Stock Valuation: Weichai Power Co Ltd (2338)

Name of Company Country of Origin/ Exchange Traded Sector Stock Price
Industrials – Industrial Products – Diversified Industrials HKD8.89
@ 03 Aug 2018
COMPANY PROFILE Weichai Power Co Ltd is engaged in the manufacturing and sale of diesel engines & related parts, automobiles & other automobiles components, auxiliary automobile components, import & export services & forklift trucks and warehouses technology services.

Weichai Power Co Ltd manufactures vehicles and equipment in China. It assembles a wide range of vehicles, and produces engines, hydraulic systems, electronic parts, and other components to improve automotive functionality. The company sells heavy-duty vehicles, construction machinery, passenger vehicles, and forklifts to reach various end markets. In addition, the company produces gear boxes and axles, and offers aftersales support and services. Weichai operates five business segments: diesel engines, automobiles and other major automobile components, other components, import and export services, and forklift trucks and warehouses technology services (the latter is the largest segment in terms of revenue generated). China accounts for more revenue than any other country.

Stock Code 2338
Valuation Analysis Below

Weichai Power Market Cap to EBIT

The Price Earnings (PE) Ratio is the most frequently used valuation indicator for a stock. However, there are times when this ratio cannot be used e.g. when the company reports a loss or profit is so minimal that it results in an abnormally high PE Ratio. Or Net Profit After Tax may be volatile and it is better to use Earnings Before Interest and Tax (EBIT) to value the company. We use the PE Band or Market Cap/EBIT Band to show whether a stock is overvalued or undervalued based on its historical valuation.
At the price of HKD8.89 as at 03 Aug 2018, Weichai Power Co Ltd is trading at a Market Cap/EBIT Ratio of 4.8 times last 12 months earnings.  This is a 29.8% discount to its historical average Market Cap/EBIT Ratio of 6.8 times. (Price based on the historical average Market Cap/EBIT Ratio of the company is indicated by the red line.)
Is the stock undervalued? One should not just look at one indicator to determine the fair value of a stock.
ProThinker believes in using a combination of valuation methods to decide whether a stock is over or undervalued? The five ratios we use are Price to Earnings, Price to Sales, Price to Cash Flow, Price to Book and Dividend Yield. We use multiple methods to value a stock because each has its benefits as well as shortcomings. Price to Earnings and Price to Cash Flow Ratios relate stock price to profitability but are meaningless when the comany has negative earnings or cash flows. Price to Sales Ratio is more stable because sales are never negative. However, this does not tell us whether the company is able to sell profitably. Price to Book Ratio gives us an indication as to how much we are paying for the company’s assets but it is not directly related to the company’s profitability. Dividend Yield cannot be used for companies that are paying little to no dividends.
While it is important to value stocks based on multiple valuation methods, this often leads to differing views on valuation. One indicator may suggest that a stock is overvalued while another suggest that it is undervalued. This does not help an investor who needs to make a definite decision whether to buy, hold or sell the stock. That is why we advocate the use of a Composite Valuation Indicator, which is derived from the best combination of the five indicators above. A Composite Valuation Indicator will give you ONE conclusion on whether a stock is under or over valued.
To find out more about our valuation methodology, click here. 
Source of Data: Charts are from ProThinker Stock Report. Company description, historical financial statements data and price data are from Estimates are from gurufocus and/or – Thomson Reuters.
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