What's new
　　Weichai Power announced it intends to buy back some of the firm’s public A-shares through auction trading with its own funds. The shares would be used for equity incentive plans.
　　Comments
　　Share buyback shows firm’s long-term confidence. Weichai Power　plans to buy back 43,632,784-87,265,568 shares (0.5-1.0% of its equity base) for no more than Rmb1.53bn in total. The repurchase will be completed within 12 months after the date of deliberations and approval of the buyback plan by the Board of Directors. The firm’s directors, supervisors, senior management, controlling shareholders, and persons acting in concert have no clear plans to increase or reduce stakes in Weichai Power during this buyback period; shareholders with stakes bigger than 5% have no plans to reduce their stakes in the next 6 months.The repurchase price stands at no more than Rmb17.57/sh with 53.3% upside from the current price, which we think shows management’s confidence in the firm’s sustained development. The repurchased shares would be used for equity incentive plans, which we think would stimulate employee initiative and boost the development of the company.
　　Earnings under short-term downward pressure; market leadership　cemented amid sector headwinds. Due to a shift towards the China VI emission standards, slowing infrastructure construction, and a COVID-19 resurgence, the sales volume of heavy-duty trucks (HDT) in China dropped 14% YoY to 1.40mn in 2021 and in January-April 2022 fell 62% to 275,000 units. Revenue at Weichai Power rose 3.1% YoY in 2021 and declined 37.2% YoY in 1Q22, showing a notably better performance than the sector. We think this is evidence of the firm’s resilience. In 2021, Wechai’s sales volume of HDT gearboxes reached 1.01mn units, with market share expanding 5.3ppt YoY to 72.4%. The firm also maintained the highest market share for port tractors, urban dump trucks and coal, sand and gravel transportation trucks, cementing market leadership. In addition, the firm completed the launch of new products such as large- diameter engines. Moreover, solid overseas demand and a large amount of export orders from major clients should boost overseas business’ earnings growth.
　　Watch for sector recovery and rebound in firm’s earnings. Data from　G7, a logistics platform, shows the index of overall freight transport volume reached 90.14 on May 1, up 17.7% and 8.2% from that on April 10 and April 17. The rising logistics demand is likely to bolster demand for commercial vehicles. Going forward, we think the impact of COVID-19 on the overall economy will weaken, transportation and logistics policies will continue to improve, “pro-growth” policies should foster downstream demand in real estate and infrastructure sectors, and logistics demand related to consumer products will improve. As a result, the firm’s sales volume of HDT may reach 1.10mn units in 2022, in our view. In the mid-to- long term, we believe HDT demand may continue growing thanks to multiple factors such as engineering and logistics demand, replacement demand, a shift towards China VI emission standards, China's efforts to prevent overloading, and overseas demand recovery. 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, achieving earnings growth.
　　Financials and valuation
　　Weichai Power A-share is trading at 10.2x 2022e and 9.3x 2023e P/E, while its H-share is trading at 8.5x 2022e and 7.8x 2023e P/E. We maintain our earnings forecasts, an OUTPERFORM rating for Weichai Power A-shares and our target price of Rmb16, implying 13.9x 2022e and 12.7x 2023e P/E with 36.3% upside. We maintain our earnings forecasts, an OUTPERFORM rating for Weichai Power H-shares and our target price of HK$17, implying 12.7x 2022e and 11.6x 2023e P/E with 49.4% upside.
　　Risks
　　Disappointing demand in the HDT sector and/or market share expansion.