Deutsche Bank Markets Research
Rating Company Date Hold Great Wall Motor 12 December 2013 Initiation of Coverage Asia China Reuters Bloomberg Exchange Ticker Price at 11 Dec 2013 (HKD) 45.60 Automobiles & 2333.HK 2333 HK HKG 2333 Price target - 12mth (HKD) 48.50 Components ADR Ticker ISIN 52-week range (HKD) 50.75 - 23.35 GWLLY US39137B1098 HANG SENG INDEX 23,744
Narrowing lead in China SUV Vincent Ha, CFA Fei Sun segment; initiating with Hold Research Analyst Research Associate (+852) 2203 6247 (+852) 2203 6130 Undisputed leader in SUV segment, but mounting competition caps upside [email protected] [email protected] As China's largest SUV manufacturer, with a 14% SUV market share in 11M13, Great Wall Motor (GWM) has become investors' favorite, with its share price appreciating about four times in the past three years and with a FY10-13E EPS Price/price relative
CAGR of 41%, thanks to the booming Chinese demand for SUVs. While we do 60 not doubt that GWM can retain its segment leadership going forward, 50 intensifying competition is likely to cap the upside for the company. We believe 40 the street, with a heavy skew to Buy ratings, is likely to be disappointed and 30 20 we see downside risk to consensus earnings. We initiate coverage with Hold. 10 0 Leadership in local brand SUV sales provides a solid foundation for growth 12/10 6/11 12/11 6/12 12/12 6/13 When compared with JV brand products, GWM’s SUVs have a niche value-for- Great Wall Motor money positioning. With its well established brand name, hardly replicated by HANG SENG INDEX (Rebased) its domestic peers, GWM managed to record 51% 11M13 YoY SUV sales Performance (%) 1m 3m 12m volume growth, outpacing the segment’s 49% growth. Due to the muted growth of GWM’s lower-margin sedan and pick-up truck (pick-up), the Absolute 4.3 9.9 90.4 company also achieved higher margins YoY in 9M13 amid a better sales mix. HANG SENG INDEX 2.9 3.5 6.4 Increasing competition is inevitable and may surprise bulls to the downside Source: Deutsche Bank Since late-2012, GWM’s monthly SUV market share has slid from its peak 18% level. While this is due partly to a temporary capacity bottleneck for its popular Stock data Haval H6 and while GWM is optimistic about regaining market share with new Market cap (HKDm) 138,734 capacity and new launches (H2, H8, etc.), we have noticed the increasing Market cap (USDm) 17,894 popularity of its peers’ new models. With even more new competing models in Shares outstanding (m) 3,042.4 2014-15, probably with competitive pricing as well, it will likely become harder Major shareholders Baoding Woetre for GWM to retain the strong growth and resilient margins it has enjoyed. (56%) Opportunities and risks fairly priced in, in our view; Hold; TP HKD48.5; risks Free float (%) 44 With a 20% 2013-15E two-year EPS CAGR, we value GWM at 11x FY14E P/E, Avg daily value traded 38.6 above its historical trading average (since 1995) but in line with the long-term (USDm) sector average, given normalizing growth. Our TP is also supported by DCF. Source: Deutsche Bank We will be watching market share and ASPs in coming months for a hint as to our next move on the stock. Key upside/downside risks: stronger-/weaker- Key indicators (FY1) than-expected perception in upcoming new launches; competition intensity. ROE (%) 33.7 Net debt/equity (%) -9.6 Forecasts And Ratios Book value/share (CNY) 9.25 Year End Dec 31 2011A 2012A 2013E 2014E 2015E Price/book (x) 3.9 Sales (CNYm) 29,037.2 41,565.2 53,917.2 66,657.4 76,611.7 EBITDA (CNYm) 4,668.7 7,553.0 10,962.2 13,829.7 15,943.8 Net interest cover (x) – Reported NPAT (CNYm) 3,426.2 5,692.4 8,362.2 10,491.2 11,962.7 Operating profit margin (%) 18.2 DB EPS FD (CNY) 1.22 1.87 2.75 3.45 3.93 Source: Deutsche Bank DB EPS growth (%) 23.4 53.7 46.9 25.5 14.0 PER (x) 7.9 7.6 13.0 10.4 9.1 EV/EBITDA (x) 5.2 5.5 9.7 7.5 6.3 Yield (net) (%) 3.1 4.0 2.5 3.3 3.9 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
______Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013.
12 December 2013
Automobiles & Components Great Wall Motor
Model updated:03 December 2013 Fiscal year end 31-Dec 2010 2011 2012 2013E 2014E 2015E
Running the numbers Financial Summary Asia DB EPS (CNY) 0.99 1.22 1.87 2.75 3.45 3.93 Reported EPS (CNY) 0.99 1.22 1.87 2.75 3.45 3.93 China DPS (CNY) 0.20 0.30 0.57 0.88 1.17 1.38 Automobiles & Components BVPS (CNY) 3.7 5.5 7.1 9.2 11.8 14.6 Weighted average shares (m) 2,738 2,814 3,042 3,042 3,042 3,042 Great Wall Motor Average market cap (CNYm) 15,853 26,969 43,299 108,634 108,634 108,634 Enterprise value (CNYm) 16,373 24,052 41,380 106,001 104,028 100,724 Reuters: 2333.HK Bloomberg: 2333 HK Valuation Metrics P/E (DB) (x) 5.9 7.9 7.6 13.0 10.4 9.1 Hold P/E (Reported) (x) 5.9 7.9 7.6 13.0 10.4 9.1 Price (11 Dec 13) HKD 45.60 P/BV (x) 2.29 1.71 2.81 3.86 3.02 2.45 Target Price HKD 48.50 FCF Yield (%) nm 2.6 0.2 3.1 5.0 6.9 Dividend Yield (%) 3.5 3.1 4.0 2.5 3.3 3.9 52 Week range HKD 23.35 - 50.75 EV/Sales (x) 0.7 0.8 1.0 2.0 1.6 1.3 Market Cap (m) HKDm 138,734 EV/EBITDA (x) 4.7 5.2 5.5 9.7 7.5 6.3 EV/EBIT (x) 5.6 6.1 6.3 10.8 8.4 7.1 USDm 17,894 Income Statement (CNYm) Company Profile Sales revenue 22,175 29,037 41,565 53,917 66,657 76,612 Great Wall Motor, through its subsidiaries, mainly Gross profit 4,877 6,443 10,004 14,147 17,693 20,213 manufactures and sells sports-utility vehicles (SUV), pick- EBITDA 3,482 4,669 7,553 10,962 13,83015,944 up trucks and sedans in China and overseas under two Depreciation 521 664 890 1,088 1,3941,733 brands, namely Great Wall and Haval. The company also Amortisation 28 38 60 68 7489 manufactures principal automotive parts and components EBIT 2,933 3,967 6,604 9,806 12,36114,122 for use in assembly of its vehicles. In terms of sales Net interest income(expense) 8 23 105 97 165 261 volume, Great Wall Motor is China's largest SUV and pick- Associates/affiliates 42 12 2 6 67 up truck manufacturer. Exceptionals/extraordinaries 0 0 0 0 00 Other pre-tax income/(expense) 59 129 130 238 277 304 Profit before tax 3,041 4,131 6,841 10,147 12,808 14,694 Price Performance Income tax expense 214 620 1,119 1,776 2,305 2,718 Minorities 126 84 30 9 1213 60 Other post-tax income/(expense) 0 0 0 0 0 0 50 Net profit 2,701 3,426 5,692 8,362 10,491 11,963 40 30 DB adjustments (including dilution) 0 0 0 0 0 0 20 10 DB Net profit 2,701 3,426 5,692 8,362 10,491 11,963 0 Cash Flow (CNYm) Cash flow from operations 3,191 4,449 4,337 7,825 10,538 13,050 Net Capex -3,206 -3,752 -4,266 -4,461 -5,087 -5,542 Great Wall Motor Free cash flow -15 697 71 3,364 5,451 7,508 HANG SENG INDEX (Rebased) Equity raised/(bought back) 0 3,894 0 0 0 0 Margin Trends Dividends paid -274 -548 -913 -1,734 -2,676 -3,567 Net inc/(dec) in borrowings -76 5 1 0 0 0 22 Other investing/financing cash flows 18 184 129 -6 -6 -6 20 Net cash flow -346 4,233 -711 1,623 2,769 3,935 18 Change in working capital -147 303 -2,222 -2,436 -2,116 -1,385 16 Balance Sheet (CNYm) 14 Cash and other liquid assets 3,095 7,107 6,337 7,960 10,729 14,664 12 Tangible fixed assets 7,313 10,443 14,009 16,782 19,825 22,934 10 11 12 13E 14E 15E Goodwill/intangible assets 1,113 1,871 2,216 2,756 3,331 3,942 EBITDA Margin EBIT Margin Associates/investments 147 71 53 53 5353
