Weichai’s net profit grew 10% YoY to RMB1.77bn, in line with our expectation. Net profit in 9M19 accounted for 72% of our full year estimates, which we feel comfortable. We maintain our positive stance on Weichai, with near term catalysts coming from a higher growth of HDT engine in 4Q19E on the back of infrastructure spending growth. Besides, we believe the expansion into excavator powertrain and engine for industrial power are new growth drivers over the coming years. Our 2019E/20E earnings estimates remain 4%/8% above consensus. Maintain BUY.
- Key highlight of 3Q19 results. Revenue remained stable (YoY) at RMB35.8bn in 3Q19. Gross margin expanded 1.6ppt YoY to 22.9%. Weichai recognized net finance income of RMB0.25mn, versus RMB43mn net expense in 3Q18. Other gain surged 120% YoY, helped by a fair value gain of RMB102mn. Excluding the fair value gain, net profit would increase by 4% YoY.
- Core business (excluding KION) remained solid in 3Q19. KION Group (KGX GR, NR) reported its 3Q19 results earlier with revenue and pre-tax profit increased by 14% and 20% respectively. Stripping out KION’s contribution, we estimate Weichai’s core business (including engine, HDT, gearbox) revenue and pretax profit dropped 10% YoY and 1% YoY respectively. This is largely expected as we understand that Weichai’s mid-to-large size engine sales were only stable in 3Q19 while Shaanxi Heavy Duty Motor’s HDT sales volume underperformed the industry growth of ~3.5% during the period.
- Consensus earnings estimate implies 10% earnings decline in 4Q19 which looks too conservative. Net profit in 9M19 grew 18% YoY to RMB7bn. We see potential upside to the consensus estimates as we believe the demand for HDT and engine will be stronger in 4Q19E, on the back of infrastructure construction activities and rising demand for logistic trucks due to stringent implementation of anti-loading policies following the Wuxi accident.
- Risk factors: (1) weakness in HDT and engine demand; (2) technology risk.
