1H22 results preview
Weichai Power preannounced that its attributable net profit reached Rmb2.25-2.57bn in 1H22, and recurring attributable net profit amounted to Rmb1.49-2.09bn. In 2Q22, attributable net profit reached Rmb1.20-1.52bn, and recurring attributable net profit stood at Rmb0.60-1.19bn. The preannounced earnings are in line with our expectations.
Trends to watch
Multiple factors weighed on commercial vehicles (CVs); 2Q22 results under pressure but decline markedly narrower than its peers. In 2Q22, Weichai Power’s sales volume of heavy-duty trucks (HDTs) fell 75.5% YoY to 50,781 units. Based on the median of the preannounced range, we calculate the firm’s attributable net profit dropped 55.9% YoY but rose 29.4% QoQ to Rmb1.36bn in 2Q22, and recurring attributable net profit fell 69.4% YoY and edged down 0.4% QoQ to Rmb0.89bn. We attribute the decline in the preannounced 1H22 earnings to disrupted logistics due to: 1) COVID-19 resurgence; 2) weak demand in the HDT industry; and 3) sales volume boosted by customers’ rush to purchase CVs under China V emission standards in 1H21, leading to a sharp YoY decrease in the sales volume in the sector in 1H22.
Sales volume of CVs started to recover MoM since May. The firm’s sales volume of CVs rose 9% MoM to 230,000 units in June, with that of HDTs down 77.2% YoY and up 11.7% MoM to 50,781 units. Sales volume of logistics HDTs increased 14.5% MoM, which we think may be driven by the easing COVID-19 impact, recovery in the logistics industry, as well as by demand from the real estate and infrastructure sectors. In addition, the firm benefited from strong growth in the large-diameter engines, agricultural machinery and hydraulics sectors, which is likely to support future earnings recovery.
Policies of stabilizing growth to boost market demand; likely to benefit from sector recovery in 2H22. The State Council proposed a series of favorable policies for the CV market since 4M22. Amid policy tailwinds and easing COVID-19 impact, we expect the shipments at OEMs of commercial vehicles to rebound in 2H22, with destocking of inventory at distribution channels. Given a low base of sales volume in 2H21 due to the shift towards China VI emission standards, we think the firm’s HDT sales may achieve positive growth YoY in 3Q22, and expect the HDT sales to improve QoQ in 2H22, following the opposite trend to 1H22. We believe Weichai Power will enjoy economies of scale amid the recovery in the sector, and may expand its market share continuously.
Financials and valuation
Weichai Power H-share is trading at 11.2x 2022e and 8.9x 2023e P/E, while its A-share is trading at 13.3x 2022e and 10.5x 2023e P/E. Given a sharp decline in the sector demand in 1H22, we lower our 2022 and 2023 net profit forecasts by 20.1% and 8.0% to Rmb8.03bn and Rmb10.12bn. We maintain an OUTPERFORM rating for Weichai Power H -shares but given a lower valuation for the company, we trim our target price by 5.9% to HK$16.00, implying 15.0x 2022e and 11.8x 2023e P/E with 33.3% upside. We maintain an OUTPERFORM rating for Weichai Power A-shares and cut our target price by 6.3% to Rmb15.00, implying 16.3x 2022e and 13.0x 2023e P/E with 23.0% upside.
Risks
Downward pressure persists amid macroeconomic downturn; sluggish logistics and freight rates; disappointing infrastructure construction; slow destocking.