Other assets 12,031 13,643 19,954 25,525 30,406 34,028 Growth & Profitability Total assets 23,698 33,135 42,569 53,077 64,345 75,623 Interest bearing debt 3,376 3,978 4,342 5,242 6,026 6,644 50 40 Other liabilities 9,922 12,136 16,584 19,554 22,211 24,462 40 30 Total liabilities 13,298 16,113 20,926 24,796 28,237 31,106 30 Shareholders' equity 10,015 16,737 21,514 28,142 35,958 44,353 20 Minorities 385 284 129 138 150163 20 10 Total shareholders' equity 10,400 17,022 21,643 28,281 36,107 44,516 10 Net debt 281 -3,130 -1,995 -2,718 -4,703 -8,020 0 0 10 11 12 13E 14E 15E Key Company Metrics Sales growth (%) nm 30.9 43.1 29.7 23.6 14.9 Sales growth (LHS) ROE (RHS) DB EPS growth (%) na 23.4 53.7 46.9 25.5 14.0 Solvency EBITDA Margin (%) 15.7 16.1 18.2 20.3 20.7 20.8 EBIT Margin (%) 13.2 13.7 15.9 18.2 18.5 18.4 5 Payout ratio (%) 20.3 24.6 30.5 32.0 34.0 35.0 0 ROE (%) 30.0 25.6 29.8 33.7 32.7 29.8 Capex/sales (%) 14.5 12.9 10.7 8.4 7.7 7.3 -5 Capex/depreciation (x) 5.9 5.4 4.7 3.9 3.5 3.1 -10 Net debt/equity (%) 2.7 -18.4 -9.2 -9.6 -13.0 -18.0 -15 Net interest cover (x) nm nm nm nm nm nm
-20 Source: Company data, Deutsche Bank estimates 10 11 12 13E 14E 15E
Net debt/equity (LHS) Net interest cover (RHS)
Vincent Ha, CFA +852 2203 6247 [email protected]
Page 2 Deutsche Bank AG/Hong Kong
12 December 2013
Automobiles & Components Great Wall Motor Investment thesis
Outlook
Having been the unrivaled leader in China’s SUV and pick-up segments, Figure 1: Great Wall Motor – GWM’s recent news flow is indeed mixed. While the company’s year-to- monthly SUV market share trend November YoY sales volume growth of 24.1% is significantly above China’s vehicle sales volume growth of 13.5%, we note that its YoY growth pace 20% slowed to 9.2%, vs. the market’s 14.1%, in November. In addition, although the company achieved 38.4% YoY growth in 9M13 revenue and a 60.7% YoY jump in 9M13 net profit, its 3Q13 revenue and net profit growth slowed to 15% 28.5% and 40.1%, respectively, with QoQ margin erosion in the quarter.
We believe GWM still enjoys solid and niche positioning in the SUV segment, 10% which should enable it to benefit significantly from the fast-expanding segment (growing at 49.1% YoY in January-November 2013). Meanwhile, its pick-up and sedan businesses should provide steady, but not rapidly 5% increasing, earnings support. As such, we still expect the company to attain a 19.2% and 19.6% FY13-15E two-year revenue and net profit CAGR, Jul-11 Jul-12 Jul-13 respectively. That said, we do not think GWM will repeat its exponential Jan-11 Jan-12 Jan-13 Source: Company data, China Association of Automobile growth track record of FY09-13, despite relief to the production bottleneck and Manufacturers (CAAM) a new round of SUV new model launches, considering intensifying new model and price competition in the SUV segment.
Valuation
We mainly use forward P/E to value Chinese auto manufacturers, taking into account their company-specific growth prospects, risks and niches. Our GWM target price of HKD48.5 is set at 11x FY14 P/E, which is considerably above GWM’s historical trading average but in line with the Chinese auto sector’s long-term trading average. We believe such a valuation is justified since, on the one hand, we think Great Wall’s valuation re-rating is well supported by its much improved profitability, and, on the other hand, the company’s growth pace in the SUV segment is expected to further normalize to the market average level. Besides, our DCF-derived valuation for the company is close to our target price, providing additional support for our target price.
Risks
Any unexpected sales weakness in GWM’s new SUV models, possibly due to competition or delays in launches, could dampen GWM’s growth prospects. Moreover, an increase in pricing competition among peers could drag down its enviable margins for selling popular SUV models. Besides, since GWM has also been manufacturing lots of auto components in-house, weaker-than- expected sales could lead to underutilization of its new facilities, thus leading to negative operating leverage. On the upside, if GWM’s new SUV products turn out to be more popular than expected, the company’s sales and earnings growth could continue to be exponential in the coming years. Moreover, stronger-than-expected export demand could result in upside risk to our revenue and profit growth estimates.
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12 December 2013
Automobiles & Components Great Wall Motor Valuation
Overview – target price has priced in normalizing growth
Our target price of HKD48.5 for GWM is based on 11x FY14 P/E, which is considerably above the stock’s historical trading average since its listing. We believe that valuing the stock above its historical average is justified, since in recent years the company has adopted unique and successful strategies of focusing on the SUV segment and stringent cost control with vertical production integration. This has significantly enhanced its profitability since FY11 vs. previous years and makes GWM one of the most profitable, listed Chinese auto companies nowadays. Moreover, based on our target P/E, GWM is valued on par with the long-term trading average of the Chinese auto industry, and we think this is fair as we expect the company’s growth to gradually normalize to the industry-average level. Furthermore, our target price is supported by a discounted cash flow (DCF)-derived valuation.
