Heavy trucks recovered strongly, and net profit to mother increased sharply year over year. Sinotruk's revenue in 2023 increased 43.9% year on year to 85.498 billion yuan (RMB, same below), and net profit surged 217.9% year over year to 5.32 billion yuan, 2% higher than market and our expectations, mainly due to the strong recovery in heavy truck sales recorded in 2023 and improved profit margins due to scale effects. Mainland and overseas sales of heavy trucks increased by 40.%/46.9% respectively. Gross margin remained roughly the same at 16.7% year over year. Operating profit surged 132.7% year over year to 6.49 billion. Expenses as a proportion of revenue declined markedly due to the scale effect, and sales and administrative expenses fell from 4.8%/8.2% of revenue in 2022 to 4.7%/5.5% in 2023. Heavy truck and light truck revenue increased by 50.3%/18.4% year-on-year respectively in 2023, with heavy truck operating margin improving from 5.2% in 2022 to 5.8% in 2023. The company paid year-end interest of RMB 0.965 per share, increasing the dividend payout ratio from 46.2% in 2022 to 50.1% in 2023.

The company is expected to maintain its lead in mainland/overseas heavy truck sales in 2024. In terms of sales volume, from January to January 2024, the mainland heavy truck market sold a total of 157,000 vehicles, a cumulative increase of 25% over the previous year. Among them, Sinotruk's sales increased 31% year on year, and its market share further increased to about 30%. In terms of heavy natural gas trucks, compared with the same period in 2023, 4 of the top 10 sales companies achieved an increase in market share in January-January this year. The most obvious increase in share was Sinotruk. The market share in January-January this year increased sharply by 13.05 percentage points to 24.1% compared to the same period in 2023. In January-January of this year, the company's heavy natural gas truck sales increased 259% year on year, in line with our previous report predicting that Sinotruk will develop heavy natural gas trucks. We believe that as the company continues to increase its sales of heavy natural gas trucks, there is room for further increase in market share. In terms of overseas markets, the company's heavy truck export sales accounted for 57% of its heavy truck sales in 2023, while accounting for about 50% of China's heavy truck export sales. We believe that its first-mover advantage is obvious, and its share is expected to remain above 50% in 2024.

Maintain purchases and attract valuations. We have slightly raised our 2024/2025 earnings forecast. As an industry leader, Sinotruk will benefit from the recovery in heavy truck sales, and its market share is expected to increase further. We raised our target price to HK$26.49 (previously HK$25.06), corresponding to our 2024 projected price-earnings ratio of 10x. The current price corresponds to the predicted dividend rate of 5.3% for 2024. The valuation is attractive and the purchase is maintained.