Great Wall Earnings: Revenue and Profit In Line; Better Cost Control Lifted Operating Margin

No-moat Great Wall Motor 02333, or GWM, reported a 42% year-over-year jump in third-quarter net profit, leaving cumulative nine-month net profit on track to meet our full-year forecast. The earnings growth was mostly due to operating expenses control as operating margin was ahead of our expectation. We increase our fair value estimate to HKD 10.30 from HKD 9.60, which implies a 2024 forward price/earnings ratio of 11 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.

According to management, its Wey brand reached breakeven in the third quarter, but we don’t expect this to be retained. Wey seems to have lost steam in recent months with an over 50% sales slump sequentially in September. Given the company’s aggressive new energy vehicle, or NEV, pricing strategy and buildout of a dedicated sales network, we maintain our cautious view of the company’s profitability trend.

We reiterate our 2023-25 revenue and gross profit forecasts given an in-line year-to-date sales run rate and gross margin trend. We lift 2023-25 net profit estimates by 2%-11% to reflect lower operating expense ratios.

Great Wall is still in its early stage of NEV transition, lagging major peers. With a few plug-in hybrid sport utility vehicle, or SUV, launches this year, such as Wey Lanshan, Haval Xiaolong, and Xiaolong Max, the company increased its NEV sales contribution to 20% in the first nine months from 12% last year. The company targets to increase its NEV sales penetration to 40%, which we believe is a very challenging target. With less advanced vehicle intelligence and weaker brand recognition in an already crowded market, we believe it’s difficult for Great Wall to achieve meaningful NEV sales and lift the company’s NEV penetration.