Figure 2: Great Wall Motor – rolling forward PE band
(x) 14 12 10 8 6 +1 SD 4 Mean 2 -1 SD 0 Jul-04 Jan-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 2007 2008 2009 2010 2011 2012 2013E 2014E EPS grow th (%) 23.0% -48.4% 97.9% 6.5% 23.4% 53.7% 46.9% 25.5%
Source: Company data, Bloomberg Finance LP, Deutsche Bank estimates
Peer comparison – forward P/E ratio implies fair valuation
We compare GWM only against its Hong Kong-listed auto manufacturing peers, given our belief that the China auto sector differs from that in other regions, with stronger growth prospects and better profit margins in general, thus commanding a valuation premium. Among its peers, GWM is currently trading at about the middle of the band with other Hong-Kong listed peers in terms of FY14E P/E. From a target valuation perspective, we do not think that the company deserves to be valued only at its historical below-industry- average, given its market-leader status, strong sales growth and above-peer- average profitability. As such, at our target valuation of 11x FY14E P/E, GWM would be priced in line with its closest domestic peer, Geely’s 11x target FY14E P/E and on par with the sector’s 11x long-term trading average. We view this as justifiable since we expect GWM’s growth to normalize after consecutive years of outperformance, considering intensifying competition, but for it to share similar growth prospects to that of Geely (refer to Figure 5).
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Automobiles & Components Great Wall Motor
For the other auto manufacturing stocks under coverage, we assign:
a lower 8.5x FY14E target P/E for Dongfeng given its slower reported EPS growth vs. peers;
higher multiples of 12.5x/34.6x target FY14E P/E for Guangzhou Auto/BYD given higher earnings growth;
a premium 15.0x target FY14E P/E for Brilliance despite a 17% FY13- 15E two-year EPS CAGR (slower than GWM’s) because Brilliance has a scarcity value in its premium brand (BMW) whose market position is hard to shake, in our view.
Figure 3: Valuation of Chinese auto manufacturers under Deutsche Bank’s coverage (as of 10 December 2013) Name Ticker Rating Price Target Mkt cap P/E (x) EPS growth EBIT margin P/BV (x) EV/EBITDA (x) ROE (%) price (%) (%) (HKD) (HKD) (USDm) 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E Dongfeng Motor 0489.HK Buy 13.00 14.1 14,445 7.8 7.1 3.7 10.2 8.9 8.9 1.21 1.06 3.2 2.6 16.5 15.9 Guangzhou Auto 2238.HK Hold 9.81 9.6 8,141 12.7 10.2 45.8 24.4 NM NM 1.37 1.24 NM NM 11.2 12.7 Brilliance China 1114.HK Buy 13.22 15.1 8,569 13.1 11.3 18.6 15.5 NM NM 3.26 2.65 NM NM 28.0 26.1 Great Wall Motor 2333.HK Hold 46.35 48.5 18,187 10.5 9.2 25.5 14.0 18.5 18.4 3.07 2.49 7.7 6.4 32.7 29.8 Geely Auto 0175.HK Buy 3.93 4.8 4,461 9.0 7.7 19.5 17.2 11.1 11.7 1.46 1.25 4.3 3.3 17.6 17.6 BYD 1211.HK Sell 39.90 31.1 12,114 44.3 35.0 117.8 26.5 5.9 6.5 3.11 2.86 12.4 10.5 7.3 8.5 Un-weighted average (ex-outlier) 10.6 9.1 22.6 18.0 11.1 11.4 2.25 1.93 6.9 5.7 18.9 18.4 Source: Company data, Reuters, Deutsche Bank estimates
In our view, balance sheet strength and trading liquidity are not differentiating factors for Chinese auto manufacturer stocks’ valuations since most of the stocks under coverage have minimal gearing or even a high net cash position and decent trading volume of at least USD9m per day on average in the past three months. The exception is BYD, which has higher net gearing of c. 70%.
Figure 4: Chinese auto manufacturers – FY14E actual P/E Figure 5: Chinese auto manufacturers – FY14E target P/E vs. FY13-15E EPS CAGR vs. FY13-15E EPS CAGR 14 16 Brilliance Brilliance 12 14 GAC 10 12 Great Wall 10 Great Wall GAC 8 Geely Geely Dongfeng 8 6 Dongfeng 6 4 4 FY14E P/EFY14E (x) P/EFY14E (x) 2 2 0 0 0 10203040 0 10203040 FY13-15E two-year EPS FY13-15E two-year EPS
Remark: Excluding outlier BYD Remark: Excluding outlier BYD Source: Reuters, Deutsche Bank estimates Source: Reuters, Deutsche Bank estimates
Peer comparison – high P/BV supported by high ROE
In terms of FY14E P/BV, GWM is now trading at more than 3x, putting it at the high end of the peer spectrum. Considering the company’s likelihood of sustaining an industry-leading 30% ROE going forward, with high profitability, we believe GWM warrants a wider valuation premium against its peers listed
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Automobiles & Components Great Wall Motor in Hong Kong. Therefore, our implied target FY14E P/BV of 3.2x is by no means demanding, in our view (see Figure 7).
Figure 6: Chinese auto manufacturers – FY14E actual Figure 7: Chinese auto manufacturers – FY14E target P/BV vs. FY14E ROE P/BV vs. FY14E ROE 3.5 4.0 Brilliance Brilliance 3.0 3.5 Great Wall 3.0 2.5 Great Wall 2.5 2.0 2.0 1.5 Geely GAC Geely 1.5 GAC Dongfeng 1.0 1.0
FY14E P/BV (x) Dongfeng FY14E P/BV (x) 0.5 0.5 0.0 0.0 0 10203040 010203040 FY14E ROE (%) FY14E ROE (%)
Remark: Excluding outlier BYD Remark: Excluding outlier BYD Source: Reuters, Deutsche Bank estimates Source: Reuters, Deutsche Bank estimates
Discounted cash flow (DCF) analysis points to similar target price
Our DCF valuation on GWM is based on WACC of 10.7% and a 1% terminal growth rate, which is our prudent assumption of the mature perpetual growth rate of the China auto sector after 10 years of explicit forecasts. The output of HKD49.2 is close to our target price of HKD48.5, which further supports our valuation benchmark selection.
