Corporate

Weichai Power Co., Ltd.

Ratings Overview

Issuer Rating ▪ Pengyuan International has assigned a first-time global scale long-term issuer LT Issuer Credit Rating BBB+ credit rating (LTICR) of ‘BBB+’ to Co., Ltd. (Weichai). The outlook is stable.

Outlook Stable ▪ The rating reflects Weichai’s position as the leading domestic heavy-duty player with increasing business diversification through an expanded product portfolio, its presence in KION Group and an exceptional leverage profile with Contents strong cash flow. On the other hand, Weichai’s rating is constrained by its relatively high exposure to cyclical heavy-duty truck market in China.

Key Rating Drivers ...... 2 ▪ Weichai primarily engages in the development and manufacturing of and components, mainly powertrains such as engines, gearboxes and axles, Business Profiles ...... 3 forklift and the provision of warehouse technology services. In 2020, Financial Profile ...... 5 24% of its revenue came from engines, 43% from automobiles and automobile components and 33% from intelligent logistics. Liquidity ...... 6 Company Background ...... 6 Rating Outlook Peer comparison ...... 6 ▪ The stable outlook for Weichai reflects our expectation that the Company will Rating Scores Summary ...... 8 continuously maintain its leading market position in the Chinese powertrain Related Criteria ...... 8 market given its extensive track record of technological innovation in the development of powertrain products such as diesel engines, gearboxes and axles.

▪ We would consider upgrading Weichai’s issuer credit rating if its credit profile improves substantially, which could be caused by: 1) a remarkable increase in market share in the key markets; and 2) a significant improvement in

business diversity through successful overseas business expansion or business diversification to non-heavy-duty truck related business.

▪ We would consider downgrading Weichai’s issuer credit rating if its credit

profile deteriorates substantially, which could be caused by: 1) a rapid Contacts decrease in market share for key products; and 2) a deteriorated financial profile on a prolonged basis, which might be caused by aggressive Primary Analyst acquisitions. Name Simon Lee, CFA Title Associate Financial Summary Direct +852 3615 8346 Email [email protected] Table 1: Financial Ratios 2019A 2020A 2021F 2022F 2023F Secondary Analyst Debt/EBITDA 0.4x -0.1x -0.8x -0.9x -1.1x EBITDA Interest 15.8x 16.1x 18.0x 18.4x 19.4x Name Vincent Ha, CFA GrossCoverage Debt/ Capital 44.0% 40.0% 33.3% 30.7% 28.2% Title Senior Director FFO/GrossD Debt/Capitalebt 243.6% NM NM NM NM FFO/Debt Direct +852 3615 8307 OCF/Debt 331.2% NM NM NM NM OCF/Debt Email [email protected] FCF/Debt 269.3% NM NM NM NM FCF/Debt EBITDA MarginMargin 12.9% 10.8% 12.8% 13.3% 13.5% ROIC 13.8% 11.6% 12.3% 11.7% 11.1% NM - Not meaningful due to net cash position Source: Company, Pengyuan International

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Key Rating Drivers

Credit Strengths

• Leading market position in domestic heavy-duty truck industry. Weichai is the largest heavy-duty truck engine manufacturer and the fourth largest heavy-duty truck manufacturer in China. The Company has strong research and development capabilities to maintain its technological innovation and develop quality engines in compliance with tighten regulatory policy. In 2020, Weichai sold 981,000 units of various engines, representing a year-on-year increase of 32%. We estimate the Company expanded its market share in domestic heavy-duty truck engines to 34% in 2020 from 31% in 2019. Notably, the Company had a market share of 50% in the natural gas heavy-duty truck engines market in 2020. We expect the Company will continue to increase its brand recognition and market penetration during the transition from China V to China VI emission standard on the back of its leading technology, integrated capabilities, high-quality products and strengthened cooperation between the Company and (Hong Kong) Limited (Sinotruk).

