China Yuchai International Limited’s (NYSE:CYD) rating stays as a Buy. The 2H 2024 outlook for CYD and China’s Heavy-Duty Truck or HDT sector is favorable, taking into account the recent government policy offering subsidies for HDT replacements. The company has also engaged in substantial buybacks in the past few months, and the stock’s potential FY 2024 buyback yield could be as good as 10%.
This article highlights the policy tailwinds for the HDT industry in Mainland China and the progress that CYD has made with its share repurchase plan. The earlier June 14, 2024 update drew attention to China Yuchai’s business outlook and its initiation of a new share buyback program.
New Government Policy Will Likely Boost The HDT Industry’s 2H 2024 Prospects
CYD’s 1H 2024 performance was good, and the company’s results might be even better in 2H 2024 taking into consideration policy tailwinds.
The company’s top line and EPS grew by +12% YoY and +35% YoY to RMB 10.3 billion and RMB 5.88, respectively in 1H 2024 as disclosed in its results press release. China Yuchai delivered a +16% revenue beat and a +46% bottom-line beat according to S&P Capital IQ data.
At the company’s 2024 interim earnings briefing this month, CYD highlighted that its HDT engine unit sales increased by +33% YoY in the first half of the current year. In contrast, HDT unit sales for the Mainland Chinese market rose by a mere +0.3% YoY during the same time period, based on China Association of Automobile Manufacturers’ data.
In other words, China Yuchai managed to register strong growth and above-expected results in 1H 2024, even though China’s HDT industry performed modestly in the same time frame. I noted in my mid-June 2024 write-up that “CYD’s product mix optimization with a shift towards LNG (Liquefied Natural Gas) HDT engines could possibly pay off in the form of higher revenue.” This might help to explain why China Yuchai’s HDT engine unit sales have outperformed the broader industry.
Looking ahead, it is reasonable to think that CYD will achieve 2H 2024 results similar to or even better than the first half, if the Mainland Chinese HDT industry does well in the second half of this year.
Late last month, Yicai Global reported that China “introduced its first trade-in policy for commercial vehicles to reduce traffic emissions” where Chinese buyers can receive subsidies amounting to RMB 80,000 if they “purchase a new eligible vehicle and scrap the old one.” A HDT typically costs more than RMB 250,000 in China, so the subsidies (RMB 80,000) relating to the government policy are significant.
This July 26, 2024, Yicai Global media report also cited Chinese brokerage firm Citic Securities’ estimate that close to 600,000 existing HDTs in the country could potentially qualify for such subsidies. As a comparison, approximately 910,000 HDTs were sold in Mainland China last year according to Chinese automotive news portal CV World’s data. As such, China’s HDT industry could perform very well in 2H 2024, if a meaningful proportion of the owners of the existing 600,000 HDTs available for subsidies under the new policy choose to upgrade their existing vehicles.
In summary, China Yuchai delivered good results in 1H 2024, and the company’s prospects for 2H 2024 are even more favorable with the policy-related tailwinds for the Chinese HDT sector.
CYD Has Had Significant Buybacks In Recent Months
China Yuchai previously disclosed in early-June 2024 that the company will initiate a new share buyback plan with no end date. This will involve the repurchase of either four million of its shares outstanding or the spending of $40 million on buybacks, depending on which of the two milestones are completed first.
CYD revealed at its 1H 2024 earnings call on August 12 that the company had already bought back 2.7 million of its own shares since June, which is encouraging. It is not uncommon for companies to announce substantial share repurchase programs and carry out a modest amount of share buybacks subsequent to the announcements.
In the case of China Yuchai, the company has already completed two-thirds of its four million share buyback plan. Therefore, it is highly probable that CYD will repurchase at least four million shares or allocate $40 million to share repurchases before the end of 2024 or within a year.
There are two key positives associated with CYD’s aggressive share buybacks.
Firstly, China Yuchai’s potential FY 2024 buyback yield is 10%, assuming the conclusion of the company’s current buyback program before this year ends. This scenario seems very likely, taking into consideration the fast pace of share repurchases between June and mid-August.
Secondly, CYD is enhancing shareholder value by allocating capital to the purchase of its undervalued shares. As a reference, China Yuchai is currently trading at 9 times consensus for the next twelve months’ normalized P/E and 0.33 times trailing P/B as per S&P Capital IQ data.
Variant View
China Yuchai’s shares might do poorly under certain scenarios.
On one hand, CYD’s 2H 2024 results could come in below expectations, if HDT replacement demand under the new government policy turns out to be weak.
On the other hand, China Yuchai could leave investors disappointed, assuming that the company’s pace of share buybacks slows going forward.
Bottom Line
CYD’s shares are attractively valued, considering its P/E multiple below 10 times and its P/B ratio of under 0.4 times. The company is doing the right thing by buying back its undervalued shares in an aggressive manner. At the same time, the outlook for the Chinese HDT market has turned favorable in light of a new government policy.
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