CYD's 2025 Results Confirm Volume Growth But Margin Erosion, Testing Investment Thesis

What happened

China Yuchai International announced its unaudited 2025 second half-year and full-year financial results, revealing continued engine unit sales growth that builds on the 29.9% surge reported in the first half. However, gross margins remained compressed, likely hovering around the 13.3% seen in 1H25, down from 13.7% a year earlier, indicating persistent pricing pressure. Overseas expansion efforts, such as Thailand production and Vietnam licensing, failed to show meaningful revenue contribution, highlighting the company's heavy reliance on China's volatile market. Customer concentration risks persist, with top customers accounting for a significant share of revenue, limiting bargaining power in a competitive landscape. Overall, the results underscore that volume gains are not translating into improved profitability, raising red flags about long-term sustainability amid electrification trends.

Implication

The ongoing margin compression suggests China Yuchai is buying market share in a declining internal combustion engine segment, rather than achieving sustainable economic gains. With China's new-energy heavy-duty truck penetration exceeding 50%, the core business faces structural headwinds that could accelerate ICE substitution. Governance complexities, including high customer concentration and subsidiary equity schemes like MGP's potential listing, add uncertainty and potential value leakage. Strong cash reserves provide a financial buffer, but restricted mobility in China limits shareholder value realization. Until gross margins recover to at least 13.7% YoY and ASEAN contributions become measurable, the stock's current price embeds overly optimistic assumptions, warranting a defensive stance.

Thesis delta

The thesis remains firmly in 'WAIT' mode, as the 2025 results show no material improvement in gross margins or overseas growth, confirming prior concerns. Investors should not upgrade their view until future reports demonstrate gross margin stabilization above 13.7% YoY and concrete evidence of ASEAN output scaling beyond symbolic levels. The lack of progress on these fronts reinforces the bear case and delays any potential re-rating based on volume growth alone.