Weichai Power's AIDC Power Business Accelerates Volume Ramp; Gas Engines Become Key Growth Driver for 2027

Overview

This research note is an update by Morgan Stanley following a conference call with company management on June 17. The core conclusion is that Weichai Power's AIDC (AI Data Center) power business is in a rapid volume ramp-up phase, with robust demand for diesel backup power and better-than-expected progress in gas engine prime power. Successful validation of SOFC (Solid Oxide Fuel Cell) would provide further upside potential. The report maintains an Overweight rating with a target price of HKD 47.00, believing that the recent share price pullback presents a buying opportunity.

Core views

The AIDC power business is currently the core growth narrative for Weichai Power. On the demand side, global AI computing capital expenditure remains high, and data center power supply will remain tight in the coming years. On the supply side, Weichai is rapidly expanding capacity: AIDC power engine capacity is expected to reach 5,000 units in 2026, further rising to 8,000-10,000 units in 2027 (including overseas capacity). Diesel backup power is the current foundation. The 2026 shipment guidance remains at 3,500-4,000 units, with actual figures more likely approaching the upper limit of 4,000 units. The target of shipping 1,000 units to the US market appears achievable, and the increasing overseas proportion is driving up the average selling price (ASP) of diesel generators overall. The company's global market share is currently 15-16%, with a medium-term goal of increasing it to 30% within 2-3 years, depending on capacity ramp-up and overseas channel execution. Gas engine prime power is the key growth driver for 2027. The product was originally scheduled for release in late June, followed by customer validation; small-batch deliveries have been advanced from the originally expected 4Q26 to 3Q26. Morgan Stanley expects gas engine shipments of at least 200 units in 2026 and approximately 1,000 units in 2027. Management indicated that pricing will be 5-10% lower than mainstream competitors. Higher-power 5MW+ gas engines are expected to be released in late 2026, validated in 1H27, and shipped in small batches in 2H27. SOFC (Solid Oxide Fuel Cell) is in the early validation stage, but management is confident in the product's competitiveness. Current system costs are approximately twice that of gas turbines, but lifecycle economics may be comparable due to higher efficiency. The breakeven shipment volume is around 100MW, with capacity planned at 30MW in 2026 and 200MW in 2027; production can be rapidly expanded within 2-3 months if orders increase. Regarding traditional businesses, the heavy-duty truck (HDT) market outlook is stable, with total sales expected to remain above 1 million units in 2027, supported by National V replacement demand and exports. The new energy powertrain business has significant growth potential, but current profitability remains weak (margin of 2-3%), primarily meeting internal group demand for heavy trucks and construction machinery, with an internal penetration target rising from 20%+ to 50-60%. In terms of valuation, Morgan Stanley assigns a 13x 2026E P/E multiple to the traditional engine and truck business (higher than the 8-year historical average of 11x), reflecting confidence in the sustainability of exports; it assigns a 90x 2026E P/E multiple to the AIDC business, based on an expected net profit CAGR of approximately 130% for 2026-28.

Analysis framework

This report adopts an analytical framework of "Sum-of-the-Parts Valuation + Business Catalyst Tracking." First, it splits Weichai Power's business into two major segments: traditional engine/truck business and AIDC power business, assigning different valuation multiples to each: the traditional business references the historical P/E median with a moderate premium, while the AIDC business is given a high P/E typical of high-growth tech businesses. Second, the report tracks the realization progress of the AIDC business across four dimensions: capacity, orders, customer validation, and channel execution, with particular focus on milestone nodes for two new products: gas engines and SOFC. This "core profit + high-growth option" valuation approach makes the progress of the AIDC business a key variable affecting overall valuation elasticity.

Methodology notes

• Valuation MethodSOTP Sum-of-the-Parts Valuation

  Sum-of-the-Parts Valuation

  Values different business segments of a company separately and sums them up, suitable for companies with significantly different business attributes and growth stages. In this report, the growth speed and risk characteristics of the traditional engine business and the AIDC power business are vastly different, making SOTP valuation more accurate in reflecting overall value.

• Valuation MethodPE/PEG valuation

  P/E Valuation and PEG Perspective

  Uses P/E to anchor mature businesses to historical medians, while using high P/E to reflect growth expectations for high-growth businesses. The 90x P/E for the AIDC business corresponds to a net profit CAGR of approximately 130%, implying a PEG of about 0.7x, which is a common practice in growth-oriented valuation.

