Weichai's market share in China HDT engine market to shrink

Badly hurt by a recent JV by Foton.

Foton, Weichai's second-largest customer in HDT engines (accounting for c29% Weichai's HDT engine sales in 2013) started to produce HDT engines at its JV with Cummins in June, and according to management, the JV will supply c10K/30-40K Cummins engines to Foton HDTs in 2H14/2015, reducing demand for engines sourced from Weichai.

According to a research note from Barclays, the company estimates that Weichai's market share in the China HDT engine market will drop by 5ppt from 2013 to 2015 as a result.

Barclays revised down its 2015/16 EPS forecasts for Weichai to reflect lower HDT engine market share assumptions.

It also reiterated its UW rating on Weichai given its bearish outlook for China's HDT market in 2H14 and 2015 and given that Weichai is facing significant market share loss in the HDT engine market due to strong products from Cummins.

Here's more from Barclays:

Foton-Cummins to ramp up HDT engine production: Foton's engine JV with Cummins started to produce 11/12L diesel engines for heavy-duty trucks in June 2014. The facility currently has capacity of 60K units, and can be expanded to 120K.

According to management, the JV's Cummins engine is priced very competitively against domestic brands: it is only RMB2,000-3,000 more expensive (+2.4-3.6%) than local brands such as Weichai, and a Foton HDT with a Cummins engine is only RMB 5,000-8,000 more expensive (+2.0-3.2%) than a Foton HDT with a domestic engine, making the HDT with a Cummins engine a very attractive product.

Management said the JV has sold c1,500 HDT engines (self-supply to Foton HDT) so far, and plans for c10K units in 2H14 and 30-40K in 2015, equivalent to HDT engine self-supply ratios of 19% and 30% for the respective periods.

Foton-Cummins' long-term goal is to expand production to over 100K units and become a supplier to not only Foton's HDT division, but also other HDT makers such as Jianghui, in addition to the construction machinery space.

Weichai negatively impacted: We estimate Foton is the second-largest customer of Weichai's HDT engines, accounting for 29% of Weichai's HDT engine sales in 2013.

As Foton begins to supply the JV's Cummins engine to its own HDTs, we expect Weichai's share as Foton's engine supplier to decline to 49% in 2015 from c70% in 2013, and consequently, Weichai's market share in China's HDT engine market to decline to 32% in 2015 from 37% in 2013.