Great Wall Reported Strong Q4 Gross Margin

No-moat Great Wall Motor 02333 reported fourth-quarter net profit down 94% year over year, in line with its preliminary announcement. We attribute its core earnings decline to weak sales volume in the quarter. In addition, heightened operating expenses, due to price promotions, dealer rebates, and the company’s step-up in efforts towards vehicle electrification, offset the gains in average selling prices and gross profit margin on sales mix improvement (Tank brand) for the period. We expect the elevated level of expenses to linger given the company’s step-up in research and development for vehicle electrification.

We cut 2023-24 revenue by 11%-13% and net profit forecast by 4%-9%. We lower our fair value estimate slightly to HKD 9.20 from HKD 9.30, which implies a 2023 forward price/earnings ratio of 9.5 times, compared with its 10-year historical average of 9 times. Even after the 23% correction in the past one year, GWM’s H-shares remain fairly valued in 3-star territory.

GWM’s fourth-quarter revenue declined 17% year over year to CNY 37.9 billion on the back of a 33% plunge in volume during the quarter. With a 24% increase in per-unit revenue due to a sales mix improvement (higher Tank contribution), gross margin for the period expanded 2.6 percentage points year over year to 17.9% from 15.3% a year ago. However, operating expenses during the quarter grew 14% from a year ago despite a revenue decline. The significant increase in selling expenses and R&D investment dragged operating margin to merely 0.3% from 1.8% a year ago, offsetting the gain in gross margin. Net profit for the fourth quarter came in at only CNY 106 million, down 94% year over year and was in line with the company’s preliminary announcement last month.