CYD 玉柴国际

Operator

Thank you for standing by and welcome to the China Yuchai International Limited Third Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) Thank you. I would now like to turn the call over to Mr. Kevin Theiss. Please go ahead, sir.

Kevin Theiss

Thank you for joining us today and welcome to China Yuchai International Limited’s third quarter 2012 conference call and webcast. My name is Kevin Theiss, and I am with Grayling, China Yuchai’s U.S. Investor Relations Advisor. Joining us today are Mr. Benny H. Goh, President; and Mr. Kok Ho Leong, Chief Financial Officer. Before we begin, I will remind all listeners that throughout this call we may make statements that may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words believe, expect, anticipate, project, targets, optimistic, intend, aim, will or similar expressions are intended to identify forward-looking statements. All statements other than statements of historical fact are statements that may be deemed forward-looking statements. These forward-looking statements are based on current expectations or beliefs, including, but not limited to, statements concerning the company’s operations, financial performance and condition. The company cautions that these statements by their nature involve risks and uncertainties, and actual results may differ materially depending on a variety of important factors, including those discussed in the company’s reports filed with the Securities and Exchange Commission from time to time. The company specifically disclaims any obligation to maintain or update the forward-looking information, whether of the nature contained in this conference call or otherwise in the future. Mr. Goh will provide a brief overview and summary and then Mr. Leong will review the financial results for the third quarter and nine months ended September 30, 2012. Thereafter, we will conduct a question-and-answer session. And for the purposes of today’s call, the financial results are unaudited and they will be presented in RMB and U.S. dollars. Mr. Goh, please start your opening remarks.

