Weichai’s 3Q20 net profit came at RMB2.4bn, up 37% YoY. The results are encouraging as (1) revenue surged 48% YoY which is above expectation, (2) gross margin rebounded 1.7ppt QoQ which should ease market concerns. We see several positive drivers going forward: (1) Management is confident of achieving sequential gross margin improvement in 4Q20E; (2) Latest guidance of KION (KGX GR) offers improved visibility; (3) New business growth is on good track. We raised our earnings forecast in 2020E-22E by 2-5%, due mainly to higher sales volume assumptions. Our SOTP is lifted from RMB16.8 to RMB17.9, after rolling over the base year to 2021E. Maintain BUY.
- Key highlights on 3Q20 financials. Weichai’s revenue surged 48% YoY to RMB52.9bn. Based on our calculation, Weichai’s revenue from core business (ex-KION) surged 90% YoY to ~RMB36bn, while KION’s revenue slightly dropped 4% YoY to EUR2.07bn. Blended gross margin in 3Q was 19.3%, down 3.5ppt YoY but up 1.7ppt QoQ. Weichai maintained good expense control with SG&A ratio continued to reduce YoY. Net profit grew 37% YoY to RMB2.4bn. It’s worth noting that KION reported adjusted EBIT/net profit of EUR159mn / EUR82mn in 3Q20, representing a significant recovery from a net loss of EUR17mn in 2Q20.
- Engine sales volume +90% YoY in 3Q20. In 3Q20, total engine sales volume grew 90% YoY to 260k units. Among this, HDT engine surged 100% YoY to 120k units, with market share increasing 2.5ppt YoY and 4ppt QoQ. LDT engine surged 2x YoY.
- New business on good track. In 9M20, large-bore engine, mainly installed for data centers, grew 30% YoY to 2.5k units. Revenue from hydraulic component grew 40% YoY in 9M20.
- Positive management guidance: (1) Volume of gas engine model with less usage of precious metals will further increase in 4Q20E, which will drive gross margin sequentially; (2) Sales volume of engine to Sinotruk (3808 HK, BUY) is expected to accelerate; (3) Amid the latest city lockdown in Europe, KION is still expected to deliver EUR101-181mn of adjusted EBIT in 4Q20E. In particular, KION’s supply chain solutions will continue to benefit from e- commerce project growth.
