Don't Write Off This Promising Company

The ongoing China construction slowdown has hit China Yuchai International (NYS: CYD) hard. Its rough third-quarter numbers are glaring proof of the headwinds it faces.

But I say you shouldn't write off the stock so soon. I think things may look up for the diesel and natural gas engine maker in the future. Read along to know what makes me think so.

The numbers
Because of the slowdown in the Chinese commercial vehicle market, especially in the truck sector, the number of diesel engines China Yuchai could sell slipped slightly, down less than 1% to 106,358 units as compared to last year. The company nevertheless managed to generate revenues of $542.6 million, marginally higher than $524.4 million a year ago, attributing this to its diversified range of engines offered in several markets.

High input costs and selling, general, and administration expenses ate into the company's top line, pulling its net profit sharply down to $10 million from $34.2 million a year ago.

Are things that bad?
China Yuchai's poor numbers are a reflection of the challenges it is facing in the wake of the ongoing construction demand issues in the country. And the construction slowdown has made even its U.S. counterparts, who derive significant revenues from the region, a little cautious.

Rival Cummins (NYS: CMI) , for instance, has lowered its full-year revenue guidance from China by almost $100 million owing to the slowdown. But the fact that it still expects 19% higher revenues from China for the year suggests things might not be as bad. Cummins remains optimistic about the long-term growth prospects in China.

Equipment giant Caterpillar (NYS: CAT) also doesn't see the current situation in China as alarming. In fact, CEO Douglas R. Oberhelman said recently, "the slowdown we have seen in the economy as the Chinese authorities have tried to get a hold of inflation, in my view is the best thing [that] could have happened to the construction equipment industry." Oberhelman believes that the levels of investment in China were unsustainable for Caterpillar and its competitors, and a bubble would have been created if not for the action taken by the Chinese government.

What's more, even automakers that have been hit by the slowdown are viewing this as a temporary phenomenon. Truckmaker Volvo, for instance, is bullish on the strong fundamentals of China in the longer run and General Motors (NYS: GM) , a huge player in the China auto market, feels the Chinese market could recover soon.

China Yuchai is also investing in increasing capacity. The situation has been bad lately mainly because it sells its products only in China, exporting less than 1%. Obviously then, any unfavorable event in China is bound to affect the company, as is the case now.

The Foolish bottom line
Things might not seem too bright for China Yuchai in the near term, until the situation stabilizes a bit in China. However, China Yuchai's business line is strong, and moves like new product initiatives -- such as China's first Euro VI-compliant diesel engines -- are indeed impressive.

Considering the present situation in China, you might prefer watching the stock from the sidelines. To make sure you do not lose out in the long term, it's important to keep tabs on the way things are shaping up in the Chinese economy and for China Yuchai. The easiest way to do this is by adding the stock to our free and personalized My Watchlist service. It will keep you updated not just on China Yuchai, but on all your favorite companies.

Click here to add China Yuchai to your stock watchlist.
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At the time thisarticle was published Neha Chamaria does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of General Motors and Cummins. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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