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CSCI-Auto-Great Wall Motor (2333 HK)：Margin pressure remains in FY19E - 20190408

Margin pressure remains in FY19E

• We estimate GWM’s ASP to see a rebound in FY19E driven by new models launch, though we foresee its margins to continue to come under pressure due to intensified competition amid a sluggish mass market in FY19E, in our view.
• Since majority of the increase in new car sales in FY19E will be NEV models instead of ICE models, the OEMs are set to incur higher unit production costs (retail price unchanged) or see a decline in sales (retail price hike) on the back of the substantially reduced NEV subsidies in FY19E.
• On anticipation of selling expenses to continue to increase due to intensified competition in FY19E, we have slashed our earnings forecasts for FY19E/20E by 39%/30% respectively, and generated a new price target of HKD6.8 (from HKD9), implying FY19E 10.0x PER and 5.5% potential upside. Maintain Hold.

Margin pressure intact in FY19E. GWM’s gross margin declined further by 1.4ppts YoY to 17.5% in FY18 subsequent to extended price cuts and more dealer rebates amid intensifying competition, albeit a 4% YoY improvement in its bottom-line. In other words, the company’s net profit is estimated to come down by c.40% YoY in FY18 on the basis of accounting policy consistent to that of FY17, as the company has capitalised c.56% of its RMB3.9bn of R&D expenses in FY18 which led to RMB2.2bn reduction in SG&A expenses. We anticipate GWM’s ASP to see a rebound in FY19E after a ramp-up in delivery of NEV models, though margin pressure will likely remain, in particularly in the face of shrinking market shares given the intensifying completion, in our view.

New car sales growth in FY19 to be driven primarily by NEVs rather than ICE models. According to management, GWM’s sales target in FY19E will be around 1.2mn units with a 14% YoY growth from 1.05mn units in FY18, whilst majority of the increase in vehicle shipments (150k units) will be NEV models such as the Ora IQ and R series, instead of ICE models like the Havel and WEY which may see limited growth. Given that the 2019 NEV subsidy plan has dramatically slashed the subsidy amount by more than 70% on average, and whilst Beijing is even urging the local governments to remove cash subsidies entirely from 2H19 onwards, the OEMs are set to incur significantly higher unit production costs (retail price unchanged) or see a decline in shipments (retail price hike), especially during 2H19, in our view. Meanwhile, we expect GWM’s total NEV shipments to come in lower than its target of 150k units in FY19E in a bid to avoid substantial losses in its NEV segment.

Valuation. In view of competition to continue to increase in the mass market during FY19E, promotion activities will likely continue and be extended further. As such, we have reduced our earnings forecasts for FY19E/20E by 39%/30% respectively and generated a new price target of HKD6.8, implying FY19E 10.0x PER and 5.5% potential upside. Maintain Hold.