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 HK$20.8 to HK$27.6. 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.