According to the SMARTER App, Soochow Securities released a research report stating that the total volume of natural gas heavy trucks and exports may be supported by the "old-for-new" policy in 2024. Domestic demand is recovering with the economy, and the volume of highway freight is growing, providing support for the inventory. The oil and gas price difference is maintained at a high level, and the economic-driven natural gas heavy truck continues to grow rapidly; the policy-driven new energy heavy truck accelerates its volume. High growth in non-Russian regions filled the decline in Russia, and exports for the whole year are resilient. The elimination of old trucks may be accompanied by substantial scrap subsidies policy, driving the scrapping of National III/National IV vehicles. In the medium and long-term, engineering vehicles have reached the bottom, and it is bullish on the future real estate recovery and infrastructure escalation to boost the bottom rebound. The concentration of cumulative update demand may contain greater elasticity.

June Sales: Terminal and export sales fell short of expectations, while new energy performed well.

Industry Totals: Terminal and export sales of heavy trucks in June fell short of expectations: 1) Production: 0.077 million heavy trucks were produced in June, down 6.0%/+8.5% m/m; 2) Wholesale: 0.071 million heavy trucks were wholesaled in June, down 17.5%/-8.7% m/m; 3) Insurance: Terminal sales of heavy trucks in June were 0.047 million, down 4.3%/-12.3% m/m respectively. 4) Export: Heavy truck industry export in June was 0.024 million units, down 7.4%/-16.5% m/m, falling short of Soochow Securities' expectations. 5) Inventory: Heavy truck inventory in enterprises increased by 0.0052 million units, and channel inventory increased by 0.0006 million units, which slightly increased after continuous destocking in April-May, basically in line with seasonal trend.

Industry Structure: Natural gas is declining compared to the previous year, while new energy is performing well. In June, sales of new energy heavy trucks were 6917 units, up 147.6%/34.3% m/m respectively, with a penetration rate of 14.7%, up 9.0/+5.1pct m/m respectively. Sales of natural gas heavy trucks in June were 0.016 million units, up 29%/-23% m/m respectively, with a penetration rate of 34.4%, up 8.8/-4.8pct m/m respectively.

June Pattern: Heavy truck exports fell compared to the previous month, while Weichai natural gas engine market share fell compared to the previous month.

Vehicle Structure: In June, the sales of various terminal enterprises differentiated compared to the previous year, with a decrease in the market share of heavy truck exports from Sinotruk compared to the previous year, and an increase in the market share of Jiefang/Dongfeng/Shaanxi Heavy Truck compared to the previous year. 1) Terminal: In June 2024, the market share of sales of Jiefang/Dongfeng/Heavy Truck/Shaanxi Automobile/Foton terminal amounted to 22.0%/21.0%/19.5%/9.4%/10.0%, respectively, down by -1.1/-2.4/+2.5/-1.0/-0.9pct from the previous year, and respectively, down by -0.6/-1.6/-0.1/-1.7/+1.2pct from May. 2) Export: In June 2024, the market share of sales of Jiefang/Dongfeng/Heavy Truck/Shaanxi Automobile/Foton exports amounted to 24.4%/10.7%/34.2%/22.3%/2.6%, respectively, up by +8.1/+4.8/-9.5/+1.8/-4.6pct from the previous year and up by +1.3/+0.8/-3.9/+1.6/-0.3pct from May.

Engine Structure: 1) Overall: In June, the market share of Weichai/Komatsu/Xi'an Cummins/Yuchai/Heavy Truck was 28.7%/15.8%/13.6%/13.6%/7.3%, up by +2.8/-4.5/+0.3/+0.1/-0.6pct from the previous year and down by -4.5/-1.2/0.0/-0.9/+0.9pct from May. 2) Weichai: In June, Weichai's terminal supporting volume was 0.135 million units, down 15.0%/-22.6% m/m respectively. Among different enterprises, Weichai's market share in Shaanxi Heavy Truck/Heavy Truck/Jiefang was 70.5%/61.4%/32.5% respectively, down -0.3/-5.4/-4.3pct m/m respectively, and -9.1/+9.9/-7.8pct y/y respectively. In terms of fuel type, Weichai diesel/natural gas engine market share in June was 18.25%/56.6% respectively, down by -0.1/-2.4pct m/m respectively, and down -3.6/-8.8pct y/y respectively.

June-July Demand Tracking: In June, freight rates remained low, real estate performance in July was weak, and the freight volume index improved slightly.

June Tracking: 1) Freight Market: The long-distance coal freight rate in Ordos was 0.22 yuan/ton-kilometer in June, down by -0.02 /-0.01 yuan/ton-kilometer m/m respectively. 2) Macroeconomic indicators: In terms of engineering logistics, the cumulative completion rate of real estate development investment in June compared to last year is -10.1%, which is not flat compared to May. In terms of production logistics, the manufacturing PMI was 49.5 in June, which was unchanged from May and below the boom-bust line; in terms of consumption logistics, the total social retail sales in June increased by 2.0% YoY, and the YoY growth rate was-1.7pct lower than the previous month.

July high-frequency tracking: 1) engineering logistics: the average cement shipping rate in the first two weeks of July was 37.5%, with a month-on-month and year-on-year decrease of 8.8/-1.6pct respectively and the year-on-year decline expanding month-on-month. The average national petrol asphalt starting rate in the first 17 days of July was 25.9%, slightly higher than June. 2) complete vehicle freight volume: the average freight volume index in the first 17 days of July was 106.4, a year-on-year decrease of 4.9%, with a narrowing decline compared to the previous month (June: -8.0% year-on-year).

Soochow Securities predicts that the terminal sales volume of heavy trucks in July will be 0.042 million units, with 0.021 million units exported, inventory decreasing by 0.004 million units, and wholesale sales of 0.059 million units, with a month-on-month and year-on-year decrease of -3.8%/-17.3% respectively.

Investment recommendation and risk tips

Investment recommendation: natural gas heavy trucks + exports + the possible policy of trading old vehicles for new ones will support the steady growth of the overall sales volume in the next 24 years. In the next 24 years, the demand will increase as the economy weakly recovers, and the increasing road freight volume will provide support for the existing stock. The high oil-gas price differential drives the continuous high growth of natural gas heavy trucks. The policy-driven new energy heavy truck will accelerate its release. The high growth of exports in non-Russian regions will fill the gap left by the Russian downturn, and the annual exports have resilience throughout the year. There may be substantial subsidy policies for the elimination of old trucks, promoting the scrappage of national III/national IV trucks.

In the long term, the engineering vehicle has reached the bottom, and the recovery of real estate and the increase of infrastructure investment will drive the bottom to rise. The concentrated release of accumulated demand may contain greater elasticity. Soochow Securities predicts that the wholesale sales volume in 2024 and 2025 will be 0.99/1.15 million units, with a year-on-year increase of 8.9%/+15.9%, respectively. In Q3 2024, the investment in the heavy truck sector will focus on strong alpha (natural gas heavy trucks+exports) and high-performance realization with high certainty variety layout [Weichai Power+Sinotruk+Faw Jiefang Group/Beiqi Foton Motor].

Risk warning: the domestic heavy truck industry's recovery may fall short of expectations, and natural gas prices may rise higher than expected.