Morgan Stanley revised its outlook for Weichai Power (02338.HK, 000338.SZ), anticipating weak Q2 results primarily due to sluggish sales of liquefied natural gas heavy-duty trucks (HDTs). However, the firm projects a gradual recovery in the second half, noting that demand for large-bore engines has remained robust year-to-date. The full-year guidance remains unchanged.

Based on a 12x multiple of projected 2025 earnings, Morgan Stanley lowered its Hong Kong-listed shares target price by 8% to HK$17.50. This valuation aligns closely with the stock's 8-year historical average one-year forward price-to-earnings ratio of 11x. Considering projected recurring net profit growth exceeding 10% in 2025, coupled with an attractive dividend yield surpassing 5%, Morgan Stanley reiterated its "Overweight" rating.

The report highlighted an expected year-on-year decline in HDT engine revenue for Q2 2025, driven by unfavorable product mix. Segment revenue is forecasted to drop in the teens percentage points, contributing to an approximately 10% year-on-year decrease in overall first-half revenue. Management expects revenue and margins in the non-heavy-truck engine segment to remain flat year-on-year for Q2. Consequently, Morgan Stanley predicts total engine revenue will decline 1% year-on-year in H1 2025.

Regarding large-bore engines, Morgan Stanley noted stable business progress. Second-quarter monthly sales volumes were consistent with Q1, averaging around 800 units. This implies approximately 5,000 units sold in H1 2025, with AIDC generators representing about 10% of total shipments and showing significant year-on-year growth. Weichai management forecasts global AIDC generator demand will grow 10%-20% annually over the next two years, expecting the company's annual sales to reach 2,000-2,500 units.

For the new energy business, management views doubling revenue year-on-year to RMB 3 billion in 2024 as achievable, though this falls below the initial RMB 5 billion guidance. The net profit margin for this segment is projected at around 4% in 2024, with expectations for relative stability year-on-year in 2025.

Morgan Stanley forecasts Weichai Power's Q2 2025 revenue will decline 4% year-on-year, with net profit down 8%. Gross margins are expected to hold steady, as unfavorable product mix in the heavy-truck segment is counterbalanced by the rising contribution of large-bore engines and cost optimization initiatives. Consequently, Morgan Stanley reduced its net profit estimates for 2025, 2026, and 2027 by 6%, 10%, and 10% respectively.