|Great Wall Motor (2333): Operational headwind may extend into 2H14 – Maintain Sell
Great Wall Motor (2333, $32.5, GWM) released its preliminary result for 1H14. Revenue was up 8.0% to RMB28.5bn. Operating profit margin dropped by 1.9ppts to 16.5% due to operating de-leverage. Net profit declined by 3.2% to RMB3.96bn, but beat market consensus by 6.3%. The company also announced it will invest RMB3.4bn for the construction of Xushui III plant, which will be mainly used for SUV production and with a designed capacity of 250k units. The construction period will last for 2.5 years.
GWM sold a total of 347.4k units of automobiles in 1H14, down 6% yoy. Among that, SUV sales grew by 21%, whereas sedan and pick-up dropped by 50% and 4%, respectively. The company has only completed 39% of the full-year sales target of 890k units. GWM will focus on sales and brand-building of its SUV products first, even though this may temporarily sacrifice the sales of sedan and pick-up. The company had a better product mix, with SUV unit sales accounted for 64.8% of total sales in 1H14, vs. 50.7% in 1H13 and 55.3% in 2013. The improvement will help GWM on ASP and gross margin.
We believe both the company’s SUV and sedan segment will encounter headwind in 2H14. Seeing the booming SUV demand in China, more automakers have entered into this market. We see several compact SUV products being launched by foreign and domestic brands, including Peugeot 2008, Hyundai is25, Chevrolet Trax, Honda Vezel and Changan’s CS75, which will become direct competitor of Haval H6 and the just launched H2. For sedan segment, domestic brands continue to face challenges from their JV peers, with market share dropped from 27.5% in 2013 to 22.2% in 1H14. As more entry-level JV models are now priced at attractive level, we believe the trend of market share loss by domestic brands will continue or even accelerated. Lower sales growth will further trigger operating de-leverage. The capacity expansion and probably increased R&D expenses (as technical problems caused the delivery deferral of Haval H8 model) will also add pressure to the falling profitability.
After the better-than-expected result, the counter surged by 7.4% yesterday. The share price has rebounded 14.0% in the past month, outperformed HSI by 8.5%. Considering the operational challenges that the company may face in 2H14, we revised down our FY14 earnings forecast by 4.2% to RMB9.0bn (EPS RMB2.954, up 9.3% yoy). The counter is now trading at 8.8x FY14E PE. We think the stock will continue to underperform its peers. Maintain Sell, with target price keep at $26.85, implying 7.3x FY14E PE.