• Industry/Industrial Analysis FrameworkUpstream-Midstream-Downstream Transmission

  Transmission chain: AI Computing Capex → Data Center Construction → Power Equipment Demand

  The implicit analysis chain in the report is: Global AI capex expansion → Accelerated data center construction → Surge in backup/prime power demand. As an upstream power equipment supplier, Weichai is at a critical link in this transmission chain.

• Company Fundamentals and Financial FrameworkEarnings Quality Analysis

  Relationship between Overseas Business Proportion and ASP/Margin

  The report notes that the ASP of diesel generators is rising overall due to the increased proportion of overseas sales (especially in the US), demonstrating the improving effect of business structure optimization on earnings quality.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Weichai Power (2338.HK / 000338.SZ)

  Core Target: Direct beneficiary of AIDC power demand; leading layout in gas engine and SOFC technologies

  Strengths

  Global market share of 15-16% in diesel backup power with room for improvement; better-than-expected progress in gas engines with competitive pricing; leading SOFC technology reserve; obvious traditional advantage in heavy truck engines

  Weaknesses

  New energy powertrain margin only 2-3%; SOFC cost still twice that of gas turbines; uncertainty in overseas channel execution

  Risks

  AIDC shipments to the US falling short of expectations; loss of market share in engines/heavy trucks

Key data

• Target PriceHKD 47.00Implies 22% upside from the closing price of HKD 38.52 on June 17
• 2026 Diesel Backup Power Shipment Guidance3,500-4,000 unitsMore likely to approach the upper limit of 4,000 units; 1,000 units achievable in the US market
• 2026 Gas Engine Shipment ExpectationAt least 200 unitsSmall-batch delivery advanced from 4Q to 3Q26
• 2027 Gas Engine Shipment Expectation~1,000 unitsPricing 5-10% lower than mainstream competitors
• AIDC Power Engine Capacity5,000 units in 2026 → 8,000-10,000 units in 2027Including overseas capacity
• SOFC Capacity Plan30MW in 2026 → 200MW in 2027Can rapidly expand production within 2-3 months
• SOFC System CostApprox. 2x that of gas turbinesBut lifecycle economics may be comparable due to higher efficiency
• SOFC Breakeven Shipment Volume~100MWCommercialization pace and validation feedback are key observation points
• Diesel Generator Global Market Share15-16%Medium-term target of 30% (within 2-3 years)
• New Energy Powertrain Internal Penetration RateCurrent 20%+, Target 50-60%Margin of 2-3%, still relatively weak
• 2026-28 AIDC Business Net Profit CAGR~130%Core assumption supporting the 90x P/E valuation
• Traditional Business Valuation Multiple13x 2026E P/EHigher than the 8-year historical average of 11x, reflecting confidence in export sustainability
• EPS (RMB)2026E 1.53 / 2027E 1.97 / 2028E 2.31Based on Morgan Stanley ModelWare framework
• Net Profit (Million RMB)2026E 13,359 / 2027E 17,221 / 2028E 20,124

Impact & implications

The research report believes that Weichai Power is at a turning point where its traditional business is stable while its new AIDC business is rapidly ramping up volume. The global demand boom for AIDC power provides a favorable window for the company's capacity expansion and product upgrades, while the accelerated delivery of gas engines and potential pricing advantages mean that 2027 is expected to see significant revenue and profit contributions. SOFC, as a longer-term technology reserve, will open up larger market space if validation is successful. However, the new energy powertrain business is currently in an investment phase with low margins, contributing limitedly to overall profitability. The report highlights that short-term focus should be on progress in four dimensions: delivery execution, product certification, customer validation, and overseas channel expansion.

Risks

• Slower-than-expected AIDC shipments to US customers
• Loss of market share in engines/heavy trucks
• SOFC commercialization progress falling short of expectations
• Ineffective execution of overseas channel expansion

What to watch

• Delivery execution and overseas channel expansion for diesel backup power
• Progress in gas engine product certification and customer validation
• SOFC customer test feedback and commercialization pace
• National V replacement policies and export demand in the heavy truck market
• Progress in increasing internal penetration rate of new energy powertrains