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KGI Alert: Weichai Power (02338.HK/2338 HK, OP)




KGI Greater China


28 Oct 2013





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What’s new Weichai announced 3Q13 results on the evening of October 27. Implications In 1Q-3Q13, sales grew 19.5% YoY to Rmb43.2bn. Net income rose 12.3% YoY to Rmb2.41bn, for EPS of Rmb1.35. Sales climbed 34.5% YoY in 3Q13 to Rmb12.4bn, while net income advanced 21.2% YoY to Rmb620mn. Improvement was considerable as heavy-duty truck sales beat in 3Q13. Weichai’s parent company (main business is truck engine) saw sales grow 53.7% YoY in 3Q13, beating heavy-duty truck’s 37.1% sales growth and in line with our projection, as component suppliers recorded extra gains after destocking had weakened. Weichai’s subsidiary Shaanxi Heavy-Duty Truck’s (unlisted) heavy-duty truck sales grew 35.0% YoY in 3Q13, basically in line with sector performance. In 1Q-3Q13, gross margin hit 20.2%, up 1.1 ppt YoY but down 0.1 ppt QoQ. Gross margin recovery was driven by heavy-duty truck sales rebound. In 1Q-3Q13, expense ratio reached 11.6%, up 1.0 ppt YoY and 0.7 ppt QoQ, driven by higher selling expense ratio and financial expense ratio. In September, heavy-duty truck sales growth was near 50% YoY, markedly higher than consensus thanks to downstream demand recovery, a lower base and implementation of national IV emission standards across the country. In 4Q13, demand improvement stemming from economic recovery and product replacement demand will support heavy-duty truck sales despite sales decline after implementation of national IV emission standards. We expect 4Q13 heavy-duty truck sales growth to remain over 20% YoY. Valuation & action 3Q13 results are basically in line. Rapid engine business growth should allay market concerns over Weichai’s falling market share. We remain upbeat on the heavy-duty truck sector in 4Q13. Yearend sales peak will support the firm’s business. Maintain Outperform. Risks Slowdown of infrastructure and real estate investment growth; delayed enforcement of National Standard IV emission controls.

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