. [Operator Instructions]. I must advise this conference is being recorded today. I would now like to hand the conference over to your first speaker for today, Mr. Kevin Theiss. Please go ahead.

Thank you for joining us today, and welcome to China Yuchai International Limited's Third Quarter 2017 Conference Call and Webcast. Joining us today are, Mr. Wei Ming Ho 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 the Private Securities Litigation Reform Act of 1995. The words believe, expect, anticipate, project, targets, optimistic, confident that, continued to, predict, intend, aim, will or similar expressions are intended to identify forward-looking statements. All statements other than statements of historical facts 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 factors, 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 headings Risk Factors, 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, whether of the nature contained in the release and conference call made today 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 third quarter and nine months ended September 30, 2017. Thereafter, we will conduct a question-and-answer session. For the purposes of today's call, the financial results for the third quarter and nine months ended September 30, 2017, are unaudited and they will be presented in RMBand U.S. dollars. All financial information presented is reported using International Financial Reporting Standards as issued by the International Accounting Standards Board. With that, Mr. Hoh, please begin your prepared remarks.

Thank you, Kelvin. Our net revenue in the third quarter of 2017 grew 31.3% to RMB3.8 billion or $570.9 million or a 25.5% increase in units sold. Total engines sold by our main operating subsidiary, Guangxi Yuchai Machinery Company Limited, GYMCL, during the third quarter 2017 were 82,839 units compared with 66,013 units for the same quarter last year. Our average selling price also increased due to improved sales mix as we sold more higher-priced engines in the third quarter 2017, which is typically a seasonally slow period. This growth was a result of double-digit growth in the sales of heavy-duty and light-duty trucks in the key off-road market, offsetting lower bus engine sales. According to data reported by China Association of Automobile Manufacturers, CAAM, in the third quarter of 2017, sales of commercial vehicles, excluding gasoline-powered and electric vehicles, increased by 28% year-on-year. Truck sales continued to expand with sales up 31.8%, led by a 91.4% increase in heavy-duty trucks. Light- and medium-duty truck sales achieved a more modest growth rates of 5.2% and 14.2%, respectively. Bus sales growth was a modest 4.3% in the third quarter 2017 as heavy- and light-duty bus sales grew 0.9% and 6.3%, respectively, partially offsetting a 1.4% reduction in medium-duty bus sales. In the first nine months of 2017, the total number of engines sold by GYMCL rose 20% to 293,487 units compared with 244,575 units in the same period of 2016. The increase was primarily due to robust growth in the heavy- and light-duty truck segment, a higher growth in key off-road market segments. The strong increase in heavy-duty truck engine sales in the third quarter 2017 was due to the ongoing diminishing effect of the strict enforcement of China's overloading policy. China's GDP growth at 6.8% in the third quarter of…

Thank you, Weng Ming. Now let me review our third quarter results. Our net revenue for the third quarter of 2017 increased by 31.3% to RMB3.8 billion, $570.9 million from RMB2.9 billion for the same quarter last year. The total number of engines sold by GYMCL during the third quarter of 2017 was 82,839 units compared with 66,013 for the same quarter last year, an increase of 25.5%. Sales reflected the industry trend with higher engine sales to the truck segment and lower engines sales to the bus segment compared with the same period last year. Sales to the off-road engine market increased in the third quarter of 2017 with higher sales in the power generation, industrial and agriculture sectors compared with the same quarter last year. According to data reported by the Chinese Association of Automobile Manufacturers, CAAM, in the third quarter of 2017, sales of commercial vehicles, excluding gasoline-powered and electric vehicles, increased by 28.0%, led by an increase of 31.8% in the truck segment and a rebound of 4.3% in the bus segment compared to the same quarter last year. Gross profit increased by 20.7% to RMB761.2 million, $114.7 million, from RMB630.7 million in the same quarter last year. Gross margin was 20.1% compared with 21.9% in the same quarter last year. The decrease was mainly attributable to higher material costs during the quarter. Other operating income was RMB50.6 million, $7.6 million, compared with RMB12.4 million in the same quarter last year. The increase was mainly due to higher interest income from bank deposits, higher foreign exchange revaluation gains and higher fair value gain on held-for-trading investment compared to the same quarter last year. Research and development, R&D, expenses decreased to RMB139.6 million, $21.0 million, from RMB161.4 million in the same quarter last year. Lower R&D expenses…

[Operator Instructions]. We have the first question from Manas Tiwari.

