20180327-兴业金融证券-长城汽车-02333.HK-Stuck_In_The_Slow_Lane_11页_455kb

Great Wall Motor Co Summary

Core Content

Great Wall Motor Co (GWM) is a Chinese automobile manufacturer that faces challenges in maintaining profitability and sales growth in 2018. Despite expectations of a 38% year-over-year (YoY) earning increase, the company may still be affected by risks related to new energy vehicle (NEV) credit pricing overhang and the cannibalization of its H6 and WEY models. The firm's performance in 4Q17 showed margin improvements at the expense of a 5% sales volume drop, especially for the H6 model, which indicates ongoing pressure to balance volume and margins.

Main Points

• Earnings Performance: GWM's 2017 earnings were impacted by sales promotions for H6, advertising expenses for WEY, and R&D costs. However, 4Q17 showed some improvement in both gross profit margin (GPM) and operating profit margin (OPM) compared to 9M17.

• Sales Volume and Margins: The 4Q17 sales volume dropped by 5%, with H6 seeing a -24% YoY decline. This suggests that the company may still be under pressure to sustain both sales and margins in 2018.

• 2018 Guidance: GWM's 2018 sales target is 1.16 million units (+10% YoY), which could negatively impact margins.

• Uncertainties: The company's recovery is slow, and the proposed joint venture (JV) with BMW for electric MINIs may take 1-2 years to contribute to earnings. The economic benefits of this JV are expected to be realized by 2020.

• Valuation and Recommendation: The analyst maintains a SELL recommendation with a target price (TP) of HKD6, which is 27% downside from the current price of HKD8.17. The TP is based on a 6.5x P/E multiple, which is about 1SD lower than its 3-year average of ~9.3x.

• Financials: GWM's recurring net profit is forecasted to increase from CNY5,027m in 2017 to CNY6,972m in 2018, with a 38.7% growth rate. However, the recurring EPS is expected to decrease from CNY0.55 to CNY0.76, reflecting the company's struggle to balance volume and margin.

• Dividend Yield: The dividend yield is expected to increase from 2.6% in 2017 to 3.5% in 2018, indicating a potential improvement in shareholder returns.

• Valuation Metrics: The company's P/B is expected to decrease from 1.21 in 2017 to 1.10 in 2018, and the EV/EBITDA ratio is projected to be 5.85x, down from 7.02x in 2017.

Key Drivers

• Stable SUV Market: The SUV segment remains relatively stable, and GWM has a leading position in this market.
• New Model - WEY: The introduction of the WEY model is expected to help the company in the long term.
• Market Share: GWM's leading position in the SUV market may provide a competitive advantage.

Key Risks

• SUV Market: The SUV market is not growing rapidly, and GWM's performance in this segment is crucial.
• Cannibalization: The cannibalization of H6 and WEY models continues to affect sales volume and margins.
• NEV Credit Pricing Overhang: The uncertainty around NEV credit pricing may continue to pressure net margins.

Financial Exhibits

Share Performance

Shareholders

Valuation Metrics

Income Statement (CNYm)

Cash Flow (CNYm)

Balance Sheet (CNYm)

Key Metrics

DCF Valuation

• FCFF is projected to be CNY6,522m in 2023.
• DCF Value per Share is based on the present value of future cash flows and is HKD6.50.
• WACC is assumed to be 9.0%.
• Terminal Growth is 3%.

Peer Comparison

Conclusion

Despite potential growth in sales volume, GWM's performance is hindered by margin pressures and model cannibalization. The company's recovery is slow, and the benefits of its proposed JV with BMW are expected to materialize by 2020. The analyst's recommendation to SELL is justified by the current valuation and the ongoing challenges faced by the company.