Weichai’s net profit in 2024 grew 27% YoY to RMB11.4bn, which is in line with our expectation. Net profit in 4Q24 grew 19% YoY to RMB3bn, driven by 28%/13% YoY reduction of S&D / R&D expenses despite a flat (YoY) revenue. Weichai proposed a final dividend of RMB0.347/shr. This, together with the interim dividend, implies a payout ratio of 55% (up from 50% in 2023), which is a record high level. We revise up our 2025E/26E earnings forecast by 9%/11%, mainly due to higher margin assumptions for engine segment. We see several catalysts for Weichai: (1) HDT demand recovery driven by new subsidies; (2) strong growth of engines for data centres; (3) potential re-rating of KION Group (KGX GR, NR). Our SOTP-based TP for A/H is revised up to RMB18.7/HK$18.0. Maintain BUY.

Key highlights in 2024 results:

Strong margin expansion for engine segment. Weichai delivered a total engine sales of 734k units (flat YoY). Exports, which grew 5%, accounted for 9% of total engines sales. The segment revenue was down 2% YoY to RMB59.4bn, due to a slight decrease in blended ASP (as a result of a 8% sales volume decline in HDT engines which carried a higher ASP, in our view). That said, the segment profit surged 35% YoY to RMB10.3bn, driven by a 4.8ppt YoY expansion of segment margin (to 17.5%). We forecast the segment margin to expand to 17.7%/17.8% in 2025E/26E, driven by the recovery of HDT engine demand and strong growth of engines for data centres.

HDT exports accounted for half of total HDT sales. Weichai delivered 118k units of HDTs (1.7% YoY). Exports grew 13% YoY to 59k units (50% of total HDT sales). The segment recorded RMB563mn in profit in 2024, with segment margin of 0.9%.

Forklifts & supply chain solution (KION Group) profit grew driven by margin. The segment profit grew 21% YoY to RMB6bn in 2024. While KION’s latest guidance for 2025E is conservative (adjusted EBIT is expected to be down 5%-21%), we are positive on the medium-term outlook thanks to Germany’s latest approval of the infrastructure investment plan.

Solid margin expansion for agricultural machinery. While the segment revenue growth slowed to 3% in 2H24 from 25% in 1H24, the segment margin continued to expand.

Risk factors: 1) weakness in engine exports; 2) lower-than-expected replacement demand in China; (3) contraction of diesel/gas price ratio.