This month I added 25% to my position of China Yuchai International Limited (CYD) on November 10th. This stock is now 4.7% of my portfolio
The purchase was at $12.03 per share in US$and the stock price at the time of this post is $12.13. My next buy point will be if it comes down below $8.00.
In summary China Yuchai is described by GuruFocus as:
China Yuchai International Ltd was incorporated under the laws of Bermuda on April 29, 1993. The Company, through Guangxi Yuchai Machinery Company Limited, manufactures diesel engines in China. The Company produces and provides covering light-duty, medium-duty to heavy-duty diesel engines, engine parts and components, diesel-powered generators, industrial engines, marine engines and natural gas engines to meet the needs across different sectors. Its other products are YC4W passenger car diesel engines, natural gas engines, diesel power generators, diesel engine parts and remanufacturing services.
The company has solid balance sheet fundamentals. The stock price is 20% above the tangible book value and although the earnings have slowed recently with te rest of the Chinese economy but they are still making money and the last four quarters earnings still are double the dividend payout which yields a whopping 9% yield.
The biggest headwind to the company is the slowing Chinese economy although it is still growing much faster than the America.
The main catalyst for my investment is this stock is priced too low for the income opportunity and value the business has when I take earnings and book value.
Here is my evaluation and conclusion for China Yuchai International:
1. The balance sheet
- Cash to Debt is .91 meaning there is as much cash on the books as there is debt. This is a solid position.
- The Net Current Asset Value (cash and short-term receivables less total debt/liabilities) is $4.80 (from serenitystocks.com) which which is positive and is a little over a third of the current stock price. This indicates some strength on the balance sheet.
- The Equity is about a third of assets which is not superb but common in high fixed cost business like this.
- Interest coverage of any loans is 11 which is solid.
In summary the balance sheet is healthy and this plus the earnings gives a margin of safety in my opinion.
2. Earnings Power of the Assets
- The earnings have dropped significantly in the last quarter financials, from .49 a share to .09 a share. This decrease has been an issue for the stock price but the price per earnings has been so low at under 6 that even slowing growth would just bring this to a more reasonable evaluation.
- Four quarter revenue is down around 40% and the net income income before taxes is down almost 60%. Still that would bring them to a PE of still under 15.
- There is definitely a risk in the slowing of revenues and earnings but the low price for the earning they do have make it an interesting buy for me. Also they have a solid balance sheet to survive and pay a big dividend which is easily covered so far (you can get paid while you wait)
3. Value ratios
- Currently there is no PE (Price to Earnings) is 5.5 which is very low for any business. This means that the earnings could pay back the investment in less than 6 years. With the slowing obviously this will take longer but still is good value.
- The PEG is 1.74 which is high due to the slowing of revenues and earnings.
- The price to book value is 1.2 which is reasonable.
- If sales continue to drop it could be an issue.
4. Setting a Price with a Margin of Safety using the Discount Cash flow calculator.
- My fair value for China Yuchai is $15.00 using a lower growth rate of 5% and a time period of 7 years for my price target.
- Use the DCF calculator at GuruFocus use the link below and change the Growth rate and terminal growth rates to 7 from 10 year, the growth rate from 20% to 5% to reflect the slowing revenues and check book value box to get the fair value. I then cut that price in have for my price target.
- China Yuchai pays a huge dividend and at this time it is only half of the last four quarters earnings.
- There is risk to the dividend if the revenue and income keep dropping but it does appear to me to have some room before cuts could happen.
- If they get back to growing then this is a high yield and safe dividend. If they continue to lose revenues then it will likely be in danger.
- For me even if they had to cut it would still be a healthy dividend while I wait for the business to pick up.
6. Qualitative Evaluation
- As China’s GDP growth slows and it’s overall stock market is coming down it brings down various companies with it even one’s that are undervalued like China Yuchai.
- Slowing earnings and revenues are and issue but companies solid balance sheet help keep it safe in my opinion.
- Many worry about fraud but I feel they have been in business since 1993 so have been around over 20 years so I expect hey will survive this slowdown.
- Again they are cheap to book and earning so they could be purchased by another company.
- One concern is that the company has issued more shares rather than purchasing them at such a low price. I expect this is to cover dividends but would prefer they buy their own shares at this rate.
- Guru Ownership includes Jim Simons who has an over 30% annualized return. Most of my other Gurus I follow are not in this security.
7. Technical Analysis
- My current price buy in is at a support that has held for six years. If it breaks the next buy price is at under $10.
From a balance sheet perspective I have enough faith in China Yuchai to continue to add to a position that is currently 4.7% of my portfolio. I am making an investment believing their balance sheet will hold up and they still have some earnings power although it has been declining. I also believe the dividend is fairly safe so like the income while I wait.
I have watched this stock for a while but any future buys will be with it at a smaller % of my portfolio. I intend to buy up to around 7% of my portfolio.
I am not recommending that readers go out and buy this stock. You should do your own due diligence as there is risk with any stock and even more when revenues and earnings are declining. Contrarian investing is taking what one considers calculated risk and that is unique to each individual.
StockStory is not a financial advice site and content should not be considered for investment recommendations.
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