1Q22 in line with our expectation
　　Weichai Power announced its 1Q22 results: Revenue dropped 37.2% YoY but rose 10.7% QoQ to Rmb41.10bn, attributable net profit declined 68.6% YoY and 22.4% QoQ to Rmb1.05bn, and recurring net profit decreased 70.54% YoY and 14.7% QoQ to Rmb897.35mn. The results are in line with our expectations.
　　Trends to watch
　　Multiple factors weighed on 1Q22 results; earnings outperformed industry, indicating sound operation. In 1Q22, the firm’s revenue and net profit both dropped YoY due to three factors. First, the overall heavy-duty truck (HDT) industry came under pressure, due to a shift towards the China VI emission standards, slowing infrastructure construction, and a COVID-19 resurgence. Data from the China Association of Automobile Manufacturers (CAAM) shows HDT sales volume in China dropped 56.5% YoY to 231,444 units in 1Q22. In addition, a COVID-19 resurgence in early 2022 significantly affected Shaanxi Heavy Duty Automobile, Weichai Power’s major client. Second, commodity prices remained high. In 1Q22, the firm’s gross margin (GM) fell 0.5ppt YoY and 1.9ppt QoQ to 18.6%, and attributable net profit margin dropped 2.5ppt YoY and 1.1ppt QoQ to 2.6%. Third, the Russia-Ukraine conflict weighed on the performance of Weichai Power’s subsidiary in Germany, KION Group. In 1Q22, comprehensive net revenue from the subsidiary declined 41.5% YoY to EUR80.2mn.
　　New businesses have ample growth upside; overseas business expands. Weichai Power continues to strengthen the commercialization of its large-diameter engines, hydraulics, and high-end engines. The sales of Sales of its non-road business are rising rapidly thanks to synergies with Weichai Lovol Heavy Industry. In overseas markets, energy prices and demand for exploitation and transportation continue to rise, and orders from clients remain high. In our opinion, Weichai Power has rich experience in industrialization and commercialization for products. We expect its new businesses to bolster future earnings growth. In addition, we think overseas business will likely contribute more earnings to the firm going forward, as its European operations are accelerating production and resuming work.
　　We suggest watching rebound in HDT market on back of favorable real estate and infrastructure construction policies. Jilin and Shanghai began to ease COVID-19 containment measures related to transportation in mid-April. On April 18, the Ministry of Transportation proposed guaranteeing normal operations of transportation and logistics systems. On April 29, the Political Bureau of the Central Committee pointed out at a meeting that infrastructure construction should be strengthened and real-estate policies should be optimized according to the local environment. We think the impact of COVID-19 on the overall economy will likely weaken, transportation and logistics policies will continue to improve, and “pro-growth” policies should bolster the development of real estate and infrastructure sectors, boding well for development of commercial vehicles. As a leading HDT firm, we expect Weichai Power to benefit from these tailwinds on the back of its diversified business matrix and strong competitiveness.
　　Financials and valuation
　　Given the downturn in the HDT market, we cut our 2022 and 2023 earnings forecasts 16.3% and 15.3% to Rmb10.05bn and Rmb11.00bn.Weichai Power A-share is trading at 9.7x 2022e and 8.9x 2023e P/E, while its H-share is trading at 8.3x 2022e and 7.6x 2023e P/E. We maintain OUTPERFORM for Weichai Power A-share and cut our target price 11.1% to Rmb16.00, implying 13.9x 2022e and 12.7x 2023e P/E with 43.0% upside. We maintain OUTPERFORM for Weichai Power H-share and lower our TP 10.5% to HK$17.00, implying 12.7x 2022e and 11.6x 2023e P/E with 53.2% upside.
　　Risks
　　Disappointing demand in the HDT sector and/or market share expansion.