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Automobiles & Components Great Wall Motor
Figure 8: Great Wall Motor – DCF analysis (RMBm) 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E EBIT 14,122.3 15,292.7 16,058.6 16,573.2 16,939.9 17,222.3 17,457.6 17,667.4 17,863.7 18,053.2 less tax on EBIT (2,612.6) (2,982.1) (3,372.3) (3,811.8) (4,235.0) (4,305.6) (4,364.4) (4,416.9) (4,465.9) (4,513.3) effective tax rate 18.5% 19.5% 21.0% 23.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% - change in working capital 750.7 375.4 187.7 93.8 46.9 23.5 11.7 5.9 2.9 0.0 + depreciation & amortization 1,821.5 2,141.0 2,408.8 2,651.7 2,879.8 3,100.0 3,317.0 3,533.5 3,751.4 3,971.7 - CAPEX (5,541.6) (5,811.2) (5,781.1) (5,634.9) (5,420.8) (5,166.7) (4,888.1) (4,593.5) (4,287.3) (3,971.7) FCF 8,540.4 9,015.9 9,501.9 9,872.3 10,211.1 10,873.7 11,534.0 12,196.6 12,865.1 13,540.2 YoY 7.4% 5.6% 5.4% 3.9% 3.4% 6.5% 6.1% 5.7% 5.5% 5.2% Terminal value 140,623.0
FCF + TV 8,540.4 9,015.9 9,501.9 9,872.3 10,211.1 10,873.7 11,534.0 12,196.6 12,865.1 154,163.2 Discount factor 1.11 1.23 1.36 1.50 1.66 1.84 2.04 2.26 2.50 2.77
NPV 7,713.2 7,353.9 6,999.6 6,568.0 6,135.4 5,900.7 5,652.8 5,398.5 5,142.8 55,657.5
EV (sum of NPVs) 112,522.5
+ net cash (end FY14E) 4,702.7 + associates & 47.8 investments (end FY14E) - minorities (end FY14E) (149.9)
Equity Value 117,123.1 Issued shares (m) 3,042.4 Equity Value (HKD/share) 49.2
Cost of Capital Assumptions Ke 11.5% Risk-free rate 3.1% Market risk premium 5.6% Beta 1.5 Kd 5.0% Kd (after tax) 3.8% Target Equity/(Debt+Equity) 90.0% WACC 10.7% Source: Deutsche Bank estimates
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Automobiles & Components Great Wall Motor Key investment highlights
Leader in infant China SUV market, but competition ahead
Consistently leading the pack since introduction GWM entered the SUV segment in 2002 with Safe, a budget SUV model, when the segment was still dominated by the more expensive foreign brands. Sales volume surged shortly afterwards, with strong market reception, and subsequently the company launched more models, with the latest successful ones being Haval H6 and M4. In 2003, GWM captured the top spot in China’s SUV sales, with a 23.6% market share. While there has been reshuffling of top SUV makes over the years, GWM has been consistently among the top few, and maintained a 14.1% share in January-November 2013, despite increasing selections in the market. Also noteworthy is that the company has a clear lead vs. its domestic peers. Currently, the SUV is the company’s top revenue contributor, accounting for 58% of GWM’s top line in 1H13.
Figure 9: Sales of top six SUV makers in China* Figure 10: Sales of top six Chinese local SUV brands* (Units) (Units) 400,000 400,000 Great Wall 350,000 350,000 Great Wall 300,000 300,000 250,000 250,000 Beijing Hyundai 200,000 200,000 Shanghai VW 150,000 Dongfeng Honda 150,000 Chery 100,000 FAW VW (Audi) 100,000 BYD GAC PV Co 50,000 50,000 Brilliance Changan Ford Changan 0 0 2008 2009 2010 2011 2012 10M13 2008 2009 2010 2011 2012 10M13
* In terms of 10M13 sales volume * In terms of 10M13 sales volume Source: CAAM Source: CAAMk
Figure 11: 2008 market share of SUV makers in China Figure 12: 10M13 market share of SUV makers in China Huatai, Others , 3.4% 14.8% Dongfeng Great Wall, FAW Honda , 14.2% Toyota, 18.0% Others , 4.1% Beijing 35.8% Hyundai, 9.7% Changfeng, Great Wall, 5.8% 13.9% Shanghai Shanghai VW, 7.1% GM, 3.3% Dadi, 6.1% FAW Dongfeng Chery, Toyota, Honda , 11.2% 4.3% 6.4% Dongfeng Chang'an Dongfeng Beijing Dongfeng Nissan, Dongfeng Ford, 5.1% 6.2% Yueda Kia, Hyundai, Yueda Kia, Nissan, FAW VW, 7.3% 9.2% 4.5% 4.6% 5.0%
Source: CAAM Source: CAAM
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Automobiles & Components Great Wall Motor
Figure 13: Great Wall Motor – revenue breakdown Figure 14: Great Wall Motor – Haval H6
SUVs Pickups Sedan
Other vehicles Auto parts SUV as % of total (RMBm) 45,000 60% 40,000 50% 35,000 30,000 40% 25,000 30% 20,000 15,000 20% 10,000 10% 5,000 0 0% 2008 2009 2010 2011 2012
Source: Company data, Deutsche Bank Source: Company data
Niche positioning helps defend against competition at the moment In China’s SUV segment, GWM’s products are in a unique position in terms of price to performance. Unlike the old Safe, Sing and Pegasus SUVs targeted at the lower-end market with low prices, the current Haval and M series lines are designed for the mid-end urban SUV market, and they compete with foreign brands’ models such as Dongfeng Honda CR-V and Shanghai Volkswagen Tiguan. However, GWM’s most popular Haval H6 is offered at a deep discount when compared with foreign brands’ models, and with decade-long experience in making SUVs, consumers also perceive GWM’s models as more sophisticated in terms of design and technology vs. local peers. As such, GWM’s sales momentum has been strong in the past two years.
Figure 15: Sales volume of major low- to mid-end SUV models in China GWM’s products have led Brand and model Engine MSRP range (RMBm)10-mo sales (Units) YoY sales in China’s SUV segment (L) 2013 2012 (%) 60,000 120,000 180,000 240,000 300,000 360,000 with its high price-to- Great Wall Haval H6 1.5T, 2.0, 2.4 171,079 178,266 25.6 performance level. Great Wall Haval H5 2.0T, 2.0, 2.4 52,793 Great Wall M series 1.5 112,584 42,186 166.9 Nonetheless, the price gap FAW Volksw agen Tiguan 1.4T, 1.8T, 2.0T 168,044 156,366 7.5 appears to be narrowing with FAW Toyota RAV4 2.0, 2.4 80,762 86,460 -6.6 Dongfeng Honda CR-V 2.0, 2.4 153,014 137,500 11.3 competing models like Dongfeng Nissan Qashqai 1.6, 2.0 97,294 92,581 5.1 Chang’an Ford EcoSport. Dongfeng Peugeot 3008 1.6T, 2.0 41,620 0 n.a. Dongfeng Yueda Kia Sportage-R 2.0, 2.4 70,945 59,392 19.5 Beijing Hyundai ix35 2.0, 2.4 127,526 79,734 59.9 Beijing Hyundai Tucson 2.0 42,743 44,335 -3.6 Chang’an Ford Kuga 1.6T, 2.0T 75,567 0 n.a. Chang’an Ford EcoSport 1.0T, 1.5T 44,507 0 n.a. Chang’an CS35 1.6 60,094 1,292 4,551.2 BYD S6 2.0, 2.4 72,414 71,027 2.0 Chery Tiggo 1.6, 1.6T, 1.8, 2.0 65,092 87,350 -25.5 Brilliance Zhonghua V5 1.5T, 1.6 58,881 35,742 64.7 GAC Trumpchi GS5 1.8T, 2.0 48,939 12,356 296.1 Shanghai GM Buick Encore 1.4T 46,913 0 n.a. Geely GLEagle GX7 1.8, 2.0, 2.4 39,859 21,505 85.3
Remark: MSRP – Manufacturers’ suggested retail price Source: CAAM, sina.com.cn, Deutsche Bank
Tremendous potential in China’s SUV’s segment… From 2007-2012, sales of SUVs in China have been extremely strong, with a 41.1% five-year CAGR, and the momentum has continued in 2013, with 49.1% YoY growth in January-November, vs. overall passenger vehicles’ (PV) 15.0% YoY growth. In our view, with the improvement in living standards, car owners in China increasingly, like their peers in the US, are now looking for roomier
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Automobiles & Components Great Wall Motor vehicles when upgrading or having an extra car. Therefore, urban SUVs now appear to be the perfect choice for those who are not satisfied with the mass- market mid-size sedans. In fact, SUV sales merely made up 12.9% of total PV sales in China in 2012, vs. about 30% in the US. Although this percentage has moved up materially, to 16.6% for January-November 2013, we still believe there is abundant room for the segment to register above-average growth.
