4Q23E earnings surged 31-71% YoY, above expectation

　　潍柴动力(000338)

　　Weichai Power (Weichai) pre-announced last night (23 Jan) that net profit in2023E is expected to surge 75-90% YoY to RMB8.58-9.32bn, which is betterthan expectations as both our and consensus estimates are only close to thelow end of the profit range. The profit alert implies that Weichai delivered netprofit of RMB2.08-2.82bn in 4Q23E (up 31-77% YoY), with a midpoint ofRMB2.45bn (+54% YoY). As we highlighted in our note on 15 Jan (link),Weichai’s multi-cylinder diesel engine sales volume surged 51% YoY in 4Q23(surpassing the industry average of 26%), driven by strong HDT enginedemand. We maintain our bullish view on Weichai (sector top pick) as areplacement cycle will offer certainty on HDT industry sales growth in 2024E.Maintain BUY with unchanged SOTP-based TP of HK19.4 (H) / RMB17.8 (A).

　　LNG/Diesel price spread expanded again. The price ratio reached arecent peak of 0.9 in late Dec 2023, which made LNG truck less attractiveto buyers. That said, with the latest LNG price declining 29% since late Dec,the price ratio dropped to 0.69 at present. We believe the current pricedifference will boost the sales of LNG trucks again given the lower operatingcosts to truck owners. We see this as a near-term driver for Weichai givenits 60% market share in the HDT gas engine segment.

　　Key catalysts: 1) Further expansion of LNG/Diesel price spread; 2) strongthan-expected HDT sales figures in 1Q24E.

　　Risk factors: 1) weakness in engine export; 2) increase in componentcosts; and 3) weaker-than-expected new business growth.