Pengyuan International Assigns ‘BBB+’ Rating to Weichai Power Co., Ltd.; Outlook Stable


30 Apr 2021

    HONG KONG, 30 April 2021. Pengyuan International has assigned a first-time global scale long-term issuer credit rating (LTICR) of ‘BBB+ to Weichai Power Co., Ltd. (Weichai) with a stable outlook. 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 strong cash flow.  On the other hand, Weichai’s rating is constrained by its relatively high exposure to the cyclical heavy-duty truck market in China.

    Weichai primarily engages in the development and manufacturing of vehicles and components, mainly powertrains such as engines, gearboxes and axles, forklift trucks and the provision of warehouse technology services. In 2020, 24% of its revenue came from engines, 43% from automobiles and automobile components and 33% from intelligent logistics.

    KEY RATING RATIONALES
    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.
    Increasing business diversification. The Company has made significant efforts in diversifying its business in recent years. The Company has increased its net profit contribution 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 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 target companies, overestimating the synergy effects brought to the Company and lowering its cash flow generating ability.

    RATINGS OUTLOOK
    The stable outlook for Weichai reflects our expectation that the Company will continuously maintain its leading market position in the Chinese powertrain 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 decrease in market share for key products; and 2) a deteriorated financial profile on a prolonged basis, which might be caused by aggressive acquisitions.
    Note: ratings mentioned above are unsolicited.

    ANALYSTS CONTACT
    Primary Analyst
    Simon Lee, CFA
    +852 3615 8346
    simon.lee@pyrating.com
    Secondary Analyst
    Vincent Ha, CFA
    +852 3615 8307
    vincent.ha@pyrating.com
    Committee Chair
    Ke Chen, PhD
    +852 3615 8316
    ke.chen@pyrating.com
    MEDIA ENQUIRIES
    Charley Lui
    +852 3615 8296
    charley.lui@pyrating.com
    RATING SERVICES ENQUIRIES
    Allen Wei
    +852 3615 8324
    allen.wei@pyrating.com
    Date of Relevant Rating Committee: 23 April 2021
    Additional information is available on www.pyrating.com


    Related Criteria
    General Corporate Rating Criteria (15 March 2018)
    Corporate Financial Adjustments and Ratio Definitions (7 May 2018)


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    Unsolicited ratings – non-participative rating – not disclosed
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