• Increasing business diversification. The Company has made significant efforts in diversifying its business in recent years. The Company has increased its net profit contributed from non-heavy-duty truck related business to 42% in 2020 from 21% in 2015. The Company continues to expand its powertrain product portfolio in industrial machinery, construction machinery, agricultural machinery, marine and power generation. Its net profit contribution from non- heavy-duty truck related business is expected to further expand to 60% by 2023. This mitigates the impact from the potential slowdown in heavy-duty truck demand in China in the next few years. Bolstered by its presence in KION Group’s intelligent logistics business, Weichai’s overseas business accounted for 35% of its total revenue in 2020. We expect KION Group’s business will recover gradually in 2021 as coronavirus vaccines have rolled out in early 2021 and the global forklift truck market demand has steadily resumed. We expect its global business will be further expanded and diversified in the next three years.

• Strong cash flow with low financial leverage. Weichai has a low financial leverage. Buoyed by the strong operating cash flow and prudent financial policy, the Company achieved a net cash position with its gross debt to total capitalisation ratio decreased to 40% in 2020 from 44% in 2019, based on our estimates. Despite of increasing capital expenditure due to investment in China VI emission standard or above engines, large-bore engines, hydraulic systems, continuously variable (CVT) powertrains and hydrogen fuel cells, we expect the Company’s operating cash flow to be sufficient to fund its capital expenditure and the Company will be able to maintain its net cash position over the next three years.

Credit Weaknesses

• Relatively high exposure to cyclical industry. The Company has a relatively high exposure to heavy-duty truck market in China. The industry is subject to high cyclicality, driven by the macroeconomic cycle, replacement cycle and regulatory policies such as emission standard and overloading, in our view. We expect China’s heavy duty truck sales volume to have reached its recent high of 1.62 million units in 2020. The sales volume would possibly register a 20% year-on-year decline to 1.3 million units in 2021, since the replacement demand is likely to be slowed in the second half of the year after the China VI emission standard becomes effective in July 2021. The slowdown in the demand for heavy-duty trucks might put pressure on the cash flow generated from the Company’s heavy-duty truck engines, trucks and related products sales.

• Risk of active acquisition. Weichai has been active in acquisitions or equity investment in powertrain, hydraulic system and new energy business. Despite its solid track record of integrating its acquisitions in the past few years, the Company’s active acquisition strategies might impose a risk of overpaying for the target companies, overestimating the synergy effects brought to the Company and lowering its cash flow generating ability.

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Table 2: Key Credit Metrics (RMB mn) 2019A 2020A 2021F 2022F 2023F Financials and Profitability Revenue 174,361 197,491 202,144 210,704 218,814 EBITDA 22,537 21,338 25,789 28,122 29,563 EBITDA margin 12.9% 10.8% 12.8% 13.3% 13.5% Return on assets (ROA) 6.7% 5.1% 5.6% 5.7% 5.6% Return on invested capital (ROIC) 13.8% 11.6% 12.3% 11.7% 11.1% Cash Flow Measures Funds from operations (FFO) 21,237 20,036 23,853 26,064 27,457 Operating cash flows (OCF) 28,873 24,730 19,437 21,283 22,670 Free cash flow (FCF) 23,479 18,964 7,329 7,965 8,020 Discretionary cash flow (DCF) 19,871 17,028 3,464 3,638 3,526 Capital expenditure 5,394 5,766 12,108 13,319 14,650 Balance Sheet Measures Cash and liquid investments 53,269 68,069 85,337 90,392 95,815 Excess cash 42,101 53,249 70,482 75,349 80,569 Total debt 50,820 50,155 49,884 49,684 49,484 Adjusted debt 8,719 -3,094 -20,599 -25,666 -31,085 Total capitalisation 115,402 125,535 149,581 162,094 175,537 Leverage Measures Debt/EBITDA 0.4x -0.1x -0.8x -0.9x -1.1x EBITDA/Interest expense 15.8x 16.1x 18.0x 18.4x 19.4x Gross debt/Capitalisation 44.0% 40.0% 33.3% 30.7% 28.2% FFO/Debt 243.6% NM NM NM NM OCF/Debt 331.2% NM NM NM NM FCF/Debt 269.3% NM NM NM NM DCF/Debt 227.9% NM NM NM NM Debt/Equity 13.5% -4.1% -20.7% -22.8% -24.7% FFO/Cash interest expense 14.3x 13.4x 16.6x 17.0x 18.0x NM - Not meaningful due to net cash position Sources: Company, Pengyuan International

