What's changed

(1) On June 24, Weifu announced a 1H profit alert and guided 1H net earnings of Rmb798-877.7mn, implying 50%-65% yoy growth. (2) On May 30, the Ministry of Environmental Protection announced the Euro III and Euro IV equivalent emission standards for off-road machinery and that the Euro III equivalent standard will commence by April 1, 2016.

Implications

(1) The 1H profit guidance is c.11-22% higher than our previous estimates. The difference is likely due to better than expected commercial vehicle Euro IV enforcement. As per Weifu, the strong earnings growth in its profit alert is largely attributed to higher investment income from JVs with Bosch, driven by rising demand for High Pressure Common Rail (HPCR) products along with the enforcement of the Euro IV standard in both the heavy and light duty commercial vehicle space. (2) The Euro III off-road machinery emission upgrade scheduled for 2016 is faster than our prior estimate of 2018. We expect continued policy tailwinds to contribute to an emissions upgrade cycle in 2014-24E (For more details, please refer to our June 13 report: Transforming China: Emission controls to drive secular upgrade demand cycle). In light of better than expected standards enforcement and the earlier than expected off-road machinery emission upgrade schedule, we increase our 2014E-16E EPS by 6%/5% /4%.

Valuation

On higher estimates, we raise our avg. 2015E-16E PB-ROE based 12m TPs by 4% for Weifu B/A (CL-Buy/Neutral) to HK$35.79/Rmb28.87, reflecting 2.2X avg. 2015E-16E P/B and 18.1% avg. 2015E-16E ROE (prior 2.1X/17.5%), implying 38%/6% upside.

Key risks

Worse than expected enforcement of new emission standards. Price competition of Selective Catalytic Reduction (SCR) product.