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Pengyuan Credit Rating (Hong Kong) Co.,Ltd Corporate China 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 Weichai Power Co., Ltd. (Weichai). The outlook is stable. Outlook Stable ▪ The rating reflects Weichai’s position as the leading domestic heavy-duty truck 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 vehicles and components, mainly powertrains such as engines, gearboxes and axles, Business Profiles ...........................3 forklift trucks 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 30 April 2021 Page | 1 RA02050200016 Corporate China 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 Sinotruk (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 transmission (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. 30 April 2021 Page | 2 RA02050200016 Corporate China 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.
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