Weichai Power: Fast and Caterpillar Joint Venture Benefits Long Term Development

Weichai Power announced that it had a 51% shareholding in the company Fast (2010 net profit contribution of 980 million yuan, accounting for 14.4%) and set up a joint venture between Caterpillar and Fast Group to establish Xi'an Shuangte Intelligent Drive Co., Ltd. Strait holds 51% of the shares, Caterpillar holds 45% of the shares, and the remaining 4% of the shares are held by Fast, another shareholder of Fast.

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Short-term profit contribution is limited, but cooperation with Caterpillar deepens the company's medium and long-term development. The joint venture is mainly to digest and absorb Caterpillar's CX series of hydraulic automatic transmission (AT) technology for heavy vehicles, and as Caterpillar's Asian production base to supply automatic transmission and construction machinery parts. The first phase of production of the project will reach 2013, and the full production time will be even later. It will be calculated based on an annual sales income of 10 billion yuan and a net profit rate of 20% after full production. The joint venture will contribute to the net profit of Weichai Power 5.2 Billion yuan, the increase is relatively limited. We prefer Weichai Power and Fast to deepen cooperation with Caterpillar through this joint venture to lay the foundation for future cooperation in engine, transmission and other components of construction machinery. Caterpillar is the world's largest construction machinery company and achieved sales revenue of US$42.6 billion in 2010.

Cooperation does not affect the original heavy-duty transmission business of Fast in China. The joint venture products are heavy-duty hydraulic automatic transmission (AT) products. The domestic heavy truck transmissions are mainly manual, and most automatic transmissions also use the AMT technology route. This joint venture will not affect the original domestic heavy-duty transmission business of Fast.

The Opportunity for Weichai Power in the Globalization of Industry. This cooperation will enable investors and downstream companies to revisit the value of Weichai Power. Benefiting from the substantial increase in sales of domestic heavy trucks, Weichai Power has already possessed the world's largest production base for heavy-duty engines and heavy-duty transmissions. Its cost advantage, R&D strength and stable supply capability far ahead of its competitors; these three advantages are now Caterpillar. Le's emphasis is that there will be other construction machinery in the future. Shipbuilding and even heavy truck companies are attracted to this. With the acceleration of globalization of the industry, Weichai Power's engines, transmissions, and other parts and components are expected to welcome more and more opportunities for overseas matching and cooperation. The company's growth space is expected to open up.

Valuation and recommendations:

It is expected that the company's 2011 and 2012 earnings per share will be 4.93 yuan and 5.81 yuan respectively. The current stock price corresponds to 11 times and 3.3 times for the 2011 A-share PE and PB respectively, and the H-share PE and PB are 9.2 and 2.7 times respectively. Values ​​are at the low end of the industry. Given the strong earnings growth prospects brought by the strong industry position of the company and the development opportunities brought by the downstream extension, we maintain our investment rating for the company.

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