What’s new? According to the preliminary figures released by CVworld, China HDT sales volume in Oct increased 12% YoY to 90k units, representing the highest monthly growth this year. We believe the strong data point is above market expectations and reaffirms our positive stance on HDT sector. Improvement in infrastructure spending, resilient property construction activities, further tightening of anti-overloading polices and the continuous elimination of NES III trucks will lend strong support to the HDT demand in 4Q19E and 2020E, in our view. We prefer Weichai Power (2338 HK, BUY, TP: HK$16.2) given its >30% market share in the HDT engine space. We also have BUY rating on Sinotruk (3808 HK, TP: HK$19.4).
- Key reasons for the growth acceleration in Oct: First, the elimination of NES III remained a key driver as local governments continued to enforce the elimination of NES III trucks. Second, demand for logistic trucks continued to increase driven by transportation of coal and other commodities. Lastly, the collapse of bridge in Wuxi due to truck overloading in Oct triggered more demand for HDT.
- Top two players continued to gain market share. FAW and Dongfeng (489 HK, HOLD, covered by Jack Bai) continued to gain share with sales growth in Oct reached 22% and 24% respectively, above the industry average. On the other hand, CNHTC (parent company of Sinotruk) saw slight improvement with sales remained stable (YoY) after a decline for six consecutive months. Total HDT sales volume in 10M19 reached ~979k units (+0.3% YoY), representing 87% of our full year estimates of 1.1mn units (Note: 10M18 accounted for 85% of the full year sales). We feel comfortable with our full year projection.
- Policy momentum to continue. The “Action plan for air quality control in Beijing, Tianjin and Hebei (Oct 2019-Mar 2020)” (“京津冀及周边地区 2019-2020 年秋冬季大气污染综合治理攻坚行动方案”) issued by the Ministry of Ecology and Environmental in Oct called for the acceleration of the elimination of NES III trucks. The volume subject to elimination should reach >40% of the total elimination target by end-2019. On the other hand, local governments will likely enforce the anti-overloading measures following the Wuxi accident that drew widespread media coverage. We expect all these will boost the HDT demand in the near term.
