Changes in the Goldman Sachs Asia-Pacific region Conviction list! Inclusion of CHINA RES LAND (01109) and Weichai Power (02338), removal of Zijin Mining Group (02899) etc.

On April 1st, Goldman Sachs added MediaTek, CHINA RES LAND (CR Land), Weichai Power, and Krafton to its Asia-Pacific Confidence List, while removing Advantest, Delta Electronics, Keppel Ltd, and Zijin Mining Group. Mediatek: Analyst Bruce Lu believes that MediaTek is poised to successfully transition from a traditional smartphone application processor supplier to a participant in the field of artificial intelligence. The business will start with edge artificial intelligence devices and expand to include enterprise dedicated integrated circuits and smart automotive solutions. He predicts that the revenue/profit compound annual growth rate (CAGR) will reach 16%/17% between 2024 and 2027. The operating profit margin (OPM) will increase from 19% in 2025 to 22% in 2027, mainly due to increased market share, demand for generative artificial intelligence-driven smartphone upgrade cycles, and new target customer groups in the enterprise dedicated integrated circuit and automotive markets. CHINA RES LAND (CR Land 01109): Due to lower debt repayment pressure and less restricted financing, analyst Yi Wang expects state-owned developers' profitabilitiy will recover well before the overall industry hits bottom. He sees China Res Land at this turning point and makes the following predictions: 1) Contract sales growth will accelerate again, increasing market share in the first-hand property market; 2) China Res Land's development business contract sales profit margin will hit bottom in 2025; 3) China Res Land's recurrent business will steadily grow; 4) Land reserves will increase. The average free cash flow yield from 2025 to 2027 is expected to be 11%, and given the current stock price, Yi Wang finds China Res Land's valuation very attractive, with a price-to-book ratio (P/B) of 0.4 for its development business, and market value pricing for leasing/property management business. Weichai Power (Weichai Power 02338,000338.SZ): Analyst Nick Zheng expects Weichai Power to undergo a valuation re-evaluation based on the following factors: 1) Improvement in the cyclical outlook for heavy-duty trucks; 2) More profitable engine product portfolio structurally; 3) Risks related to capital expenditure in Europe through KION changing from unfavorable to favorable for Weichai. He also predicts that dividend payments will gradually increase due to strong net cash position and free cash flow (FCF) generation capability. Weichai Power's H-share 2025 estimated price-to-earning ratio is 10 times, with a dividend yield of 6%, and a two-year compound annual growth rate (CAGR) of earnings per share of 18%. Krafton: Analyst Eric Cha believes that the market should focus on the strong development momentum of Krafton's "PUBG" series, which is a key driver of the company's profitability this year, rather than the new game "inZoi" with mixed early test feedback (expected to account for around 3% of the projected revenue in 2025). He thinks the performance of "PUBG" will be a key focus for the first quarter of 2025 earnings, and expects the market to reassess the full-year outlook. The current trading valuation for Krafton is near historical lows, with a 2025 estimated price-to-earnings ratio of 12 times. Goldman Sachs' April Asia-Pacific Confidence List includes: Analysis and research on Weichai Power: Key Points Nick Zheng expects Weichai Power to undergo a re-evaluation of its valuation, for the following reasons: 1) an improvement in the cyclical outlook for heavy-duty trucks; 2) a more profitable structure in the engine product portfolio; and 3) the capital expenditure risks in Europe through KGX.DE (coverage paused; Weichai holds 47%) changing from unfavorable to favorable. Among the many Chinese machinery companies covered by Nick Zheng, he believes Weichai Power is one of the few companies whose profitability in this cycle will be stronger than in the previous cycle. This is due to engine sales hitting new highs (he expects this peak to be 16% higher than the previous peak) and a rise in unit profitability (unit net profit is 2.2 times the historical average in the middle of the cycle). This is because he expects LNG penetration in the heavy-duty truck sector to increase (Weichai dominates the LNG engine market compared to diesel engines), and the future outlook for large-bore engines is positive, especially with the increase in investment in global artificial intelligence data centers (AIDC), and their broad application prospects in the data center sector. Additionally, Weichai's market share in the off-road machinery engine market is continuing to expand. The unit profitability of LNG engines and large-bore engines is 2-3 times and 5-7 times that of traditional heavy-duty diesel engines, respectively (can reach 40-60 times for data center applications). Given Weichai's net cash position is close to a quarter of its market value, and its stronger free cash flow (Nick Zheng expects free cash flow yield to be around 15%-25% in 2025-2026), he also expects dividend payments.The dividend will gradually increase, with an average annual increase of 5 percentage points, from the current 