My research paper in Microecomomics on China Yuchai International Limited (The graphs I created don't show up.)

At this time last year, the price of CYD stocks was roughly a little more that $12. The stock was undervalued because it lacked the attention it deserved. Few had heard of this small stock until Investors Business Daily put it in the spotlight by publishing it as number one in December, 2003 based on its growth rate and profits. In response, many people bought the stock and CYD’s stock price rose. Once fully valued, Investors Business Daily removed CYD from its number one spot. Since dropping from its number one spot, CYD has done almost nothing to inform investors about the good things happening in the company. For an instance, CYD recently decided to join in a partnership with Yamaha, but that information reached investors only through Yamaha press releases. The point is, once Investors Business Daily brought CYD stock to full value, many investors began selling due to talk of a big slowdown in China. In addition, high oil prices and a bad job market in the US have put a downward pressure on almost everything.
Since oil price has rose so much, many investors have hurriedly sold their CYD stocks. Many investors reasoned that the high oil price would decrease the Chinese demand for diesel engines. Some investors even blamed the rising oil price on the recent boom in oil consumption in China. In fact, China is expected to become the world’s second largest consumer of oil after the US by year 2010. Since the supply of oil hasn’t increased but demand has with the additional growing demand from China, oil prices went uphill. There is of course some truth in the statement that China’s recent increase in demand for oil is partly to blame for the rise in oil price. However, the statement that high oil price will decrease China’s demand for diesel engines is false. Thus, the frenzy to sell CYD stock was completely unnecessary considering that China’s increasing demand for oil is actually a good thing for CYD. It shows that the demand for transportation remains strong. The increase in China’s market demand for diesel engines and automobile transportation is greater than the incentive for consumers to drive less due to high oil prices. This is because of the continued expansion of highways and roads in China that lead to an increased demand for new trucks, buses, and construction equipments which leads to increased demand of Yuchai’s products. Thus China’s increasing consumption of oil would actually cause CYD prices to go up.
These concepts are illustrated in these graphs below:
1. The effect on oil price of China’s increased demand for oil when oil supply is completely inelastic:
Price
*Red diamond shows the new higher price of oil


D’
S D
Quantity
*In reference to graph above*- OPEC is an example of a perfectly inelastic supply of oil.
The oil supplied by the eleven countries under OPEC is limited to the daily quota of 26 million barrels (effective August 1, 2004). Currently, it is estimated that the eleven countries under OPEC accounts for 40% of the world’s oil production and 2/3 of the world's known oil reserves. Since, OPEC accounts for such a large portion of the world’s oil market, it can be a major driving force of oil price.
2. Increase in demand of automobile transportation and thus diesel engines exceed incentives to cut down on oil consumption
Price



S D
Quantity
*In reference to graph above*- The dotted red line shows the decrease in demand of diesel engines due to incentives to use the road less because of higher gas price. However, the increase in demand to buy more diesel engines represented by the distance between the two red lines causes an overall shift right in the demand curve. Overall, the price of Yuchai products goes up.
It was mentioned in the introduction to this paper that CYD is expecting a 33% increase in production and profits. In year 2003, there was a similar 32% increase in profits from the previous year of 2002. What can explain these impressive figures? To begin with, a shift in the consumer’s tastes shifted the demand curve right. Chinese consumers are rapidly replacing more traditional and low-tech methods of transportation with automobiles. In addition, a rather recent boom in industrialization in China has led to a greater demand for large trucks and vehicles, many of which are powered by Yuchai’s heavy-duty diesel engines. The overall effect is a shift right in the demand curve due to change in tastes.
A second major factor that has led to the large increase in CYD’s profit is the increase in Chinese people’s incomes. China’s GDP increased approximately 8% in 2003 from 2002, and this is expected to continue in about the same degree into year 2004.
The expected increase in GDP for year 2004 of about 7% to 8% is possible due to greater amounts of Foreign Directed Trade and a higher level of personal wealth and consumer spending. Thus, the demand curve again shifts right due to an increase in income.
The third and final major factor that leads to the large increase in CYD’s profits is an increase in technology. Perhaps the greatest new technology for CYD is its recently developed 6112 heavy-duty engine. The production of this new 6112 heavy-duty engine alone has increased the Yuchai’s production substantially. Thus, new technology leads to a shift right in the supply curve.
The overall effect of these three major factors in increasing CYD’s production and prices can be seen with the graph below:

Price


D’
S S’ D
Quantity (Production)
* In reference to graph above*- If demand increases faster than supply, then the prices will rise. If demand and supply increase at an equal rate, then the price will remain the same. If demand increases at a slower rate than supply, then the price will decrease. However, the quantity produced will be greater then before either way.
It is true that CYD has excellent prospects. If only investors were able to realize this and if only CYD had an investors relations department, the stock would easily trade in the 20’s. Stocks can do wild things in the short term where fear and greed take command of the market, but in the long run the reality of the market situation will always come through. CYD is scheduled to report its second quarter earnings for this year on August 11th, 2004. When investors tune in to this market report and realize CYD’s excellent earnings projections, investors will again begin buying rather than selling. The stock price will rise to its full value, maybe even reaching $25 by September or October, 2004. Hopefully, investors will not be driven by fear to sell their CYD stocks this time so that the CYD stock can keep its rightful value in the high 20’s.