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Morningstar | Great Wall Blames Disappointing 3Q Results on Intensifying Competition; FVE Lowered to HKD 6.10

Great Wall Motor posted disappointing third-quarter results with revenue down 19% and adjusted operating profit (adding back the portion of R&D expenses that are now capitalized to third-quarter 2017 results) down more than 70% year over year. Management continues to blame weak volume on intensifying competition and the slowdown in Chinese auto sales, which reaffirms our business strategy outlook that competitors of Great Wall are gradually achieving similar perceived value propositions as Great Wall. We lower our fair value estimate to HKD 6.10 per share from HKD 6.30 after adjusting for near-term headwinds and continued depreciation of the Chinese yuan.

With Great Wall’s sales volume on track to meet our full-year estimate of 1 million, worse-than-expected revenue was mainly the result of heavy discounting on SUVs. While discounting can help the company to maintain its leading market share, we continue to believe it will also lead to a drop in the perceived value of the Great Wall’s Haval brand. We continue to believe margin for the business will improve slightly over the next five years owing to growth in its premium Wey brand. On the cost front, the company disclosed that it had spent roughly CNY 400 million in purchasing NEV credits that will be sufficient to offset 2018’s deficit. The slight uptick in SG&A was the result of increased spending on outsourced workforce and extra marketing expenses incurred during the 2018 World Cup.

Strategically, given the recent slowdowns in SUV sales, Great Wall Motor seems to be expanding its focus to cover both pick-up trucks and new energy vehicles (NEV). We think dedicating more resources into the pickup truck segment is strategically sound since Great Wall is a reputable brand with more than 30% market share in China’s pickup truck market. However, the same cannot be said for the company’s footprint in NEV. Great Wall is not only late to the NEV game, sales of its hybrid electric vehicle, Wey P8, have also been quite muted, averaging merely 500 units per month over the past five months. We think the rationale behind the company’s recent push for newly created electric vehicle brand Ora is solely to harvest some NEV credits to fulfill the annual quota set out by the government.

Lastly, Great Wall’s announced disposal of its battery subsidiary Honeycomb Energy does not have a material impact on our valuation for the company. During the first nine months of 2018, Honeycomb Energy is made a negligible loss of CNY 16 million, and the business is being sold at a relatively small consideration of CNY 790 million. However, the fact that Honeycomb was established earlier this year and is now being sold to an entity 99% owned by the CEO of Great Wall makes us question the motives behind the move.