I would now like to turn the conference over to Mr. Kevin Theiss. Please go ahead, sir.

Hi, everyone. I'm Wong Teck Kow. I will start this call on behalf of Kevin Theiss. Thank you for joining us today, and welcome to the China Yuchai Limited's Fourth Quarter 2018 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 certain statements that 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 or update the forward-looking information whether of the nature contained in the release 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 fourth quarter and 12 months ended December 31, 2018. Thereafter, we will conduct a question-and-answer session. For the purpose of today's call, the financial results for the fourth quarter and 12 months ended December 31, 2018, are unaudited, and they will be presented in RMBand 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, Wong Teck Kow. For the fourth quarter 2018, we achieved a 19.7% top line growth and reached RMB4.5 billion or $660.4 million on a 27.5% sales volume growth to 93,881 units. We not only achieved double-digit growth in both on and off-road engine segment, but also recorded this growth in a slowing economy where China's GDP growth was 6.4% in the fourth quarter and 6.6% in 2018 full year, the slowest pace since 1990. The industrial production growth in China was 6.2% in 2018 compared with 6.6% in 2017. According to data reported by China Association of Automobile Manufacturers, CAAM, in the fourth quarter of 2018, sales of commercial vehicles, excluding gasoline-powered and electric-powered vehicles, decreased by 6.3%; truck sales decreased by 6.0% with heavy-duty truck sales increasing by 3.6%. GYMCL's heavy-duty and medium-duty truck engine sales in the fourth quarter 2018 increased with the latter growing by double digit in percentage terms. The bus market continued to decline in the fourth quarter 2018. GYMCL's off-road engine sales rose by double digit in percentage in the fourth quarter of 2018, led by higher sales in the agricultural equipment market. During the 2018 year, 800 buses manufactured by Anhui Ankai Automobile Company Limited were exported to Saudi Arabia and powered by -- exclusively by Yuchai's engines. Our heavy-duty YC6MK model was installed in 600 bus units with the smaller heavy-duty YC6L model powering the remaining 200 buses. The resource rich Middle East and Saudi Arabia in particular, continue to be important growth markets for our engine. Our research and development, R&D, expenses decreased by 53.4% to RMB107.7 million or $15.7 million from RMB231 million in the same quarter in 2017. We capitalized the development costs of new engines that met IFRS capitalization criteria. In fourth quarter 2018, our total…

Thank you, Weng Ming. The comparative figures for the fourth quarter and 12 months ended December 31, 2017 were restated due to the adoption of IFRS 15 from January 1, 2018, for revenue from contracts 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 our fourth quarter results for 2018. Net revenue increased by 19.7% to RMB4.5 billion, $660.4 million compared with RMB3.8 billion in the fourth quarter of 2017. Gross profit decreased by 18.0% to RMB0.9 billion, $125.6 million compared with RMB1.1 billion in the fourth quarter of 2017. Gross margin was 19.0% in the fourth quarter of 2018 compared with 27.7% in the fourth quarter of 2017. The decrease in the gross margin was mainly attributable to the market conditions and product mix. The market conditions resulted in a drop in the average selling price compared with the fourth quarter of 2017. The product mix effect was from a higher sales volume of lower -- smaller capacity engine, a lower average selling price and a lower gross profit from off-road engine sales as compared with the fourth quarter of 2017. Other operating income was RMB64.4 million, $9.4 million compared with RMB370.6 million in the fourth quarter of 2017. The decrease was mainly due to a onetime gain in the fourth quarter of 2017 of RMB324.1 million on the sales of HL Global Enterprises Limited, HLGE, hotel assets. Research and development, R&D, expenses decreased by 53.4% to RMB107.7 million, $15.7 million from RMB231.0 million in the fourth quarter of 2017. Lower R&D expenses was mainly due to the capitalization of development costs for National VI and Tier 4 engine that met the IFRS capitalization criteria. In the…

[Operator Instructions]. And we have our first question from the line of William Gregozeski from Greenridge Global.

I wanted to know what your outlook for the commercial market was in 2019? And given that you outperformed in each segment on this current reporting period, if you think you can repeat that in 2019 and then what the gross margins will be for this year?