For GWM, management expects that, riding on the popularity of the Great Wall and Haval brands, the company will manage to sustain its sales growth, considering the pending demand for the Haval H6 and M4 SUVs, due to tight capacity, as well as a few new SUV model launches in FY13-14E, including the Haval H7, H8 high-end SUV and H2 mid-end SUV.
In our view, while we concur that GWM is still likely to outperform peers in FY14-15E with new models, we believe the extent of outperformance should narrow significantly considering the ample increase in number of new models in the SUV space. When doing our DCF analysis, we also expect GWM’s overall sales revenue to slow to 3% YoY growth over the next five years, implying normalizing volume growth and some pricing softness, due to mounting competition as illustrated in subsequent paragraphs.
Figure 16: Great Wall Motor – Deutsche Bank’s assumptions for SUV sales We expect GWM’s sales 2011 2012 2013E 2014E 2015E volume to normalize rapidly Sales volume (units) 147,341 279,956 418,153 505,383 594,112 YoY (%) 7.6% 90.0% 49.4% 20.9% 17.6% Source: Company data, Deutsche Bank estimates
… but competition is mounting While we concur with GWM’s management that its above-market growth can be sustained in the near term, with the strong demand for existing products and the launch of new products, we think the company’s sales outperformance in the segment is fading.
To elaborate on the existing mid-end SUV segment, we see a narrowing price gap between local and JV brands with JV brand compact/sub-compact SUV products, such as the Dongfeng Nissan Qashqai, the newly launched Chang’an Ford EcoSport and the Shanghai GM Buick Encore (see Figure 15). Given a decent reception for these models, we would not be surprised to see more similar offerings in the coming years by various brands (see Figure 17) since they would be more than happy to expand their SUV sales contribution for their currently lower level (vs. GWM) to enhance their margin outlook. Regarding the local brand mid-end SUV products, while it is true that a close competitor to the Haval H6 or M4 is still non-existent, there are an increasing number of local-brand products (such as the Chang’an CS35 and Geely’s GLEagle GX7) that could chip away some market share from GWM in the coming years.
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Figure 17: Examples of key new SUV models to be launched in China There will be an increasing Brand Model Type number of local/JV brand BYD S7 Local brand mid-end SUV SUV models trying to eat into Chang’an CS75 Local brand mid-end SUV GWM’s market share Chang’an CS95 Local brand hi-end SUV Geely Emgrand SX8 Local brand hi-end SUV Beijing Hyundai ix25 Mass-market JV brand sub-compact SUV Dongfeng Peugeot 2008 Mass-market JV brand sub-compact SUV Guangqi Honda Urban Mass-market JV brand sub-compact SUV Shanghai GM Chevrolet Trax Mass-market JV brand sub-compact SUV Source: Deutsche Bank, based on news search
Figure 18: Leading auto brands in China – sales contributions from SUVs While GWM may have
Sales volume Other passenger vehicles SUV stretched out its SUV sales
10M13 13% contribution, other industry Shanghai VW 10M12 14% players have much room to 10M13 6% Shanghai GM 10M12 1% catch up with more new 10M13 9% models FAW-VW 10M12 7% 10M13 0% Shanghai GM Wuling 10M12 0% 10M13 Beijing Hyundai 10M12 10M13 15% Dongfeng Nissan 10M12 17% 10M13 9% Chang'an 10M12 0% 10M13 22% Chang'an Ford 10M12 0% 10M13 65% Great Wall Motor 10M12 58% 10M13 9% Dongfeng PSA 10M12 0% 10M13 24% Dongfeng Yueda Kia 10M12 24% 10M13 11% Geely 10M12 6% 10M13 24% FAW Toyota 10M12 25% 10M13 18% BYD 10M12 21% 10M13 20% Chery 10M12 23% 10M13 0% Dongfeng 10M12 0% 10M13 0% Guangqi Honda 10M12 0% 61% Dongfeng Honda 10M13 10M12 59% 10M13 31% GAC Toyota 10M12 30% 0% Jinbei 10M13 10M12 0% -200,000(units) 200,000 600,000 1,000,000 1,400,000
Source: CAAM
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New price segment for GWM has uncertain outlook To prepare for the increasing competition, GWM has ambitiously enlarged its SUV product offering range, with the most recent introduction of the Haval H8, a high-end mid-size SUV priced at RMB201,800-236,800. According to the company, it targets to achieve about 3,000 units of sales a month and hopes that this could lead to a similar gross profit margin to its existing SUV business. Given the high starting price tag, we think GWM will need to strive for more sales in first-tiered cities. This implies a potential challenge, in our view. To begin with, the company has a relatively small dealership network in the first- tiered cities to compete against JV brands (see Figure 21). In addition, GWM used to drive a significant amount of sales from upgrading customers in lower- tiered cities, while first-tiered cities’ car owners may prefer upgrading to JV brands or even premium brands. Last but not least, prior to GWM, only one local brand has tried to launch a SUV product, mainly in the RMB200k range, i.e. Shanghai Auto, with its Roewe W5 (with MSRP at RMB162,800-298,800). In the year to October, only 9,000 units of the W5 were sold, with the deepest discount at about RMB50,000 per unit.
Figure 19: Great Wall Motor – Haval H8
Source: Company data
Figure 20: Sales volume of major mid- to high-end SUV models in China At the moment, the Brand and model Engine MSRP range (RMBm)10-mo sales (units) YoY RMB200,000-plus SUV (L)200,000 300,000 400,000 500,000 600,000 700,000 2013 2012 (%) segment is dominated by JV Great Wall Haval H8 2.0T n.a. n.a. n.a. brands. It may be tough for FAW Audi Q5 2.0T 84,844 75,151 12.9 GWM to win a place in this FAW Audi Q3 2.0T 33,969 0 n.a. FAW Toyota Prado 4.0 16,659 16,823 -1.0 segment. GAC Toyota Highlander 2.7, 3.5 74,742 62,356 19.9 Beijing Hyundai new Santa Fe 2.0T, 2.4 59,805 0 n.a. Beijing Benz GLK 3.0 32,120 17,326 85.4 Brilliance BMW X1 2.0, 2.0T 17,871 18,282 -2.2 Dongfeng Yulong Luxgen Big 7 2.2T 16,582 24,666 -32.8
Remark: MSRP – Manufacturers’ suggested retail price Source: CAAM, sina.com.cn, Deutsche Bank
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Figure 21: Store network for selected brands and selected locations in China Great Wall may also have a Great Dongfeng Dongfeng FAW Toyota SAIC disadvantage selling products Wall Honda Yueda Kia Volkswagen in major cities given its First-tier cities smaller network Shanghai 5 7 13 15 46 Beijing 8 13 12 24 28 Guangzhou 6 9 6 18 8 Shenzhen 6 6 3 18 8 Tianjin 4 5 6 11 15 Total 29 40 40 86 105 Selected second-tier cities Suzhou 6 4 8 7 18 Chongqing 4 6 6 6 12 Chengdu 6 7 9 7 16 Wuhan 4 6 5 4 7 Hangzhou 3 5 6 12 13 Qingdao 7 4 8 5 10 Total 30 32 42 41 76 Source: Company data, Deutsche Bank
Sedan and pick-up truck – good products but lack of focus
Sedan – once aggressive but recent developments more muted Considering the smaller scale of the SUV/pick-up market in China, with an increasing number of players, it would be logical for GWM to look elsewhere for diversification. Consequently, the company commenced its economy sedan and MPV project in 2004 and started constructing its sedan/MPV production base with projected annual capacity of 200,000 units in 2005. We estimate the total investment to be close to RMB3bn.