Benny Goh

Thank you, Kevin. The China Association of Automotive Manufacturers, CAAM, overall recently reported that sales of diesel-powered commercial vehicles declined 8.0% in the third quarter of 2012 and sales of heavy duty diesel-powered trucks and trailers declined by 28.7% quarter-over-quarter. In the first nine months of 2012, overall sales of diesel-powered commercial vehicles declined by 12.1% and by 31.0% on diesel-powered trucks and trailers respectively as compared with the last – the same period last year. In this weak commercial vehicle market environment, unit bus sales continued to be resilient as total unit sales rose by 0.8% in the third quarter of 2012 versus the same quarter of 2011. For unit sales in the first nine months of 2012, total bus sales rose by 3.8% as compared with the same period last year. During the third quarter of 2012, our overall engine sales declined by 8.5% compared with the third quarter of 2011, as sales of commercial vehicles decreased in China. Our net revenue was RMB 3.08 billion, US$485.2 million, compared with RMB 3.45 billion in the third quarter of 2011. Gross margin increased slightly to 20.2% in the third quarter of 2012 as compared with 20.0% in the same quarter of 2011, driven with a slightly higher proportion of light-duty engine sales. Our operating profit increased 28.9% to RMB 215.2 million, US$33.9 million from the third quarter of 2011. For the nine months ended September 30, 2012, based on our unit sales, we remained market leader in diesel engine industry in China, with the products range of diesel engines and the growing technology base to build more advanced engines to capture market share. Our cost controls continue to enhance our operational effectiveness. In addition to our lower cost of goods sold, SG&A expenses declined 40.8% in the third quarter of 2012 to RMB 353.1 million, US$55.7 million from the third quarter of 2011. Phase 1 of our foundry expansion has reaped good returns on our investment on cost savings. The savings for engine cuttings are personally RMB 100 million per annum. As our Phase 2 of the foundry expansion, the trail production is expected by the end of 2012 and we will progress the full scale production in March and April 2013. With the completion of Phase 2 expansion, the total capacity will reach 1 million engine hits and blocks. With this expansion, we will have the largest foundry and engine casting facility in China. Research and development, R&D expenses rose 12.5% to RMB93.9 million, US$14.8 million compared with RMB83.5 million in the third quarter of 2011 due to increased R&D stock costs for new products including engine emission improvement, lower emission natural gas engines, hybrid products and high horse power products as well as continued quality improvement initiatives. As a result of net revenue, R&D spending rose to 3.1% compared to 2.4% in the third quarter of 2011. New innovations and new products are the foundation for us to maintain our leadership position as we create better engines and penetrate new markets. We have completed construction of our research and development institute located in a high tech development zone of Jining and we expected to be fully operational in early Q2 of 2013. The R&D institute will spot new innovations which would provide us with a competitive advantage in the domestic market and enable us to compete globally. As a leading supplier of engines to the growth bus market in China, we are especially well position to benefit from continuing high bus sales. We have diesel engines for heavy, medium and light metal buses and long distance coaches and we are diversifying our product line by offering natural gas engines to complement almost every diesel engine model we offer with a bus and truck market. We introduced our first natural gas engine products in early 2000. Then demand for this early model engines was limited and focused on local and regional markets. Today, we see this as another new opportunity for growth as recent government economic and environment policies have encouraged the use of natural gas engines due to the cleaner emissions and lower fuel prices. More recently, we have been introducing self-developed natural gas engines using our proprietary technologies to offer our customers a comparable natural gas alternative to our industry leading diesel engine. Metro bus markets in Shanghai, Beijing and other Tier 1 cities in China have exhibited increasing interest in our natural gas engines to take advantage