Is This Chinese Stock Worth Watching?


China Yuchai International (NYS: CYD) , a company that manufactures and sells engines, recently reported a 13.4% fall in its second-quarter bottom line in spite of selling a higher number of diesel engines.

Does that signal that business is slowing down, or was it just a soft quarter?

The numbers
Revenues for China Yuchai remained flat at $620.7 million. While demand in most market segments fell, higher sales of diesel engines in the light-duty and off-highway segments helped maintain the top line.

Higher costs for raw materials as well as product mix changes ate into the top line, pulling the company's gross margins down from 22.3% to 19.2% year over year. As a result, net profits came in lower at $24 million, compared to $27.7 million in the same quarter last year.

Future plans
China Yuchai remains a leader in introducing new and better products. Last month, it introduced China's first Euro VI-compliant diesel engines. This is a big achievement and could give the company an advantage over its peers, given that the European Union is planning to implement the stringent Euro VI standards beginning in 2013.

The company will also construct more facilities at its plants to increase production capacity of power generators and marine engines, anticipating an increase in demand for these products.

From a balance sheet perspective, China Yuchai has high cash and lower debt. While cash and equivalents stand at $452.18 million, long-term debt is at $34 million. The company thus looks to be in a comfortable position to take on further expansionary and product development moves.

China calling
China has attracted even U.S. engine and truck companies, and it has been playing a big role in boosting demand for their products. Cummins (NYS: CMI) , China Yuchai's biggest rival, reported a strong 34% growth in its second-quarter revenues from China. The company has been producing engines in China since 2009, and it remains highly optimistic about the growth prospects there.

Caterpillar (NYS: CAT) has also been aggressively expanding in China. A few days back, it announced that it is building manufacturing facilities in China. The company had hinted that its eye was keenly focused on China earlier this year when it announced plans to spend more than $1 billion in building further capacity there. This is one company that looks totally inclined toward China.

China Yuchai faces competition not just from its local counterparts but also from these U.S. giants. But the aggressive China-centered plans of these companies also indicate the business the country could offer in terms of future demand for machines and engines, something that China Yuchai should directly benefit from.

The Foolish bottom line
The exit of a key executive in May might have hit Yuchai's stock hard, but the company is based in a growing country and makes products used in all sorts of industrial applications. If the current numbers make you cautious, a long-term eye on the stock may be worth the money.

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At the time thisarticle was published Fool contributor Neha Chamaria does not own shares of any of the companies mentioned in this article.Motley Fool newsletter serviceshave recommended buying shares of Cummins. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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