J.P. Morgan maintains an Overweight rating on Weichai Power A/H shares, believing the AIDC thesis is still playing out and that the pullback offers a more attractive entry point.

Overview

This report focuses on Weichai Power A/H shares' AIDC growth thesis, management updates, and a 1H26 earnings preview. J.P. Morgan believes the recent 20%-25% stock price pullback from the May peak mainly reflects investor concerns over 1H26 deliveries, weak domestic ICE heavy-duty truck sales, and AIDC oversupply; however, data center power demand, order backlog, U.S. market entry, gas engine certification, and capacity expansion all indicate the company's strategic execution remains on track.

Core views

The core views are: first, the upcycle in power demand behind AIDC is structural, with rack power density rising from around 10kW historically to about 50kW currently and potentially exceeding 600kW by the end of this decade, driving a reassessment of power equipment bottlenecks and capital expenditure; second, U.S. data center power demand is expected to grow at about a 22% CAGR, with supply still lagging orders, making oversupply more likely a post-2030 risk; third, leveraging its diesel and gas engines, domestic supply chain, U.S. customer validation, and flexible sales model, Weichai is positioned to expand share in both AIDC backup and prime power demand; fourth, short-term concerns around 1H26 may be overstated, with high growth in parent company revenue and data center product revenue providing a positive read-through.

Analysis framework

The report combines a top-down view on the AIDC industry cycle, expert discussions with JPM European capital goods analyst Phil Buller, company management updates, a 1H26 earnings preview, peer valuation comparisons, and DCF valuation. At the industry level, it focuses on data center architecture upgrades, the gap between orders and deliveries, supply bottlenecks, and pricing power; at the company level, it focuses on U.S. EPA certification, customer orders, capacity planning, product gross margins, after-sales service value, and read-through from parent company operations.

Methodology notes

• Valuation methodsDCF valuation

  Using discounted cash flow to determine A/H share target prices

  The June 2027 target price of Rmb49 for A-shares and HK$52 for H-shares are both based on DCF. Key assumptions include WACC of 8.1%, cost of equity of 8.6%, beta of 0.9x, cost of debt of 5%, tax rate of 25%, target debt-to-capital ratio of 10%, and terminal growth rate of 3%, with a 5% discount applied to A/H valuations.

• Industry cycle analysisAIDC power equipment supply-demand framework

  Using data center power density, orders, deliveries, and supply bottlenecks to judge cycle sustainability

  The report believes AIDC power demand is driven by architecture upgrades and grid bottlenecks, and that current order growth and delivery gaps support suppliers' pricing power, with genuine oversupply risk skewed more toward after 2030.

• Company fundamental validationManagement update and order pipeline validation

  Validating company execution through product certification, shipment guidance, capacity, and customer orders

  Management updates show that the 2026 AIDC shipment guidance of 3,500-4,000 units is still on track, U.S. certification of the 2.5MW gas engine is proceeding as planned, and gas engine orders in 2027 along with ramp-up of the 5.5MW model provide clues for subsequent growth.

• Relative valuationAIDC power and machinery peer comparison

  Comparing valuations across AIDC power equipment, engine OEMs, turbine components, and machinery sectors

  The report presents P/E, EPS growth, ROE, P/B, share price performance, and target price upside for Weichai and relevant global and Chinese equipment companies to support its relative attractiveness across AIDC growth and traditional machinery sectors.

Asset mapping & comparison

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

• Weichai Power-A (000338.SZ / 000338 CH)

  Core covered asset, A-share listing

  Strengths

  AIDC shipments and gas engine product rollout are progressing, while the traditional engine business still provides a stable profit base, and the target price implies substantial upside.

  Weaknesses

  In the short term, it is affected by weaker domestic ICE heavy-duty truck and LNG truck demand, and investors worry that 1H26 deliveries may miss expectations.

  Comparison

  The table shows FY27E P/E for A-shares at about 11.8x, lower than some global leaders in AIDC power equipment and turbine equipment, while target price upside is high.

  Risks

  Heavy-duty truck recovery slower than expected, market share gains weaker than expected, weaker-than-expected Kion performance, or delays in AIDC deliveries or certification.

• Weichai Power-H (2338.HK / 2338 HK)

  Core covered asset, H-share listing

  Strengths

  Shares the same AIDC growth, order, and margin thesis as the A-shares, with the HK$52 target price implying about 75% upside.

  Weaknesses

  Also affected by cyclical businesses and market sentiment, while H-share performance may additionally be influenced by Hong Kong market liquidity and risk appetite.

  Comparison

  The table shows FY27E P/E for H-shares at about 12.5x; although share price performance has been strong year to date, the report still views it as attractive after the pullback.

  Risks

  The AIDC cycle sustainability being disproven, slower-than-expected overseas customer onboarding, weaker-than-expected gross margins, and intensifying industry competition.

• AIDC diesel and gas engine business

  Main driver of the company's growth thesis

  Strengths

  Diesel backup engines contribute near-term shipments, while gas engines have higher gross margins and are progressing through U.S. certification; 2.5MW is the mainstream solution, and 5.5MW is expected to ramp in 2027.

  Weaknesses

  U.S. certification and customer validation still require time, and a second-half-weighted delivery schedule may create short-term earnings volatility.

  Comparison

  The report believes leading suppliers benefit from order backlog and supply bottlenecks, showing stronger profit resilience than the oversupply scenario feared by the market.