Okay. Thank you. Thank you, William. It's Weng Ming here. If you go by segment-by-segment I think I will give you more color. Now before that let's look at the regulations in the next 12 to 18 months. In the next 12 to 18 months, there is going to be the National VIA implementation in China with the official implementation dated in the middle of next year. But some cities are bringing forward the implementation date to the end of this year, all right. So now -- and also, if you look at the last two years for -- just let's talk about heavy-duty trucks, for that matter, it's been at a very high level of over 1.1 million units. So this is pretty high. I think there are a quite few engine manufacturers who are actually thinking that the -- you will drop somewhat in the year 2019. However, because of the implementation of the National VI in the later part of this year and early next year, the decline will probably be mitigated somewhat by the prebuy of the National VI engines. In the case of bus engines, I think it's going to be flat. The incentives for EVs is coming off. So we doesn't -- we think that bus market has come -- reached a mature point and the diesel engine bus is going to be flat for next year. For off-road engines, I know the market is weak, but we have been able to grow quite significantly, especially in the last quarter for our agriculture machinery engine. We will be getting the market share there, so we think that will continue for us. Now in terms of gross margin, if you look at our gross margin for the full year, and if you look at it on a quarter-by-quarter basis, it averages about 19%. So the full year gross margin is about 19%. It's a little bit lower than last year of 21.7% for whole year. So going forward, I think, this will be a good number to use. Hope that answer your questions?

We have the next question from David Raso from Evercore ISI.

Question about the new National VI engine. What will be the impact on the average price point?

I believe the -- because of emission requirements for National VI are so much more stringent than National V, the components that's needed to make it happen. We believe the price point will be higher than National -- what National V would be.

Can you help us with a little bit of quantification just trying to understand the desire to prebuy is probably predicated a little bit on how much more expense that the National VI are? And I'm just trying to understand to try to think through the impact. Is it -- I know it's a big jump, but I mean is it -- let's talk to total truck and maybe not your engine, when you think of the truck price, is it 5%, 10%?

Okay. If you look at the engine price, I mean, if you look at the truck side, engines are a big component of a truck. If you look I think -- I guess, it appears the thing is that, at this point, we haven't actually finalized any pricing yet with our OEMs, but we expect it to go up by at least 5% to -- no, I think would be more than 5%, at least 10% to 15% in terms of pricing.

And with that kind of increase, and I appreciate your thoughts, there'll be some prebuy, have some of your truck customers already indicated strengthening of their build schedules later in the year related to the prebuy? Or is it still a little bit more speculative that there will be a prebuy? I'm just curious to see, it's a logical thought, I'm just not sure if -- are we yet hearing from the manufacturers their planning for it.

Right. Yes, David, in our case, we will have visibilty for up to a month, right? We get a month's order for delivery. So it's a lot of -- it's a bit of an assumption on our part here that there must be some prebuy partly largely because we expect the cost of the new vehicle to be higher. In fact, based on what I just said earlier, it will make a difference in the pricing to buy earlier.

We have the next question from the line of Ke Chen from Shah Capital Management.

My first question is regarding your market share. Obviously, you have outperformed the market in the fourth quarter significantly. And could you talk about your market share, especially in the marine and power generation? What's your market share today? And what's your projectary as we already know that maybe bus and agriculture is already #1 in the market?

Mr. Chen, this is Kelvin. I mean, the -- talking about our market share in the Q4 for marine and power generation, we actually -- we had recorded a small growth in the power generation. But on the marine side, there is a little bit of drop. And so -- but along the whole year, we are very -- little bit much better than the industry in overall sales we have been made. However, the -- even then we had a slight drop in the marine segment, but we had a more share on the high horsepower engine which -- and there is a benefit to overall sales revenue and also on the profit level of the marine segment. So that is really an advantage of the whole operation.

Okay. My second question is regarding your new strategic alliance with OEMs. Weng Ming mentioned Shaanxi because the new National VI engines, I'm wondering, do you see maybe 10% or higher sales uplift from your new partners like FAW and other OEMs in 2019 because of all these new engines? And also because of it's a capital-intensive new product, do you see your market share increase because of smaller engine competitors going out of business?

Okay. It's Weng Ming here, Mr. Chen. Now obviously with this -- now these new OEMs that we signed up as strategic partners, we will see a increasing number of engines will be sold to them. Now whether or not that reaches 10%, I think it's a bit too early to say. Personally, I don't think it will hit 10% within the first year of cooperation if that is there. It will gradually build up. And also because the actual National VI full implementation is not this year, it's going to next year, middle next year, there will be some major cities that will implement this year, so we will see some improvement, I believe. But I don't think we will see the full impact until the National VI is fully implemented.

Well, we did hear a lot of cities actually implemented July 1 of this year, so that's different from what you mentioned in the prepared remarks. So I just want to make sure that...

Well, I mean, in the last year, they have mentioned it, but I think lately, if you look at this year's announcement, some of the cities are actually pushing back the implementation dates.

[Operator Instructions]. We have the next question from Andrew Norris from Lazard Asset Management.

