Intangible assets

12 Months Ended

Dec. 31, 2022

12.	Intangible assets


	Goodwill		Technology Know-how		Development costs			Trademarks		Total
	RMB’000		RMB’000		RMB’000			RMB’000		RMB’000
Cost
At January 1, 2021		218,311		136,822		1,093,423			169,811		1,618,367
Addition		—		—		313,571			—		313,571
Transfer		—		414,704		(414,704	)		—		—

At December 31, 2021 and January 1, 2022		218,311		551,526		992,290			169,811		1,931,938
Addition		—		—		181,181			—		181,181
Transfer		—		121,227		(121,227	)		—		—

At December 31, 2022		218,311		672,753		1,052,244			169,811		2,113,119


Accumulated amortization and impairment
At January 1, 2021		5,675		128,724		—			—		134,399
Amortization		—		38,957		—			—		38,957

At December 31, 2021 and January 1, 2022		5,675		167,681		—			—		173,356
Amortization		—		64,939		—			—		64,939

At December 31, 2022		5,675		232,620		—			—		238,295


Net carrying amount
At December 31, 2021		212,636		383,845		992,290			169,811		1,758,582

At December 31, 2022		212,636		440,133		1,052,244			169,811		1,874,824

US$’000		30,587		63,311		151,361			24,426		269,685

Goodwill

Goodwill represents the excess of purchase consideration over fair value of net assets of businesses acquired.

Goodwill acquired through business combinations have been allocated to two cash-generating units for impairment testing as follows:

•

Yuchai

•

Yulin Hotel. Goodwill allocated to Yulin Hotel was fully impaired in 2008.

Carrying amount of goodwill allocated to the cash-generating unit:


	31.12.2021		31.12.2022		31.12.2022
	RMB’000		RMB’000		US$’000
Yuchai		212,636		212,636		30,587

Yuchai unit

The Group performs its impairment test annually. The recoverable amount of the unit was determined based on a value in use calculation using cash flow projections from financial

budgets approved by senior management covering a

ten-year

period. The business of Yuchai is stable since the Group has control in 1994 and the business model of Yuchai is unlikely to change in the foreseeable future. The

pre-tax

discount rate applied to the cash flow projections w

as 14.34% (

2021:

12.54

%) and cash flows beyond the

ten-year

period are extrapolated using a

growth rate (2021:

%) that is the same as the long-term

average growth rate for PRC. No impairment was identified for this unit.

Key assumptions used for value in use calculations

Key assumptions used in estimation of value in use were as follows:

•

Profit from operation

•

Discount rate

Profit from operation – Profit from operation is based on management’s estimate with reference to historical performance and future business outlook of Yuchai unit.

Discount rate – Discount rate reflects management’s estimate of the risks specific to the cash-generating unit and is estimated based on weighted average cost of capital (“WACC”). The WACC takes into account both debt and equity. The cost of equity is derived from the expected return on investment by the Group’s investors. The cost of debt is based on the interest-bearing borrowings the cash-generating unit is obliged to service. This rate is weighted according to the optimal debt/equity structure arrived on the basis of the capitalization structure of the peer group.

Sensitivity to changes in assumptions

The implications of the key assumptions for the recoverable amount are discussed below:

Profit from operation – A decreased demand can lead to a decline in profit from operation. A decrease in demand by

26.64%

(2021: 15.21%) would result in impairment.

Discount rate – A rise in

pre-tax

discount rate to

17.92%

(2021: 14.03%) in the Yuchai unit would result in impairment.

With regard to the assessment of value in use of the Yuchai unit, management believes that no reasonably possible change in any of the above key assumptions would cause the recoverable amount to materially fall below the carrying value of the unit.

Technology know-how

At December 31, 2022, The Group has an intangible asset representing technology development costs with carrying amount of RMB

5.9

million, which is the technology know-how that relates to production of 4Y20 engines. As of December 31, 2022, the accumulated impairment loss that was brought forward from prior years on this technology know-how was RMB

126.7

million.

In late 2018, the Group had commenced the production of 4Y20 engines. In 2020, 2021 and 2022, management believed that there was no indicator for further impairment. Also, having considered that there was no significant change to the market and economic environment which will have a favorable effect to the recoverable amount of the intangible asset, management had concluded that no reversal of impairment was necessary in 2020, 2021 and 2022.

In 2022, the development of certain engine platform relating to National VI engines were completed, and the related development costs amounting to RMB 121.2 million (US$ 17.4 million) (2021: RMB 414.7 million) were transferred from development costs to

technology know-how, and amortization were charged accordingly based on the Group’s policy.

Development costs

During 2021 and 2022, the Group has capitalized development costs of RMB

313.6

million and RM

181.2

million

(US$

26.1

million), respectively,

mainly

for new engines that comply with National VI and Tier 4 emission standards. As of December 31, 2022, the total capitalized development costs are RMB

1,052.2

million (US$

151.4

million) (2021: RMB

992.3

Million). These development costs relate to

on-going

development efforts and, accordingly, have not yet been available for use, and therefore no amortization

charges were recorded.

In 2021 and 2022, the Group performs an impairment test on the development costs that are not available for use. No impairment has been identified. The recoverable amount was determined based on its value in use using the discounted cash flow approach. Cash flows were projected based on historical growth, past experience and management best estimation of future business outlook. In 2022, the Group used 7 years (2021: 8 years) forecast and were based on the updated financial budgets approved by the senior management with no terminal value.

Key assumptions used in estimation of value in use were as follows:

•

Profit from operation – Profit from operation is based on management’s estimate with reference to historical revenue generated, growth rate and estimation of future business outlook. In 2022, the

Group used a 7 years business plan, and estimated the revenue growth rate is the range of 15% to

20%

year-on-year from 2023 to 2027 in view of the implementation of new emission standard and management expect an accelerated growth for new energy products due to the government’s emphasis on new energy. Management assumes the revenue for the year 2028 and 2029 remain the same level as 2027. In 2021, the Group used a 8 years business plan, the revenue growth rate is estimated at an average around 12% year-on-year from 2022 to 2025 decrease

to 5% in 2026 and thereafter management assumed no revenue growth from 2026 to 2029.

•

pre-tax

discount rate of

14.34%

(2021: 12.54%).

Sensitivity to changes in assumptions

The implications of the key assumptions for the recoverable amount are discussed below:

Profit from operation – A decreased demand can lead to a decline in profit from operation. A decrease in demand by

4.88%

(2021: 13.86%) would result in impairment.

Discount rate – A rise in

pre-tax

discount rate to

19.17%

(2021: 15.69%) would result in impairment.

With regard to the assessment of value in use, management believes that no reasonably possible change in any of the above key assumptions would cause the recoverable amount to materially fall below the carrying value.

Trademarks

In 2019, Yuchai entered into a trademark license agreement with GY Group under which Yuchai was granted the exclusive and perpetual use of the trademarks listed in the trademark license agreement for a

one-time

usage fee of RMB 169.8 million

(US$ 24.4 million).

Management has assessed and concluded that the right granted by the trademark license, according to the terms and conditions of the trademark license agreement, is indefinite.

In 2021 and 2022, the Group performed an annual impairment review by taking Yuchai as a cash-generating unit. Using the same cash flow projection and assumptions for goodwill impairment test disclosed above, management concluded that no impairment charge is to be recognized in 2021 and 2022.