1Q24 net profit +40% YoY in line; solid growth outlook

While Weichai Power (Weichai)’s revenue growth of 6% YoY in 1Q24 is below our expectation, net profit of RMB2.6bn (+40% YoY) accounted for 21.4% of our full-year estimates (run rate in 1Q23: 20.5%), which is still in line with our expectation. The earnings growth was driven by margin expansion on both core business and KION Group (KGX GR, NR). We maintain Weichai as our sector top pick, given (1) the large gas/diesel price gap will continue to drive natural gas engine demand, where Weichai has >60% market share in; (2) high-speed large-bore engines will serve as a structural growth driver on the back of construction of more data centres. Maintain BUY with SOTP-based TP of HK$22/RMB20.4 for Weichai H/A.

1Q24 results highlights. Weichai’s revenue grew 6% YoY to RMB56.4bn.

Gross margin expanded 3.4ppt YoY to 22.1% in 1Q24. With limited increase in SG&A and R&D expense ratio, the pre-tax profit surged 58% YoY to RMB4.2bn. Based on our calculation, the pretax profit of Weichai’s core business / KION grew 45% / 93% YoY in 1Q24 (in RMB terms). Operating cash flow in 1Q24 substantially improved to RMB1.6bn, vs outflow of RMB471mn in 1Q23.

Margin recovery of KION Group. KION (46.5% owned by Weichai) reported adjusted EBIT of EUR227mn in 1Q24 (+46% YoY), driven by easing cost pressure. KION guided a full-year adjusted EBIT target of EUR790-940mn (up 0-19% YoY).

Weichai’s engine sales outpaced industry in 1Q24. According to CICEIA, Weichai's multi-cylinder sales (HDT, construction machinery, other engines) grew 13% YoY to 206k units in 1Q24 (vs the industry average of a decline of ~1%), with market share of ~18% (+2.3ppt YoY).

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