Weichai Power owns the gold industrial chain of the powertrain, with higher efficiency and greater economies of scale. In addition, the heavy-duty truck business of Shaanxi Automobile Group makes Weichai Power's vertically integrated business model unique, which enables Weichai Power to have stronger cost control and internal absorption capabilities. However, domestic heavy truck manufacturers are beginning to gradually reduce their reliance on professional engine manufacturers. Declining customer resources may not be good news for Weichai Power.
Weichai Power's performance in the second quarter will continue its weak performance in the first quarter. The sales volume of the heavy truck industry in the first five months was approximately 320,000, a year-on-year decrease of 33.0%. However, the welcome change is that the decline rate of monthly heavy chain sales has been narrowing. In May, the industry sales and Shaanxi Automobile Group's sales growth were -10.2% and -4.2% respectively, which was better than the -28.4% and -22.5% growth in April. We expect the trend of a mild pick-up in the growth rate of the ring will continue. In addition, we observed that inventory levels of manufacturers and channels are declining. The current heavy truck inventory is maintained at the sales level of 1-2 months, which is better than the inventory level of about 3 months in the fourth quarter of last year. We updated our EPS forecast for 2012/13/14 to RMB2.54/2.71/2.94, which is approximately 20% lower than our consensus forecast.
We expect the company's 2012 heavy truck industry sales will decline 15% year-on-year, which is in line with the industry's overall level. The forecast based on SWS's quarterly GDP growth is 8.1%, 7.8%, and 8.1% ad8.5%, respectively. We expect China's heavy truck sales to rebound in the second half of this year. Combining the growth rate of industrial added value and M2 growth helps to determine the turning point of heavy truck sales. We believe that the monthly growth rate of industrial added value is a better indicator of the inflection point of pre-judgment for heavy truck sales, and the growth rate of M2 is a better leading indicator. Based on the forecast of the quarterly growth trend of GDP growth this year and the expectation of the relaxation of macroeconomic policy, the growth of industrial added value and the growth of M2 are very important.
After the benchmark interest rates for deposits and loans were lowered by 25 basis points each on June 8, the probability of introducing more targeted easing policies to ensure a soft landing for the economy is increasing, which will provide strong support for cyclical stocks. Based on our adjusted earnings forecast, the current price/earnings ratio for 2012/13/14 is 10.5x, 9.8x and 9.1x, respectively; the 2012/13/14 P/B ratios are 1.34x, 1.17x and 1.04x respectively; Both the P/E and P/B ratio are significantly lower than the company's historical average, 12.2x P/E and 3.3x P/B. During the January-February period of this year, due to the stimulation of policy relaxation, Weichai Power's performance overcame the market, and its peak valuation reached 1.8x P/B. We maintain our target price of HK$43.11 as we upgrade our rating to buy by more than 20%.
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