Weichai’s net profit in 2023 surged 84% YoY to RMB9bn, which is in line with the profit range of RMB8.58-9.32bn announced in Jan. In 4Q23, net profit grew 58% YoY to RMB2.5bn. It’s worth noting that Weichai has declared a final dividend of RMB0.293/shr. This, together with the interim dividend, implies that the payout ratio has reached 50% (up from 45% in 2022). We revise up our 2024E/25E earnings forecast by 19%/20%, mainly due to higher margin assumptions across different segments. We maintain our positive stance on Weichai (sector top pick) as we see (1) the replacement cycle, (2) higher sales contribution of gas trucks, and (3) exports offering certainty on HDT industry sales growth in 2024E. We revise up our SOTP-based TP for Weichai H/A to HK$22/RMB20.4 from HK19.4/RMB17.8. Maintain BUY.

Key highlights in 4Q23. Net profit grew 58% YoY to RMB2.5bn, driven by 20% YoY revenue growth (to RMB53.6bn) and 3.3ppt YoY gross margin expansion (to 23.7%). The gross margin in 4Q23 is the highest one since 4Q18.

Strong engine growth in 2023. The segment revenue grew 55% YoY to RMB60.8bn, driven by a 28% increase in engine sales and increase in blended ASP (due to more contribution of HDT engines based on our estimate). The segment profit surged 1.7x YoY to RMB7.7bn, driven by 5.5ppt YoY expansion of segment margin.

Automobiles & components turned to profit in 2H23. The segment (mainly includes HDTs and parts) recorded RMB610mn of segment profit in 2H23 (vs RMB24mn in 2H22 and -RMB16mn in 1H23), driven by operating leverage.

Forklifts & supply chain solution (KION’s operation) continued to see recovery. The segment profit surged 10x YoY to RMB4.9bn in 2023 from a low base. According to KION’s latest guidance, the adjusted EBIT is expected to grow 0-19% YoY in 2024E.

Agricultural machinery helped by better margin. While the segment revenue dropped 9% YoY to RMB16.2bn in 2023, the segment margin expanded 1ppt YoY to 4.1%. This helped boost the segment profit by 23% YoY.

Risk factors: 1) weakness in engine export; 2) lower-than-expected replacement demand; 3) an increase in component costs.