of their low emissions and higher horsepower. In 2011, sales of our natural gas engines reached approximately 13,000 units and we were the only domestic engine supplier of liquefied natural gas LNG engines to the Chinese OEM market primarily to bus manufacturers. We expect our sales to increase as our new natural gas engine development project commences operations in stages from the first quarter of 2013. Our new Euro V compliance YC6L240-40 and natural gas engines volumes used by the Hangzhou Public Transportation Corporation in 33 new buses during China’s national day holidays in October this year in the Xihu district of Hangzhou, Zhejiang province. These are the first Euro V-compliant natural gas engines being used in Hangzhou’s public transports as well in entire Zhejiang province in China. We are introducing natural gas engines for outbound users such as power generation, marine and construction applications. In this way we’re going to expand our market position in the overall engine market in China and enhance our already excellent relationships with our many OEM customers and commercial vehicle operators who are seeking new solutions to the issues of higher profitability through less expensive fuel and improve emissions. We’ve become one of the leading engine suppliers for mining trucks and we are a top-seller of engines and trucks used for engineering construction. Both these industries could be good markets for natural gas engines. We are building our production capacity for both natural gas engines and high horsepower diesel engines to further maintain our leadership in current markets and to add as springboard to penetrate newer markets and reduce our concentration in the light and medium trucks in vast markets. Recently we announced the entry into a new joint venture with Guangxi Skylink Software Technology Company to design, develop, manage and market the next generation electronic operations management platform. That platform with also radiofrequency identification capabilities and it will remotely monitor engine performance and pinpoint vehicle location with GPS tracking. This platform which is our next generation of technology enabling communications within the vast Chinese transportation industry will allow for the remote monitoring other location of our engines, supervise real-time engine performance and conduct analytical diagnostics on any engine captured within our system. In the future, marketing and sales activities will be able to – be conducted on that platform, which will improve supply chain efficiency. I will now provide a brief update on our joint ventures. In relation to the joint venture with Chery, further to our decision to focus only on Chery Yuchai, we should all develop and produce a 4020 diesel engine for passenger cars. We are nearing the completion of engine tests on the second generation prototype and we will progress to our third generation prototype engines in early 2013. Our remanufacturing manufacturing joint venture with Caterpillar is designed to provide another cost effective service to our customers and fulfill our green mandates to protect the environment and conserve natural resources. We believe that this is another way for us to expand our leadership in the engine industry in China. The permanent factory located at Suzhou Industrial Park has begun operations and production is starting to increase. Over 200 units of engines were remanufactured in September as we expect to reach full manufacturing – remanufacturing operational capacity towards the end of the first quarter 2013. Our joint venture with CIMC-Chery for the production of the YC6K heavy-duty engines is progressing well and the production capacity of the existing facility located in Yulin City, Guangxi Province is 30,000 units. We remain committed to capturing market share in the heavy-duty vehicle market in China with a goal of becoming one of China’s far largest heavy-duty engine providers by 2015. We have expanded our YC6K engine with a natural gas version for the heavy duty truck market. This engine has the highest power in its class at 450 to 500 horsepower with lower emissions compared with diesel engines. Our diversified product line, ongoing technological innovations, combined with a largest service network in China will drive our sales and expand our market presence with our OEM customers. With that let me now turn the call over to Mr. Kok Ho Leong, our Chief Financial Officer to provide more details on our financial results.

