Great Wall Motor (2333): operation uncertainties exist – Downgrade to Sell
Great Wall Motor (2333, $33.90, GWM) announced its monthly sales figure after market close yesterday. GWM sold
a total of 50.1k units of automobiles in February. Total unit sales increased by 4% yoy to 119.7k in the first two
months of 2014, among which SUV sales grew by 27%, whereas sedan and pick up dropped by 27% and 3%,
respectively. Unofficially announced sales target for 2014 is 880k units, up 17% yoy. Obviously, unit sales volume in
the first months was far below the full year sales target.
There are several uncertainties in GWM. Its share price has dropped 3.3%, 25.2% and 17.2% in the past 1 month, 3
months and 6 months, underperforming Hang Seng Index by 8.7%, 20.3% and 17.6%, respectively.
As a recap, management attributed the unsatisfied sales performance in December 2013 to natural gas supply
shortage in North China this winter. According to historical experience, the company’s monthly production and sales
volume were almost at the same level. The slowdown of sales volume growth year-to-date may be a result of
production cut. We make a bold assumption that serious pollution problem in China has forced regulators to
implement strict control over power supply and industrial operation, especially during the Chinese New Year and
NPC meeting period. GWM’s plants are located in Heibei and Tianjin, the most polluted area in China. If the strict
control continues, the company’s operation will be materially hurt.
GWM made an announcement on 13 January 2014 to express the deficiencies of H8 model. In order to further
enhance the quality of the products, the company delayed the launch for three months. This news negatively affected
market sentiment. The new launching time is coming but GWM’s service capability and market acceptability is still
uncertain. As the sales of sedan and pick-up segment are losing momentum, we believe further de-rating will
continue if its SUV development strategy proves failure.
GWM recently announced preliminary financial data for 2013. Net profit increased by 45% yoy to RMB8,267mn.
Considering the sales performance of the first two months and the above mentioned uncertainties, we cut our 2014
earnings forecast by 6% to RMB9,654mn (EPS RMB3.17). The counter is now trading at 8.4x 2014 PER with 2014
EPS growth of 17%. The share price premium of A-share to H-share has dropped to 9%, compared to historical
range of -11% to 82% and average of 24% since its listing on Shanghai Stock Exchange in 2011. Given an uncertain
earnings outlook, we downgrade GWM from hold to SELL with a price target of $30.45, implying 7.5x 2014 PER.