We remain positive on heavy-duty truck (HDT) sector as: (1) abundant funding from the issuance of local government bonds will continue to drive demand for construction trucks; (2) anti-illegal truck operation will further speed up the replacement cycle, offering support to the truck demand between 2020E-22E; (3) strong policy support to remove NES III trucks with certain regions starting to phase-out NES IV trucks. We revise up our HDT sales projection by 13% in 2020E and 8-10% in 2021E-22E. Maintain BUY rating on Weichai (2338 HK, TP: HK$19.2 / 000338 CH, TP: RMB16.8) and Sinotruk (3808 HK, TP: HK$28.3).
- Abundant funding to provide solid support to the HDT demand throughout the year. The amount of local government bond issued surged 1.1x YoY to RMB1.2tn in Aug, taking the total amount to RMB4.96tn in 8M20 (+25% YoY). Excluding bonds for refinancing, the amount of new bond issuance reached RMB3.75tn in 8M20. While the spending in indemnificatory housing and renovation of shanty area in Jul/Aug reached 40%/23% of the total fund raised (versus a single-digit in 1H20), we expect the proportion will not further increase going forward, as infrastructure construction such as transportation and municipal projects remain the key focus.
- Anti-illegal truck operation underway. MIIT released a circular in Jul calling for the crackdown of illegal truck modification with a target to eliminate those illegal trucks by 2022 (<关于开展货车非法改装专项整治工作的通知>). Target vehicles include (1) hazardous goods trucks, (2) dump trucks, (3) semi-trailers, (4) light-duty trucks and (5) concrete mixers. According to the timetable, the operation has just entered the inspection stage (Sep 2020 - Mar 2021). This will trigger a new round of replacement cycle.
- Strong policy support to remove NES III trucks with certain regions starting to phase-out NES IV trucks. Key provinces such as Shandong and Henan already set clear targets to phase out a total of ~430k units of NES III trucks. Of this volume, 70% will need to be achieved by end-2020. In Shandong, subsidies will be extended to 2021 (depends on city-level policies) for NES III elimination. Besides, in Hebei, certain cities have already set restriction on the operation of NES IV in some districts. We see rising possibility that the phase-out of NES IV will be accelerated, thereby offering upside to the HDT demand.
- Higher HDT sales projection. We revise up our 2020E/21E/22E HDT sales forecast by 13%/9%/10% to 1.54mn/1.38mn/1.40 units. We expect a 24% YoY sales growth in Sep-Dec 2020, after a 35% YoY growth in 8M20, which will take the full year growth to 31% YoY. Due to high base effect, we forecast HDT sales to drop 10% YoY in 2021E and stabilize in 2022E. That said, such sales volume still implies a sizable market and we expect large players to grow through market share gain going forward.
- Raised TP of Weichai Power. While we trimmed our 2020E earnings forecast by 5% due mainly to revised margin assumptions, we lifted our 2021E-22E forecast by 3-4% after incorporating our new industry forecast. Our SOTP-based TP is raised to HK$19.2 (H) /RMB16.8 (A). We believe concerns on margin weakness is already in the price, while strong upcoming HDT sales data points and improvement in 3Q results will serve as near term catalyst
