China Yuchai International Limited

China Yuchai International Limited (NYSE: CYD) is a Chinese engine manufacturer specialising in trucks, buses, passenger vehicles, construction equipment, maritime, and agriculture. CYD also manufactures and maintains diesel generators and provides maintenance and retrofitting services. It markets directly to automobile Original Equipment Manufacturers (OEMs) and retailers. Guangxi Yuchai Machinery Company Limited (GYMCL) is the company's significant operating subsidiary.

Why Should Investors Exit?

• Decline in Profitability: Net income (attributable to equity holders) for H1FY21 was RMB 253.71 million, compared to RMB 305.73 million reported in H1FY20, attributable to higher operating expenses during the current period.
• Customer Concentration Risk: Dongfeng Group, CYD's largest customer, accounted for 29.2% of the company's net sales in FY20. Furthermore, the top five customers, including Dongfeng Group, accounted for 46.6% of CYD's revenue throughout the fiscal year. The loss of any of these key customers could hurt the company's financials.
• Industry Below Profit Margins: In H1FY21, CYD reported EBITDA margin was 4.0% vs. the industry median of 14.7% and reported net margin of 2.8% in the period under consideration which was lower than the 5.2% reported in the same period of the corresponding previous financial year.
  

Valuation Methodology: Price/Earnings Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

CYD's stock price has declined 13.29% in the past nine months and is currently leaning towards the lower band of its 52-week range of USD 10.57 to USD 19.59. We have valued the stock using the Price/Earnings-based relative valuation methodology and arrived at a target price of USD 12.23.

Considering the correction in the stock price in the past nine months, decline in profitability, dependence on Dongfeng Group, current valuation, and associated risks, we recommend a "Sell" rating on the stock at the current price of USD 13.83, up 3.52% as of February 15, 2022, at 02:10 PM ET.

Three-Year Technical Price Chart (as of February 15, 2022, at 02:10 PM ET). Source: REFINITIV, Analysis by Kalkine Group

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.