WEIFANG POWER's High Growth Continues with Increasing Certainty

Since the beginning of this year, "new quality productive forces" have undoubtedly been one of the most popular terms.

The government report this year has placed "vigorously promoting the construction of a modern industrial system and accelerating the development of new quality productive forces" as its top priority. It specifically points out the need to firmly grasp high-quality development as the primary task and to develop new quality productive forces according to local conditions. It also emphasizes that developing new quality productive forces does not mean neglecting or abandoning traditional industries. It is important to prevent a rush to engage and the creation of bubbles, and to avoid adopting a one-size-fits-all approach.

Traditional industries form the foundation for the emergence of new quality productive forces. Many traditional industries have been transformed and upgraded to become the main battleground for nurturing new quality productive forces. How to develop new quality productive forces according to local conditions? How can traditional industries improve their quality and upgrade? Governments and enterprises across various regions are exploring paths that suit them.

Following this logic, traditional enterprises with efficient organizational structures that can take the lead in developing new quality productive forces are worth re-evaluating their value.

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Weichai Power, as a leader in the heavy truck industry, has actively promoted its own reform and innovation, providing a good sample for observation. Its recently released financial report also gives us a new window to observe the intrinsic value of a "major country's heavy equipment" enterprise.

1. Diversified business resonance upward, profitability increases under synergy effect

Overall, Weichai Power's mid-term performance for 2024 can be summarized as "high growth."

In the first half of 2024, Weichai Power achieved a total revenue of 112.49 billion yuan (in RMB, the same below), a year-on-year increase of 6.0%; the net profit attributable to the parent company was 5.9 billion yuan, a year-on-year increase of 51.4%.

Both core data have achieved good performance, especially the significant improvement in profitability is eye-catching. After the gross margin increased to over 20% in the third quarter last year, the company's gross margin has been maintained above this "baseline." In the first half of this year, this figure has increased to 21.75%.

From a macro perspective, the external environment's recovery has laid the foundation for Weichai Power to achieve high growth. According to data from the China Federation of Logistics and Purchasing, in the first half of 2024, the total social logistics in China reached 167.4 trillion yuan, a year-on-year increase of 5.8%. Economic recovery and improving domestic demand have driven the continuous recovery of the heavy truck market's prosperity. According to data from the China Association of Automobile Manufacturers, the heavy truck market accumulated 504,500 vehicles in the first half of this year, a year-on-year cumulative increase of 3.3%.However, it is evident that the weak recovery of the heavy-duty truck market is not sufficient to explain Weichai Power's "steady revenue growth and significant improvement in profitability." The more critical factors are its capture of the booming sales opportunities for natural gas heavy-duty trucks and the value release brought about by its diversified business structure.

In recent years, Weichai Power has actively expanded its business areas and fully utilized its core competitiveness to strategically extend into various segments of the industry chain. Currently, the company has successfully established a diversified business structure that includes powertrains, complete vehicles, intelligent logistics, agricultural equipment, and other fields that develop synergistically.

As a traditional advantage business for the company, the engine business maintains a stable market share and highlights its leading position in the domestic market. During the reporting period, Weichai Power sold approximately 400,000 engines of various types, a year-on-year increase of 9.8%.

It is worth mentioning that against the backdrop of a significant increase in natural gas heavy-duty trucks in the first half of this year, Weichai Power has established a clear advantage in the industry with its continuously enhanced product competitiveness, especially in its high-horsepower natural gas product series, thereby achieving rapid growth in the sales of natural gas heavy-duty truck engines. In the first half of 2024, the company's sales of natural gas heavy-duty truck engines were approximately 73,000 units, a year-on-year increase of 77%, which has become the main driving factor for the growth in Weichai Power's engine sales. In terms of market share, Weichai Power's market share is as high as 63.1%.

