2019 results missing market expectation
Weichai Power announced 2019 results: revenue rose 9.48% YoY to Rmb174.36bn, and attributable net profit grew 5.17% YoY to Rmb9.1bn or Rmb1.15/sh, missing expectation.
We attribute the disappointing results to falling gross margin and rising R&D expenses. 4Q19 gross margin fell 6.2ppt YoY and 2.9ppt QoQ due to a changing schedule of revenue recognition, downstream clients’ efforts to increase sales in early 2020 and short-term changes in Weichai’s sales strategy. 2019 R&D expenses rose 21.01% YoY to Rmb908mn, as R&D headcount increased and incentive for R&D staffs improved. We think this will enhance Weichai’s long-term competitive edge.
Trends to watch
Domestic demand an important support in 2020; watch structural opportunities in construction HDTs （heavy-duty trucks）。
Lowering payout ratio amid hard times.
Financials and valuation
Given COVID-19’s impact on overseas business, we trim 2020 net profit forecast 8.1% to Rmb9.48bn and introduce 2021 forecast at Rmb9.88bn. Weichai A-shares are trading at 10.7x and 10.3x 2020-2021e P/E, and H-shares at 9.5x and 9.1x P/E. We maintain an OUTPERFORM rating on Weichai A-shares and H-shares, and keep the target price for A-shares at Rmb15.70 （13.1x 2020e P/E with 22.5% upside）， but lower the target price for H-shares by 4.0% to HK$17.00 （12.3x 2020e P/E with 29.6% upside）。
Risks
Domestic HDT demand disappointing; sharper-than-expected impact from global spread of COVID-19.