Weifu High-Technology:HDT recovery drives Weifu's earnings improvement but recovery may be unsustainable

Lifting EPS estimates on better-than-expected HDT industry recovery

    In Jan-Sept 2016, China's heavy-duty truck (HDT) industry sales reached 490k units, up20.4% YoY, with the growth beating our forecast of 5% (made at the beginning ofthe year). Therefore, we are raising our 2016-18E sales for the industry 17%/17%/19%and raising our 2016-18E EPS 3%/9%/13%. We are lifting our PT 20% to Rmb24, andmaintain our Neutral rating, since: 1) Weifu's shares have gained c17% over the pastsix months, which we believe factors in the better-than-expected recovery of theindustry and the company's earnings; and 2) we believe the rapid growth of the HDTindustry looks unsustainable.

    Rapid growth of the HDT industry may not be sustainable

    Given solid support from replacement- and logistics-driven demand, we estimateChina's HDT sales should rise 20% YoY to reach 660k units in 2016E. However, giventhat: 1) ongoing sluggishness in China's economy may lead to a delay in the recovery oflogistics-driven demand; and 2) the property market control measures recently rolledout by the government may affect property investment activity, which has just begun torecover, we believe the rapid growth of the HDT market may be unsustainable andestimate that HDT industry sales will only rise a respective 5%/5% YoY to 690k/730kunits in 2017-18E.

    China V takes effect in 2017; the upgrade may have a limited impact on Weifu

    According to the Ministry of Environmental Protection's existing regulations, heavy-dutydiesel engines will be subject to China V standards as of 1 July 2017 (an upgrade fromthe current China IV standards). The upgrade from China IV to V will not changeemission standards for particulate matter (PM) but the emission value for nitrogenoxides (NOx) will be lowered c43%. We believe the upgrade does not require additionalinstallation of other devices and only requires to modify and upgrade high-pressurecommon rail (HPCR)+SCR for heavy-duty diesel engines and change HPCR+DOC+POCto HPCR+SCR for light-duty diesel engines.

    Valuation: Raising PT to Rmb24, maintain Neutral

    Based on our higher earnings estimates, we are lifting our PT to Rmb24 from Rmb20,implying 12.2x 2017E PE, at the low end of its past 5-year average PE range (10-25x).Our new DCF-based PT assumes 7.3% WACC (from 7.5%) and 5% terminal growth(from 3%).