My first question is regarding the gross profit margin. So the gross profit margin was strong year-over-year at around 1.8 percentage points. So can you provide some color on that? And what should we expect in terms of the gross profit margin going forward?

Yes, the material cause has been that commodity prices have been going up over the period from last year, all right? So that materially affected us. So I think we do have a slightly lower gross margin. But if you look at it on a year-to-date basis, you'll see 19.6% both this year and last year, all right? So I think we will not -- at the end of the day -- by the end of the year, we don't think the gross margin will be too different from what we had last year.

Okay. And when I look at the balance sheet, I see a huge jump in the short-term and the long-term debt. Can you just provide some color on that as to where the money is being used?

This is Thomas. The increase on the short-term debt, basically in anticipation of the oncoming investment on the National IV and Tier 4 development.

Okay, I'll add on to that. If you look at the cash -- the balance that we have highlighted in our announcement, the trade and bill balance receivables has gone up compared to last year by about CNY2.4 billion, right? So yes, part of the increase in these borrowings is to fund it. Now usually in our case, we will collect most of our receivables by the end of the year. So come end of the year, you'll see a big drop in the actual receivables. But we will still have a quite significant record of bank bills. The bank bills, as we have discussed many times over, is actually guaranteed by the bank, so the risk is very low. But actual receivables, come end of year, usually will be down significantly.

So just to provide more color on that, the receivables should come down by year-end and that should remain at around these levels only?

That will depend. We have -- I think it may remain or it may go down. But the receivables definitely will go down by the end of the year. And the last portion of the receivables is actually not, I'll call, open credit. A large proportion of that actually is bank bills.

Okay. And can you provide an update on the coming policy to subsequently phase out subsidies? Are there any changes or updated comment now [indiscernible] the phase-out strategy to EV manufacturers?

Okay. When you say subsidies, what are you referring to? Are you referring to the EVs or electric vehicles or what?

Yes, that's correct. Subsidies...

Okay. The electric vehicle subsidies has really come down at the beginning of this year.

Yes. So it's expected to come down for the next 3 years, right?

Yes, gradually. I think gradually, yes, that's the expectation, yes.

We have the next question from the line of Ke Chen.

My first question is regarding ASP. Do you see engine ASP going further, another 5% or more in next year, 2018, in light of forceful environment [indiscernible] in China as well as higher sales of bigger-powered engines and higher standard engines?

As a majority of our on-road engine sales are the engine of National V compliances, we cannot see any further price leap due to the emissions standard upgrade. However, sales in the higher-powered engine could possibly raise the ASP. Having said that, the volume of higher-powered engine sales is infinite at present.

Okay. So what's your market outlook for the gas hybrid as well as the Euro MTU engines going forward both in China as well as your export markets?

Regarding on the gas engine market, we see that will continue to grow because of the [indiscernible] policy banning of the heavy-duty trucks in some uncertain progress. So it will be going. And regarding on the hybrid engine, I think the demand remains slow, so it's a little bit sluggish. On the MTU engine, the demand this year on the engine is a little bit slow because of the exchange rate of the euro in comparing to the RMB. So it's actually increasing the cost for the MTU engine compared to our competitors. On the export market, there, we're still seeing a single-digit growth until the end of the year. So we expect that to maintain very similar more, both on the engine sales in 2018 and 2017 and because of the transition of the new emissions standard in certain countries and in the Southeast Asian regions. That's all.

I see, okay. My third question is regarding cash flow. I think you mentioned you have a very good operating cash flow in the last two quarters. And could you talk about the cash flow, operating cash flow in this quarter due to the company generating roughly $150 million cash flow? And then you also mentioned accounts receivables are coming down by year-end. So what's the estimation for operating cash flow for the full year?

Okay. Cash flow-wise, I think our business is very seasonal. So in the third quarter, what we usually do is we prepare for the fourth quarter. And so in the third quarter, we generally use cash more so than generating cash. But once this cash is used to produce the engines like [indiscernible] and later on translate into recuring money, then [indiscernible] the cash flow, part of the cash flow towards the end of the year. So normally for the whole year, we expect to see a positive cash flow, okay? But some of the cash flow will be tied up in bank bills, which will mature, we believe, about 3 to 6 months. But these are guaranteed, right? So we will not cash it out unless there's a need for working capital. Otherwise, we'll let it mature six months later and collect the cash at that point in time. This way, we will not be worried to minimize our interest cost. So for the end of the year, we should expect to see a positive cash flow. You'll be -- if you look at the EBITDA, it should be quite significant.

