China Yuchai: Turning Bullish On Buyback Plan And Improved Outlook (Upgrade) (NYSE:CYD)

Asia-Pacific Images Studio/E+ via Getty ImagesElevator Pitch My investment rating for China Yuchai International Limited (NYSE:CYD) has been revised from a Hold to a Buy. Previously, I touched on a wide range of factors influencing China Yuchai’s future business and share price performance in my March 30, 2024 write-up. For the current update, I assess CYD’s new buyback plan and the company’s prospects. China Yuchai’s potential shareholder yield has become more appealing following the initiation of a new $40 million share repurchase program. Furthermore, the HDT (Heavy Duty Truck) sector outlook offered by CYD’s peer and the most recent LNG (Liquefied Natural Gas) HDT sales numbers in China suggest that China Yuchai’s actual FY 2024 results might surprise on the upside. Taking into account the above-mentioned factors, I upgrade my rating for CYD to a Buy. New Share Repurchase Program Boosts CYD’s Potential Shareholder Yield Last week, China Yuchai issued an announcement disclosing a new “share buyback plan under which the Company may repurchase its ordinary shares up to US$40 million in dollar amount or 4 million in number (whichever occurs earlier).” This share repurchase program has no specific expiry date. In my prior August 18, 2023 write-up, I highlighted that CYD ‘s “decision to obtain shareholders’ approval for the change to the company’s Bye-laws associated with share buybacks increases the probability of CYD executing on share repurchases in the near future.” While this potential catalyst has taken a longer-than-expected period of time to materialize, it is better to be late than never. This latest development means that CYD’s shareholder capital return outlook has become more favorable. China Yuchai’s consensus forward fiscal 2024 dividend yield is 4%. A low-to-mid single digit dividend yield is decent, but I don’t think this is sufficiently compelling to make CYD an appealing investment candidate. But if one takes into consideration China Yuchai’s total shareholder capital return (dividends and buybacks), the stock becomes a much more attractive investment proposition. CYD’s potential forward buyback yield could be 11% based on the assumption that the company spends the full $40 million on share repurchases in a year’s time. On the flip side, if China Yuchai takes two years to complete its buyback plan, the stock’s buyback yield on an annual basis might be 5.5%. In other words, it is possible that the stock’s potential one-year shareholder yield (buybacks and dividends divided by market capitalization) is as high as 9.5% (4%+5.5%) or 15% (4%+11%). In a nutshell, I have a favorable opinion of China Yuchai’s improved shareholder capital return prospects and enticing potential shareholder yield. Positive Takeaways From Peer’s Guidance And Latest Industry Data CYD’s business outlook has turned for the better taking into consideration its peer’s updated guidance and the most recent sales numbers for LNG HDTs in Mainland China. Weichai Power Co., Ltd. (OTCPK:WEICF) [2338:HK] is a HDT engine maker focused on the Mainland Chinese market just like China Yuchai. JPMorgan (JPM) published a research report (not publicly available) for Weichai Power on June 4, 2024 titled “Industry Tour Showcases Outlook Lift.” In that JPM report, it was mentioned that Weichai Power revised its Mainland Chinese HDT “industry sales outlook” for the current year from “flattish Y/Y” earlier to “+10% Y/Y” after considering “China’s large-scale equipment renewal policy.” I had also touched on the potential for “higher-than-expected HDT sales” due to the planned roll-out of “HDT replacement subsidies” by “the Chinese government” in my end-March article. The sell-side analysts are currently forecasting that China Yuchai’s top line expansion will moderate from +8.0% in the previous year to +5.7% for the current year as per S&P Capital IQ data. If the Chinese HDT sector sales do grow by +10% in this year as per Weichai Power’s guidance, CYD’s actual FY 2024 sales growth might exceed expectations. Separately, strong LNG HDT sales have positive read-throughs for CYD’s future results. The sales volume for LNG HDTs in Mainland China was estimated to have grown by +85%-90% in May 2024 according to a June 3, 2024 news article (translated using Google) published on Chinese automotive news portal CVWorld. China Yuchai previously guided at its FY 2023 analyst briefing in late February this year that it is anticipating “a more complete set of products to offer for the gas engine in particular” could “improve the (company’s) sales hopefully in 2024.” The latest data indicates that demand for LNG HDTs is robust, and this suggests that CYD’s product mix optimization with a shift towards LNG HDT engines could possibly pay off in the form of higher revenue. To sum things up, China Yuchai’s prospects have become brighter, taking into account the most recent data on LNG HDT sales in China and Weichai Power’s (CYD’s peer) updated industry sales projection. Risk Factors There are two major risks to watch when one contemplates a potential investment in CYD. The first risk factor is that China Yuchai returns a lower-than-expected amount of capital to shareholders through dividends and buybacks. This implies that CYD’s actual shareholder yield could turn out to be less attractive. The second risk factor is that the actual growth of the Chinese HDT market for 2024 is much weaker than what the market had anticipated. This increases the probability of revenue and earnings misses for CYD. Concluding Thoughts I have turned bullish on China Yuchai, as CYD’s business prospects and capital return outlook have improved. CYD’s undemanding valuations also support a Buy rating. As per S&P Capital IQ data, China Yuchai is currently trading at consensus next twelve months’ EV/EBITDA and normalized P/E multiples of 1.9 times and 7.8 times, respectively. In contrast, the market values its peer Weichai Power at 4.5 times consensus forward EV/EBITDA and 10.2 times consensus forward normalized P/E now. The valuation metrics are sourced from S&P Capital IQ.