Kok Ho Leong

Thank you, Benny. Let me first walk you through our third quarter 2012 financial results. Net revenue for the third of 2012 was RMB3.08 billion, US$485.2 million compared with RMB3.45 billion in the third quarter of 2011. The total number of diesel engine sold by GYMCL during the third quarter of 2012 was 97,328 unit compared with 106,385 units in the third quarter of 2011, a decrease of 900,030 units or 8.5%. The revenue decrease was mainly due to vehicle demand in the commercial truck market especially in the heavy-duty truck segment. The decline in net sales was RMB371.4 million or 10.8% as compared to the same period in 2011. Gross profit was RMB621.5 million, US$98.0 million, compared with RMB691.0 million in the third quarter of 2011. Gross margin increased slightly to 20.2% in the third quarter of 2012, as compared with 20.0% in the same quarter of 2011 and compared with 19.7% in the second quarter of 2012. The higher gross margin was attributable to the lower cost of raw materials partially offset by the higher direct labor and factory overhead cost per unit as the sales volume decreased in the third quarter of 2012. Other operating income was RMB40.7 million, US$6.4 million, an increase of RMB66.6 million from other operating loss of RMB25.9 million in the third quarter of 2011. The increase was mainly due to foreign exchange revaluation gain. Research and development, R&D, expenses were RMB93.9 million, US$14.8 million, compared with RMB83.5 million in the third quarter of 2011, an increase of 12.5%. As a percentage of net revenue R&D spending rose to 3.1% compared with 2.4% in the third quarter of 2011. The increase in R&D expenses was mainly due to increased R&D stock cost for new products including lower emission natural gas engines and high horsepower products as well as continued quality improvement initiatives. Selling, general, and administrative SG&A expenses were RMB353,000, sorry, RMB353.1 million, US$55.7 million, compared with RMB414.7 million in the third quarter of 2011, a decrease of 14.8%. SG&A expenses represented 11.5% of first quarter of 2012 net revenue compared with 12.0% in the same quarter a year ago. The lower SG&A expenses as a percentage of net revenue on a year-over-year was mainly due to effective cost controls and reduced selling related expenses. Operating profit increased 28.9% to RMB215.2 million, US$33.9 million, from RMB166.9 million in the third quarter of 2011. The improvement was mainly due to the increase in other operating income and lower SG&A expenses. The operating margin was 7.0% compared with 4.8% in the third quarter of 2011. Finance costs rose to RMB28.7 million, US$4.5 million from RMB24.8 million in the third quarter of 2011. The higher finance costs were due to increased borrowings. GYMCL issued RMB1 billion short-term financial bond STFBs, during the third quarter of 2012. The share of joint ventures was a loss of RMB8.3 million, US$1.3 million, compared with a loss of RMB9.9 million in the third quarter of 2011. In the third quarter of 2012, total net profit attributable to China Yuchai’s shareholders increased 74.6% to RMB11.1 million, US$17.5 million from RMB63.6 million. Earnings per share increased to RMB2.98, US$0.47 from RMB1.7 to RMB 1 in the third quarter of 2011. Let men now move to financial highlights for the nine months ended September 30, 2012. For the nine months ended September 30, 2012, net revenue was RMB10.19 billion, US$1.61 billion, compared with RMB 11.7 billion in the same period of last year. The total number of diesel engines sold by GYMCL during the first nine months of 2012 was 338,354 units compared with 406,425 units in the same period last year, a decrease of 68,071 unit or 16.7%. This was mainly due to a weaker demand in the commercial vehicle market, especially in the truck segment. The decline in net sales was RMB1.51 billion or 12.9% as compared with to the – as compared to the same period in 2011. Gross profit was RMB2.07 billion, US$327.2 million, compared with RMB2.41 billion in the same period last year. Gross margin decreased to 20.4% in the first nine months of 2012, as compared with 20.6% a year ago. In the first nine months of 2012, the lower gross margin was attributable to higher direct labor and factory overheads cost per unit as sales volumes decreased in the first nine months of 2012 mitigated by lower raw material costs. Other income was RMB78.4 million, US$12.4 million, an increase of RMB63.6 million from RMB14.8 million a year ago. This increase was mainly due to foreign exchange revaluation gain. Research and development, R&D, expenses were RMB271.0 million, US$42.7 million, compared with RMB 243.4 million in the same period last year, an increase of 11.3%. As a percentage of net revenue, R&D spending rose to 2.7% compared with 2.1% in the second period last year. The increased R&D expenses were a result of higher R&D staff costs and quality improvement initiatives. Selling, general and administrative, SG&A, expenses were RMB1.11 billion, US$175.0 million, down from RMB1.29 billion in the same period last year, a decrease of 14.1%. The decrease in SG&A expenses reflect the reduction in sales. SG&A expenses were at 10.9% of net revenue for the first nine months of 2012 compared with 11.0% for the corresponding period last year. Operating profit declined to RMB 772.5 million, US$121.8 million, from RMB 885.7 million in the same periods last year. This decrease was mainly due to lower gross profit offset by higher other operating income and lower SG&A expenses. The operating margin was 7.6% for both comparable nine months period in 2011 and 2012. Finance costs rose to RMB 166.2 million, US$26.2 million, from RMB 100.1 million in the same periods last year. The increase in finance costs was due to increased average borrowings. The share on joint ventures was a loss of RMB 31.2 million, US$4.9 million, compared with a loss of RMB 36.9 million in the same period last year. For the nine months ended September 30. 2012 total net profit attributable to China Yuchai’s shareholders was RMB 346.1 million, US$54.6 million or earning per share of RMB 9.29, US$1.46 compared with RMB 449.2 million or earning per share RMB 12.0 million in the same period in 2011. Now, I will shell proceed to balance sheet highlights. As of September 30, 2012, cash and bank balances were RMB 4.24 billion, US$668.2 million compared with RMB 4.12 billion at December 31, 2011. The company paid out a cash dividend of US$0.19 for ordinary share on July 9, 2012. This amounted to a customary RMB 212 million or US$33.5 million. Trade and bills receivable were RMB 6.68 billion, US$1.05 billion compared to RMB 6.69 billion at the end of 2011. Net inventory was RMB 2.02 billion, US$319.1 million, down from RMB2.42 billion at the end of 2011. Short and long-term borrowings were RMB 3.15 billion, US$496.1 million, down from RMB 3.70 billion at the end of December 2011. GYMCL issued short-term financing bonds STFBs totaling RMB 2.39 billion over three tranches in March, July and November 2012. On July 22, 2012, upon the maturity of STFBs amounting to RMB700 million, GYMCL repaid the full amount due. On August 28, 2012, GYMCL issue STFBs amounting to RMB1.0 billion, at a fixed annual interest rate of 4.45% with a maturity date of August 29, 2013. With that, operator, we are ready to begin the Q&A session.

