China Yuchai: Trading Below Net Tangible Assets And Growing Fast

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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