2021 results in line with our expectations
　　Weichai’s 2021 revenue and attributable net profit rose 3.1% and 0.5% YoY to Rmb203.55bn and Rmb9.25bn. Its 4Q21 revenue was Rmb37.12bn (-25.9% YoY and -7.3% QoQ) and attributable net profit was Rmb1.35bn (-35.6% YoY and -7.8% QoQ). The results are in line with our expectations.
　　Trends to watch
　　Earnings substantially outperformed sector amid downturn; further　consolidating market status. Weichai’s 2021 gross margin rose 0.2ppt YoY to 19.1%, and net margin remained stable YoY at 5.7%. Its 4Q21 decline in revenue and profit was milder than the sector, which we attribute to the firm’s strong position along the value chain, and its operating resilience as well as risk resistance. Weichai’s full-year sales volume of engines rose 3% YoY to 1.02mn units, and that of gearbox fell 2.8% YoY to 1.15mn units. Its sales volume of gearboxes for heavy-duty trucks (HDT) reached 1.01mn units, with market share expanding 5.3ppt YoY to 72.4%. Sales volume of axles fell 14% YoY to 938,000 units, and that of HDT axles was 697,000 units. Sales volume of forklifts rose 18.5% YoY to 237,000 units. The firm maintained the highest market share for port tractors, urban dump trucks and coal, sand and gravel transportation trucks. Exports of commercial vehicles rose 72% YoY to 19,000 units.Weichai’s domestic and overseas revenues were Rmb117.9bn (-7% YoY) and Rmb85.7bn (+22% YoY).
New business ramping up and supporting medium/long-term growth; overseas business to start contribution. 1) KION’s 2021 attributable net　profit rose 343% YoY to Rmb1.8bn. Supply chain solution (represented by Dematic) booked revenue of EUR3.8bn (+44.5% YoY) and profit of EUR290mn (+97.4% YoY). 2) Revenue from large-diameter engines rose 49% YoY to Rmb1.41bn in 2021. 3) Its 2021 domestic revenue from high- end hydraulics rose 12% YoY to Rmb560mn. 4) Hydrogen fuel cell: The cooperation with Ballard is well on track. The firm has launched a number of hydrogen engine products, and supplied China’s first hydrogen ski- waxing truck to the Winter Olympics. We think that Weichai will leverage its industrial experience and strength in commercialization to develop first-mover advantages in the entire value chain from engines to vehicles. Amid accelerating production resumption in Europe, we think that overseas business’ earnings contribution will likely further improve. We also expect new business to provide solid support to earnings.
　　Support for sales volume of commercial vehicles in medium/long- term; watch earnings expansion ahead. Based on HDT sales data in　1Q22, we estimate full-year HDT sales volume at 1.25mn units in 2022.We see support for commercial-vehicle demand from construction & logistics demand, replacement demand, growing overseas demand, shift towards China VI emission standards, and regulatory crackdown on overloading. We thus still see support for Weichai’s earnings ahead.
　　Financials and valuation
　　We maintain 2022 net profit forecast at Rmb12.0bn, and introduce 2023 forecast at Rmb13.0bn. Weichai A-shares are trading at 9.9x 2022e P/E and H-shares at 7.8x P/E. Given falling average valuations, we cut A- share and H-share TPs 18.2% and 17.4% to Rmb18.00 (13.0x 2022e P/E with 31.6% upside) and HK$19.00 (11.9x 2022e P/E with 52.7% upside).
　　Risks
　　Disappointing demand in the HDT sector and/or market share expansion.