4Q23 net profit +58% YoY; Payout increased to 50%; Higher earnings forecast on margin

Investment Rating - The report maintains a "BUY" rating for Weichai Power, with a revised target price of RMB20.40, up from RMB17.80, indicating a potential upside of 25.4% from the current price of RMB16.27 [2][3]. Core Insights - Weichai Power's net profit for 2023 increased by 84% year-on-year to RMB9 billion, aligning with earlier profit forecasts [2]. - The company declared a final dividend of RMB0.293 per share, raising the payout ratio to 50%, up from 45% in 2022 [2]. - The positive outlook is supported by factors such as the replacement cycle, increased sales of gas trucks, and export growth, which are expected to drive sales growth in the heavy-duty truck (HDT) industry in 2024 [2][3]. Financial Performance Summary - In 4Q23, Weichai's net profit rose 58% year-on-year to RMB2.5 billion, driven by a 20% increase in revenue to RMB53.6 billion and a gross margin expansion of 3.3 percentage points to 23.7%, the highest since 4Q18 [2][6]. - The engine segment saw a revenue increase of 55% year-on-year to RMB60.8 billion, with segment profit surging 1.7 times to RMB7.7 billion due to a 5.5 percentage point margin expansion [2][3]. - The automobiles and components segment turned profitable in the second half of 2023, recording a profit of RMB610 million compared to losses in previous periods [2]. - The forklift and supply chain solutions segment reported a tenfold increase in profit to RMB4.9 billion in 2023, reflecting a recovery [2][3]. - Agricultural machinery revenue decreased by 9% year-on-year to RMB16.2 billion, but the segment margin improved by 1 percentage point to 4.1%, resulting in a 23% increase in segment profit [2]. Earnings Forecast - The report revises the earnings forecast for 2024 and 2025 upwards by 19% and 20%, respectively, primarily due to higher margin assumptions across various segments [2][3]. - Revenue projections for 2024E and 2025E are set at RMB236.3 billion and RMB250.1 billion, respectively, with expected adjusted net profits of RMB12.1 billion and RMB13.1 billion [3][18]. Valuation - The SOTP-based target price for Weichai Power is set at HK$22/RMB20.4, reflecting a valuation methodology based on EV/EBITDA multiples [10]. - The report highlights that Weichai's core business is valued at an EV/EBITDA multiple of 6.5, contributing significantly to the overall equity value [10].