20220325-招银国际-China_Heavy_Duty_Truck_Lower_industry_forecast_on_weak_recovery__D_G_Weichai-A__BUY_Weichai-H___Sinotruk_on_valuation_14页_2mb

China Heavy Duty Truck Industry Summary

Core Content

The China Heavy Duty Truck (HDT) industry is undergoing a normalization phase, with demand expected to decline compared to the previous upcycle. The replacement cycle of NES III trucks has largely completed, and the industry is now focused on new demand rather than replacement demand, which is expected to be insufficient to offset the slowdown in the downstream sectors. As a result, the HDT sales forecast for 2022E and 2023E has been revised down by 21% and 20%, respectively, to 1.02mn and 1.06mn units, implying a -27% and +4% YoY change. The HDT fleet size is expected to grow at a moderate rate of 5% p.a., in line with economic growth.

The GDP value per unit of HDT has remained stable at RMB12-13mn over the past 10 years, and the overall growth of the HDT sector is expected to be driven by the normalization of demand and economic growth. However, the industry faces challenges due to weak recovery in logistics and construction vehicle sectors, which are key drivers of HDT demand.

Main Points

• Industry Forecast:

  • Revised down HDT sales forecast for 2022E and 2023E to 1.02mn and 1.06mn units, respectively.
  • The HDT sales growth will be driven by new demand, but this is expected to be insufficient to offset the decline in replacement demand.
  • The HDT fleet size is expected to grow at 5% annually, in line with economic growth.
  • The GDP value per unit of HDT has remained stable at RMB12-13mn.

• New Energy HDT Growth:

  • New energy HDT sales have shown robust growth, with full year sales in 2021 reaching 10.5k units (+3x YoY).
  • Sales surged 10x YoY to 3.2k units in 2M22, driven by government support and the push for carbon neutrality.
  • Key players in the new energy HDT market include SANY Group, Yutong Commercial Vehicles, XCMG, and CAMC.
  • FAW Jiefang, Dongfeng, and Sinotruk have set ambitious targets for new energy HDT sales, focusing on electric, hybrid, and fuel cell technologies.

• Company Ratings and Valuation:

  • Weichai Power (2338 HK): Maintained as a BUY, with a target price of HK$17.2.
    • Revised earnings forecast for 2021E/22E/23E by 5%/26%/22% (2%/28%/29% below consensus).
    • Target EV/EBITDA revised down to 4.5x (1SD below historical average).
  • Weichai-A (000338 CH): Downgraded to HOLD from Buy due to limited upside potential relative to the SOTP-based target price.
    • Target price revised to RMB14.1, with a valuation discount of 25% compared to the H-share, the widest since 2015.
  • Sinotruk (3808 HK): Maintained as a BUY, with a target price of HK$16.
    • Trading at 0.6x 2022E EV/EBITDA and 0.9x net cash per share, indicating a distressed valuation.
    • Target EV/EBITDA revised to 1.5x (1SD below historical average of 2.3x since 2017).
    • Equivalent to 8.4x 2022E P/E.

Key Information

• Market Trends:

  • The HDT industry is experiencing a normalization phase due to the completion of the NES III replacement cycle.
  • New energy HDT is showing strong growth, with sales in 2021 reaching 10.5k units and a 10x YoY increase in 2M22.
  • The penetration rate of new energy HDT is increasing, with electric vehicles accounting for the majority of the market in 2021.

• Company Performance:

  • Weichai Power:
    • Total engine sales volume is expected to decline by 6% YoY in 2022E.
    • HDT engine sales are projected to decrease by 20% YoY, due to lower HDT demand.
    • Fuel cell battery sales are expected to increase significantly in 2022E.
  • Sinotruk:
    • HDT sales are projected to decline by 31.3% YoY in 2022E, due to weak demand.
    • The company is focusing on new energy HDT, with a full range of new energy commercial vehicles in development.

• Valuation Metrics:

  • Weichai-H: Trading at 25% discount to A-share, with a target P/E of 11.1x.
  • Weichai-A: Trading at 13.4x P/E, with a target EV/EBITDA of 5.5x.
  • Sinotruk: Trading at 0.6x EV/EBITDA and 0.9x net cash per share, indicating undervaluation.

• Financial Outlook:

  • Weichai's core business is expected to have a moderate growth in revenue and net profit, despite the decline in certain segments.
  • The company's segment profit and margin are projected to decline in 2022E due to lower sales volume and margin assumptions.
  • Sinotruk's revenue and EBIT are expected to decline in 2022E, but the company remains a BUY due to its distressed valuation.

Conclusion

The HDT industry in China is transitioning from a high-growth phase to a more normalized growth phase. While the overall demand for HDT is expected to decline, new energy HDT is showing strong growth and is likely to drive future sales. Weichai Power remains a BUY due to its attractive relative valuation, while Weichai-A is downgraded to HOLD due to limited upside potential. Sinotruk is also maintained as a BUY, given its undervalued position and focus on new energy HDT. The industry is expected to grow at a moderate pace, aligned with economic growth, but with challenges in the short term due to weak recovery in logistics and construction sectors.