Business Profiles

Leading market player in the domestic heavy-duty truck market Weichai is the largest manufacturer of heavy-duty truck engines in China. The Company ranked 63th in the Fortune China 500 in 2020. The Company also ranked the sixth largest listed machinery manufacturing company in the world in terms of revenue in 2020, based on our estimates. Weichai reported a total revenue of RMB197.5 billion with total assets of RMB270.8 billion in 2020. The cumulative sales of various engines of the Company have recorded 981,000 units in 2020, representing a year-on-year increase of 32%, and the total sales of engines ranked the first place in the world for the first time.

We estimate that Weichai’s market share in domestic heavy-duty truck engine market further increased to 34% in 2020 from 31% in 2019. Notably, the Company had a dominant market position of 50% market share in the natural gas heavy-duty truck engine market in 2020 according to cvworld.cn, an auto industry information service provider. We expect the Company will further expand its leading position in the industry during the transition of China V to China VI emission standard due to its leading technology, integrated capabilities, high-quality products and strengthened cooperation between the Company and Sinotruk. We assess that Weichai has higher technical capabilities than most of its domestic peers. The Company released the world's first commercial with a thermal efficiency exceeding 50% in September 2020, setting a new benchmark for the thermal efficiency of global diesel engines. This enhances Weichai’s leading position and product competitiveness in the field of internal combustion engines. Since the equity transfer of China National Heavy Duty Truck Group Co., Ltd. (the parent company of Sinotruk) from Ji’nan SASAC to Group Co., Ltd. (the parent company of Weichai) in September 2019, the cooperation between the Company and Sinotruk has been strengthened. We estimate the engine sales to Sinotruk was around 250,000 units in 2020. We expect the engine sales to Sinotruk will be doubled in 2021, with 200,000 units of heavy-duty truck engines and 300,000 units of light-duty truck engines to Sinotruk.

Weichai has a controlling interest of 51% in Shaanxi Heavy-duty Automobile Group, which is the fourth largest heavy truck manufacturer in China. Shaanxi Automotive Group sold 181,000 units of heavy-duty trucks, representing growth of 16% year- on-year. According to Chinatrucks, Shaanxi Automotive Group has maintained a relatively stable market share of 14% to 15% in the domestic heavy-duty truck market from 2015 to 2020.

The Company also has a 51% interest in Shaanxi Fast Gear Co., Ltd., which specialises in production and sales of heavy- duty gearboxes. Shaanxi Fast Gear Co., Ltd. sold 1,186,000 units of gearboxes, representing a year-on-year growth of 18%. The market ownership exceeds more than 10 million units and it has a market share of over 70% in domestic heavy-duty gearbox market in 2020. The annual output and sales of heavy-duty gearboxes has ranked the first in the world for 15 successive years.

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Exhibit 1: Weichai's domestic heavy-duty truck engine market share Exhibit 2: Domestic heavy-duty truck market share 25% '000 units 600 40.0% 20% 500 30.0% 15%

400 Thousands 300 20.0% 10% 200 5% 10.0% 100 0% 0 0.0% 2015 2016 2017 2018 2019 2020 China FAW Group 2015 2016 2017 2018 2019 2020 Weichai's heavy-duty truck engines sales China National Heavy Duty Truck Group Shaanxi Heavy-duty Automobile Group Market share Beiqi Others Sources: Company, Pengyuan International Sources: Chinatrucks, Pengyuan International

