Great Wall Earnings: With NEVs Ramping Up, Margin Contraction Continues To Weigh on Profit

No-moat Great Wall Motor 02333 reported second-quarter net profit plunging 70% year over year, at the midpoint of earlier guidance. The earnings decline was mostly due to margin contraction as new energy vehicle, or NEV, sales ramped up contribution. We increase our fair value estimate to HKD 9.60 from HKD 9.20, which implies a 2024 forward price/earnings ratio of 12 times, compared with its 10-year historical average of 9 times. At the current price level, Great Wall’s H-shares remain fairly valued in Morningstar 3-star territory.

With a few plug-in hybrid sport utility vehicle launches in the second quarter, such as the Wey Lanshan, Haval Xiaolong, and Xiaolong Max, Great Wall increased its NEV sales contribution to 19% in the first seven months from 12% last year, but still lags its major peers in NEV transition. The company targets increasing 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 maintain our cautious view of the company’s profitability trend. Given the Great Wall’s aggressive NEV pricing strategy and buildout of dedicated sales network, we expect unit profitability to be thin.

We slightly raise our 2023-25 volume forecasts by 4%-6% to reflect the year-to-date sales run rate and also lift our revenue estimates by 4%-6%. However, we lower our 2023-25 gross margin forecasts given the ramp-up of our NEV sales contribution. Our 2023 net profit is therefore cut by 11%, but we raise 2024-25 profit estimates by 5%-6%, as lower operating expense ratios offset the cut in gross margins.