Operator

We will now begin the question and answer session. (Operator Instructions) Your first question will come from Alexander Potter with Piper Jaffray.

Alexander Potter

Hi guys.

Benny Goh

Hi Alex.

Alexander Potter

Was wondering if you could just give a little bit of market commentary regarding your outlook here. Have you started to see any signs of sequential improvement in your end markets, whether it’s trucks demand or any of our other end market?

Benny Goh

Yes. What we are seeing here is this. I think we are – the worse is probably over, but we are not going to anticipate a very huge upswing in demand in a moment. What we are seeing is probably we have gone through the worse of the market over the past two quarters and so we are seeing some light at end of the tunnel. Having said that we are a bit cautious still we do not see a huge uptick in demand on to probably next year more likely in Q2 next year.

Alexander Potter

Okay. So does that imply that you don’t anticipate kind of the normal seasonal ramp, I mean obviously at this point usually in Q4 and Q1, that’s when a lot of the dealers do restocking, you don’t think that will happen?

Benny Goh

We see a some slight improvement over – or in Q4 compared to say Q2 or Q3 of this year. But then, we don’t see a huge jump and again, as it is – the whole thing is tempered by the fact that the Chinese are hell over of the government is going on and I think that has kind of like put a lot of things on hold until the whole government is solidly in place. So that’s why I always say, that’s why it’s going to be lesser Q1, before things start improving in terms of the incentives and things that will start picking up again.

Alexander Potter

Okay, okay. That makes sense. Also, obviously, you’ve spent a lot of time here on the call and a lot of R&D dollars on natural gas, was just wondering if you could comment I guess on two things regarding natural gas. Number one, what you estimate is the penetration of natural gas in your major end markets, so I guess you can focus specifically on truck? And number two, what is the pricing look like for natural gas, is that more expensive than diesel equivalents or is it less or what are the trends, any commentary on pricing would be interesting too?

Benny Goh

Okay. In terms of penetration, right now as you can see we are doing reasonably well in the bus market area, over 50% of the bus market share. In terms of trucks, we are still picking up. Right now, we are increasing from 10% and we anticipate to be moving up in that to – probably within 20% or so over the coming years. For the pricing, obviously the gas engine is much more expensive because of the emissions capability, but the gas itself is cheaper. So, overall you’re talking about operating cost, it is looking to be cheaper. We’re looking at, I think, price difference of around, is this 5% to 10% difference.

Kok Ho Leong

It will be more than that.

Benny Goh

I think it’ll be more than that. Of course, 20% I think.

Alexander Potter

Okay. So that’s 20% price – upfront price differential between natural gas and diesel, right?

Kok Ho Leong

That’s right. Yeah thereabouts, right.

Alexander Potter

Okay. Okay. And then one last question here, I was wondering if you could comment on whether or not in Q4 we’re going to see a big jump in growth margin again like we have over the last several years?

Benny Goh

We hope to, but I wouldn’t want to form a spec, we don’t know. And of course this year, as everybody knows, this is a very unique year where things are much slower than before. So, I wouldn’t anticipate more or less here like what we see in the past.

Alexander Potter

Okay. Thank you very much.

Benny Goh

Thanks, Alex.

Operator

Your next question will come from Gerwin Ho, Citi.

Gerwin Ho

Hi. Good morning, gentlemen. Thank you for your time. Good to hear that it appears that the worst is over. Just two questions, first of all, in terms of the heavy duty market, you anticipate a more noticeable recovery second quarter of 2013. For the full year 2013, what would you expect the rebound of the heavy truck in your sales to be, and for this share, how much – what do you think the decline will be like? Secondly, talking to some other people in the industry, it appears there’s still some uncertainty over the China IV emission standard implementation date on July 1, of 2013 for next year. What’s our view on that and what are we hearing on the China IV emission standard implementation? Thank you.

Benny Goh

Okay. Maybe I’ll take the second question first. What we just heard recently was that they are still on track on the July 1 for the emission standards to be in place. But again, it being pragmatic – Chinese being very pragmatic, what we are probably going to see is that it’ll not be a very steep cliff. It might be some sort of a gradual phasing approach, where they announce regulation, but it may not be totally and strategically in force, it is what we are told right now. In terms of the first your first question, what is the heavy-duty truck loss was get going to be for 2013. We anticipate that to be small growth – I think the industry we are looking at probably in a same number slight a better than this year. We anticipate probably, gradually reaching about a 800,000 units or so. In terms of what we are doing, I think we’ll improve definitely, but what happens what we’re seeing right now is that our swing has been very much 40-60. We are going more towards our lighter-duty engines as opposed to heavy-duty because of the depressed demand this year. So next year, we hope to go back to almost 45-55 and back to more heavy-duty trucks again.

