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Analyst: Weichai Power to resume 25 percent share at HD market

BEIJING – The automobile research department of China International Capital Corporation Ltd. (CICC, 3908.HK) upgraded the ratings of Weichai Power to “recommendation” and expects the market share of Weichai Power to be around 25 percent at the heavy-duty truck market. Reasons include an over 20 percent sales increase expectation in the second quarter, the continuously uprising demand of 12L-13L large emission volume engines and a better operational condition of KION, a German company acquired by Weichai in 2012.

The engine business of the parent company is the cash-cow business of Weichai Power, said CICC. Weichai’s share at the heavy-duty engine market dropped from 36.5 percent in 2014 to 21.4 percent in 2015 after the Foton Cummins ISG engine was put into production in 2014. CICC expects the market share of Weichai to increase to over 25 percent given the adjustment of products and customer structure.

Because of the heavy-duty truck demand recovery, the second quarter of 2016 will welcome a hot season for sales which may boost an over 20 percent increase of Weichai engines.

The Cummins ISG engine has changed the competition pattern of 10L heavy-duty truck engine market in China. However, as the upgrading of Chinese domestic heavy-duty truck demand, the Weichai 12L-13L large emission engines are in over-demand with sales taking up 10 percent of whole year sales. As the price and gross margin of larger emission volume engines are higher than the 10L diesel engines, the gross profit of single unit is bound to increase.

The management and cost control capability of Weichai enables an over 25 percent gross profit ratio despite the comparatively low rate of capacity utilization. The rebound of sales and upgrading of product structure will keep on assisting the pickup of the gross profit ratio of the parent company of Weichai Power.

CICC thus raised the profit forecast of Weichai Power to ¥1.74 billion ($267.7 million) and ¥1.99 billion in 2016 and 2017 with a growth of 8.7 percent respectively.

Risks include the potential price wars at the heavy-duty truck engine market and the lower demand recovery than expectations, said CICC.

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