  Risks

  Failed customer validation, delays in EPA certification, competitors expanding capacity faster than expected, and a slowdown in data center capital spending.

• SOFC and new energy solutions

  Long-term growth optionality

  Strengths

  Capacity plans of 30MW in 2026 and 200MW in 2027; if demand strengthens, investment could accelerate and potentially open up overseas prime power applications.

  Weaknesses

  Not expected to be a major profit contributor over the next few years, with meaningful financial impact only after scaling up.

  Comparison

  Compared with diesel and gas engines, SOFC is more of a long-term technology reserve and valuation option.

  Risks

  Commercialization progressing more slowly than expected, insufficient cost declines, competition among technology routes, and uncertainty in customer adoption.

• Traditional heavy-duty truck engine business

  Stable profit base and source of cyclical risk

  Strengths

  Weichai is a leading heavy-duty truck engine supplier with about 40% domestic market share, and parent company operating data show continued growth in powertrain and energy businesses.

  Weaknesses

  Domestic ICE heavy-duty truck and LNG truck sales were weak in May-June, which can easily affect short-term earnings expectations and valuation sentiment.

  Comparison

  The market is shifting from a cyclical engine story toward an AIDC and new energy growth platform narrative, but the traditional business still affects short-term volatility.

  Risks

  Heavy-duty truck volume recovery falling short of expectations, industry price competition, and market share gains below expectations.

Key data

• A-share rating and target priceOverweight; target price Rmb49.00; current price Rmb24.29Target price horizon is June 30, 2027, implying about 102% upside from the current price.
• H-share rating and target priceOverweight; target price HK$52.00; current price HK$29.66Target price horizon is June 30, 2027, implying about 75% upside.
• AIDC 2026 shipment guidance3,500-4,000 unitsManagement updates indicate progress remains in line with full-year guidance, with shipments more weighted toward the second half.
• AIDC-related capacity target8,000-10,000 units by end-2027Flexible production lines can support both diesel and gas products.
• Gas engine gross marginAbout 40%-50%Higher than diesel backup engines, supporting product mix improvement.
• Diesel backup engine gross marginAbout 35%-40%Still the main near-term volume base for AIDC shipments.
• SOFC capacity plan30MW in 2026; 200MW in 2027Limited short-term profit contribution, but management believes breakeven can be reached at 100MW.
• After-sales service lifecycle value target20%-30%Management expects service and parts revenue to increase as the installed base expands.
• U.S. data center power demand growthAbout 22% CAGRUsed by the report to support a multi-year demand cycle view for AIDC power equipment.
• Supply-demand gap exampleAbout 55GW delivered versus about 100GW of new orders last year; about 64-65GW delivered versus 110-120GW of new orders this yearBased on this, Phil Buller believes order backlog may continue to expand, supporting leading players' pricing power.
• Parent company 1H26 revenueMore than Rmb200B, up 22% year-on-yearThe report sees this as a positive read-through for the listed Weichai Power entity.
• Parent company data center product revenueUp 140% year-on-yearShowing acceleration in strategic growth businesses.
• 1H26 profit expectation2Q and 1H26 profit up 12%-15% year-on-yearThe report believes market expectations are too low, leaving room for upside on margins.
• Current valuationAbout 12x FY27E P/E; current dividend yield about 4%The report believes the post-pullback valuation is attractive given the multi-year growth path.

Impact & implications

From an investment perspective, the report repositions Weichai from a traditional cyclical heavy-duty truck engine company to a multi-year growth platform driven by AIDC and new energy. In the short term, weak domestic ICE heavy-duty truck and LNG truck sales may weigh on 2Q26 sentiment, but if AIDC orders, U.S. certification, 2026 shipments, and margins continue to deliver, the share price pullback may provide an opportunity to rebuild positions. Over the medium to long term, after-sales service, gas engines, SOFC, and overseas prime power applications could expand the profit pool and reinforce valuation re-rating potential.

Risks

• Heavy-duty truck sales recovery is slower than expected.
• Market share gains are weaker than expected.
• Kion performance is weaker than expected.
• AIDC demand or data center capital spending falls short of expectations.
• U.S. EPA certification, customer validation, or initial shipments are delayed.
• Industry capacity expansion causes supply to catch up with demand earlier than expected, weakening pricing power and gross margins.
• Monetization of gas engines, SOFC, or after-sales service is slower than expected.
• Weak domestic ICE and LNG heavy-duty truck demand drags on short-term profits and market sentiment.

What to watch

• Whether U.S. EPA certification and customer validation for the 2.5MW gas engine are completed on schedule around August.
• The pace of initial U.S. shipments after certification and the conversion of orders from major data center customers.
• Whether the 2026 AIDC shipment guidance of 3,500-4,000 units is achieved, especially the second-half ramp-up.
• Progress in building AIDC-related capacity of 8,000-10,000 units by end-2027.
• Whether 40%-50% gross margins for gas engines and 35%-40% gross margins for diesel backup engines can be sustained.
• The path to realizing after-sales service and parts revenue as 20%-30% of lifecycle value.
• Whether actual 1H26 and 2Q26 profits reach 12%-15% year-on-year growth or exceed expectations.
• The full-year parent company revenue target of Rmb400B, data center product revenue growth, and growth trends in power and energy businesses.
• Whether the gap between U.S. data center power orders and deliveries continues to support pricing and order backlog.