China Specialist, Auto and Industrial Specialist

Victoria Li

20 years experience as sell side analyst focusing on China's Industrial and Auto sectors

China Auto: Stay with Conservative Players

Weichai Power(2338.HK)： Fuel Cell Not the Answer (Yet), More Boldness Needed on All-Electric

Equity Bottom-Up

Weichai Power Co Ltd H / Equity Bottom-Up

We believe the market underestimates Weichai's earnings benefit its from cooperation with Sinotruk. Current Bloomberg consensus indicates a 2.5% net profit increase in 2020E. We estimate that Weichai's HDT sales will increase by 10% yoy in 2020E due to Sintruk's order increase, which would drive Weichai's earnings increase up 7% yoy. In addition, with sales increase from other clients for Weichai's National VI engines (diesel and natural gas engines), new N flatform engines, National IV wheel loader engines; we estimate Weichai's earnings will increase by 12% yoy in 2020E. 
In the long term, we believe Weichai has regained earnings drivers in its engine business. 
<ul>
<li>Its cooperation with Sinotruk could increase its earnings by 28%, assuming Weichai supplies 50% of Sinotruk's trucks engines needed in 2020E. In addition Sinotruk's market share gain would drive upside in Weichai's earnings benefits from the co-operation.</li>
<li>Weichai's newly launched N platform engines( 2L-7L engines) could cover demand from all types of commercial vehicles, including light duty trucks(LDT), buses, mini buses, SUVs, etc. LDT is the biggest segment in truck market. We believe Weichai's LDT engine sales would reach 360,000 units, the same sales level as its HDT engines sales today, within 10 years.</li>
<li>National VI natural gas engine has gained traction in the market with 70% market share gained. Weichai will be the winner of long term demand increase and National VI Standard implement in natural gas heavy duty truck market. </li>
<li>
Sales of diesel engines for non-road machines(agricultural machines and construction machines) is also being driven by new national standard. In July 2018, State Council required non-road machines to have National IV engines by 2021.
</li>
</ul>

We believe the market underestimates Weichai's earnings benefit its from cooperation with Sinotruk. Current Bloomberg consensus indicates a 2.5% net profit increase in 2020E. We estimate that Weichai's HDT sales will increase by 10% yoy in 2020E due to Sintruk's order increase, which would drive Weichai's earnings increase up 7% yoy. In addition, with sales increase from other clients for Weichai's National VI engines (diesel and natural gas engines), new N flatform engines, National IV wheel loader engines; we estimate Weichai's earnings will increase by 12% yoy in 2020E. 
In the long term, we believe Weichai has regained earnings drivers in its engine business. 

Its cooperation with Sinotruk could increase its earnings by 28%, assuming Weichai supplies 50% of Sinotruk's trucks engines needed in 2020E. In addition Sinotruk's market share gain would drive upside in Weichai's earnings benefits from the co-operation.
Weichai's newly launched N platform engines( 2L-7L engines) could cover demand from all types of commercial vehicles, including light duty trucks(LDT), buses, mini buses, SUVs, etc. LDT is the biggest segment in truck market. We believe Weichai's LDT engine sales would reach 360,000 units, the same sales level as its HDT engines sales today, within 10 years.
National VI natural gas engine has gained traction in the market with 70% market share gained. Weichai will be the winner of long term demand increase and National VI Standard implement in natural gas heavy duty truck market. 

Sales of diesel engines for non-road machines(agricultural machines and construction machines) is also being driven by new national standard. In July 2018, State Council required non-road machines to have National IV engines by 2021.



Weichai Power (2338.HK): Engine Power Regained