We expect the lockdown of major cities in Hubei Province following the outbreak of Pneumonia will potentially affect the delivery of Dongfeng (489 HK)’s HDT in the foreseeable future as the Company’s production lines are mainly located in Wuhan and Shiyan City. The supply risk of Dongfeng’s HDT will offer room for other major players to gain market share. Weichai Power (2338 HK, BUY, TP: HK$17.9 / 000338 CH, BUY, TP: RMB15.9) will likely benefit as FAW (一汽), Weichai’s major customer, will possibly gain market share. Besides, Shaanxi Heavy Duty Motor, JV between Weichai and SXQC (陕汽), and Sinotruk (3808 HK, BUY, TP: HK$19.4) will likely gain market share as well. At this stage, we have not revised our 2020E HDT demand projection. Taking 2003 as reference, the HDT sales still increased 4% YoY despite the outbreak of SARS. We will closely monitor the situation.
- Dongfeng’s commercial vehicle and engine capacity is mainly located in Hubei. Dongfeng’s commercial vehicle (CV) business is mainly operated by four subsidiaries, namely (1) Dongfeng Commercial Vehicle (a JV between Dongfeng and Volvo Cars) with annual CV production capacity of 240k units and engine capacity of 90k units with a focus on HDT, (2) Dongfeng Motor (a JV between Dongfeng and Nissan Motor) with annual CV capacity of 250k units and engine capacity of 280k units with a focus on LDT, (3) Dongfeng Liuzhou Motor (CV: 60k units), and (4) Dongfeng Special Commercial Vehicle (CV: 75k units). Dongfeng Motor, located in Wuhan, is the major production base of commercial vehicle and engine, while Dongfeng Commercial Vehicle is located in Shiyan City, Hubei.
- Scenario analysis: Dongfeng’s HDT sales volume in 2019 was ~240k units with a market share of ~20%, ranked second in China. Historically, HDT sales in 1Q is the highest throughout a year. In 2019, HDT sales in 1Q reached 325k units, representing 28% of the total sales for the full year. Dongfeng’s potential supply disruption will leave room for other players to gain market share. Given that the actual impact is uncertain at this stage, we conduct a scenario analysis to quantify the impact. Dongfeng’s HDT sales in 1Q19 was 58k units. Assuming a 50% YoY reduction of Dongfeng’s HDT sales in 1Q20E and no change in total HDT demand, the shortfall will be ~29k units or 9% of the total HDT demand in 1Q20E.
