The Chinese company powering through macro headwinds

As most Chinese companies struggle through broad economic uncertainty global supply chain woes, one vehicle engine giant has been tipped to hold strong.

According to S&P Global Ratings, Weichai Power, which is listed on both the Hong Kong and Shenzhen stock exchanges, will likely deliver steady earnings and maintain its net cash position in 2022.

The ratings agency says this is despite a drop in Chinese demand for heavy-duty trucks and construction machinery, on which it relies for the majority of its profits.

“Weichai should be able to absorb the hit from lower demand in its biggest market (heavy-duty trucks),” S&P said in a recent public report.

“This is because of the solid growth prospects of its German subsidiary Kion Group AG, potential to gain market share in the China engine market, and its expanded product offerings.

“We anticipate that structural growth in global e-commerce development and demand for more efficient supply chain solutions will likely underpin about 10% top-line growth for Kion in 2022, following a more than 20% revenue increase and 30% order hike during 2021.”

S&P has previously determined that China heavy-duty truck sales would drop by about 20% to around 1.1 million units this year, after a replacement and policy-driven boom over the pat give years. However, the agency believes Weichai will further improve its share of the domestic engine market and continue to outperform its competitors.

“Despite a decline of more than 10% in overall HDT market sales in China, Weichai still managed to increase its HDT engine sales … in 2021,” S&P said.

“We expect the company’s comprehensive business portfolio and decent competitive position to support revenue of Chinese renminbi (RMB) 195 billion-RMB205 billion over 2022, largely on par with revenue during 2020-2021.

“We believe that Weichai could maintain its strong balance sheet with prudent financial management over the next two years.

“The company generated over RMB8 billion in free operating cash flow in 2021 even though accelerated payments to suppliers to mitigate supply chain disruptions led to working capital outflow and lower operating cash flow.

“This, in addition to a RMB14 billion equity placement, has helped the company reach a net cash position last year, compared with a debt-to-EBITDA ratio of 0.6x in 2020.

“In our view, Weichai’s strong financial standing gives it more cushion against macro uncertainties.”