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Morningstar | Disappointing 1Q Results In Line With Our Estimates, Margin Recovery Still Stuck in First Gear

Great Wall Motor reported first-quarter earnings that were just shy of Street consensus, but in line with our more pessimistic forecast. Management maintains its sales volume target of 1.2 million but provided little guidance on profitability outlook. We lift volume assumption for Great Wall after factoring in stronger-than-expected sales of its Ora line. This, however, will have a negligible impact on the firm’s bottom line because these compact EVs are sold near cost. Therefore, we maintain our fair value estimate of HKD 4.60 and see Great Wall as overvalued.

For the first three months of 2019, Great Wall sold a total of 283,000 vehicles, an 11% increase from number sold during the same period last year. However, rising volume did not translate into higher revenue. A 15% year-over-year drop in sales resulted from mix shift toward cheaper vehicles and continued discounting of flagship SUVs. While there are early signs that the automaker might adopt a more balanced sales approach, namely, focusing more on profitability and less on market share, we worry discounting could have adverse effects on Great Wall’s SUV brand equity.

On the flip side, the firm continues to sell well, while maintaining its profitability, on pickup trucks. Sales during the first quarter went up 15% year over year. With more than 30% of market share, Great Wall is, by far, the largest pickup truck manufacturer in China. We think the rumored government easing of pickup truck ban inside cities will boost demand for Great Wall’s offerings in the category, but the positive impact to earnings will be capped by the firm’s limited exposure to the segment (around 14% of the volume sold in 2018). We do not expect a significant increase in the adoption of pickup trucks by Chinese consumers over our explicit forecast, because these vehicles are perceived for the use of transporting cargo as opposed to carrying passengers.

When it comes to alternative energy, Great Wall is investing in both electric and fuel cell powered vehicles. Given the firm is a late-adopter of electrification and the government’s aggressively slashing of subsidies, we see little chance that the automaker will generate much profits from selling low-end EVs. On the other hand, Great Wall is one of the first Chinese automakers to invest in fuel cell technology, but we think a fuel cell revolution is too far down the road. As of the end of 2018, there were merely 28 hydrogen stations across China. Unless the government implements more subsidies, hydrogen-powered vehicles will face direct competition from EVs that are becoming cheaper and more efficient.