Increasing business diversification to mitigate impact from industry cyclicality Weichai has made efforts in diversifying its business in recent years. The Company has increased its net profit contributed from non-heavy-duty truck related business to 42% in 2020 from 21% in 2015. We expect the non-heavy-duty truck related business to expand rapidly, especially the large-bore engines, hydraulic powertrains, CVT powertrains for agricultural machinery and KION Group’s business. This mitigates the impact from the potential slowdown in heavy-duty truck demand in China over the next few years. In 2020, 24% of its revenue came from engines, 43% from automobiles and automobile components and 33% from intelligent logistics. The Company has a wide range of targeted markets which include trucks, buses, construction machinery, marine power, power generation, and agriculture machinery. The Company has a diversified product portfolio covering powertrains, heavy-duty trucks, construction machinery, hydraulic devices, forklift trucks and related components, provision of warehouses technology and supply chain solution services. In 2020, the Company launched its hydrogen fuel cell engine plant and started to build new energy powertrain business, we expect the Company’s strategies to be in line with the government’s policy of delivering carbon neutrality in China. The Company also benefits from having diversity in both its customer base and supplier base. Its top five customers accounted for 14.2% of its revenue and the top five suppliers accounted for 13.7 % of its cost of goods sold in 2020. Bolstered by its presence in KION Group’s intelligent logistics business, Weichai’s overseas business accounted for 35% of its total revenue in 2020. Weichai has 45.2% of the shares of KION Group, which is the largest manufacturer of forklift trucks in Europe and second largest manufacturer of forklift trucks worldwide in terms of revenue in 2020. KION Group acquired a warehouse automation solutions company, Dematic, in 2016. Dematic is the largest automated material handling system supplier in North America and the third largest worldwide in terms of revenue in 2020. Although KION Group’s forklift truck business was negatively impacted by the coronavirus pandemic in 2020, we expect KION Group’s business will recover gradually with low double-digit growth in 2021 as coronavirus vaccines have rolled out in early 2021 and the global forklift truck market demand has steadily picked up. We expect its global business will be further expanded and diversified in the next three years.

Exhibit 3: Revenue breakdown by segment (2020) Exhibit 4: Revenue breakdown by region (2020) Intelligent logistics Engines 33% 24% Other countries and regions 35%

China 65%

Automobiles and automobile components 43%

Sources: Company, Pengyuan International Sources: Company, Pengyuan International

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Cyclical heavy-duty truck industry China’s heavy duty truck industry is cyclical. Since 2017, China’s heavy-duty trucks sales volume has remained above 1.1 million units per year. The sales reached a peak of 1.6 million units in 2020, representing a year-on-year growth of 38%. The implementation of China Stage VI Emission Standard and stricter regulations on overloading have boosted the demand for replacement of China III heavy-duty vehicles, as China III vehicles will be unqualified after China VI emission standard becomes effective from July 2021. We estimate that the sales will come off to around 1.3 million units in 2021, translating to a year-on-year decrease of 20%, mainly due to slowed replacement demand in the second half of 2021. Logistic activities and infrastructure construction in China remain solid and partially offset the decreased replacement demand, in our view. The industry downcycle might put pressure on the cash flow generated from the Company’s heavy-duty truck related business.

Exhibit 5: China's heavy truck sales

'000 units 1,800 80.0% 1,600 60.0% 1,400 1,200 40.0% 1,000 20.0% 800 600 0.0% 400 -20.0% 200 0 -40.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

China's heavy truck sales Sales growth (RHS)

Sources: Chinatrucks, Pengyuan International

Financial Profile

Deleveraging trend with an expected net cash position going forward

Weichai has a strong financial profile with deleveraging trend in the past four years due to strong operating cash flow and prudent financial policy. The gross debt to total capitalisation has continuously decreased to 40% in 2020 from 44% in 2019 and debt to EBITDA ratio improved to -0.1x in 2020 from 0.4x in 2019. The Company has a strong debt-servicing capacity. The EBITDA interest coverage maintained at 15.8x and 16.1x in 2019 and 2020 respectively. In 2020, the Company generated a positive operating cash flow of RMB19.0 billion with low capital expenditure of RMB5.8 billion. Gross debt decreased 1% to RMB50.2 billion in 2020 from RMB50.8 billion in 2019, while excess cash increased 26% to RMB53.2 billion in 2020 from RMB42.1 billion in 2019, resulting in a net cash position of RMB3.1 billion.

