EUR 850.00 For Business Accounts Only

Morningstar | After Fresh Look at Great Wall, We Are Lowering our FVE to HKD 6.30; Shares Offer Upside. See Updated Analyst Note from 24 Sep 2018

After transferring coverage of Great Wall Motor to a new analyst, we are lowering our fair value estimate to HKD 6.30 per share from HKD 6.60. While we removed the company from our Best Ideas list, shares of Great Wall still look attractive based on expected cash flows. We maintain our no-moat, negative trend, and high uncertainty ratings. We have lowered our stewardship rating to Standard to reflect the absence of evidence management has made exceptionally strong or poor capital allocation decisions.

While Great Wall remains one of the largest players in China's SUV market, the group is facing a level of competition it has never seen before. We are worried that other domestic competitors can achieve similar perceived value propositions as Great Wall, namely offering fine SUVs at consumer-friendly prices. Coupled with the fact that international automakers are also entering the budget SUV space that has historically been dominated by Chinese brands, the competitive landscape is becoming more challenging for Great Wall. An elevated oil price and expectations for the economic downturn in China will continue to have adverse impacts on consumer appetite for gas-guzzling SUVs. Over the longer term, we think growth in demand for SUVs will decelerate, as evidenced by the narrowing gap between growth of SUV and overall car sales as penetration approaches saturation point.

On the electric vehicle front, the company is quite late to the game. Great Wall's first battery electric car, Ora, wasn't released until late 2018. We think the primary rationale behind launching Ora is to harvest new energy vehicle credits to offset its past deficit resulting from having churned out SUVs. While sales of Ora will most likely have a negligible impact on the bottom line, we are keeping our eyes on the group's joint venture with BMW in manufacturing electric Mini Coopers and believe this could be a longer-term catalyst for Great Wall's future earnings. This partnership is due to launch its first product in 2021, and we anticipate that some volume from the factory will be exported to countries in the Association of Southeast Asian Nations, and Oceania.