A Strong Start
in 2014 - Revenue is Booming
China Yuchai
International Limited (NYSE:CYD) is starting off fiscal 2014 with a
bang. China Yuchai reported a 19.6% increase in revenues compared
to the same quarter last year, and earnings per share came in at a solid 78
cents per share, which would make for an annualized earnings of $3.12. This puts
the PE ratio in the single digits at around 6.5 at the time of writing this
article (7/27/2014). Net income increased 3.5% compared to the same quarter last
year, which doesn't sound amazing until you discover that they had a 10.6%
increase in research and development. In 2013, China Yuchai sold
over 500,000 engines in China and launched 20 new engine
models.
The Company - A
Long History Filled With Growing Dividends
China Yuchai
International Limited is one of the largest engine manufacturers in China
through its principal operating subsidiary Guangxi Yuchai Machinery Company
Limited (76.4% owned by China Yuchai). These engines vary from light to
heavy-duty and consist of diesel, natural gas, and hybrid engines which power
trucks, buses, and cars. Guangxi Yuchai Machinery Company Limited was founded in
1951 and China Yuchai International Limited had its IPO on the New York Stock
Exchange in 1994 and has been trading in the US markets since that time. As of
December 31, 2013, Yuchai employed approximately 11,976 people
nationwide in China.
China Yuchai has
been paying dividends since 2006, something not many companies doing business in
China trading on the US markets can claim. The company paid a dividend of $1.20
(5.9% at the current price of $20.89) in 2013 and the dividend has been growing
over the years at an exponential rate, it started at only 2 cents per share in
2006. See the chart below to see just how far the company has taken their
dividend policy. China Yuchai: Years Ahead In Terms of Emission
Technology
China is currently
shifting towards National IV emission engines, which are a form of cleaner
engines that will help reduce smog. China Yuchai has had the ability to produce
National IV emission compliant engines on a commercial
basis since 2008. In fact, China Yuchai has developed National V
engines in order to comply with future regulations and even has National VI
prototypes in the works, which could explain the increase in research and
development spending this quarter. National III regulation went into
effectJuly 2013. National IV, which China Yuchai is fully able to
commercialize, won't even be implemented nationally until January 2015. (Some
cities required it earlier, such as Shanghai which implemented the regulation in
2009). National V won't go into effect until January 2018. (Again, some cities
required it early, such as Shanghai in 2013). There isn't even a set date for
National VI engines, of which China Yuchai is already working on prototypes. The
YC6K 6-cylinder diesel engine produced by China Yuchai is
compliant with both National IV and V and a natural gas equivalent of this
engine is available as well. China Yuchai is already set through 2018 in terms
of technology and is advancing their engines years faster than the regulation
requires.
Risks
So why is it
trading so low? The company did have some issues in the past regarding
management and ownership. For details on the issues this company had in the past
(nothing relating to fraud) please see this highly detailed Seeking Alpha
article from 2007. The issues you will read about are extremely complex
for casual investors and for those worried - it is safe to say the issues have
not been prevalent in many years and that is reflected in the increasing share
price. Management seems to have improved relations and in this
interview here you can read more about what is being done to ensure
the company runs smoothly in the future.
Trading Below
Net Tangible Assets - A Huge Value Can Be Found in CYD Shares
CYD is currently
trading at a market cap of $778.51 million. Net tangible assets at
the end of 2013 came in at over $996 million. In the first quarter of 2014, cash
and bank balances totaled $347.8 million. See for yourself just how
amazing the balance sheet was at the end of the first quarter of 2014.
Unfortunately,
China Yuchai does not provide extremely detailed balance sheet reports during
its quarterly reports - those detailed reports can be found in their annual
reports. Due to this fact, I cannot comment on how much the net tangible assets
have increased since the end of 2013. However, since net income for the first
quarter of 2014 was $38.6 million, it is safe to say that net tangible assets
now sit over a billion US Dollars.
The Chinese
government in 2013 "initiated a nationwide reform of the natural gas pricing
mechanism in July, 2013, hoping to bring it gradually into line with the market
situation." (Source) Natural gas is only going to continue to
increase. So how does CYD benefit from this? CYD produces natural gas engines!
During the first quarter of 2014, China Yuchai sold38.3%
more natural gas engines than the same quarter last year. In Fushun city,
a new pilot program for clean energy buses began in June. 800 new
buses were purchased - all of which had engines built by China Yuchai.
200 of these buses were powered by natural gas engines. China Yuchai started
moving into the European market just recently in 2014.
Conclusion
China Yuchai is
undervalued and pays you over 5% annually in dividends while you wait for shares
to become fair valued. The company has a long history and China Yuchai engines
can be seen in millions of vehicles in China. The classic argument against
Chinese stocks simply does not apply here. This company is far too large with
nearly 12,000 employees and 500,000 engines sold per year. You can even find
Youtube videos with their products. China Yuchai is a solid investment that can
survive a financial collapse with its strong balance sheet. With growth to boot,
this stock is a no brainer for a diversified portfolio.
Summary
·
CYD is trading significantly below
its net tangible assets.
·
CYD is growing rapidly with nearly
20% revenue growth in Q1 2014.
·
CYD has a long history of paying
dividends which sets it apart from other Chinese companies.
·
CYD is a major player in the
Chinese engine market and is years ahead of the regulation in terms of its
technology.
·
China Moving Towards Natural Gas -
China Yuchai Benefits
China's natural gas use
increased 13.9 percent to 167.6 billion cu/m in 2013. Duan Zhaofang
of the CNPC Economics and Technology Research Institute states, "the volume of
imported gas experienced a marked increase last year, rising 25 percent to 53
billion cubic meters. Pipeline gas accounted for 52.8 percent or 28 billion
cubic meters and liquefied natural gas accounted for the rest." In order to
combat rising pollution and smog, China is shifting towards alternatives to
coal. This shift isn't a moment too soon. Beijing exceeded national standards 62
percent of the time during the third quarter, the Ministry of Environmental
Protection said (Source). Natural gas usage has been increasing
exponentially in China over the past few years, check out the chart below for a
visual
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