In the mid-to-downstream sectors, Shaanxi Heavy Duty Truck (Shaanxi Heavy), a subsidiary of Weichai Power, continues to exert effort. In the first half of 2024, Shaanxi Heavy's cumulative sales exceeded 60,000 units, a year-on-year increase of 3.6%, with a market share of 12.6%. Among them, the hot sales of natural gas heavy-duty trucks have driven Shaanxi Heavy's natural gas sales volume from about 7,000 units in the first half of 2023 to about 17,000 units in the first half of 2024, a year-on-year increase of 134.3%. The rapid increase in sales has accelerated the release of economies of scale, promoting a continuous reduction in average costs, which is more directly reflected in its profitability level. In the first half of 2024, Shaanxi Heavy's net profit was 317 million yuan, a significant year-on-year increase of 462%.

KION Group, an overseas holding subsidiary of Weichai Power, continued the good development momentum of 2023 in the first half of this year, becoming an important driving force for the rapid growth of Weichai Power's performance. In the first half of 2024, KION Group achieved a revenue of approximately 5.74 billion euros, a year-on-year increase of 2%, setting a new historical record for the same period; the net profit was about 180 million euros, a year-on-year increase of 24.1%, with both the company's revenue and profit achieving positive growth.

In the agricultural machinery field, thanks to the improvement in the prosperity of the agricultural machinery industry and the company's own product structure adjustment, as well as the obvious competitive advantage of high-horsepower products, the sales volume of Weichai Lovol has been further improved. During the reporting period, the total sales volume of agricultural equipment products increased by 17.5% to approximately 77,000 units, with a stable scale at the top of the industry. The high increase in sales volume has driven the rapid growth of Lovol's revenue. During the reporting period, the total revenue achieved was about 9.8 billion yuan, a year-on-year increase of 28.1%, setting the best level for the same period in history.

II. Looking to the future, how to view the value of Weichai Power?

Despite the financial report showing great growth potential, looking back at the capital market, the company's stock price is still at the bottom of the valuation, highlighting its elasticity.Wind data shows that as of the close on August 23, the price-to-earnings ratio (P/E ratio) of Weichai Power's A-shares was 10.57 times, significantly lower than the industry median of 19.54 times. However, considering the company's position as a leading enterprise in the heavy-duty powertrain sector, and its ability to achieve growth beyond the cycle in the context of diversified development, its scarcity value is highlighted and it should command a certain premium.

Securities research reports also support this view. After the release of the semi-annual performance forecast, CICC stated in its research report that the company's net profit growth exceeded expectations. It is expected that under the "low freight rate, low gas price" scenario, the prosperity of the natural gas heavy-duty truck industry will continue. CICC has given Weichai Power a "sector outperform" rating, with a target price of 20.96 yuan for A-shares and 20.3 Hong Kong dollars for H-shares. This also implies that, based on the current stock price of Weichai Power, the company has a potential increase of over 57% in both the Hong Kong and A-share markets.

Looking further, the recovery of domestic demand, the growth of overseas market demand, and the structural growth of natural gas heavy-duty trucks are several factors that jointly promote the upward movement of the heavy-duty truck industry cycle from the bottom. According to predictions from Zheshang Securities, it is expected that the compound annual growth rate of heavy-duty truck sales from 2023 to 2026 will be 12%.

This provides "fertile soil" for the realization of Weichai Power's value.

In terms of domestic demand, in the first half of this year, the State Council's executive meeting reviewed and approved the "Action Plan for Promoting Large-scale Equipment Renewal and Consumer Goods Replacement," which promotes a new round of large-scale equipment renewal and consumer goods replacement. Zheng Shanjie, the head of the National Development and Reform Commission, also clearly pointed out that with the in-depth promotion of high-quality development, the demand for equipment renewal will continue to expand, and it is preliminarily estimated to be a huge market with an annual scale of more than 5 trillion yuan. Against the backdrop of policy support, the replacement demand brought about by equipment renewal is expected to drive the rapid growth of Weichai Power's product sales.

The overseas market remains a key focus of industry competition. With many overseas countries introducing economic stimulus policies, the demand for heavy-duty trucks has increased, and China's heavy-duty truck exports have entered a high-growth phase. According to data from the China Association of Automobile Manufacturers, in the first half of the year, the cumulative export volume of China's heavy-duty trucks was 152,000 units, a year-on-year increase of 9.3%. For Weichai Power, the strong performance of heavy-duty truck exports is not only beneficial for the export of its subsidiary Shaanxi Heavy Duty Truck but also will drive the high growth of the parent company's heavy-duty truck supporting engine sales, which is conducive to the rapid growth of Weichai's overall performance.

