Hong Leong Asia
Reinstate coverage with BUY, SGD 1.28
By DBS

Capture China&rsquo s upgrade momentum

• Robust 1H24 results signal a potential dividend surprise 
• Supportive government policies and sentiment drive 16% y/y engine sales growth while China&rsquo s investment and upgrade cycle underpin 2025-2026 upside 
• Building materials segment to benefit from robust pipeline of government led infrastructure and HDB projects
• Reinstate coverage with BUY, SGD 1.28 based on sum-of-the-parts (&ldquo SOTP&rdquo ) valuation 

Powertrain Solutions (&ldquo Yuchai&rdquo ): Scaling new heights 

Leading diesel engine manufacturer with various industrial applications. China Yuchai International Limited (&ldquo Yuchai&rdquo ) is a leading engine manufacturer in China. Yuchai is engaged in the design, manufacture, assembly and the sale of a wide variety of light-duty (&ldquo LD&rdquo ), medium duty (&ldquo MD&rdquo ) and heavy duty (&ldquo HD&rdquo ) engines for trucks, buses, passenger vehicles, industrial and construction equipment and marine industries. In addition, through its strategic alliances, the company has the capacity to produce power generation engines for data-centers, mining and oil & gas operations. Over the years, Yuchai&rsquo s timely deliveries has been well appreciated by customers, establishing a strong brand and track record. 

Constantly innovating to drive technological advancement in engine design and lower emissions.  The company is investing heavily in research and development (&ldquo R& D&rdquo ) to improve engine design and technologies. It has a large portfolio of diesel and natural gas engines and hybrid systems for off and on-road HD, MD and LD applications, and is constantly innovating to deliver new designs to meet with increasingly higher emission standards in China. The transition to China 7 emissions regulations, which is expected to be implemented sometime in 2030, will be key target for the group to drive advancements in vehicle and engine technology. 

Encouraging 1H24 sales, engine sales at a multi-year high.  Yuchai reported a robust c.16.3% y/y growth in engine unit sales to 192,743 units in 1H24, which outpaced the industry&rsquo s growth of 4%, according to China Association of Automobile Manufacturers. The increase was across all product categories except pick-up trucks.   Overall sales growth and change in product mix towards heavy-duty engines (vehicle & industrial) lifted gross margins. Looking ahead, the group is expected to continue to benefit from supportive policies announced in July&rsquo 24 by the Chinese Government, where financial subsidies of up to RMB 140k are offered to companies and individuals to replace their older operating trucks with new ones. While this has yet to be implemented, it will boost the growth prospects for Yuchai come FY25F. Management hopes to achieve a vehicle growth rate of c.5%-6%, which we have factored in our estimates.

R& D to pave the way for future growth areas.  Yuchai has consistently been investing heavily into R& D, spending between RMB 800mn &ndash 1bn per annum. Most recently, Yuchai&rsquo s partnered with Tsinghua University to set up a R& D centre in Wuxi for hydrogen fuel cells and stacks. These fuel cells will be developed to power long-haul medium and heavy commercial vehicles. HLA also recently launched 50 fuel cell powered buses with Beijing Xingshunda (82KW & 120KW versions). While still at trial stage, this development could potentially see significant upside if adoption broadens, which we have not priced in.