[Operator Instructions]. We have the next question from the line of [indiscernible].

I just have one question. What's your view on the fourth quarter heavy-duty sales volume in China? Will the year-on-year growth rate go up or be flattish or go down?

Sorry, can you please repeat that? I didn't quite catch it, the last part of the question.

I just want to know what's your view on the fourth quarter heavy-duty truck sales volume in China? Will the year-on-year...

Okay. Now if you look at the growth in heavy-duty truck, if you look -- go back four quarters, in the fourth quarter of last year, the heavy-duty truck engines grew very significantly, right? So now we are at a higher base now, so we cannot expect the growth to be -- achieve similar level of growth. So I think it would probably be flat in the fourth quarter for heavy-duty truck and also follow into the first quarter next year. We're actually now operating now at a much higher base. If you look at the total heavy-duty trucks sold in the last four quarters, the market has already absorbed close to 1.1 million trucks. So that's just [indiscernible] for China.

We have the next question from the line of Manas Tiwari.

I have just two more questions. The first question is regarding the bus engine sales. So we have seen some signs of recovery over the last two quarters. Do we expect the recovery to continue over the coming year? What is your view on the bus engine market for the next year?

Okay, the bus market [indiscernible] is broken out into two segments, right? The first is inner city transit buses. Now you know China has ceased, earlier we talked about this, subsidies for EV. So China is pushing very hard to electrify the inner city buses. So that probably will affect our business, okay, the inner city bus market segment will be affected. For the intercity buses, yes, there's still a market for us. So for the overall bus market, we do not expect to see a significant improvement. It's been a market that's significantly affected by the EV. But on the other markets, like the off-road market, they actually did much better in the last year if you look at it, what I said earlier. We actually grew 34% for the total off-road market. And our truck, heavy-duty truck segment [indiscernible] has grown about the same as the market. So while one down, in that case, we are lucky to have others that were able to mitigate the effect of the decline. So overall, as a result, we are able to still achieve a growth of 30% year-to-date.

Yes, okay. Yes, that's good. And one last question regarding the research and development expenses. So year-to-date, that has been around 3% of revenue, which is 1 percentage point lower year-over-year. So what should we expect going forward? Should that be, as a percentage of revenue, should be around 3%? Or should it go back to 4% level?

Okay. Now some of this is volume-driven, right? So we have larger volumes, the percentage will go down. But I think, as you know, there's going to be an implementation of National VI engines about three years from now and also an upgrade to T4 for off-road engines. So for the next three years, we will probably be spending some money to R&D to upgrade our engines to meet up with those two emissions standards. So we might see a bit higher R&D cost going forward in the next year.

We have the next question from the line of Ke Chen.

Yes, my question is regarding HLGE, you mentioned. Is the next step for CYI to fully divest HLG investments and fully focus on the core business?

Okay. Well, you know that we have made an announcement that we have divested 2 out of 3 [indiscernible]. So what is left in there is actually a very small piece of asset. In fact, if you look at the whole scheme of things as a percentage of the total assets of CYI, it is really not material, okay? So it's not [indiscernible] our time. While it is still there, we will manage it. But we have not decided what to do with HLG yet at this point in time.

[Operator Instructions]. We do have one question. This question is from the line of Wayne Fung.

This is Wayne Fung with China Merchants Bank International. I just have one question regarding the heavy-duty truck sector. So it seems that we have a high base for this year. So how do you think about the picture for next year? Are you expecting in China like 900,000 units? Or have you got any -- can you give us some idea about what will be the decline or the picture like?

We can't talk too much -- I mean, we can't put a number to it. But I think [indiscernible] is it stays flat. It may go down next year. It has already had a very, very good run in the last four quarters. For China, even if China achieves 1.1 million units of heavy-duty truck, it's a lot of trucks. So these trucks will take some time to digest before they come up for replacement. So yes, I think there will be some decline. But for other truck segments, like medium-duty and light-duty trucks, those two have not grown too much in the last four quarters. So we'll probably see some growth in there that will mitigate the decline in the heavy-duty trucks if there's any.

[Operator Instructions]. As there are no further questions at this time, I'd like to hand the call back to your speaker for any closing remarks.

Okay. Thank you all for participating in our conference call. We look forward to speaking with you again. See you next time. Thank you.