In the first half of the year when the heavy truck market faced growth pressure, Weichai Power (000338.SZ, 02338.HK) still delivered an impressive mid-year report card.

Recently, Weichai Power released its mid-year report for 2024. During the reporting period, the company achieved a total operating income of 112.49 billion yuan, a year-on-year increase of 6.0%; the net profit attributable to the parent company was 5.9 billion yuan, a year-on-year increase of 51.4%.

In the past two years, Weichai Power has been seizing the opportunity of the "oil to gas" transition in heavy trucks, and its natural gas heavy truck engines and complete vehicle business have become a significant driver of performance. With the domestic diesel heavy truck market share falling below 50%, can Weichai Power maintain its competitiveness in the natural gas heavy truck sector in the future? Can it also gain more share in the rapidly growing new energy heavy truck market?

Natural Gas Heavy Trucks Become a New Driver of Performance Growth

Weichai Power's main business covers powertrain systems, commercial vehicles, intelligent logistics, agricultural equipment, and other sectors. Among them, the powertrain, complete vehicle and key component business and intelligent logistics business are the two main pillars of Weichai Power, achieving revenues of 46.684 billion yuan and 44.192 billion yuan respectively in the first half of 2024, accounting for 41.5% and 39.29% of the total revenue, with year-on-year increases of 5.29% and 4.73%.

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The year 2023 was the explosive starting year for natural gas heavy trucks, and the growth of Weichai Power's powertrain, complete vehicle and key component business in the past two years is inseparable from the rapid increase in the penetration rate of natural gas heavy trucks. According to Wind data, in 2021, the sales volume of natural gas heavy trucks was only about 60,000 units, with a market share of just 4.2%; by 2022, the gasification rate of heavy trucks had risen to 7.8%; in 2023, the sales volume of natural gas heavy trucks reached 152,000 units, with a gasification rate of heavy trucks soaring to 24.8%; by the first half of 2024, the sales volume had already reached 109,000 units, with a year-on-year increase of up to 104%, and the gasification rate of heavy trucks broke through 35%.

The sudden surge in the popularity of natural gas heavy trucks in the past two years, with a skyrocketing penetration rate, has caught many diesel engine companies and heavy truck manufacturers off guard. Weichai has benefited from its diversified business strategy, having early reserves in natural gas-related products, which has allowed it to quickly introduce products to keep up.

The annual report shows that in 2023, Weichai Power's powertrain business achieved a high-speed growth of 52.03% year-on-year, selling 122,000 natural gas heavy truck engines throughout the year, with a market share increase of 6 percentage points to 65%; it sold 116,000 heavy trucks, of which more than 26,000 were natural gas heavy trucks, a year-on-year increase of 416%, accounting for 22.4%.

In the first half of 2024, the growth rate of Weichai's natural gas heavy truck engines and complete vehicle sales slowed down, but the performance was still commendable. As of the end of June, the company's domestic market share of natural gas heavy truck engines was 63.1%; it sold 63,000 heavy trucks, of which 17,000 were natural gas heavy trucks, a year-on-year increase of 134.3%, and the proportion increased to 27%.

What will be the future trend of the natural gas heavy truck market?1. The price gap between natural gas and diesel may gradually narrow

The main driving factor behind the "oil-to-gas" trend for heavy-duty trucks in the past two years has been the price difference between diesel and natural gas. Although the purchase cost of natural gas trucks is higher than that of diesel trucks, the lower fuel prices for natural gas compared to diesel have resulted in significantly lower operating costs for natural gas trucks. A rough estimate suggests that the higher cost at the time of purchase compared to diesel trucks can be recouped in about half a year.

The continued growth in sales of natural gas trucks depends on whether the price gap between diesel and natural gas can be maintained. Natural gas prices experienced a significant drop in the first half of 2023, with the oil-gas price difference exceeding 4 yuan/kg in July, August, and September. In July of this year, the oil-gas price gap narrowed compared to the same period last year, maintaining at around 3 yuan/kg.