Gerwin Ho

And maybe one additional question is as we look at the heavy truck demand going forward there is some thinking that going forward the demand will be more driven by the logistic side of things versus the heavy – versus the construction demand. Is this what we’re envisioning for next year as well? Is that logistics become more important in construction? Where do we see the recovery coming from next year?

Benny Goh

I think it’s partially right in the sense that the construction will probably kick off towards the second half of next year because infrastructure projects are still not really in place as yet. Again, it’s all tied to the figure of changeover in government, we’re going to see many projects going in place until probably the full changeover in March. And so my anticipation is that give it could take a quarter or two, so in second half of next year you’ll see infrastructure projects. So the first half, you’re right to say that it’s more really to be driven by logistics and generals?

Gerwin Ho

Understood. Thank you very much.

Benny Goh

Thanks, Gerwin.

Operator

Your next question will come from Ravi Gill with Goldman Sachs.

Ravi Gill

Hi. Good morning. Thank you for taking my call. On the natural gas side specifically, can you speak to the competitive environment? We’ve heard a significant price competition from Yuchai. How has that impacted your own pricing tactics on the nat gas side?

Benny Goh

Yuchai has also got their own gas capability, but right now what we are seeing is that because of the heavy-duty market being very depressed this year, we are focusing a lot more on our buses and I think this is where we have been dong relative well. We did catch quite a lot of the bus market share. Pricing wise, I think it is natural, just like in diesel engine and in natural gas. However depressed market as you see this year, prices are being pushed out and everybody is fighting over same orders.

Ravi Gill

Okay. And then, on the opportunity in busses, can you frame the size of the bus market and your view of the current penetration rate of natural gas? And then, where do you think that percentage goes over the next three years to five years. And when I talk about penetration, I mean, how many busses are nat gas versus the total population?

Benny Goh

Right. I think for busses, the nat gas penetration can be higher because busses being municipal and the infrastructure of nat gas, within a city it’s easier to – as suppose to say between cities where heavy-duty diesel engines are being applied from city to city. So what we are probably looking at, and this play will be at least more than 50% to 70% of the natural gas can penetrate into the fast market. As to the numbers itself, I can only have a guess, I don’t have the full numbers with me right now. But if you look at what Yuchai has done last year, we sold about 13,000 units, this year, we’re going to sell double the number and we are close to about 30% to 40% market share. So that’s why we look at our numbers.

Ravi Gill

Thanks. I guess, what proportion of that is busses versus trucks of your nat gas engine sales?

Benny Goh

Right now, the numbers I quoted are the busses, so that’s the full bus numbers that we have.

Ravi Gill

Okay. All right. Thank you for taking my questions.

Benny Goh

You’re welcome, Ravi.

Operator

(Operator Instructions) Your next question will come from Jonathan Brodsky with Advisory Research.

Jonathan Brodsky

Good evening, gentlemen. Thank you for the time. I’d like to ask some questions about the receivables. It seems that the receivables continued to stay at a relatively elevated level and given the decline in sales, I would have expected them to come down. Can you talk about whether or not you’re seeing any write-offs in your receivables or what the profile of those receivables look like?

Benny Goh

Okay. Limit to the receivable, I think you’re right to say that they remain fairly stable although our sales has come down considerably as a result of the market. There are some process behind because, especially dealing with the larger player, those OEM more established site, there is a continuer requests from them to extend their credit to give them a larger credit. This is the as the result the current tight market situation. Predominantly for us, we are dealing with those large players that are main manufacturer of trucks and buses. So that’s account for this high, I would say high that the maintaining this same balance of account receivable as a result of debt. Another factor that you make and see is also because as we embark on more issuing of bonds, our discounting of the receivable may go down because we will compare the cost of bonds, particularly short time while at the moment that is the only instrument we have, which is in the mid to study middle 4%, 4.5% to 5% range. Is it still a very competitive rates as compared to, you think your receivables and discount and so that’s the reason why the interplay with the customer as well as the money market at the moment, you will see our account receivable maintain in the same level. As for your second part of the question, that’s our profile of the call receivable deteriorate. My quick answer is, no. We are not deteriorated – we are in the sense that we are not giving credit to the small player. We are giving credit to a bigger player. In that sense, our credit is under checked. So that explains for interplay of the account receivable.

