For the domestic engine giant Weichai Power, the engine is undoubtedly the most important one among the three business segments of powertrain, commercial vehicle and auto parts. In the first three quarters of 2010, Weichai Power achieved sales of 46.9 billion yuan, an increase of 84.45% year-on-year. Among them, 36% of sales and 80% of net profit come from the engine. The sales revenue of the heavy truck business accounted for 34%, but the profit contribution was only 14%. The introduction of high-end heavy truck products was a top priority. In fact, before January, Weichai Power disappointed China National Heavy Duty Truck with a price of about 5 million yuan, and lost its position in the Shanghai Huizhong heavy truck business. Its ambition to enter the heavy truck business has been fully demonstrated.
The Huizhong heavy truck business originally sold only about a few hundred units a year and was in a semi-discontinued state. The main reason for Weichai Power’s previous acquisition was to obtain its production qualifications. At the same time, in addition to Shaanqi, it sought out another heavy truck resource. Weichai Plan is to develop 400,000 to 600,000 yuan worth of products in the future and build it for this purpose. A brand new brand to implant their own high-end heavy truck projects.
The outbreak of the engine business enabled Weichai Power to enter into a rocket-like assault since October. It has soared from RMB 76.6 to RMB 118 at the peak, with a monthly increase of more than 54%. “Weichai’s current rally represents a round of market corrections for valuations. It should be said that the uncertainties of the previous issue concerning Weichai have all received positive responses in the third quarter. Since 2009, with the country’s 4 With trillions of yuan of investment, the heavy-duty truck market can gradually recover, but the valuation of Weichai Power has not received a market response. Its P/E ratio only remains around 10 times, and many institutions are betting on Weichai power.
In fact, the year-on-year growth of the heavy-duty truck market in the third quarter of this year has experienced a significant decline, including a 4.8% year-on-year growth in sales in September. Sales volume of major customers, Shaanxi Heavy Duty Truck and Foton Automobiles, fell 37.8% and 32.2% respectively. The engine sales revenue of the division decreased by 13% qoq to RMB 6.24 billion. Under such circumstances, the scale effect of Weichai Power apparently resisted the impact of market fluctuations, and it has maintained a net profit margin of around 20%.
In addition to market fluctuation expectations, another concern for Weichai Power's performance lies in its ability to control the downstream industry chain. In the domestic heavy truck industry sector, FAW, Dongfeng and CNHTC are the first echelons, while Weichai's main suppliers are concentrated in customers of the second echelon of Shaanxi Auto, Futian and Beiben.
With the increasing size of the second tier in recent years, the impulse to self-built engine supporting systems has become increasingly strong. Since last year, Beiqi Foton signed an agreement with Daimler, a joint venture between Jianghuai and NC2, a joint venture between Duff and Hengtian, a joint venture between GAC Group and Japanese Hino, and so on. However, the production of new domestic heavy-duty truck engines will be put into operation after 2012. It should be said that Weifang’s market dominance will not be threatened in the near future. It is worth noting that the rise of the third echelon including Hualing, Dayun, Jianghuai, etc., due to the weak supporting capacity of such newly-emerged heavy truck companies, Weichai Power will continue to hold the right to speak in the field of heavy trucks in the future.
At present, Weichai Power's annual profit is more than 6 billion yuan, while the capacity investment is only about 1.5 billion. Weichai Power, which holds large sums of cash, is eager to use capital to expand the industrial chain. In 2005, Weichai Power achieved a 51% stake in Shaanxi Auto and Fast by acquiring the Hunan Torch. This acquisition laid the foundation for the company's rapid development in the past five years. In the entire industry chain, in addition to upstream opportunities for Weichai Power, high-end heavy trucks may be the best opportunities for the downstream.
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