Summary of China Machinery 3Q25 Preview Industry Overview - The report focuses on the **China machinery industry**, specifically construction machinery and trucks, with an emphasis on sales volume and profitability trends for 3Q25 [1][7][16]. Key Points Sales Volume Trends - **Domestic Sales Growth**: - Domestic sales volume for heavy-duty trucks (HDTs) increased by **81% year-over-year (yoy)** at the wholesale level and **65% yoy** at the retail level, indicating strong channel inventory health [5]. - Excavator sales volume also saw a surprising increase of **18% yoy**, surpassing earlier expectations of **5-10%** growth [5][14]. - Small machines drove the growth in excavators, with a **26% yoy** increase, while medium-to-large machines faced a **2% yoy** decline [5][14]. - **Export Trends**: - Export sales for HDTs grew by **23% yoy**, with strong performance in regions like Africa, the Middle East, and Southeast Asia [9][14]. - Overall export growth remained strong across most machinery categories, except for mobile cranes and aerial work platforms (AWPs) [14]. Profitability Insights - Despite solid top-line growth, profitability is expected to be under pressure due to: - Unfavorable foreign exchange impacts, particularly affecting companies like Hengli and Dingli [7][17]. - A negative product mix impacting Sany Heavy [7][17]. - Increased competition affecting Weichai [7]. Earnings Forecasts - The report anticipates that **4 out of 6** coverage companies will report solid top-line growth, primarily in double digits, led by Hengli [7]. - EPS estimates for the coverage companies have been revised downwards by **-7% to +6%** based on year-to-date developments [1][8]. Stock Ratings and Recommendations - **Buy Ratings**: - Weichai and Dingli are maintained as Buy rated due to their potential from German fiscal expansion and exposure to developed markets [8]. - **Neutral Ratings**: - Most construction machinery stocks, including Sany, Hengli, and Lonking, are rated Neutral as their positive outlooks are already reflected in current valuations [8]. - **Sell Rating**: - Sinotruk is rated Sell due to concerns over overestimated profitability amid pressures from electric HDTs and unfavorable export conditions [8]. Additional Insights - The report highlights a notable shift in the powertrain mix for trucks, with LNG penetration recovering and electrification accelerating, while diesel HDTs reached a historical low share [5]. - The construction machinery sector is experiencing intensified competition, particularly in the rental channel, which may affect future sales dynamics [14]. Conclusion - The China machinery industry is showing robust sales growth, particularly in domestic markets, but faces challenges in profitability due to external factors and competitive pressures. The outlook for individual companies varies, with specific recommendations based on their market positions and expected performance in the upcoming quarter.

Weichai Power (000338.SZ) Conference Call Summary Industry and Company Overview - **Company**: Weichai Power, a leading manufacturer of internal combustion engines in China, holds approximately 18% market share in the diesel engine segment, with operations across commercial vehicles, construction machinery, agricultural equipment, marine, and power generation [doc id='15'][doc id='16']. Key Market Concerns Addressed 1. **HDT Cyclical Outlook**: - Management believes the heavy-duty truck (HDT) market is in the early-to-mid stage of an upcycle, expecting annual domestic sales to remain between 600k to 800k units over the next 3-5 years [doc id='6'][doc id='2']. - For 2025, management is optimistic about exceeding 1 million units in industry sales volume, supported by strong year-to-date performance [doc id='6']. - Concerns regarding a potential scaling back of equipment programs into 2026 are mitigated by a large remaining installed base of China IV HDTs (>400k units) [doc id='6']. 2. **Impact of Electrification**: - The company’s earnings are now less dependent on the HDT market, with HDT engines' net profit contribution declining from 60% to approximately 40% in 1H25 [doc id='9']. - Weichai's exposure to diesel HDT engines is limited to 15-20% of sales volume, with a net profit contribution of less than 6% of total company net profit [doc id='9']. - The impact of electrification is viewed as manageable, with the e-powertrain business expected to cushion the contraction in diesel engine sales [doc id='9']. 3. **Engine Market Share Dynamics**: - Management noted a recovery in market share during July-August 2025, returning to historical averages due to improved sales and product mix [doc id='13']. - The company aims to maintain gross profit margins (GPM) around 27% despite pricing competition [doc id='13']. Strategic Growth Pillars - Weichai is diversifying its engine portfolio, increasing contributions from large-bore engines and off-highway engines, which now account for about 20% of net profit [doc id='9']. - The company is also focusing on its new energy powertrain business, projecting sales of RMB 4 billion for the year [doc id='9']. Shareholder Return Policy - Management indicated potential for increased shareholder payouts in 2025, considering an expansion of the share buyback program to H-shares [doc id='12']. - The company is committed to improving total shareholder returns, supported by a strong free cash flow profile [doc id='16']. Financial Projections and Valuation - Weichai's revenue is projected to grow from RMB 215.7 billion in 2024 to RMB 266.3 billion by 2027 [doc id='21']. - The company maintains a strong net cash position, approximately 25% of its market cap, which supports its commitment to shareholder returns [doc id='16']. - The target price for Weichai's H-shares is set at HK$21.00, reflecting an upside potential of 48.9% [doc id='21']. Risks and Challenges - Key risks include slower-than-expected macroeconomic activity, weaker global economic growth, and the shift towards higher electrification in powertrains [doc id='20']. Conclusion - Weichai Power is positioned to benefit from a favorable cyclical outlook in the HDT market, a diversified engine portfolio, and a commitment to shareholder returns, making it a compelling investment opportunity despite the challenges posed by electrification and market dynamics [doc id='16'][doc id='21'].