Welcome to the China Yuchai International Limited 2018 Third Quarter Conference Call and Webcast. [Operator Instructions] On the call with us today, we have Mr. Weng Ming Hoh, China Yuchai International President; Dr. Thomas Phung, China Yuchai International CFO; Kelvin Lai, China Yuchai International VP of Operations; and Mr. Kevin Theiss, Investor Relations. I would 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 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 conditions, 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, 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 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 our update the forward-looking information whether of the nature contained in the release, or made during 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 third quarter and 9 months ended September 30, 2018. Thereafter, we will conduct a question-and-answer session. For the purposes of today's call, the financial results for the third quarter and 9 months ended September 30, 2018, 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 begin your prepared remarks.

Thank you, Kevin. For the third quarter 2018, China's GDP growth slowed to 6.5% from 6.7% in the second quarter, and 6.8% in the first quarter of 2018. These numbers represent the weakest growth since the first quarter of 2009. Industrial production in the month of September grew by 5.8%. Fixed assets investments for January to September grew by 5.4% year-over-year, and China's economy grew 6.7% percent year-over-year in the first 9 months of 2018. According to data reported by China Association of Automobile Manufacturers, CAAM, in the third quarter of 2018, sales of commercial vehicles, excluding gasoline-powered and electric-powered vehicles, decreased by 15.2%. The truck market unit sales decreased by 15.6%, led by a 31.1% decrease in medium-duty truck sales and a 33% decline in heavy-duty truck sales. The bus market decreased by 12.3% with significant decline in medium-duty bus sales. Our net revenue for the third quarter of 2018 decreased by 15.8% to RMB3.2 billion or $403.6 million compared to RMB3.8 billion in third quarter of 2017. The total number of GYMCL engines sold during the third quarter of 2018 was 71,062 units compared with 82,839 units for the same quarter last year. Our lower-engine units sales in the third quarter of 2018 was generated by lower truck and bus sales, except for higher medium-duty truck engine sales, and increase in several off-road markets, including agriculture and power generation segments. Our off-road engine segment continues to contribute higher unit sales and it's a great part of our total sales. For the first 9 months of 2018, our engine unit sales were down 4%, with increases in medium-duty truck engines, industrial engines and other off-road engine sales. Net revenue declined 5.5% to RMB11.7 billion or $1.7 billion compared with RMB12.4 billion in the same period last year. Our gross…

Thank you, Weng Ming. The comparative figure for the third quarter and first 9 months ended September 30, 2017, were restated due to adoption of IFRS 15 from January 1, 2018, on revenue from contract with customer by a full retrospective application. The financial impact on the adoption of IFRS 15 is described and attached at the end of the press release. Now let me review the third quarter result for 2018. Our net revenue for the third quarter of 2018 decreased by 18 -- 15.8% to RMB3.2 billion, $463.6 million from RMB3.8 billion for the same quarter last year. The total number of engines sold by GYMCL during the third quarter of 2018 was 71,062 units compared with 82,839 units for the same quarter last year, a decrease of 14.2%. Sales reflect industry trends with lower engine sales to the truck and bus segment compared with the same quarter last year. Sales to the off-road market increased in the third quarter of 2018, primarily due to higher sales in the agriculture and power generation sector compared with the same quarter last year. According to the data reported by the China Association of Automobile Manufacturers, CAAM, in the third quarter of 2018, sales of commercial vehicle, excluding gasoline-powered and electric-powered vehicle, decreased by 15.2% overall compared with the same quarter in 2017. This includes a 15.6% decrease in the truck segment and a 12.3% drop in the bus segment. During this period, the sales of heavy-duty and medium-duty trucks dropped by 23.0% and 31.1%, respectively. Gross profit decreased by 16.2% to RMB607.7 million, $88.3 million, from RMB725.5 million in the same quarter last year. Gross margin was 19.1% compared with 19.2% in the same quarter last year. Other operating income was RMB44.1 million, $6.4 million, compared with RMB50.6 million in…

[Operator Instructions] Our first question comes from the line of Mr. David Raso from Evercore ISI.

Two questions. One, the gross margins held up a little better than I would have thought with that type of volume decline. So if we think the next couple of quarters could also be a little challenging on year-over-year revenue growth, can you give us some examples of why we should be comfortable the gross margins can continue to hold off that well? And then the second questions about, what are you seeing on your orders for on-highway relative to the revenue growth you just posted. Just trying to get a sense of how to think about modeling the revenues the next couple of quarters.

