What's new
Weichai Power announced on April 19, 2022 that it intends to acquire 274,401,120 shares (representing about 22.69% of total issued shares) of Weichai Lovol held by Weichai Group at the initial consideration of about Rmb1.58bn. Upon completion of the acquisition, the firm will hold around 62% of the total issued share capital of Weichai Lovol and become its controlling shareholder.
Comments
Further progress in business diversification; earnings continue to grow. Weichai Lovol Heavy Industry is one of the leading domestic producers of agricultural equipment, registering revenue of Rmb17.3bn and net profit of Rmb1.24bn in 2021. After the acquisition, the firm will become the controlling shareholder of Weichai Lovol, and we believe the acquisition can expand the firm’s agricultural machinery product line. Meanwhile, we think the firm's products such as engines and transmissions could be installed in agricultural machinery, which is conducive to boosting downstream demand and accelerating the expansion of its business from heavy-duty trucks to agricultural machinery. In addition, the financial results of Weichai Lovol will be consolidated into Weichai Power, and we expect this to significantly increase the firm's earnings.
Leveraging synergies to improve product performance, energy saving, and environmental protection at Weichai Lovol. Staring from December 1, 2022, the Chinese government will officially implement the China IV emission standard for non-road mobile machinery with power of 560kW or lower to further improve environmental standards. The firm has a series of high-end non-road engines and CVT powertrain and hydraulic powertrain products. Its WP7 high-pressure common rail engine has a torque reserve of 37%, which, together with the CVT powertrain, can improve overall operating efficiency by 30% and reduce overall fuel consumption by 10%. We expect the firm’s acquisition to enhance Weichai Lovol’s powertrain, performance of products, comprehensive fuel efficiency, as well as the products’ environmental protection upgrades.
Expanding to full-category intelligent agriculture machinery. In February 2022, the Ministry of Agriculture and Rural Affairs issued the "14th Five-Year Plan" for the development of national agricultural and rural informatization, pointing out that intelligent agriculture machinery is one of the seven key areas in the development of smart agriculture. We believe that the firm enjoys industry-leading advantages in new technologies such as electric control, alternative energy, self-driving and automation, etc. We expect the firm to fully leverage synergies to enhance Weichai Lovol’s intelligent agricultural equipment, and improve full-category intelligent agriculture machinery. We think this could increase per-vehicle value and further consolidate the comprehensive competitiveness of the firm in the market.
Financials and valuation
We maintain our 2022 and 2023 net profit forecasts at Rmb12bn and Rmb13bn. Weichai A-shares are trading at 9.0x 2022e P/E and 8.3x 2023e P/E, while H-shares are trading at 7.4x 2022e P/E and 6.8x 2023e P/E. We maintain our A-share TP at Rmb18.00 (13.0x 2022e P/E with 46.1% upside) and H-share TP at HK$19.00 (11.9x 2022e P/E with 60.7% upside).
Risks
Disappointing demand in the HDT sector and/or market share expansion.