Raised Power Generation Guidance Drives 2027 Earnings Surge; Buy Ratings on Weichai A/H Shares Unchanged

Overview

The report reviews Weichai Power's better-than-expected second-quarter 2026 results and its August 28 analyst conference call, focusing on the earnings impact of management's raised guidance for the AIDC power generation business. Goldman Sachs believes that the product portfolio comprising diesel backup generation, gas-fired on-site generation, and SOFC will shift the company's core investment narrative from the heavy-duty truck cycle to AI data-center power supply. It therefore raises its 2026-2028 earnings forecasts and reiterates its Buy ratings on both the A-shares and H-shares.

Core views

Weichai Power is China's largest internal combustion engine manufacturer, with an approximately 20% sales share of China's multi-cylinder engine market. Its operations span commercial vehicles, construction machinery, agricultural equipment, marine applications, and power generation, while Shaanxi Heavy-duty Motor, Shaanxi Fast Gear, Weichai Lovol, and KION provide exposure to complete vehicles and components, agricultural equipment, and intelligent logistics. The report's core view is that the company's investment narrative has shifted from heavy-duty trucks to AI data-center power generation infrastructure. The AIDC power generation business contributed only RMB1.3bn in net profit in 2025, accounting for 12% of total net profit, but Goldman Sachs expects its net profit to rise to RMB12.9bn by 2028, nearly tenfold, accounting for 51% of the total and contributing more than 80% of incremental EPS growth through 2028. The demand-side case is based on management's assessment of the power supply gap, orders, and customer prepayments. Management estimates that the AIDC-driven power shortage could reach 100-160GW from 2026 to 2030. Given the long commercialization cycle for nuclear power, it believes demand for diesel and gas-fired generator sets as backup or primary on-site power sources could persist through 2030. Contract liabilities increased by approximately RMB3.0bn quarter over quarter in the second quarter of 2026, mainly due to customer prepayments for power generation products, supporting the view that demand has progressed beyond expressions of interest. Large-bore diesel engines represent a relatively high-certainty near-term backup power business. Shipments reached 1,400 units in the first half of 2026, more than doubling year over year. Full-year 2026 shipment guidance was raised from more than 3,500 units to more than 4,000 units, compared with 1,400 units delivered in 2025. Management further provided guidance of 6,000 units for 2027, at the upper end of the previous market expectation range of 5,000-6,000 units. Goldman Sachs expects the segment's net profit to rise from RMB0.9bn in 2025 to RMB2.6bn in 2026, RMB4.0bn in 2027, and RMB4.9bn in 2028. Gas reciprocating engine generator sets are the primary driver of the 2027 earnings surge. Management expects initial product deliveries to begin in September-October 2026 and raised 2026 shipment guidance to 200-300 units. Detailed conference information indicated that previous guidance was 100-200 units, while the report's front-page summary characterized the previous level as 200 units. Shipments are expected to exceed 2,000 units in 2027, representing nearly tenfold growth, with the corresponding volume already covered by framework orders. AIDC is expected to account for 90%-95% of these shipments, and customers typically reserve capacity through framework supply-guarantee agreements. In terms of products, the 2.5MW model has begun selling, the 3.0MW model is expected to launch by the end of 2026, and models above 5.0MW are expected to have prototypes delivered by the end of 2026 and formally launch in 2027. Pricing is benchmarked against peers at approximately US$0.6mn-0.7mn per MW. Goldman Sachs expects net profit from gas-fired generator sets to rise from RMB0.6bn in 2026 to RMB7.0bn in 2027, RMB7.5bn in 2028, and RMB9.0bn in 2030. SOFC offers greater long-term incremental potential, but the realization path depends on capacity construction. Management maintained its plans to establish 30MW of capacity by the end of 2026 and complete commissioning of a fully automated 200MW production line by the end of 2027, with small-batch deliveries expected to begin by the end of the first quarter of 2027. Orders totaling 15MW have already been signed, while subsequent orders will depend on