We acknowledged the Company’s plan to raise no more than RMB13 billion of A-shares to fund its investment in the whole fuel cell industry chain construction projects (RMB2 billion), a full range of high-end engine projects for H platform with China VI or above emission standards (RMB4 billion), large bore high-end engine industrialisation projects (RMB3 billion), a full range of hydraulic powertrain projects and large-scale CVT power assembly industrialisation project (RMB3 billion) and supplementary working capital (RMB1 billion). We expect the proposed equity placement and strong expected operating cash flow will enable the Company to enlarge its net cash position and maintain its deleveraging trend in 2021. We anticipate the gross debt to total capitalisation will further drop to 33.3% in 2021 and debt to EBITDA ratio will further expand to -0.4x in 2021. We believe its EBITDA interest coverage will further increase to 18.0x in 2021 on the back of EBITDA margin recovery.

Strong profitability with expectations of margin recovery from 2021

We assess the Company’s profitability to be strong and recover gradually from 2021. Weichai recorded a revenue growth of 13.3% in 2020, mainly driven by revenue growth from engines segment and automobiles and automobile components. The increased market share from heavy-duty truck engines and strengthened cooperation between Sinotruk and the Company supported the engines segment’s growth. The increased demand in heavy-duty trucks also increased the Company’s sales

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of gearboxes, axles and trucks. However, the Company’s blended gross margin declined to 19.3% in 2020 from 21.8% in 2019. The blended gross margin was substantially below the historical range of 21.8% to 23.1% between 2015 and 2019. As a result, its EBITDA margin also dropped to 10.8% in 2020 from 12.9% in 2019 and its return on invested capital (ROIC) decreased to 11.6% in 2020 from 13.8% in 2019. The decline in margin in 2020 was mainly due to supply chain disruptions under coronavirus outbreak in China in early 2020, which increased the material costs and squeezed the margin. Also, KION Group’s forklift truck business was negatively impacted by the coronavirus pandemic in 2020 and its gross margin dropped to 24.5% in 2020 from 26.5% in 2019.

In anticipation of slowdown in the heavy-duty truck market, we estimate Weichai will still maintain a positive growth in revenue in 2021. While the heavy-duty trucks sales might slowdown, the engines segment benefits from its diversified products in construction machinery, agricultural equipment and engineering machinery engines. Strengthened cooperation between the Company and Sinotruk. partially offset the slowed replacement demand in heavy-duty truck engines and light-duty truck engines sales. These factors boost the overall engines sales growth to remain resilient. Also, as coronavirus vaccines have become available to the public in early 2021 and the global forklift truck market demand has steadily picked up, we expect KION Group’s margin to recover gradually in 2021. We expect the Company’s blended gross margin will improve to 20.7% in 2021 from 19.3% in 2020 mainly due to better business mix. The EBITDA margin will increase to 12.8% in 2021 from 10.8% in 2020 and the ROIC will improve to 12.9% in 2021 from 11.6% in 2020. Liquidity