GWM launched its first budget sedan model, the Peri, in 2008, followed by other models, such as the Florid. Initial market perception was weak, with sedan sales of only 9,704 units and 77,133 units in 2008 and 2009, respectively, probably due to a lack of brand image (for sedan products) and a lack of differentiating design. Then, in 2010, the company launched a compact sedan model, the Voleex C30, which turned out to be a successful model, with more than 10,000 units of average monthly sales since November 2010. As of now, the C30 is still GWM’s most popular sedan model, helping GWM to achieve a gross profit margin of around mid-20% for the sedan business, on our estimates.
However, since GWM has been devoting its efforts to developing its SUV business, the pace of new sedan development has slowed down, and the company’s sedan sales in January-November achieved only 10.2% YoY growth, vs. the market’s 11.1% growth. While we should see GWM’s sedan sales pick up somewhat going forward, with the Tianjin plant capacity ramp-up and the launch of facelift models, a sales outperformance is unlikely from this segment.
Figure 22: Great Wall Motor – Deutsche Bank’s assumptions for sedan sales GWM’s sedan sales unlikely 2011 2012 2013E 2014E 2015E to outperform the market Sales volume (units) 187,504 199,256 217,714 240,794 263,917 YoY (%) 52.6% 6.3% 9.3% 10.6% 9.6% Source: Company data, Deutsche Bank estimates
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Figure 23: Great Wall Motor – Voleex C30 Figure 24: Great Wall Motor – Voleex C50
Source: Company data Source: Company data
Extended record of sales excellence in an unexciting pick-up truck segment Despite a slower pace of growth, pick-ups still accounted for 17.2% of GWM’s total sales volume in January-November, and remain a meaningful part of the company’s core business. As China’s leading pick-up manufacturer, again on its leading price to performance characteristics, the company has had the highest market share for 15 consecutive years among its peers.
Given the fact that pick-ups are not allowed in big cities in China, we do not expect this segment to post strong demand in the future, contrary to the US. Nevertheless, with improving living standards in rural China and an increasing number of small-scale businesses that could utilize pick-ups for goods transportation, we would envision sales growth in this segment to broadly match rural economic growth. For Great Wall, the company is poised to benefit with its well established Wingle 5 models, with a price range of RMB67,800-119,800.
Figure 25: Great Wall Motor – Deutsche Bank’s assumptions for pick-up sales We do not expect much 2011 2012 2013E 2014E 2015E excitement from GWM’s pick- Sales volume (units) 121,673 136,694 128,016 139,885 151,775 up sales due to a lack of YoY (%) 23.3% 12.3% -6.3% 9.3% 8.5% strong segment growth Source: Company data, Deutsche Bank estimates
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Figure 26: Great Wall Motor – Wingle 5 pick-up truck
Source: Company data
First mover in vehicle exports and prospects still bright
Exports to augment growth, although not a large focus for GWM currently GWM began exporting its pick-ups in 1998, and the company has already recorded sales in more than 120 countries and regions, including some developed economies such as Australia and Italy. Current export products include the full range of SUVs, sedans and pick-ups, and the company is among China’s largest SUV and pick-up exporters. Leveraging on its value-for- money proposition, the company’s export volume registered a 15.6% five-year CAGR in 2007-12. This is considerably below GWM’s overall 42.0% sales volume CAGR during the period, since the company has experienced robust demand from within China, which consumed most of GWM’s production capacity.
GWM’s export sales made up as much as 43.0% of the company’s sales volume in FY07, but dwindled to 11.3% in 1H13. Going forward, GWM plans to boost its export sales by setting up more overseas assembly plants (from 12 knock-down plants at the moment) to avoid hefty import tariffs in countries such as Russia. We think that, while the importance of the export market has reduced from GWM, it will still help to augment the company’s future growth when rapid domestic sales growth starts to normalize.
Figure 27: Great Wall Motor – export sales trend Figure 28: Great Wall Motor – 2012 export destinations by volume Pickup SUV Sedan Other vehicles (Units) other 140,000 Italy overseas 0% 120,000 Ukraine countries Russia 1% 17% 30% 100,000 Ecuador 3% 80,000 Peru 3% Chile 60,000 8% 40,000 Algeria Austrialia 20,000 7% 14% Iraq South 0 8% Africa 2008 2009 2010 2011 2012 2013E 2014E 2015E 9%
Source: Company data, Deutsche Bank estimates Source: Company data
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Automobiles & Components Great Wall Motor
Unique sales method to drive turnover
Similar to its peers, GWM has developed an extensive sales network in China, with about 500 sales outlets. Unlike typical dealers that derive income from the difference between the final selling price and the ex-factory price, GWM adopts a unique revenue generation mechanism for its dealers. In brief, dealers source their inventory from GWM at MSRP, and their sales income is mainly from sales commission, accompanied by other rewards or bonuses, depending on the sales volume achieved. Adding these up together, the income is about 7-8% of new car sales revenue, on our estimates. Note that in both typical and GWM’s cases, dealers assume inventory risks.
With the higher costs of keeping inventories but with more flexibility and upside for earnings (due to all types of rewards and bonuses), GWM’s dealers are better motivated to push sales. Nevertheless, this also makes our estimates for ASPs and selling expenses more difficult, due to the fluctuation in the amount of incentives being given to dealers.
Extensive vertical integration could be double-edged sword
When compared with its peers in China, GWM has consistently showcased above-average margins. The key to the company’s higher margins, in our view, is its higher concentration of sales in high-margin SUV products and the fact that it has about 50-60% of its components manufactured in-house vs. less than 50% for typical OEM peers.
Going forward, we think that the product mix shift is still likely to be favorable to GWM, given our expectation of faster sales growth in the SUV segment. That said, we do not forecast overall margin expansion, because we feel higher competition in the SUV segment will lead to margin erosion in that segment.
Regarding the company’s vertical integration, this could be a positive for GWM, as long as it can maintain high production utilization. If not, the fixed costs along the supply chain will eat into the company’s profitability if there is idle capacity in various component plants. Furthermore, as GWM is branching out with higher-end SUV products, such as the Haval H8, the chances are that the company will rely more on third-party global auto component suppliers for higher quality parts. In other words, we may have seen the best outcome from vertical integration already, with a lack of further upside surprises.
Figure 29: Comparison of selected Chinese auto manufacturers’ margins GWM has unrivaled margins Dongfeng Motor* Great Wall Motor Geely Auto vs. its peers, due to a high FY12 sales volume (units) 2,172,723 621,438 483,483 SUV concentration and FY12 SUV sales volume as % of total sales 14.3% 45.0% 6.4% vertical integration. This may FY12 gross profit margin (%) 20.1% 24.1% 18.5% also mean limited upside in FY12 net profit margin (%) 8.0% 13.7% 8.3% the future.
