We believe the weak 2020 results has been largely priced in following the recent share price correction. We expect Weichai’s earnings growth to resume in 2021E-22E, driven by the synergies with Sinotruk (3808 HK, BUY), recovery of KION’s earnings and on-track development of new business including large-bore engine, hydraulic powertrain for construction machinery and CVT powertrain for agricultural machinery. We raise our earnings forecast in 2021E/22E by 2%/5%. Our SOTP-based TP is lifted from RMB17.9 to RMB23.4. Key catalysts: (1) breakthrough in the sales volume of hydrogen fuel cell vehicles; (2) better-than-expected HDT sales; (3) potential M&A for new energy business. Maintain BUY.
- Expectation on HDT demand is bearish enough. We believe both industry players and market have already expected a slowdown of China HDT demand in 2H21E due to the upcoming implementation of NES VI, which implies a sales decline of ~13-20% YoY (to 1.3-1.4mn units) for the full year. With HDT sales volume already reaching 532k units in 1Q21 (+94% YoY), market is expecting a decline of 37-43% YoY in Apr-Dec 2021. Such bearish expectation will easily trigger a share price recovery once the monthly sales over the coming months remain strong, in our view. On the other hand, the implementation of NES VI will potential result in a shift of demand from diesel truck to natural gas truck. Weichai will become a beneficiary given the high market share of >60%.
- Strong synergies with Sinotruk to continue. On the back of Weichai’s engine supply, Sinotruk’s market share in HDT increased from 14% in 2019 to 17% in 2020. Besides, Sinotruk will put more focus on LDT and pickup trucks going forward. We expect Weichai’s engines sales will continue to be driven by the proactive strategy taken by Sinotruk.
- Positive guidance from KION. KION’s adjusted EBIT dropped 36% YoY to EUR547mn in 2020, due to the impact of COVID-19. KION guided revenue growth to be 10-17% while adjusted EBIT is expected to grow 32-46% to EUR720-800mn. This will serve as a key recovery driver for Weichai.
- Risk factors: (1) Weaker-than-expected demand of HDT and engine in 2H21E; (2) increase in component cost; (3) risk of new business.
