Morgan Stanley anticipates Weichai Power's (02338, 000338.SZ) second-quarter performance will face headwinds, primarily driven by sluggish liquefied natural gas heavy-duty truck (HDT) sales. However, the investment bank projects a gradual recovery in the latter half of the year. Demand for large-bore engines has remained robust year-to-date, supporting the company's unchanged full-year guidance.

Based on a 12x multiple of projected 2025 earnings, Morgan Stanley reduced its Hong Kong-listed share target price by 8% to HK$17.50. This valuation aligns closely with Weichai's eight-year historical average one-year forward price-to-earnings ratio of approximately 11x. Morgan Stanley views this as attractive, particularly given the expectation of over 10% recurring net profit growth in 2025 and a dividend yield exceeding 5%. Consequently, the firm reaffirmed its "Overweight" rating.

The report highlighted that adverse product mix effects are expected to cause a year-on-year decline in HDT engine revenue for Q2 2025. Revenue from this segment could drop by approximately ten percentage points, contributing to an overall estimated 10% year-on-year decrease in first-half revenue. Management expects revenue and margins in the non-heavy-duty truck engine division to remain stable in Q2 compared to the prior year. Consequently, Morgan Stanley forecasts a modest 1% year-on-year dip in total engine revenue for H1 2025.

Conversely, the large-bore engine business demonstrates solid performance. Monthly sales volume in the second quarter mirrored Q1, averaging around 800 units. This translates to roughly 5,000 units for the first half of 2025. AIDC generator shipments constituted about 10% of the total, showing significant year-on-year growth. Weichai management forecasts global demand for AIDC generators to increase by 10% to 20% annually over the next two years. The company aims to boost its annual sales volume to between 2,000 and 2,500 units.

Regarding the new energy business, management considers doubling year-on-year revenue to 3 billion yuan achievable for the current year, though this falls below the initial guidance of 5 billion yuan. The net profit margin for this segment stood at approximately 4% in 2024, with expectations for relative stability in 2025.

Morgan Stanley projects a 4% year-on-year decline in Weichai's Q2 2025 revenue and an 8% drop in net profit. Despite adverse product mix in the HDT segment, gross margins are likely to hold steady, offset by a higher contribution from large-bore engines and ongoing cost optimization initiatives. Consequently, Morgan Stanley revised downward its net profit forecasts for Weichai Power by 6%, 10%, and 10% for the years 2025, 2026, and 2027 respectively.