the commissioning progress of the new production line. The report believes customer interest is strong and that the current constraint is primarily capacity rather than demand. However, delivery delays would trigger contractual penalties, so the company has not yet signed formal orders on a large scale. In terms of costs, peer pricing is approximately US$2.7k/kW after subsidies and approximately US$4.0k/kW before subsidies. Management acknowledged that cost-reduction challenges could persist at the 200MW stage but believes that production volumes above 1GW could bring costs close to peers' post-subsidy pricing. Goldman Sachs expects SOFC to contribute approximately RMB0.2bn, RMB0.7bn, and RMB1.9bn in net profit in 2028, 2029, and 2030, respectively. After-sales services could further enhance the lifetime profitability of the power generation business. Management noted that more than 50% of overseas peers' profits come from the aftermarket and that Weichai is shifting toward a comprehensive ecosystem solution covering both equipment and services. Depending on the scope of service agreements, after-sales services could contribute 10%-60% of profits. This means profitability will depend not only on initial equipment sales but could also continue to grow as the installed base and service coverage expand. Based on the above guidance, Goldman Sachs raised its 2026-2028 EPS forecasts by 1%-13%, from RMB1.74, RMB2.33, and RMB2.91 to RMB1.77, RMB2.62, and RMB2.94, respectively, with the 13% increase for 2027 being the most significant. The corresponding revenue forecasts are RMB263.178bn, RMB292.074bn, and RMB315.332bn, while net profit forecasts are RMB15.364bn, RMB22.591bn, and RMB25.180bn. The new EPS forecasts are 6%, 22%, and 12% above Visible Alpha consensus, respectively. As it is still awaiting further capacity plans beyond 2027, the report raised its longer-term forecasts by only 0%-1%. Segment forecasts show that net profit from the AIDC power generation business will surge from RMB3.4bn in 2026 to RMB11.3bn in 2027, exceeding the RMB9.2bn generated by traditional businesses over the same period and accounting for approximately 50% of the company's total net profit. By 2030, the business is expected to contribute RMB17.5bn, accounting for 54%. Regarding valuation, the report notes that the stock trades at approximately 10 times expected 2027 earnings, with the main text citing a dividend yield of approximately 6.6%, while the forecast table indicates 10.5 times earnings and a 6.5% dividend yield. Goldman Sachs therefore considers the valuation clearly undemanding. It uses a sum-of-the-parts valuation: traditional businesses are valued at 10 times average 2026-2027 EPS, with the market value of Weichai's KION stake added; large-bore diesel engines are valued at 20 times 2028 earnings, while gas-fired generator sets and SOFC are each valued at 25 times 2030 earnings. The values of all three power generation businesses are discounted to mid-2027 using a 9% cost of equity. In the sum-of-the-parts valuation, the value attributable to Weichai's AIDC power generation business is approximately RMB317.0bn, accounting for 73% of total valuation, with diesel engines, gas-fired generator sets, and SOFC accounting for approximately 25%, 38%, and 8%, respectively. Traditional businesses, KION, and PSIX account for approximately 23%, 4%, and 1%, respectively. This produces a 12-month H-share target price of HK$55.00 per share. Based on trading patterns over the past six months, the A-shares are assigned a 5% discount to the H-share equity value, resulting in a target price of RMB48.00. The report believes the H-shares have begun pricing in some RICE potential but do not yet reflect SOFC value, while the A-shares do not yet reflect the potential value of either.

Analysis framework

The report first uses the management conference call following the second-quarter results to update shipment volumes, orders, customer prepayments, product launch timelines, and capacity plans, and then maps the operating guidance for diesel engines, gas-fired generator sets, and SOFC into segment earnings forecasts. It subsequently compares the new EPS forecasts with its previous forecasts and Visible Alpha consensus, applies a sum-of-the-parts valuation to separately capture the value of traditional businesses and power generation products at different stages of maturity, and finally forms its rating conclusion based on target prices, gaps versus current prices, and explicit risks.