1H13 sales volume (units) 1,210,453 370,301 263,544 1H13 SUV sales volume as % of total sales 14.2% 50.3% 10.7% 1H13 gross profit margin (%) 19.2% 26.3% 19.2% 1H13 net profit margin (%) 7.7% 16.1% 9.4% * Under-proportionate consolidation accounting method Source: Company data
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Automobiles & Components Great Wall Motor Financials
High concentration in SUV sales leads to rapid growth
In summary, we believe GWM could achieve 19.2% revenue CAGR in FY13-15, driven mainly by strong growth in the SUV business and by growing exports. Considering a better sales mix, the high utilization rate of its existing plants and its discipline in operating cost control, we estimate that its net profit CAGR could be mildly higher, at 19.6%, in FY13-15.
Figure 30: Great Wall Motor – revenue growth trend Figure 31: Great Wall Motor – net profit growth trend
Revenue (RMBm) YoY (%) Net Profit (RMBm) YoY (%) 14,000 100% 90,000 60% 90% 80,000 12,000 50% 80% 70,000 10,000 70% 60,000 40% 8,000 60% 50,000 50% 30% 40,000 6,000 40% 30,000 20% 4,000 30% 20,000 20% 10% 2,000 10,000 10% 0 0% 0 0% 2009 2010 2011 2012 2009 2010 2011 2012 2013E 2014E 2015E 2013E 2014E 2015E
Source: Company data, Deutsche Bank estimates Source: Company data, Deutsche Bank estimates
Sales volume –growth supported by the SUV segment
The key investment highlight for GWM, in our view, is always centered on its volume growth prospects, especially SUV volume growth. We project a 15.0% sales volume CAGR for FY13-15 for the company’s overall vehicle sales.
To elaborate, besides the stable 8.9% CAGR in pick-up truck sales volume and 10.1% CAGR on sedan sales volume that we estimate for FY13-15, our major growth assumption still lies in the SUV segment, with a FY13-15 CAGR of 19.2%. We forecast 505,383 units and 594,112 units of SUV sales, respectively, for 2014 and 2015, to be driven by sales of new models, such as the Haval H8 and the Haval H2. While our growth assumption is probably lower than market consensus, we think it is justified considering the intensifying competition in the SUV segment.
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Automobiles & Components Great Wall Motor
Figure 32: Great Wall Motor – sales volume trend
(Units) Pickup SUV Sedan Other vehicles 1,200,000
1,000,000
800,000
600,000
400,000
200,000
0 2009 2010 2011 2012 2013E 2014E 2015E
Source: Company data, Deutsche Bank estimates
ASPs: SUV to soften, stable outlook for pick-up and sedan
Over the past two years, GWM has managed to steadily increase its blended SUV ASP, thanks to an improving sales mix with increasing Haval H6 sales. What is more, its mid-end SUV products like Haval H5 and H6, selling at about RMB100,000 per unit, lack of close competition from both local and JV brands.
Driven mainly by strong demand for the existing Haval H6 and M4, as well as by new higher-end SUV model launches, e.g. the Haval H8, we factor in 8.8% and 0.6% sequential growth for SUV ASP in FY14 and FY15, respectively. Over the medium term, however, (FY16 and beyond) we expect competition to lead to ASP declines which we think may surprise the street to the downside.
For pick-up trucks, we expect a small 2.8% blended ASP lift in FY14, due to the end of the low-priced Deer pick-up sales, and we expect the price to remain stable in FY15. GWM has managed to maintain a relatively stable ASP trend for its pick-ups in the past few years. This is probably because the company is the market leader in pick-up trucks, and its established brand equity among domestic brands prevents it from participating in excessive price wars.
Blended ASP for GWM’s sedan segment has been on the rise in the past couple of years because of the inclusion of contributions from the higher- priced Voleex C50 models. Going forward, we think the company’s ASPs on sedan products should remain stable in FY14-15, with a normalizing product mix.
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Figure 33: Great Wall Motor – ASP trends
(RMB) SUV Pickup Other vehicles Sedan 90,000
80,000
70,000
60,000
50,000
40,000
30,000 2008 2009 2010 2011 2012 2013E 2014E 2015E
Source: Company data, Deutsche Bank estimates
Margins and returns – supported by new products and high capacity utilization
Despite rising competitive pressure, we still expect GWM’s higher-than-peer margins to be sustainable, at least in FY14-15, due to stable ASP expectations in general, as well as a favorable product mix change, i.e. increasing contributions from the SUV segment partly offset by rising unit production costs such as labor and parts. While the company is adding capacity in the new Xushui plant, after ramping up capacity in its Tianjin plant recently, we do not expect much margin pressure from fixed cost increases, since GWM still manages to utilize its facilities significantly, with strong demand for its SUVs. All in all, we believe GWM can maintain its enviable ROE of about 30% in the foreseeable future, supporting its higher-than-market average P/BV ratio.
Figure 34: Great Wall Motor – gross profit margin trend Figure 35: Great Wall Motor – overall margin trend
Pickup SUV Sedans Gross profit margin EBIT margin Net profit margin 40% 30% 30% 25% 20% 20%
10% 15%
0% 10%
-10% 5% 2008 2009 2010 2011 2012
2013E 2014E 2015E 0% -20%
-30% 2008 2009 2010 2011 2012 2013E 2014E 2015E
Source: Company data, Deutsche Bank estimates Source: Company data, Deutsche Bank estimates
Strong liquidity position providing additional peace of mind
GWM has a debt-free RMB8.3bn net cash position as of 30 September 2013, in addition to a steadily increasing operating cash inflow of about RMB3-4bn a year in FY10-12. While such an unleveraged capital structure may not be the most efficient one for the company, it provides extra comfort to investors, especially considering that: 1) GWM plans to spend an aggregate of RMB4-
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5bn in capex per year to expand production capacity in the Tianjin and Xushui plants, 2) the company aims to sell 1.3m units of vehicles in 2015, and 3) there is room for increasing the dividend payout.
