2015 set to be challenging for Weichai Power

Its FY2014 results are also not great.

It has been noted that Weichai Power's FY2014 results are not great.

According to a research note from Barclays, Weichai's 5% miss in clean EPS versus Barclays' forecast was primarily due to lower than forecast OPM for its diesel engine segment at 14.0%, 0.8ppt lower than Barclays' forecast of 14.8% and declining 0.9ppt y/y. Management attributed the declining OPM to smaller volume (-7% y/y) and lower margin for NS IV engines.

Also, higher loss in the non-major auto parts segment (RMB458mn in loss versus Barclays and 2013's RMB141mn).

Compared to 2013, Weichai's revenue increased by 37% and operating profit increased by 7%, but excluding the impact from Kion consolidation, the organic growth of its revenue was +2.3% y/y while operating profit declined 15% y/y.

Here's more from Barclays:

2015 is challenging on market demand, market share and margin: We see 2015 as being a very challenging year for Weichai.

HDT sales in China declined 36% y/y in Jan/Feb, and we anticipate a similar rate of decline to continue for a few more months since dealers still carry a high level of NS III HDTs that now need to be sold at a discount (we currently forecast 10% y/y decline for HDT sales in 2015 but do see downside).

Weichai's engine sales to Foton are also at risk in the L-T in our view despite the existence of a S-T contract.

We have concerns on margin for HDT engines in 2015 given the sharp decline of engine op margin in 2H14 (5.5ppt h/h and 3.9ppt y/y).

Weichai reported FY14 EPS of RMB2.51/sh, or RMB 1.90/sh ex one a time gain, 5% lower than our forecast due to lower than expected OPM.

Highlights from the results briefing: (1) Management is cautious on HDT outlook and expects demand to stabilize at approximately 700K units p.a. for coming years (-6% vs 2014).

(2) Management acknowledged the strong competition from Cummins but stated that in the short-term Weichai has a contract to supply engines to 60-70% of Foton's HDTs.

(3) Weichai could further increase its Kion stake from the current level (38.25%).

(4) Management guides +28% y/y growth in top line in 2015, mostly coming from full year consolidation of Kion vs half a year in 2014 and flattish revenue for the rest of Weichai's business.

We think the target is aggressive given current weakening demand of HDTs in China. We forecast 1% y/y decline in core EPS in 2015 as we expect full year contribution from Kion is not enough to offset decline from the Company's domestic business.

Our PT is unchanged at HK$24/sh. We maintain UW as (1) China's HDT demand is still in the down cycle and (2) Weichai's market position in HDT engines is at risk due to vertical integration of Foton (accounts for 30% of Weichai's 2014E HDT engine sales) with engine suppliers.