Methodology notes

• Valuation MethodSOTP Valuation

  Separately value traditional businesses, KION, diesel power generation, gas-fired generator sets, SOFC, and PSIX based on business maturity

  The report believes the various power generation products are at different stages of growth, so rather than applying a single company-wide multiple, it values them separately and sums the results. This method produces a value of HK$55 per H-share and derives an A-share target price of RMB48 by applying a 5% discount.

• Valuation MethodPE/PEG valuation

  Apply different P/E multiples to earnings in different years

  Traditional businesses are valued at 10 times average 2026-2027 EPS, large-bore diesel engines at 20 times 2028 earnings, and gas-fired generator sets and SOFC at 25 times 2030 earnings. The power generation business valuations are then discounted to mid-2027 using a 9% cost of equity.

• Industry/Sector Analysis FrameworkVolume-price decomposition

  Assess the power generation business using generator-set shipments, unit-capacity pricing, and capacity expansion paths

  The report combines shipment guidance for diesel engines and gas-fired generator sets, gas-fired generator-set pricing per MW, and SOFC capacity and cost targets to assess the timing of revenue and earnings realization for each product.

• Event-Driven Strategy and Behavioral FinanceExpectation Gap/Expectation Management

  Compare management's new guidance, Goldman Sachs' previous forecasts, and Visible Alpha consensus

  The report uses the 13% increase in 2027 EPS and the new EPS forecast being 22% above consensus to quantify the expectation gap created by the conference-call guidance and explain why the earnings changes could support a rerating.

Asset mapping & comparison

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

• Weichai Power A-shares (000338.SZ)

  The report believes the growth of the AIDC power generation business and the change in the earnings mix are not yet fully reflected in the A-share valuation and reiterates Buy.

  Strengths

  An integrated product portfolio spanning diesel backup power, gas-fired on-site generation, and SOFC; the AIDC power generation business is expected to contribute approximately half of net profit in 2027.

  Weaknesses

  SOFC remains constrained by capacity and cost reduction, while traditional businesses remain exposed to heavy-duty truck, infrastructure, real estate, and macroeconomic cycles.

  Comparison

  The A-share target price applies a 5% discount to the H-share equity value, and the report believes the A-shares have not yet priced in the potential value of RICE or SOFC.

  Risks

  Slower-than-expected development or capacity ramp-up of the power generation business, as well as risks related to heavy-duty truck engine market share, electrification, and macroeconomic demand.

• Weichai Power H-shares (02338.HK)

  The H-shares are the primary anchor for the report's sum-of-the-parts valuation, and Goldman Sachs reiterates Buy while maintaining its HK$55.00 target price.

  Strengths

  They likewise benefit from AIDC power generation earnings growth, and the sum-of-the-parts valuation shows that the power generation business accounts for 73% of total value.

  Weaknesses

  The report believes the market has begun pricing in some RICE potential, but SOFC potential remains unreflected and its realization depends on capacity construction.

  Comparison

  The H-share valuation serves as the reference basis for the A-share target price; the report states that the H-shares price in RICE to a greater extent than the A-shares.

  Risks

  Slower-than-expected development or capacity ramp-up of the power generation business, as well as risks from global growth, traditional powertrain markets, and electrification substitution.