In addition, under the dual influence of the increase in domestic natural gas supply and the low demand, the price ratio of China's natural gas to diesel has continued to decline since 2023. As the price difference between natural gas and diesel continues to widen, the life cycle cost advantage and long-term cost-effectiveness of natural gas heavy-duty trucks gradually become apparent, prompting end customers to purchase natural gas heavy-duty trucks. Guojin Securities stated that in the medium to long term, domestic natural gas prices will remain relatively low, and the price ratio of gas to diesel will maintain a significant difference, and the sales volume of natural gas trucks is expected to continue to be popular.

Natural gas engines have a higher added value and value compared to diesel engines, with higher revenue and gross profit margins per engine. Weichai Power has been deeply involved in natural gas engines for many years, with a long-term market share of natural gas engines of about 60%. Therefore, under the continuous explosion of natural gas heavy-duty truck sales, Weichai Power's business in this area is expected to benefit deeply from the structural opportunities of natural gas engines, further achieving dual growth in revenue and profitability.From a longer-term perspective, the upgrading of the industrial structure can also promote the rapid development of the industry.

On February 29th, seven departments including the Ministry of Industry and Information Technology issued the "Guiding Opinions on Accelerating the Green Development of the Manufacturing Industry." The 2024 government work report proposed to implement a technological transformation and upgrading project for the manufacturing industry, cultivate and expand advanced manufacturing clusters, create national demonstration zones for new industrialization, and promote the high-end, intelligent, and green transformation of traditional industries.

Under these circumstances, enterprises that can grasp the trends of the times and achieve precise business deployment are expected to benefit deeply from the incremental benefits brought by the upgrading of the industrial structure.

Weichai Power has acted in line with the trend and firmly adhered to a diversified energy power combination. In the field of traditional energy power, the company has fully utilized its strong scientific and technological strength to continuously improve the thermal efficiency of diesel engines, breaking the world record for the thermal efficiency of the engine body four times in four years, and in 2024, it launched the world's first commercial diesel engine with a thermal efficiency of 53.09% for the engine body; in the field of new energy power, Weichai Power has continued to increase and accelerate the technical layout and application in the directions of fuel cells, pure electricity, hybrid, etc.

Based on its leading industry technology and products, Weichai Power has built a very high competitive barrier, and naturally can improve the profit level while further expanding its market share. Data shows that in the nearly ten years of research and development process, Weichai Power has obtained a total of 176 authorized invention patents and 68 utility model patents.

From this point of view, with the company's own solid base and the growth opportunities brought by the transformation and upgrading of the industry, the certainty of Weichai Power's future performance growth is becoming higher and higher, thereby significantly raising the company's long-term investment appeal.

Third, with continuous high dividends, Weichai Power's potential is worth market certification.

In addition, Weichai Power also plans to distribute interim dividends, paying a dividend of 3.72 yuan per 10 shares.

What is this concept?

In the first half of the year, the amount of dividends paid by Weichai Power is about 55% of its profits, and the dividend yield exceeds 5% based on its current stock price. Such dividend performance is indeed relatively outstanding among state-owned enterprises.In fact, Weichai Power has always had a "fine tradition" of high dividends, rewarding investor trust with continuous and stable dividends. According to Wind data statistics, since its listing, the company has made a cumulative cash dividend of 36 times, with the total cash dividend amount exceeding 30 billion yuan (including this interim dividend), reflecting the company's emphasis on shareholder returns.

Of course, the company's ability to implement such a strategy is based on its confidence in its own future stable development. The company has ample cash flow, and it is expected that future profit margins will also be good.

From this perspective, Weichai Power not only enhances valuation safety cushions with strong growth, but also further improves investment returns through high dividends. Therefore, for such a high-growth, high-dividend company, the value of Weichai Power should be recognized by the market.