"Buy" with a TP of HK$15.90. Considering the gradual recovery of the domestic economy and the strong export market of heavy-duty trucks (HDT), we forecast Weichai Power's (the "Company") EPS in 2023F-2025F to be RMB1.064/ RMB1.370/ RMB1.638, respectively. Given the company's competitive advantages in the powertrain industry and the strong differentiation advantages of other products, we give the company a 2024 PE of 10x, corresponding to a target price of HK$15.90.
　　3Q2023 results continued to grow rapidly yoy, and profitability continued to improve. The Company's top line increased by 24.0% yoy in 3Q2023, reaching RMB54.2 bn. In 3Q2023, its GPM increased by 6.5 ppts yoy to 21.8%. Net profit attributable to shareholders soared by 182.5% yoy and 27.3% mom to RMB2.6 bn. Net profit attributable to shareholders excluding extraordinary profit and loss reached RMB2.3 bn, up 344.1% yoy. The Company's GPM in 1-3Q2023 was 20.2%, up 3.3 ppts yoy, and NPM reached 4.1%, up1.5 ppts yoy. GPM in 3Q2023 was 21.8%, up by 6.5 ppts yoy, and NPM in 3Q2023 reached 4.8%, up 2.7 ppts yoy.
　　HDT and Powertrain dual-business boosted the Company's business growth, and moderate business growth in 4Q2023 is promising. The market demand for HDTs in 1-3Q2023 was strong, with cumulative sales (including exports) reaching 701,000 units, up 34.0% yoy, which was higher than the total sales of 670,000 units in 1-3Q2022. The Company's engine sales in 1-3Q2023 reached 548,000 units, up 24.5% yoy, of which; HDT engine sales reached 222,000 units, accounting for 40.5%; engine export sales were 52,000 units, up 35.6% yoy. Product competitiveness continues to be highlighted. In 1-3Q2023, Shaanxi HDT's sales volume hit 92,000 units, up 52.0% yoy, of which HDT export sales were 42,000 units, up 71.9% yoy. The industry's conditions have risen to a prosperous level, and sales are expected to continue to grow in 4Q2023.
　　The new catalyst of equity incentives is expected to boost the Company's business to grow steadily and to further promote product sales. The Company announced an equity incentive plan to motivate management and employees to help the Company's business continue to grow. The plan will grant a total of 85.44 mn restricted shares to 716 directors, senior executives, middle management and core technical personnel, accounting for 0.98% of the total share capital. The Company has a broad business layout with a leading position in the industry. The Company is accelerating its R&D and application of new energy powertrains such as WP engines, methanol engines, and hydrogen internal combustion engines, which is expected to expand the Company's leading edges and further promote product sales in the domestic market and abroad.
　　Risks: 1) Demand recovery in HDT industry may fall short of expectations, and; 2) overseas economic recovery may be slower than expected.