PUBLISHED : Sunday, 28 May, 2006, 12:00am
UPDATED : Sunday, 28 May, 2006, 12:00am

About a year ago policy risks prompted Morgan Stanley to downgrade its recommendation on Weichai Power, a manufacturer of heavy-duty engines in China, to 'equal weight V', meaning the stock's return was expected to be only in line with the China MSCI index return over the next 12 to 18 months.

The broker cut its price target by 13 per cent to $25.80, implying an upside of only 2.4 per cent. It saw two policy risks for the sales of big trucks: the government's restrictions on truck design, which were disrupting production and causing a slowdown in orders; and renewed overloading of trucks in many regions, causing demand to slow.

It believed the government would reaffirm its commitment to fight overloading as it could not afford the cost of road damage, safety, pollution and poor fuel economy. When it acted, Weichai's growth could revive.

Weichai reported net profit jumped 94.2 per cent in 2004 to 538.88 million yuan. Chairman Tan Xuguang said the Shangdong company should be able to sell 180,000 engines in 2005, up from 134,464 in 2004. The counter was trading at $23.70 about a year ago.

Last month Weichai Power reported a drop in turnover for last year to 5.25 billion yuan, from 6.16 billion yuan in 2004. It said gross earnings fell to 1.15 billion yuan from 1.5 billion yuan, and net profit fell to 315.2 million yuan from 533.25 million yuan.

The counter closed on Friday at $15.20.