I have a just kind of clarification on the gross margins, and I think you kind of highlighted in respect to why Q4 this year gross margins were less than what they were last year due to the mix effect. But my question here is that the magnitude of that difference is so great, yet if I take your volume of engines sold and divide the sales into the volume, you basically don't get that much of a significant decrease in the overall ASP. So can just kind of highlight exactly what's going on, on a year-over-year basis? Because if I look also on Q4 '16, you also kind of generated 27% gross margin similar to what it was last year in Q4, but this year is basically almost 800 basis points less or 900 basis points actually. So I think there is something more to it. So I just want to understand what's driving that real big difference because I do see also the cost of goods sold is significantly higher than it was last year? Any detail on that will be great.

Andrew, this is Thomas. As we explained, the market condition that resulted the change -- the drop in the average selling price, as you would have analyzed the financial statement, you will see that approximately 7% drop on the average selling price from -- as compared with the Q4 of 2017 so that would have contributed. But if you look at a year-to-date, you will see that the year-to-date is pretty much flat quarter-by-quarter is we stay at a range above 19%. So I would say that, overall the full year, the percentage are very constant.

Yes. But if you look at the cost of goods sold, you will have $535 million of cost of goods sold in Q4 '18 this year versus $400 million last year, so that's a $135 million. So if you're thinking that your mix is weaker or a different mix with small engines, I would think that the cost of those engines will be less than what it was. So I'm just trying to kind of understand better, what's going on in these Q4s?

Yes. Andrew, it's Weng Ming here. Now I think mix is one big major factor that caused the fourth quarter to drop this year. But if you look at our gross margin, quarter-by-quarter, from 1 to 4, the gross margin is a little bit higher than the same period last year, especially in the first quarter, all right. So now the other thing is -- that we need to highlight here is that, I think, come, at the end of the fourth quarter, we issue -- we'll make provisions for our sales rebates for performance of sales -- volume rebates, payments certain conditions that we have to meet. So we have made the necessary adjustments in the fourth quarter. So this year, I think, there are a lot of customers who have met our -- the sales conditions. So there's a bit of increase in the sales rebates as well back to customer for volume for -- to achieve kind of volume and whatnot, right, so that also has a impact. And the other impact of our cost is the mix. We are selling a lot more -- less four cylinder engines in the fourth quarter this year or even throughout this year compared to the same period last year.

Right. So those -- these provisions that you basically -- so it's a rebate back from the customer if they didn't meet certain volume?

Yes. There are few conditions that is required to meet. One is, of course, the volume, right? In order to achieve certain sales volume, we have a step-up to have rebate systems to them. And the other one, of course, is the payments. We expect them to make regular payment or prompt payment. If you look at our receivables, you see that our collection's actually very good if you take the yields. Our total payout days is less than that a month, about 2 weeks or less. So that drives it. So there are various conditions, I won't go into a lot of details that go through the initial customers to determine whether or not they meet the requirements and are titled to the rebates as agreed. And I'm not allowed to talk a lot about negotiations.

So just to kind of -- if I understand this correctly, so in Q4 '17 you basically had these payments back or whatever provisions that were kind of written off or written back that reduced the cost of goods sold?

More towards the pricing, which was further expected due to cost of goods sold.

We have the next question from the line of Ke Chen from Shah Capital Management.

Weng Ming, you mentioned about Eberspaecher joint venture. Could you guys talk about more about other joint ventures like MTU, Zoomlion and CIMC? And how this joint venture will impact our future bottom line?

Mr. Chen, this is Kelvin, again. I'd like to answer about -- regarding on the -- some of the joint ventures under GYMCL. Regarding on the MTU-Yuchai, I mean, the Baotou, China has already been expanded and now they can ready for full-scale production. But in the year 2018, production is only around 100-plus unit, but in the year 2019 they will really introduce and then the production volume [indiscernible] for 400 units. So this is another picture on the MTU-Yuchai joint venture. Regarding on the Eberspaecher Yuchai, that JV for the aftertreatment facility manufacturing has already been -- the company has already been set up and the renovation work for the factories are now being processed. So we are planning an [indiscernible] joint venture in operation by Q3 of this year. And so that will be the main supplier for the Yuchai engine for the next 6 engine and also too many in future. Regarding on the YC engine, our 6K engine joint venture with the CIMC, so that one and then -- also we will expect there will be slight growth on the engine production in the year 2019 mainly because we have new market on the off-road for the 6K engine, so that's the -- some of the update for you.

Okay. Well, my second question is regarding your patents. As a leaders in National VI engines, could you talk about how many issue patents for your products? More importantly, how you capitalize these patents like, for example, for future domestic and international licensing revenues?

This is Kelvin, again. We have a number of patents for the National VI and also Tier 4 engine. I'm not going to declare the numbers of patent here. But most of those patents will remain the propriety of the Yuchai instead of the licensing or transfer. And then at the moment, we don't have any pending licensing of these patents to other manufacturers or to rather any third party.

Thank you. We have now reached the end of the Q&A session. I will return it now back over to Mr. Hoh.

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

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