We evaluate Weichai’s liquidity as strong. Its 12-month and 24-month cashflow adequacy ratios are at 2.9x and 3.2x respectively. We expect Weichai’s liquidity to be sufficient even in the extreme scenario when all short-term debts have to be repaid without renewal. Aided by the low financial leverage and strong cash flow, the Company achieved a net cash position in 2020. Although we expect the Company to increase its capital expenditure focusing on investment in China VI emission standard or above engines, large-bore engines, hydraulic systems, CVT powertrain and hydrogen fuel cell, we believe the Company’s strong funds from operations to be sufficient to support its capital expenditure needs. We made the following key projections on Weichai’s liquidity: • Estimated liquid assets on hand of RMB68.1 billion and RMB85.3 billion in 2021 and 2022; • Estimated funds from operations to be about RMB23.9 and RMB26.1 billion in 2021 and 2022; • Estimated short-term debt payment of RMB17.1 billion and RMB18.0 billion in 2021 and 2022; • Estimated cash interest of RMB1.4 billion and RMB1.5 billion in 2021 and 2022; • Estimated mandatory capital expenditure of RMB12.8 billion and RMB14.1 billion in 2021 and 2022 respectively. Company Background

Founded in 2002 and headquartered in Weifang, Shandong province, Weichai Power Co., Ltd. is a leading Chinese diesel- engine manufacturer. The Company primarily engages in design, development, production and sale of engines, vehicles and other parts, the production of forklift and the provision of warehouse technology services. The Company offers its products under brand names such as Weichai Power Engine, Fast Gear, Hande Axle, Shacman Heavy Truck and Linder Hydraulics. The Company had 65% of revenue from the mainland China and the remaining balance was from the rest of the world in 2020.The Company is listed on the and the . As of the end of 2020, Shandong Heavy Industry Group Co., Ltd. indirectly owned 17.72% of the Company’s shares through Weichai Holding Group Co., Ltd. Currently, Shandong Heavy Industry Group Co., Ltd. is 70% owned by State-owned Assets Supervision and Administration of Shandong Provincial People's Government, 20% owned by Shandong Guohui Investment Co., Ltd. and 10% owned by Shandong Provincial Social Security Fund Council respectively. Peer comparison

We analyse Weichai’s peers with four domestic participants, namely , , Faw Jiefang and Sinotruk and two international participants, namely Cummins and PACCAR, based on the consideration of similar industry these companies and Weichai operate – machinery manufacturing. In this section, we do not assign ratings to the selected peers of Weichai.

Table 3: Weichai’s Peers Zoomlion Zoomlion Heavy Industry Science and Technology Co., Ltd. (Zoomlion) is a Chinese manufacturer of construction machinery and sanitation equipment, headquartered in Changsha of the Hunan province. The business of Zoomlion consists of three segments: construction machinery, agricultural machinery and financial services. Construction machinery accounted for 95% of its total revenue in 2019, followed by 3% from agricultural machinery and 2% from financial services. The construction machinery segment provides concrete machinery, crane machinery,

