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Morningstar | Profit Surprise Within Our Expectations; Disappointing Volume Offset by ASP Growth. See Updated Analyst Note from 17 Jul 2018

Leading Chinese automotive manufacturer Great Wall Motor noted a positive profit surprise for its first-half results. While the investment community might be raising their eyebrows, we have fully anticipated Great Wall’s earning recovery, driven by strong WEY sales, and baked it into our current valuation for the company. In a brief statement, the company attributes the profit surprise to rising sales of its premium WEY product lines. We maintain our fair value estimate of HKD 13.50 per share and still believe the shares are attractive for investors. However, limited information was released in addition to the profit surprise, and we will provide another update once the full interim result is released.

Great Wall’s preliminary assessment suggests first-half net profit growth of 52% compared with last year. Given that sales volume was up by only 2.3% for the first half of 2018, we think that much of the reported profit growth came from a rising average selling price, or ASP.  Going forward, we believe that shifting product mix toward higher-margin WEY SUVs will continue to drive Great Wall Motor’s bottom line. While WEY lines will gradually become a major driver for earnings growth, Great Wall’s joint venture with BMW to produce electric Mini Coopers is a potential long-term catalyst. In a recent announcement, the company disclosed that the JV with BMW is expected to produce 160,000 Mini Coopers in China every year. As sales of Mini Coopers in the country only totaled 35,000 in 2017, we anticipate that some volume from the factory will be exported to countries in the Association of Southeast Asian Nations, or ASEAN, and Oceania. Furthermore, given that all the vehicles produced by the JV will be electric, this will help Great Wall meet China’s new-energy vehicle, or NEV, credit requirement.