Now in the case of -- let me answer the first question first relating to the gross margin. We have this ongoing program whereby we will -- this is called a lean manufacturing, where we take cost out of the operations, we have been doing that every year. And we also renegotiate the components with our suppliers every year as well. So every year, we're able to bring down some cost. As to the percentage of cost reduction, there is target every year. So even though we had a drop of these sales slightly, but we're able to maintain the gross margin because of that. One is the take out cost -- the lean manufacturing taking cost out. The other one is the mix as well. We are selling more high-horsepower engines -- so competitor the same period last year, there's a growth there. This high-horsepower engines are because has higher revenue and so has higher margins as well in terms of contribution. Now in terms of order, I think, the market the way I look at it is that -- I mean, if you look at the first 6 months of the year, there seems to be a quite significant growth. But the growth slowed down or declined -- the market started to decline in the third quarter. So going forward, this quarter, we expect to see the decline to continue due to the effect of growth to be so strong -- I mean it's been very strong over the last couple of years, so I think it's time for it to perhaps come down. And for the next quarter too, we'll probably expect a little bit of decline as well. Hope that answers the question?

The year-over-year declines, do you foresee from your conversations with customers, maybe some indication from early insight into some pre-buying related to the new emission standards, when would you foresee the revenues year-over-year begin to flatten back out? I know it's hard to predict, but just trying to get a sense on when the revenues and margin will flatten out.

The implementation of the National VI for on-road, so the full implementation was, of course, officially set at first -- is sub-2020. Some big cities -- in fact, many big cities has brought forward the implementation to next year, in some cases, later part of next year. So with that, we would expect to see some pre-buy for Nat VI. Of course, Nat VI engine is presumably going to be more expensive than the National V engine. But also at the same time, we must remember that in the last two years, there has been a very strong growth in the heavy-duty and medium -- heavy-duty, especially, engines, trucks in the last year until about the third quarter of this year. So, yes, there'll be some pre-buy but -- and also, yes, at the same time, there has been quite a bit strong growth. So that may even itself up a bit, I think.

Your next question comes from the line of William Gregozeski, from Greenridge Global.

You mentioned selling more higher-horsepower engines. Can you disclose what percent of your engine sales in the quarter, and the year-ago period were light-duty engines?

In terms of growth?

Units sold.

No. We don't provide that level of detail in our conference call normally. But the light-duty engines for trucks, in our case, for quarter 3, we saw a decline in light-duty trucks. Whereas I think the market has seen an increase -- also a small decline. But we don't -- light-duty truck engines is not a big part of our business.

As far as the unit decline, is that -- the year-over-year decline, is that just related to the market weakness? And you guys have the incremental weakness from buses going electric. Is there any other big drivers that are going to continue on in coming quarters where you might be weaker than the market?

No. I think the -- no it's actually due to the segments that our OEMs are stronger or weak in. So we're very much depends on the driver the OEM is slow. Now a lot of it, I would say, is in line -- is along the line of the market movement.

And then it looks like you held your operating expenses quite a bit tighter than normal. Is that something we can expect in these weaker quarters coming ahead?

Were you referring to operating expenses or referring to just selling and distribution expenses, or R&D as well?

Both.

Both? Okay. In terms of R&D, if you look at the numbers, yes, we're down more than the previous year. It's because -- largely because of the -- our capitalization of some of the R&D costs. This is required by the IFRS. So that dropped out bit of the R&D cost. And the cost of the coming implementation of T4 and the National VI engines, most of the R&D are geared towards those two platforms. So some of them got -- those got qualified got capitalized during the quarter.

And then as far as the -- just the SG&A then, that also be relatively tied to top line?

SG&A, yes. The selling expenses is definitely tied to the top line, but general and administrative expenses is, more or less, fixed. But again, it's kind of semi-variable.

[Operator Instructions]

Okay, we have a question. So how will the China's economy impact CYD? And where are our strength that will pull us through? Now as I mentioned earlier, the general economy of China has slowed slightly. But still, it's still way ahead of a 6% growth rate. So it hasn't really slowed down that much. Now we have slowed down a little bit in our third quarter sales as well. That's effected by the economy. Now I think going forward to the next year, the implementation of Nat VI and the coming implementation of Tier 4 will help us drive -- bring us through the difficult -- the slowdown that we see now. We already got our engines ready for those two upgrades. So we'll be ready when the time comes in the next year or two.

[Operator Instructions] There are no further questions at this time. I would like to hand the conference back to today's presenter.

Okay. Thank you all for participating in our conference call. We look forward to speaking with you all again. Thank you. Bye-bye.

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