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road construction machinery, infrastructure construction machinery, road building and maintenance machinery, forklift truck and other products mainly for infrastructure and real estate construction. Sany Sany Heavy Industry Co., Ltd. (Sany) is a Chinese multinational manufacturing company headquartered in Changsha of the Hunan province. Sany engages in research and development, manufacture, distribution and provision of services of engineering machinery. Sany’s major products are categorised into five types, which are concrete machinery, excavating machinery, hoisting machinery, pile driving machinery and road construction machinery, including truck-mounted concrete pumps, trailer concrete pumps, excavators, truck cranes, rotary drilling rigs and sets of road equipment, among others. Faw Jiefang Faw Jiefang Group Co.,Ltd. (Faw Jiefang) is a Chinese state-owned automotive manufacturing company headquartered in Changchun of the Jilin province. Its principal products are automobiles, buses, light, medium and heavy-duty trucks, and auto parts. Faw Jiefeng has two segments: vehicles and parts and other segments. The vehicles segment accounted for 81% of its total revenue in 2019, while the remaining is contributed by parts and other segments. Sinotruk Sinotruk (Hong Kong) Limited. (Sinotruk) is a Chinese truck manufacturing company, which specialises in the research, development and manufacture of heavy-duty trucks, light-duty trucks, buses and related key parts and components such as engines, cabins, axles, steel frames and gearboxes. Sinotruck has four segments: heavy duty-trucks segment, light-duty trucks and buses segment, engines segment and finance segment. Heavy-duty trucks accounted for 81% of total revenue in 2019, followed by 16% from light duty trucks and buses segment and 2% each from engines segment and finance segment respectively. Cummins Cummins Inc is a global diesel engine manufacturer. The company designs, manufactures, distributes and services diesel, natural gas, electric and hybrid powertrains and powertrain-related components including filtration, aftertreatment, turbochargers, fuel systems, controls systems, air handling systems, automated transmissions, electric power generation systems, batteries, electrified power systems, hydrogen production and fuel cell products. Cummins operates in five segments: engine, distribution, components, power systems and new power. Engine, distribution and components segments accounted for over 90% of its total revenue in 2019. PACCAR PACCAR Inc is one of the largest medium- and heavy-duty trucks manufacturers in the world. The Company's segments include truck, parts and financial services. The truck segment includes the design, manufacture and distribution of light-, medium- and heavy-duty trucks. It also manufactures engines, primarily for use in PACCAR’s trucks. The parts segment includes the distribution of aftermarket parts for trucks and related commercial vehicles. The financial services segment includes finance and leasing products and services provided to customers and dealers. The three segments contributed 78%, 16% and 6% of its total revenue in 2019. Source: Company, Pengyuan International

The peer comparison table below shows that Weichai and most selected peers had a strong financial profile in 2019 due to low financial leverage and high debt-servicing capacity. While the profitability varied among them, Weichai’s profitability was to be in line with the selected peers’ average in terms of EBITDA margin and ROIC, based on our assessment. Weichai had a better operating efficiency than the selected peers in terms of cash conversion cycle as the Company had shorter receivable days, inventory days and longer payable days than the selected peers’ average.

Table 4: Peer comparison table (2019) (RMB mn) Zoomlion Sany Faw Sinotruk Cummins PACCAR Weichai Jiefang Financials Revenue 174,361 43,307 75,666 27,664 62,227 162,869 176,887 Gross margin 21.8% 30.0% 32.7% 18.7% 19.0% 25.4% 18.8% EBITDA 22,537 6,920 15,351 406 6,554 24,737 28,116 EBITDA margin 12.9% 16.0% 20.3% 1.5% 10.5% 15.2% 15.9% Return on assets (ROA) 6.7% 6.5% 15.4% -1.2% 7.5% 13.9% 11.0% Return on invested capital (ROIC) 13.8% 11.0% 26.8% -2.1% 16.7% 25.7% 17.5%

Cash Flow Measures Funds from operations (FFO) 21,237 5,013 12,368 -1,829 5,261 19,527 22,671 Operating cash flows (OCF) 28,873 4,595 13,430 2,102 8,717 21,980 19,764 Free cash flow (FCF) 23,479 3,258 9,590 14,550 7,891 16,625 6,146 Discretionary cash flow (DCF) 19,871 1,457 7,526 13,581 6,336 7,843 -1,721 Capital expenditure 5,394 1,337 2,355 839 826 5,355 13,618

Balance Sheet Measures Cash and short-term investments 53,269 9,384 20,525 24,214 19,911 10,236 37,165 Total debt 50,820 22,244 20,090 8,234 1,057 19,971 78,419 Adjusted net debt 8,719 12,860 -435 -15,980 -18,853 9,735 41,254 Equity 64,582 38,827 47,151 28,440 26,360 52,274 67,587 Total capitalisation 115,402 61,071 67,242 36,674 27,417 72,245 146,006

