One of the largest outside investors in China Yuchai International Limited (NYSE:CYD) is pushing for changes in the holding company, whose main business is manufacturing of diesel engines. Shah Capital, which holds a 6.23 percent position in China Yuchai, is unsatisfied with the way the company is content with its under-priced market value.
Unleashing the Value of Guangxi Yuchai
In a letter to the company’s directors, Shah Capital’s CIO Himanshu Shah called China Yuchai’s main subsidiary Guangxi Yuchai Machinery Company Limited not only a gem in China but also on a global-scale. China Yuchai owns a 76.4 percent stake in Guangxi Yuchai and Shah Capital is pushing the company to take it to 100 percent. Yuchai has dormant value in terms of its natural gas engine manufacturing capability, which by unit volume makes the company the largest natural gas engine maker not only in China but also in the world. This of course becomes a formidable capacity considering that China is moving towards greener fuel options. GYMCL is also a top tier diesel engine manufacturer, ranked No.1 in terms of diesel unit sales by China Association of Automobile Manufacturers (CAAM).
China Yuchai Q1 Earnings
China Yuchai International Limited (NYSE:CYD)’s Q1 sales came in at $613 million, gross profits were $124 million and gross margins were 20.2 percent. Revenues in FY2012 came in at $2.14 billion. A clear gap in valuation lies here—when China Yuchai went public in 1994, its revenues came up to $100 million and it traded at $10 whereas now with $2 billion revenues, the stock has not appreciated in parallel and trades at a mere $18.
The company also has strategic joint ventures with Caterpillar Inc. (NYSE:CAT) and Geely Automobile Holdings Ltd. (HKG:0175). China Yuchai International Limited (NYSE:CYD). CYD has excellent manufacturing capabilities and has increased its R&D budget over the years, which has led to the development of the National IV compliant engine, hybrid bus engine and LNG Engine. The company also ranks No.1 in customer satisfaction and in addition to sales, it operates over 3000 service stations.
What pains China’s Yuchai’s shareholders is that despite being a successful competitor to U.S. manufacturers and China-based engine manufacturers, China Yuchai International Limited (NYSE:CYD) remains severely undervalued, capitalizing on only $672 million in market value, which approximately is 6x earnings, 0.8x of book value and 2x of cash flow.
Shah Capital believes that if the company sheds its conglomerate status by selling its stakes in HL Global Enterprises Limited (SGX:L18), it would become a more focused engine manufacturer and thus gain more exposure in the industry, which should drive the company to become a front-running market player.
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