Jonathan Brodsky

Yeah.

Benny Goh

Maybe at the same time, I will answer a similar question again, there is different question from the – sending in by writing saying that, do we expect our account receivable for Q4 to go down or to discount them? Okay. Basically, there are two factors playing. If you look at our company’s financials, we usually have a lower account receivable in the middle of the year as well as the end of the year. Then it’s the time when we have a considerable effort to ask to try and to require the claim to clear the accounts before the New Year begins or the new second half begins. So that was somewhat helped to reduce the account receivable. But most importantly, the receivables depend on the money market, so once the money market is okay, then we will play accordingly. Yeah, thank you.

Jonathan Brodsky

Are any of the OEM providers suffering from financial distress or are they all in reasonably okay financial shape?

Kok Ho Leong

If – our OEM customers are in relatively good shape right now. So, I think that is a good thing because we mixture that our customers are – have good credit before we’ll be extending many special terms.

Jonathan Brodsky

So, I suggest that to closeout my questions. You feel confident that the receivables although the time period to collect has been extended. You don’t feel as if these receivables are likely to go into default?

Kok Ho Leong

Oh. Yeah. That’s right. We do not see any delinquent customers right now.

Jonathan Brodsky

Thank you.

Operator

Your next question will come from Bruce (inaudible), Lazard Capital.

Unidentified Analyst

Yeah. Hello. Hi. I have two questions. First, what is your sales volume of diesel engine for heavy duty trucks in the first nine months of this year and what is the breakdown of the major customers? And the second, I heard, Tongfang is developing their own technology, so, is it a concern to you that they’ll buy less from you? Thanks.

Benny Goh

I think to answer the second part of your question, first, Tongfang is a very big customer of ours and they continue to be – will be a big customer. Although, they have some partnership and I think, everybody knows that the partnerships are coming for example what we are continuing to do is that we are supplying them in a different segment of their requirements. And this partnership is doing very good and we’ll not going to see that deteriorating. While your first part of question, what’s was a sales volume for our heavy duty engines – we’re talking of – total for engines, we are selling this year is about 175,000 units. In 2012, the next quarter we’re selling almost the same numbers thereabouts, that’s right; about 220,000 or so.

Unidentified Analyst

I think that’s 170 units – 170,000 units?

Benny Goh

175,000 units of overall engine trucks this year.

Unidentified Analyst

Right. Yes. What is the number for heavy duty truck?

Benny Goh

Well, if you look at our breakdown, it’s around 60-40, so this will continue.

Unidentified Analyst

Okay. So 60% of 75,000 units are – 60% of it are for heavy duty target there?

Benny Goh

We normally don’t want to give a figure, but we said earlier on that our breakdown of our light to heavy duty is in the region 60%-40% in that region.

Unidentified Analyst

Okay.

Benny Goh

Where actually we’re selling more light duty than heavy duty.

Unidentified Analyst

Okay. Okay. Thanks. So what is a major customer for the heavy duty truck engines?

Benny Goh

Our major customers, actually as I said, Tsinghua Tongfang we also have the JAC and Rasoya food chain, these are the few big customers that we have.

Unidentified Analyst

Helpful. Okay. Got it. Thanks.

Operator

(Operator Instructions). Your next question will come from Ben Ling Bank of America Merrill Lynch.

Ben Ling

Thank you so much, everybody. Actually I have a follow-up question about demand forecast. In terms of the natural gas deals that you’re looking at about 800,000 units for heavy truck in China. From the 1 September, you implied the sales maybe this year will be 650,000. So, your forecast about 22% to 25% growth year-over-year net ASP growth, so did you consider the restocking as contribute about 10% growth or you just don’t consider any restocking? Thank you so much.

Benny Goh

I’m sorry, can you please repeat Ling.

Ben Ling

Okay. From the first trimonth number that heavy truck sector sales was around in full year about 650,000 units. It was that forecast full year 2013 will be around 800,000 units, which imply goes maybe 22% to 25% year-over-year? So, my question, did your 20% increase including the restocking help or just an organic growth? Thank you.