Leverage Measures Debt/EBITDA 0.4x 1.9x -0.0x -39.3x -2.9x 0.4x 1.5x EBITDA/Interest expense 15.8x 4.1x 27.6x 42.6x 47.5x 32.8x 20.0x Gross debt/Capitalisation 44.0% 36.4% 29.9% 22.5% 3.9% 27.6% 53.7% Debt/Equity 13.5% 33.1% -0.9% -56.2% -71.5% 18.6% 61.0% FFO/Debt 243.6% 39.0% NM NM NM 200.6% 55.0% OCF/Debt 331.2% 35.7% NM NM NM 225.8% 47.9% FCF/Debt 269.3% 25.3% NM NM NM 170.8% 14.9% DCF/Debt 227.9% 11.3% NM NM NM 80.6% -4.2% FFO/Cash interest expense 14.3x 3.0x 22.2x -191.9x 38.2x 25.9x 16.1x

Operating Efficiency Receivable days 64.3 206.4 105.2 131.5 46.5 54.4 18.7 Inventory days 60.8 128.4 92.6 177.5 77.6 75.3 20.6 Payable days 141.9 241.6 120.9 311.4 240.7 101.9 64.7 Cash conversion cycle -16.8 93.1 76.9 -2.4 -116.6 27.8 -25.5 NM -Not meaningful due to net cash position Sources: Company, Pengyuan International

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Rating Scores Summary

Business Profile Moderate Industry and Operation Risk Profile Moderate Macroenvironment Risk Low

Financial Profile aa+ Preliminary Leverage Profile aa Cash Flow Variations Neutral Debt Structure and Financial Policy Neutral Financial Volatility Neutral Investments 0 notch Final Leverage Profile aa Profitability Strong

Indicative Credit Score (ICS) bbb+

Adjustment Factors Corporate Structure and Governance Neutral Liquidity Strong Supplementary Analysis Neutral

Standalone Credit Profile (SACP) bbb+

External Support Parental Support N/A Government Support N/A Issuer Credit Rating (ICR) BBB+

Note: ratings mentioned in this report are unsolicited rating.

Related Criteria

General Corporate Rating Criteria (15 March 2018)

Financial Adjustments and Ratio Definitions (07 May 2018)

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For the purpose of the rating process, the Company obtains sufficient quality factual information from sources which are believed by the Company to be reliable and accurate. The Company does not perform an audit and undertakes no duty of due diligence or third-party verification of any information it uses during the rating process. The issuer and its advisors are ultimately responsible for the accuracy of the information provided for the rating process.

Users of the Company’s credit ratings shall refer to the rating symbols and definitions published on the Company’s website. Credit ratings with the same rating symbol may not fully reflect all small differences in the degrees of risk, because credit ratings are relative measures of the credit risk.

NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF ANY INFORMATION GIVEN OR MADE BY THE COMPANY IN ANY FORM OR MANNER. In no event shall the Company, its directors, shareholders, employees, representatives be liable to any party for any damages, expenses, fees, or losses in connection with any use of the information published by the Company.

The Company reserves the right to take any rating action for any reasons the Company deems sufficient at any time and in its sole discretion. The publication and maintenance of credit ratings are subject to availability of sufficient information.

The Company does not receive compensation for its unsolicited credit ratings. The rated entity did not participate in the rating process. The unsolicited credit rating has not been disclosed to the rated entity or to its related party before being issued.

The Company reserves the right to disseminate its credit ratings and reports through its website, the Company’s social media pages and authorised third parties. No content published by the Company may be modified, reproduced, transferred, distributed or reverse engineered in any form by any means without the prior written consent of the Company.

The Company’s credit ratings and reports are not indented for distribution to, or use by, any person in a jurisdiction where such usage would infringe the law. If in doubt, please consult the relevant regulatory body or professional advisor and ensure compliance with applicable laws and regulations.

In the event of any dispute arising out of or in relation to our credit ratings and reports, the Company shall have absolute discretion in all matters relating to resolving the dispute, including but not limited to the interpretation of disclaimers and policies.

Copyright © 2021 by Pengyuan Credit Rating (Hong Kong) Company Ltd. All rights reserved.

30 April 2021 Page | 9 RA02050200016