55% to 70%. This is similar to the dividend growth rate from 2019 to 2024, and will further increase shareholder returns.Weichai Power's expected P/E ratio for 2025 is 10 times, with a dividend yield of 6%, and a two-year compound annual growth rate of earnings per share of 18%. Nick Zheng believes that, given the improvement in its profitability over the cycle, the valuation should be higher than the long-term cycle average, and the industry is currently in the early stages of an upturn cycle driven by years of renewal demand for heavy trucks. However, due to one-time expenses related to efficiency improvement plans, Kaiou Group's current profitability is lower than normal levels. Key points of contention with Goldman Sachs' views At what stage is the truck industry cycle? Compared to the market consensus, Nick Zheng is more optimistic about the domestic truck cycle. His supply-demand analysis framework shows that the truck fleet size and industry activity have been rebalanced, showing signs of stabilization since the second half of 2024. This leads him to believe that the Chinese heavy truck industry will enter a multi-year upturn cycle driven by renewal demand, with domestic heavy truck sales expected to reach twice the previous cycle peak by 2030, with this cycle's peak expected to be 1.22 million vehicles (the previous cycle peaked in 2020 at 1.55 million vehicles), while the market consensus believes that demand for Chinese domestic heavy trucks is unlikely to exceed 1 million vehicles (see Nick Zheng's industry outlook upgrade report). How will the electrification of trucks affect Weichai's long-term prospects? Nick Zheng believes that the market is overly focused on the impact of electrification on heavy truck sales, while sales have always been the most critical driving factor for Weichai's historical profitability. However, expectations for mid-term demand for domestic heavy trucks have decreased due to electrification, overshadowing its importance. Although the expected customer base for domestic heavy truck engines is decreasing, he still expects Weichai's engine sales to reach a new high in this cycle, up 16% from the previous peak in 2020. The key factors include: 1) Increasing penetration of LNG in the heavy truck sector, with Weichai dominating the engine market in this sector; 2) Export potential of Chinese heavy truck original equipment manufacturers (OEMs); 3) Growth opportunities for large-bore engines (especially for data center applications); 4) Growth in applications in non-road machinery fields (especially excavators and mining trucks). More importantly, he believes that the market is overlooking the structural improvement in Weichai's engine unit profitability, combined with higher peak engine sales volume, leading Nick Zheng to expect its peak profitability to be more than 1.4 times higher than the previous cycle peak level (close to the levels of 2022-2024). Catalysts Nick Zheng believes that the key short-term catalyst for the accelerated growth of domestic heavy truck sales in the second quarter of 2025 stems from the positive impact of truck replacement policies. Weichai's stock price has always been correlated with heavy truck industry sales. He also believes that Weichai is likely to further demonstrate signs of successful implementation of its diversified product portfolio strategy (such as large-bore engines, electric power systems, non-road machinery engines) around the time of announcing its mid-year performance in August 2025, driving market adjustment in profit margin and earnings expectations. Nick Zheng's earnings per share expectations for 2025-2027 are 6% - 18% higher than Visible Alpha's market consensus expectations. Valuation, target price and key risks The 12-month target price for H shares is HK$22, based on a P/E ratio of 13 times earnings per share for 2025. The 12-month target price for A shares is RMB 24, with a 19% premium over the H share equity value, in line with the average A/H share premium over the past 6 months. Chart 12: In this cycle, Weichai Power has successfully doubled the engine unit net profit, making the product portfolio more profitable structurally, according to Nick's analysis. Chart 13: With higher unit profit and sales peak, Nick expects Weichai Power's engine net profit to nearly double by 2030 compared to 2024. Analysis and Research on CHINA RES LAND Core views Yi Wang believes that state-owned developers face much less pressure in terms of debt repayment and financing, and their business profitability will recover well before the industry as a whole reaches a trough. He believes that CHINA RES LAND, as a leading central state-owned enterprise developer in both real estate sales and shopping center operations in China, is at this turning point and makes the following forecasts: (1) CHINA RES LAND's contract sales growth rate will accelerate again, with its market share in the primary housing market expected to increase by 2 percentage points to 5% by 2027 compared to 3% in 2024. (2) The profit margin of CHINA RES LAND's development business contract sales will bottom out in 2025, with the disclosed gross profit margin (which lags cash profit margin by 2-3 years) expected to recover from around 16% in 2025-2026 to 18% by 2027. (3) CHINA