Weichai Power disappoints with 43.4% drop in profit to RMB600m

Balance sheet and cash flow also deteriorating.

Weichai Power reported Rmb600mn in net profit (EPS RMB 0.30/sh) for 1Q15, declining 43.4% y/y, which has been noted as a disappointment given it's only 16% of Barclays' previous full year earnings forecast.

According to a research note from Barclays, it lowers its EPS estimates by 12%/11% for 2015/16, reflecting lower gross margin assumptions for Weichai's HDT engines and lower its PT to HK$21(based on 10x 2015E EPS).

Barclays also noted that it believes China's HDT demand is still in a down cycle and Weichai's market position in HDT engines is at risk due to vertical integration of Foton (accounts for c30% of Weichai's 2014 HDT engine sales) with engine suppliers.

Here's more from Barclays:

1Q15 poor: We estimate Weichai's 38.25% Kion stake contributed an incremental Rmb312mn in net profit as it is now consolidated into Weichai's P&L.

Excluding Kion, Weichai's organic earnings would have declined 69%, driven by 1) a 44% y/y decline in the top line as China's HDT sales were down 33% y/y in 1Q15; 2) a 3ppt gross margin contraction to 18.0% from 21.0% a year ago; and 3) SG&A expenses as % of revenue increase of 1.6ppt to 13.4% from 11.7% in 1Q14 as we assumed same SG&A as % of revenue for KION in 1Q15 as in FY14.

Balance sheet and cash flow also deteriorating: Weichai reported 32.9%/41.1% growth in accounts receivable/interest receivable compared to end of 2014 due to credit terms and interest accrued on the deposits placed with Shandong Heavy Industry Group Finance Co.

Short-term borrowing surged 46.4%, which is mainly attributable to the new borrowings for the increase of stake in Kion. Net operating cash outflow increased to Rmb2.3bn from Rmb1.4bn in 1Q14 as a result of an increase in cash paid for the purchase of goods and services in 1Q15.