According to the "Natural Gas Market Report (Q3 2024)" released by the International Energy Agency (IEA), global liquefied natural gas (LNG) production performed poorly in the second quarter, with geopolitical tensions exacerbating price volatility. In recent months, prices in all major markets have increased, reflecting a tightening of supply and demand fundamentals. As the heating season begins in October, the increase in demand will likely drive up natural gas prices.

At the same time, diesel consumption in the first half of 2024 was 103.8208 million tons, a year-on-year decrease of 3.52%. Slow progress in industries such as mining and infrastructure, as well as the substitution of logistics by LNG trucks, has dragged down diesel demand in the first half of the year, with a noticeable decline in consumption. The weakening demand for refined oil products, coupled with relatively abundant supply, has exerted a significant suppressive effect on gasoline and diesel prices, leading to weaker pricing.

The tight supply and demand for natural gas, combined with weaker diesel prices, have already narrowed the oil-gas price gap in the second quarter of this year compared to the same period last year. If the oil-gas price gap continues to narrow, it will directly affect the willingness of end-users to consume natural gas trucks.

2. "Trade-in" policy does not subsidize natural gas trucks

On July 31, 2024, the Ministry of Transport and the Ministry of Finance issued a "trade-in" policy for operational trucks, supporting the early scrapping of diesel trucks with emissions standards below the national three standard and providing subsidies for the purchase of new trucks with the national six emissions standard or new energy trucks. The implementation period of this subsidy policy will last until December 31, 2024.

The subsidy is only available for diesel and new energy trucks, with natural gas trucks not included in the subsidy. The maximum subsidy for scrapping old trucks and updating to new energy trucks can reach 140,000 yuan (early scrapping subsidy of 45,000 yuan + new purchase of new energy truck subsidy of 95,000 yuan).

Against the backdrop of a narrowing oil-gas price gap and high subsidies for new energy trucks, the penetration rate of natural gas trucks is expected to peak, while the sales of new energy trucks are expected to increase rapidly. According to Wind data, new energy truck sales in the first half of 2024 reached 27,700 units, a year-on-year increase of 140.9% compared to 11,500 units in the same period of 2023.Opportunities and Challenges for New Energy Heavy Trucks

Compared to fuel-powered vehicles, natural gas heavy trucks still have many shortcomings. For instance, the explosive power of natural gas engines is not as strong as that of fuel engines, especially when climbing hills or requiring rapid acceleration, there might be a feeling of insufficient power. Moreover, natural gas engines are still in the technological iteration phase, with high failure rates and high maintenance costs.

However, as the price gap between oil and gas narrows, the competition for natural gas heavy trucks in the future will shift to a comparison of product performance.

In contrast to manufacturers that have only recently started to focus on natural gas engines, Weichai Power has been deploying natural gas engine technology for nearly 20 years, giving it a strong competitive advantage in terms of technological maturity and product performance.

In late May of this year, Weichai released three new natural gas engines with different displacements, namely 13L, 15L, and 17L. The Weichai WP17NG engine has a displacement of 16.6L, with a maximum power of 700 horsepower and a peak torque of 3200 Newton meters. This data is already close to that of diesel engines and represents a leapfrog breakthrough in the field of natural gas engines, solving the problem of insufficient power in mountainous or highland areas that require climbing. With competitive products, Weichai's market share in the natural gas heavy truck market is expected to further increase.

The future demand for new energy heavy trucks is on the rise. Weichai Power has systematically deployed new energy technologies, including hydrogen fuel, in this field. In the first half of 2024, the sales of new energy heavy trucks reached 2,840 units, doubling year-on-year.

However, the new energy heavy truck market is still in a stage of simultaneous development of multiple technological paths, and the market's recognition of different technologies and brands has not yet formed a consensus. In addition to traditional heavy truck manufacturers like Weichai, automakers such as Yutong, BYD, and Remote (Geely) are vigorously developing new energy heavy trucks with mature three-electric systems. Traditional engineering vehicle manufacturers like Sany and XCMG are also heavily investing in the research, development, and design of new energy heavy trucks.

Weichai Power has not yet formed a strong competitive edge in the field of new energy heavy trucks. It urgently needs to strengthen research and development in the future, launching new energy heavy truck products that are lightweight, have long endurance, and are intelligent, in order to gain more of the new energy heavy truck market.