[ET Net News Agency, 17 December 2019] Sinotruk (Hong Kong) (03808) announced its plan
to purchase parts from Weichai Power (02338) for its commercial vehicle business. It will
buy no more than RMB130mn in December 2019 and RMB1.47bn in 2020, at market price.
Within the RMB1.47bn deal in 2020, Morgan Stanley expects most to be heavy-duty truck
(HDT) engines. Morgan estimated this RMB1.47bn purchase would contribute RMB210mn net
profit to Weichai in 2020 (assuming engine segment net margin of 14%), accounting for 2%
of Weichai's 2020 net profit (Morgan assumed RMB8.5bn net profit in 2020).
In turn, Sinotruk would face an impact of RMB220mn on 2020 operating profit (by assuming
the engine segment operating margin of 15%). After baking in the potential decline in the
engine workshop's utilization, the impact is likely to be larger than RMB220mn.
Morgan remains "underweight" on Sinotruk, with a target price of HK$10. The research
house forecast Sinotruk's earnings to decline in both 2019 and 2020. It expects that
Sinotruk's own engine workshop would face lower utilization after increasing Weichai's
engine supply. This would make Weichai more defensive in turn, with stable market share
status amid an industry down-cycle. (KL)