Benny Goh

So, let me just repeat your question. You are asking whether we see any uptake, any increase in the numbers. But actually what we are looking at is that this year although the market was established to be about 800,000 units. So, I think this year, the numbers are much lower. We see things going – must – I’ll tell you could be actually 650,000 units. So, it’s not really growing at the moment. So, from that angle, we will not see much growth until probably in the middle of Q2 of next before the market recovers.

Ben Ling

How about the restocking, did you see the restocking next year?

Benny Goh

Restocking next year. Right now, we are seeing very little down our inventory, so I’m not sure whether that will be taking place until probably maybe in the second quarter of average age.

Ben Ling

Thank you.

Benny Goh

Okay. We’re trying to see any broadcast questions are coming out. I think there is a question that’s asked about hybrid engines, discussing what hydro engines are we going to release? Now actually, we are focusing at our hybrid engines – we have actually introduced hybrid engines almost a couple of years back and it has been successful sold in some of our busses before we introduce our gas engines. So this is one area. And of course hybrid engines, being what they are because it is a mixture of both is obviously a bit more expensive than the diesel or the gas engines standalone. So we don’t that as a big market at the moment. In fact, the gas engines are much more attractive. And there is a question to ask, how many gas engines sold year-to-date? Right now, we have sold close to over 20,000 in this year. Okay. Operator, are there any questions.

Operator

(Operator Instructions) Your final question will come from...

Benny Goh

Okay. If there are no questions (inaudible) question that it’s been asked many times, it’s good also to refresh because the question is while we are holding so much cash, at the same time we have loan at safe times. Yeah, but the point is that just our main operating company Guangxi is such a big company, we are always have to maintain a very strong ties with the bank. So, we will always continue to explore various cover instruments, whether it is bond, mid-term bond or a short-term bond option, of various types of funding facilities such as bill discounting or AR factoring. That is the reason why we maintained this guidance. But if you look at our bank balance even RMB4 billion of bank balance is not considered high compared to our total annual turnover of RMB12 billion to RMB15 million a year. So, that is the scenario that we are always playing with. The other point that people will always ask is that, our finance cost has increased, that you have always looked at our company in the way that we have been funding a lot of the internal upgrading of our facilities with our internal fund, okay. So over time we need to continue to invest in our sustaining CapEx as well as to explore to new product development so you can see we are reaching to a stage that we have to maintain this initiative. Yeah.

Kevin Theiss

Okay. Operator, maybe we can have a last question.

Operator

Your final question will come from Jeff Geygan with Milwaukee Private Wealth Management.

Jeff Geygan

Thank you for taking my call today. Under other operating income, can you please provide more detail to the nature of the foreign exchange revaluation gains?

Benny Goh

Yeah, okay. We have Singapore dollar loan to one of the related company. But this all occur because the loan is denominated in Singapore dollar, but whereas our book is maintained in U.S. dollar. And when we do the final announcing the result we do it in renminbi. So when Sing dollar appreciate against U.S. dollar which occur in this year, we will have foreign exchange gain as a result of this. So that is what you see in both Q3 as well as our year-to-date, okay. This is the main driver.

Jeff Geygan

All right. Second and final question, you indicated that your research and development institute to be completed by mid-2013 giving you the ability to compete globally. What type of opportunity do you see for exporting your engines if that’s in fact what you meant?

Benny Goh

Well, we are improving our capability in emissions. We are talking about our capability in high horsepower. We are looking at all good engines capability. So these are our key areas that we are developing and this would put us in a good position to go globally. And our cars are – what are you also alluding to is that the horse in to – include our marketing for Chinese brand name. I think that’s the key point behind that. Car technology is already there.

Kevin Theiss

Okay. Thank you, Jeff.

Operator

We have now reached the end of our Q&A session and I’ll turn the call back over to Mr. Goh.

Benny Goh

Thank you for participating in our third quarter 2012 earnings call. We look forward to speaking with you again. Thank you and goodbye.