China Yuchai (CYD): Asia expert eyes diesels

"In China, there is roughly one car for every 53 people vs. in the United States where the average is 2.28 vehicles per household," notes Keith Fitz-Gerald.

The advisor -- who spends much of his time in Asia gaining first-hand knowledge of potential investment opportunities, suggests, "Desiel engine maker China Yuchai International Ltd. (NYSE: CYD) is poised to rocket on China’s auto market growth." Here's the latest from The New China Trader.

"And as China’s economy continues to grow, China’s demand for commercial vehicles from taxis to buses, light duty delivery trucks and heavy duty construction vehicles will grow as well.

"Automobiles don’t go very far if they don’t have engines, enter China Yuchai, a Singapore-based small cap ($368 million), founded in 1951.

"The company manufactures a wide ranging array of light duty, medium sized, and heavy duty diesel engines for use in everything from construction equipment, to buses, trucks, and cars. 

"In 2008, CYD’s main operating subsidiary, Guangxi Yuchai Machinery, sold 372,000 diesel engines and was consistently ranked no.1 in units sold by the Chinese Association of Automobile Manufacturers.

"Net revenues increased by 17.9% from the first quarter of 2009 to the second quarter of 2009. The company is on pace to produce and sell over 510,000 units by year’s end, which would represent an increase of roughly 37% over 2008.

"That should further solidify them as the leading producer in diesel engines - again as ranked by the Chinese Association of Automobile manufacturers.

"In September, CYD announced phase one of their new 120,000 sq meter diesel engine assembly factory in Xiamen is complete and ready for commercial production. The new factory is expected to increase CYD’s total annual production by an additional 100,000 units.

"The firm's new Xiamen facility is located in the heart of Xiamen Automobile Industry City near the Xiamen port, a major hub for manufacturing auto-parts, bus and construction equipment. This premium location should help CYD shorten its supply chain and lower production costs.

"Last quarter sales increased by 33% year-over-year and the 3 year average sales increase has been a very healthy 29%.

"What that tells us is that recent sales are coming in above the three year average – and that’s without the huge boost they are about to experience from their new Xiamen facility.

"Recently, management has been doing a good job of keeping the books in order. In 2008, CYD reduced its long term debt by 66.8% and increased their Free Cash Flow position by over 33%. And those numbers came in a climate of a weakened Chinese economy.

"With all the hoopla around the Chinese auto market, you would think a small cap player like this would have gotten priced through the ceiling – but they haven’t. Most of Wall Street has yet to catch on. CYD is trading at a PE ratio is only 9.99. Buy CYD and be prepared to hold for 12 months."