Key data

• A-share Target Price and Current PriceRMB48.00／RMB27.6412-month target price; the current price is the closing price on August 28, 2026, implying 73.7% upside.
• H-share Target Price and Current PriceHK$55.00／HK$32.7612-month target price; the current price is the closing price on August 28, 2026, implying 67.9% upside.
• Potential AIDC Power Supply Gap100-160GWManagement's estimate of the AIDC-driven power shortage from 2026 to 2030.
• Change in Contract LiabilitiesIncreased by approximately RMB3.0bn quarter over quarterThe increase in the second quarter of 2026 mainly came from customer prepayments for power generation products.
• Large-Bore Diesel Engine ShipmentsMore than 4,000 units in 2026; 6,000 units in 2027Previous 2026 guidance was more than 3,500 units; 1,400 units were delivered in 2025, while 1,400 units had already been shipped in the first half of 2026, more than doubling year over year.
• Gas-Fired Generator-Set Shipments200-300 units in 2026; more than 2,000 units in 2027Initial deliveries are expected to begin in September-October 2026, and the 2027 volume is already covered by framework orders.
• AIDC Share and Pricing of Gas-Fired Generator Sets90%-95% of shipments; approximately US$0.6mn-0.7mn/MWAIDC is the primary application for gas-fired generator sets, and pricing is benchmarked against peers.
• SOFC Capacity and Orders30MW by the end of 2026; 200MW by the end of 2027; 15MW of signed ordersSmall-batch deliveries are expected to begin by the end of the first quarter of 2027, with capacity ramp-up being the main bottleneck.
• 2026-2028 EPS ForecastsRMB1.77／2.62／2.94Raised by approximately 2%, 13%, and 1% from the previous forecasts, respectively, and 6%, 22%, and 12% above Visible Alpha consensus.
• 2026-2028 Net Profit ForecastsRMB15.364bn／22.591bn／25.180bnThe largest upgrade is for 2027, mainly driven by higher guidance for the power generation business.
• 2027 AIDC Power Generation Business Net ProfitRMB11.3bnExpected to account for 50% of Weichai Power's total net profit, exceeding the RMB9.2bn from traditional businesses over the same period.
• AIDC Segment Valuation WeightApproximately RMB317.0bn, accounting for 73% of the sum-of-the-parts valuationLarge-bore diesel engines, gas-fired generator sets, and SOFC account for approximately 25%, 38%, and 8% of total valuation, respectively.
• 2027 Valuation and Dividend YieldApproximately 10 times P/E and approximately 6.6% dividend yieldThe main text uses approximate figures; the forecast table shows 10.5 times P/E and a 6.5% dividend yield.
• Rating HistoryBuy rating since December 16, 2024The report reiterates Buy ratings on both the A-shares and H-shares.

Impact & implications

Goldman Sachs believes Weichai Power's future earnings mix will shift from being dominated by traditional heavy-duty truck and engine businesses to a portfolio centered on AIDC power generation. Diesel backup power provides near-term growth, gas-fired generator sets drive the 2027 earnings surge, and SOFC and after-sales services offer longer-term potential. Therefore, even though forecasts beyond 2027 were adjusted only modestly, the high weight of power generation businesses in the sum-of-the-parts valuation still supports the report's rerating thesis. The A-share and H-share target prices remain unchanged because the power generation business valuation underlying the target prices uses benchmark years beyond 2027, while longer-term EPS adjustments were minimal.

Risks

• Weaker-than-expected macroeconomic activity, particularly slower road freight, infrastructure, and real estate activity.
• Weaker-than-expected global economic growth.
• An accelerated shift of powertrains toward higher electrification penetration, combined with lower-than-expected LNG penetration.
• Weaker-than-expected market share performance by Weichai Power in the heavy-duty truck engine market.
• Slower-than-expected development, capacity construction, or commercialization of the power generation business.

What to watch

• Monitor whether initial deliveries of gas-fired generator sets begin as planned in September-October 2026 and whether orders for more than 2,000 units in 2027 are fulfilled.
• Monitor whether SOFC reaches 30MW of capacity by the end of 2026, achieves small-batch deliveries by the end of the first quarter of 2027, and completes commissioning of the 200MW production line by the end of 2027.
• Monitor SOFC cost-reduction progress at the 200MW stage and the feasibility of scaling to more than 1GW.
• Monitor whether customer prepayments and contract liabilities continue to validate actual demand and order fulfillment for AIDC power generation products.
• Monitor additional capacity plans beyond 2027 and the evolving data-center power supply-demand landscape.