The strong growth of power related engines (in particular AIDC backup power engine: +2.4x YoY) in 1Q26 proved that Weichai is on-track to ride on the AIDC growth. Meanwhile, Caterpillar’s (CAT US, NR) better-than-expected results in 1Q26, followed by the upward revision of power generation equipment sales target in 2030 (from >2x to >3x, compared with 2024), suggested that AIDC’s medium-term demand will remain robust with good visibility. We revise up Weichai’s 2026E/27E/28E earnings forecasts by 2%/11%/15%, due to higher assumptions on AIDC engine volume and margin. We now expect the contribution of power related engine EBITDA (on attributable basis) to increase substantially from 17% in 2026E to 38% in 2028E. We revise up our SOTPbased TP for Weichai H/A to HK$45.1/RMB40.2 (from HK$30.5/RMB28.7), as we now value Weichai’s power engine business separately with a 35x target EV/EBITDA for 2026E in order to reflect the re-rating of power business. Reiterate BUY. We see Weichai a key pick in the Capital Goods sector.

Strong growth of AIDC backup power engine in 1Q26. Weichai’s power related engine sales volume grew 21% YoY to 30k units in 1Q26. Largebore engine sales volume also grew +21% YoY to 3k units but carried much higher ASP (our estimate: >RMB500k/unit). Of the large-bore engine sales, AIDC engine sales surged 2.4x YoY to ~500 units (ASP: >RMB2mn/unit).

Higher assumptions for power related engines. For AIDC engine, we expect the full-year sales in 2026E to surge 1.7x YoY to 4kt. In particular, we expect the breakthrough in the US market to continue to gain traction.

Potential for further re-rating. Caterpillar is trading at 36x 2026E P/E and 28x EV/EBITDA. For Weichai, we now assign 35x target EBITDA for the power business, which we believe is justified given Weichai’s much higher growth potential as a challenger (we expect 45% power segment EBITDA CAGR between 2026-28E). For traditional business (i.e. engine for HDT & machinery + HDT + agricultural machinery), we assign 10x target EBIDTA (peak cycle valuation) to reflect the continuous up-cycle for the HDT sector.

Key risks: 1) unexpected slowdown in diesel and gas engine demand due to high oil and gas prices; 2) increase in raw material costs; 3) lower-than-expected AIDC backup power engine sales.