Morgan Stanley anticipates Weichai Power (02338.HK, 000338.SZ) will report subdued second-quarter results primarily due to sluggish liquefied natural gas heavy-duty truck (HDT) sales, though expects gradual recovery in the second half. Demand for large-bore engines remains solid year-to-date, supporting unchanged full-year guidance.

The investment bank lowered its Hong Kong-listed shares target price by 8% to HK$17.5, based on 12 times projected 2025 price-to-earnings ratio – broadly aligned with its 8-year historical average one-year forward P/E of 11x. Morgan Stanley views this valuation as attractive given over 10% projected recurring net profit growth for 2025, coupled with a dividend yield exceeding 5%. The firm maintains its Overweight rating.

Unfavorable product mix is expected to drive a year-on-year decline in Q2 HDT engine revenue, with segment revenue falling by a low-teens percentage. Consequently, H1 engine revenue is projected to drop approximately 10% YoY. Management indicates non-heavy-truck engine division revenue and margins should remain stable YoY in Q2, leading Morgan Stanley to forecast a modest 1% YoY decline in total H1 engine revenue.

Large-bore engine operations show robust performance, with monthly sales in Q2 matching Q1’s roughly 800 units. This translates to approximately 5,000 units for H1 2025, with AIDC generator shipments constituting about 10% of total volume – reflecting significant YoY expansion. Weichai’s management projects global AIDC generator demand will grow 10%-20% annually over the next two years, expecting company sales to reach 2,000-2,500 units.

For its new energy business, management believes doubling revenue YoY to RMB3 billion in 2025 is achievable, though below initial guidance of RMB5 billion. The segment’s net profit margin is estimated at about 4% for 2024, with stability anticipated in 2025.

Morgan Stanley forecasts Weichai’s Q2 2025 revenue will decrease 4% YoY, with net profit falling 8%. Gross margins could remain stable as unfavorable heavy-truck product mix is offset by rising large-bore engine contributions and cost optimization. The firm consequently reduced its net profit estimates for 2025, 2026, and 2027 by 6%, 10%, and 10% respectively.