Weichai has the best powertrain advantages in China and the most complete automotive and parts industrial chain in China. The engine business continues to maintain its leading position in the industry and remains the main source of profit.
While solidifying traditional products, Weichai actively develops new products. In addition, it is expected that there will be some room for improvement in gross margin in 2009.
Driven by the twin powers of heavy trucks and construction machinery, Weichai’s 2009 and 2010 earnings per share are forecast to be 2.77 yuan and 3.29 yuan respectively. Maintain "strongly recommended" investment rating.
Risk Warning: National macroeconomic policies and investment scale have a greater impact.
Steady engine market position
In 2008, Weichai Power's sales revenue was RMB 33.1 billion, and earnings per share was RMB 2.32, which was basically in line with our forecasted value (income of RMB 33 billion and earnings per share of RMB 2.39). The company is one of the major professional manufacturers of high-power high-speed diesel engines in China. It has the advantages of the best powertrain (engine, transmission, axle) in China and the most complete automotive and parts industrial chain in China. The company’s engine business continues to maintain its leading position in the industry and remains the main source of corporate profits. We estimate that the business accounts for about 28% of the company's total revenue (net of internal offsets), and the profit contribution is about 86%.
In 2008, the company sold 295,717 diesel engines of various types, an increase of 20.76% over the previous year. Among them, 197,351 heavy-duty truck engines were sold, an increase of 30.37% year-on-year, 19.29 percentage points higher than the industry growth rate. The main customers of the company's heavy-duty truck engines include Shaanxi Heavy Duty Truck, Beiqi Foton, North Benz, Anhui Hualing, Jianghuai Automobile (600418, stocks) and other manufacturers. The rapid increase in the scale of production and sales of North Benz and Anhui Hualing is the main driving force for the growth of the company’s engine business. The company's engine products also provide support for construction machinery. In 2008, the Chinese construction machinery market sold a total of approximately 470,000 units, an increase of approximately 9% year-on-year, of which 104,566 units were sold for large-scale construction machinery with 5 tons of loaders, an increase of 8.07% year-on-year. In 2008, the company sold 88,302 sets of construction machinery engines, an increase of 3.80% year-on-year, and still maintained its absolute leading position in the industry.
Actively carry out new product development
Weichai's engine products have adopted the high-pressure common-rail technology line during the process of meeting Euro III emission standards. Compared with China National Heavy Duty Truck Group's EGR products, the technology is advanced, but there are high production costs, high maintenance requirements, and oil products. The problem of high quality requirements has restricted the growth of sales. In order to meet the needs of customers and markets, the company has also developed EGR products. It is expected that the supporting heavy truck products will soon be approved by the relevant national authorities and marketed.
Weichai Co., Ltd., while maintaining its position in the traditional product market, actively developed new products. Its WP5/WP7 engine passed the “two-high†test of plateau and high-altitude matching with the entire vehicle, and was unveiled during the company’s business conference. These two small and medium-power engines help the company increase its market share in passenger cars, medium and heavy trucks and construction machinery, and reduce its dependence on more than 10 liters of engine products.
The decline in the performance of the two subsidiaries
Weichai's subsidiary, Shaanxi Heavy-duty Trucks Co., Ltd. sold 64,105 heavy trucks in 2008, an increase of 6.81% year-on-year. The heavy truck products of the company are the same as those of China National Heavy Duty Truck, Chongqing Hongyan and Beiqi Foton. The technology comes from the Steyr platform. The product has the characteristics of heavy load capacity, but it has a large weight. In the context of more and more provinces implementing the toll-by-weight policy, customers are more interested in light weight heavy truck products, and the advantages of Steyr platform products have been weakened. In the first half of the 2008 heavy-duty truck market, FAW and Dongfeng's products were light weighted and their production capacity was fully stocked. The market share rapidly increased and they took up the market share of STC products such as Shaanxi Zhongqi.
Another Fastcast Gear Co., Ltd., a company controlled by Weichai, sold 464,515 heavy-duty transmissions during the reporting period, an increase of 7.98% year-on-year, which was lower than that of the downstream heavy truck industry. We speculate that China National Heavy Duty Truck Co., Ltd. has increased the proportion of self-made gearboxes, resulting in a decrease in orders for Shaanxi Fast. From the latest situation, Shaanxi Fast actively seeks breakthrough space for the passenger car market, which is expected to partly compensate for the decline in market share of heavy trucks.
The increase in the cost of raw materials in 2008 brought greater pressure on the company's operations. We believe that the company's gross profit margin in 2009 will have some room for recovery. According to the latest situation, the gross profit rate in the first quarter of this year rose by 4.09 percentage points.
Earnings forecast and rating
Weichai Company is cautiously optimistic about the development of the industry and expects sales revenue to reach around 3.52 billion in 2009. We are optimistic that the state will invest RMB 4 trillion in boosting domestic demand for the development opportunities brought by the heavy truck and construction machinery industry. It is expected that the heavy truck industry will first benefit from the construction of the “three links and one leveling†construction project, and the dump truck market will be the first to start, followed by construction materials (steel, Demand for the transportation of bulk raw materials such as cement and equipment will start sales of semi-trailer tractors. According to the latest data, in March 2009, the heavy truck industry sold 61,500 vehicles. Although the industry’s most optimistic forecasters, actual sales in March still slightly exceeded our forecast.
Driven by the twin forces of heavy trucks and construction machinery, the company's performance will continue to grow steadily. We forecast the company's earnings per share for 2009 and 2010 to be 2.77 yuan and 3.29 yuan respectively. At present, the dynamic PE is low, and the stock price has a large room for growth. Maintain the "strongly recommended" investment rating.