RES LAND's recurring business will steadily grow, maintaining a core profit contribution of around 40% during the 2025-2027 period, while the profitability of the development business will also recover. (4) Land reserves will increase in the next three years (with the average proportion of contract sales in 2025-2027 at 35%, compared to 30% in 2024), but will be well balanced to maintain a stable.Increasing free cash flow provides support for potential dividend increases.Yi Wang expects the average free cash flow yield for the years 2025-2027 to be 11%. She believes that at the current stock price, CHINA RES LAND's valuation is very attractive, with a price-to-book ratio of 0.4 times for its development business and a market value valuation for leasing/property management business. In Yi Wang's view, considering that there has already been a 7% asset write-down in the sector, the current valuation implies that there may be a need for an additional 15% write-down of inventory. Key Controversy Points and Goldman Sachs View Yi Wang sees CHINA RES LAND's ability to further consolidate its market share in first-tier/second-tier cities as the key driver for growth. During the period of 2025-2027, she expects CHINA RES LAND's strong existing development project pipeline and robust land reserves on the balance sheet (with 35% of contract sales expected to come from land reserves in 2025-2027) to benefit the most from the stabilization of the real estate market, driving CHINA RES LAND's average annual contract sales to reach about RMB 310 billion in 2025-2027 (20% higher than the 2024 level). Considering that over 50% of CHINA RES LAND's salable resources have been acquired since 2022, and with stable profit margins, Yi Wang also expects CHINA RES LAND's development business cash gross margin to increase by 2 percentage points per year during the period of 2025-2027, reaching approximately RMB 50 billion in cash gross profit by 2027 (1.7 times the 2024 fiscal year level). The investment property has shown a significant growth trajectory. As of the end of 2024, CHINA RES LAND's shopping center portfolio reached 92, with assets under management totaling RMB 298 billion (a 10% increase year-on-year), and is expected to open about 25 new shopping centers between 2025-2028, increasing the total portfolio floor area by over 30% from current levels. Yi Wang expects significant growth in CHINA RES LAND's shopping center business for the following reasons: 1) market integration (about 80% of operating shopping centers rank in the top three in local retail sales); 2) balanced coverage of high-end consumption demands (in the 2023/2024 fiscal year, luxury shopping centers contributed about 40% of CHINA RES LAND's retail sales); 3) membership base (grew 27% year-on-year to 57 million at the end of 2024) and further monetization of the brand portfolio (at the end of 2024, there were a total of 15,000 brands, with over 8,000 cooperating brands, a 60% increase from the end of 2020), thus benefiting from the continued attention of policy makers to stimulate consumption. Catalysts The contract sales growth rate for 2025 is expected to be 14%, outperforming peers, while the average growth rate for state-owned enterprise developers covered by Yi Wang is 5%. The sales average price for the upcoming new projects will also stabilize. The government is expected to better implement policies to ease overall inventory pressure, boost consumer confidence, and release demand. Government stimulus measures for consumption are expected to improve consumption trends, thus benefiting its shopping center operations. Valuation and Target Price Based on the net asset value (NAV) at the end of 2025, the target price is HKD 36, with a 10% discount to the NAV per share at the end of 2025. Chart 10: Yi believes that CHINA RES LAND's valuation is very attractive, based on the current stock price, with a price-to-book valuation of 0.4 times for the real estate development business if the investment property leasing/management business is valued at the current market value. Chart 11: Yi expects sales and construction cycles to return to normal, with more accurate capital expenditure budgets for high-certainty projects in core cities, and recurring business will bring more significant revenue/profit contributions, improving CHINA RES LAND's cash turnover and enhancing free cash flow generation capabilities (with an average free cash flow yield of 11% from 2025-2027), providing greater room for dividend payments. Analysis and Research on ZAI LAB (Buy Preferred, 09688) ZAI LAB remains on the Asia-Pacific confidence selection list. Analyst Ziyi Chen points out that ZAI LAB is a biotechnology company transitioning from a model based on importation/China-market-only to an internal research + importation dual-engine/focus on global opportunities business model. In Ziyi Chen's view, this shift is driven by several factors: 1) China's business map significantly reduces risk, including over 10 high-quality assets in late-stage (Phase 3 trials and beyond) acquired from global partners; 2) A growing global product pipeline, led by ZL-1310 (a DLL3-targeted antibody-drug conjugate [ADC]), is a key driver in realizing ZAI LAB's global market value. Maintains a buy preferred rating.