Great Wall Earnings: Net Loss on Recurring Basis, Rising Expenses to Linger

No-moat Great Wall Motor’s 02333 first-quarter 2023 recurring bottom line plunged 89% year over year to a net loss. Excluding the first quarter of 2020 when the pandemic broke out, this would be the first recurring net loss the company recorded in the past decade. We attribute the earnings decline to sluggish vehicle sales and mounting expenses in the quarter. The heightened operating expenses, due to price promotions, dealer rebates, and the company’s step-up in efforts toward vehicle electrification, offset the gains in average selling price on sales mix improvement (Tank brand) for the period. Our cautious view on the company’s profitability trend and new energy vehicle strategy is unchanged. We expect the elevated level of expenses are here to stay given the company’s step-up in research and development efforts toward vehicle electrification.

We keep our financial forecasts and maintain our fair value estimate at HKD 9.20, which implies 2023 forward price/earnings ratio of 9.5 times, compared with its 10-year historical average of 9 times. At the current price level, GWM’s H shares remain fairly valued in Morningstar 3-star territory.

Great Wall’s first-quarter net profit came in lower than expected at merely CNY 174 million, down 89% year over year, while it recorded recurring net loss of CNY 217 million, compared with CNY 1.3 billion profit in the prior-year’s quarter. Revenue declined 14% year over year to CNY 29.0 billion on the back of a 22% volume plunge in the quarter. Partially offset by an 11% increase in per-unit revenue due to sales mix improvement (higher Tank contribution), gross margin for the period contracted 1.1 percentage points year over year to 16.1% from 17.2%. Operating expenses during the quarter grew 14% from the prior-year quarter, despite sales volume and revenue decline. The significant increase in selling expenses and R&D investment dragged operating margin to negative 1.1% from positive 3.5% in the first quarter of 2022.