Figure 36: Great Wall Motor – summary income statement (RMBm) 2010 2011 2012 2013E 2014E 2015E Net revenue 22,175 29,037 41,565 53,917 66,657 76,612 Cost of sales (17,298) (22,594) (31,562) (39,770) (48,964) (56,399) Gross profit 4,877 6,443 10,004 14,147 17,693 20,213 Gross profit margin (%) 22.0% 22.2% 24.1% 26.2% 26.5% 26.4% Selling and distribution expenses (1,070) (1,193) (1,656) (1,941) (2,433) (2,796) General and administrative expenses (874) (1,284) (1,744) (2,399) (2,900) (3,294) Operating profit (EBIT) 2,933 3,967 6,604 9,806 12,361 14,122 Operating profit margin (%) 13.2% 13.7% 15.9% 18.2% 18.5% 18.4% Investment income 14 12 17 52 58 63 Net interest income 8 23 105 97 165 261 Share of profits of associates/JVs 42 12 2 6 6 7 Other non-operating income, net 44 117 113 186 219 241 Profit before income tax 3,041 4,131 6,841 10,147 12,808 14,694 Income tax (214) (620) (1,119) (1,776) (2,305) (2,718) Profit for the year 2,827 3,511 5,722 8,371 10,503 11,976 Minority interests (126) (84) (30) (9) (12) (13) Net profit 2,701 3,426 5,692 8,362 10,491 11,963 Net profit margin (%) 12.2% 11.8% 13.7% 15.5% 15.7% 15.6% Source: Company data, Deutsche Bank estimates
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Figure 37: Great Wall Motor – summary balance sheet (RMBm) 2010 2011 2012 2013E 2014E 2015E Non-current assets Fixed assets 7,313 10,443 14,009 16,782 19,825 22,934 Intangible assets 1,111 1,869 2,214 2,754 3,329 3,940 Goodwill 2 2 2 2 2 2 Investment properties 2 6 6 6 6 6 Interests in associates/JVs 147 70 42 42 42 42 Deferred tax assets 297 352 408 469 525 578 Other non-current assets 2 18 40 47 52 57 8,874 12,761 16,722 20,102 23,782 27,560 Current assets Inventories 2,104 2,777 2,695 3,516 4,265 5,006 Bills and accounts receivables 8,053 9,382 15,482 19,970 23,860 26,515 Held for trading financial assets 0 1 12 12 12 12 Other receivables 1,202 650 854 983 1,100 1,210 Other current assets 371 456 467 535 597 656 Cash and cash equivalents 3,095 7,107 6,337 7,960 10,729 14,664 14,825 20,374 25,848 32,975 40,563 48,063 Current liabilities Accounts payables 4,904 6,034 8,697 10,484 12,053 13,288 Tax payable 179 284 537 618 692 761 Other payables 791 1,414 1,956 2,249 2,519 2,771 Short-term financing liabilities 3,376 3,978 4,342 5,242 6,026 6,644 Other short-term financing liabilities 2,638 3,004 3,787 4,355 4,878 5,366 11,887 14,714 19,319 22,948 26,168 28,830
Net current assets 2,937 5,661 6,529 10,027 14,395 19,233 Non-current liabilities Other non-current liabilities 1,410 1,400 1,607 1,848 2,070 2,277 1,410 1,400 1,607 1,848 2,070 2,277
Net assets 10,400 17,022 21,643 28,281 36,107 44,516
Minority interests 385 284 129 138 150 163 Shareholders’ equity Share capital 1,095 3,042 3,042 3,042 3,042 3,042 Reserves 8,920 13,695 18,472 25,100 32,915 41,311 10,015 16,737 21,514 28,142 35,958 44,353
Total equity 10,400 17,022 21,643 28,281 36,107 44,516 Source: Company data, Deutsche Bank estimates
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Figure 38: Great Wall Motor – summary cash flow statement (RMBm) 2010 2011 2012 2013E 2014E 2015E Profit after tax 2,827 3,511 5,722 8,371 10,503 11,976 Depreciation & amortization 549 702 949 1,149 1,469 1,822 Share of profits of associates/JVs (56) (24) (19) (9) 0 0 Net finance income 17 4 10 3 3 3 Increase/(decrease) in provisions 27 5 75 9 0 0 Change in working capital (147) 303 (2,278) (1,698) (1,437) (751) Other operating cash flow (25) (52) (123) 0 0 0 Cash flow from operations 3,191 4,449 4,337 7,825 10,538 13,050
Net capital expenditure (3,206) (3,752) (4,266) (4,461) (5,087) (5,542) Free cash flow (15) 697 71 3,364 5,451 7,508
Proceeds from investment disposals 1,804 1,795 5,257 0 0 0 Acquisition of subsidiaries and associates (53) (7) (3) 0 0 0 Other investments, net of investment income (852) (1,527) (4,924) (3) (3) (3) Dividends paid (274) (548) (913) (1,734) (2,676) (3,567) New issue of capital 0 3,894 0 0 0 0 Net increase/(decrease) in borrowings (76) 5 1 0 0 0 Other investing or financing cash flow (863) (69) (192) (3) (3) (3) Net cash flow (before FX effect) (328) 4,241 (703) 1,623 2,769 3,935 Source: Company data, Deutsche Bank estimates
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Automobiles & Components Great Wall Motor Risks
Main risks come from SUV segment
As GWM relies heavily on the SUV business for fueling growth in the coming years, any unexpected sales weakness in its upcoming SUV models, possibly due to intensifying competition with more competing new models, or any delay in new model launches, could dampen GWM’s growth prospects and the share price. Moreover, since the SUV segment still carries better margin prospects for auto manufacturers, an increase in pricing competition among peers to capture market share more aggressively could eventually drag down these enviable SUV margins faster than we expect. Above all, since GWM also manufactures a significant amount of auto components in-house, weaker-than- expected sales could lead to underutilization of its new facilities.
However, if GWM’s new SUV products turn out to be more popular than expected, the path to a more normal earnings growth profile may take longer than expected and the stock could continue to re-rate.
Losing out in the sedan segment
In FY07/08, GWM put a lot of effort into the development of sedans, with the sedan segment still China’s largest PV sub-segment, despite thinner margins. However, after some success in selling its Voleex C30 sedan, GWM does not appear to be putting as much effort into new sedan model development vs. new SUV development. As such, the company may risk losing out in the sedan segment again in the long run. However, we also see an upside risk here if the sedan segment is materially reduced in scale as GWM could then become a “pure-play”, which may be viewed positively by the market.
Upside potential from export sales
In 1H13, GWM’s export sales volume accounted for only 11.3% of its total sales volume. This is considerably below the level of its local brand peers (such as Chery and Geely), due to the overwhelming domestic demand for GWM’s vehicles. With the new capacity in place, there is upside for GWM to win more export sales in the longer run.
On the flipside, increasing export sales going forward would also lead to increasing downside risks related to foreign exchange rates, protectionism in export countries, geopolitical situations, etc.
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Automobiles & Components Great Wall Motor Company background
History
Located in Baoding city in Hebei province, GWM is one of China’s largest privately owned auto makers and the largest manufacturer in the SUV and pick-up segments. It also ranks among the biggest auto exporters in China in terms of SUV and pick-up shipments.
Great Wall Industrial (GWI), GWM’s predecessor, was originally a collectively owned enterprise engaged in vehicle refitting and modification. In 1991, Mr. Wei Jianjun, GWM’s current Chairman, was contracted for the operation of GWI when it was in financial difficulties. A few years later, in 1996, the company moved into the business of pick-up manufacturing and launched its first pick-up model, the Deer. GWI underwent a restructuring in 1998, and became GWM. In addition, the company started to export its products. Since then, GWM has been the country’s top pick-up manufacturer and seller, for 15 consecutive years. In 2002, the company commenced SUV manufacturing of its first model, the Safe, ranked first in China’s SUV market in 2003. Great Wall introduced its first sedan model, the Peri, in March 2008.
Currently, the company manufactures one pick-up model line (Wingle 5), five SUV models (M2, M4, Haval H5, Haval H6 and Haval H8), three sedan models (C20R, C30 and C50) and one MPV model (V80) on 800,000 units of annual production capacity. Its products are sold in more than 120 countries and regions, with exports accounting for 11.3% of total sales volume in 1H13. Great Wall launched a dual-brand strategy in March 2013, unveiling the Haval brand, which is dedicated to SUV models, including the current H5, H6 and H8 models, and the new SUV models, such as the H2 and H7, due for launch in the future. The company also plans to split and further develop the dealership network into the Great Wall brand and the Haval SUV brand. In the medium term, GWM aims to achieve sales of 1.3m units on 1.5m units of production capacity in 2015.
Shareholding structure
GWM was listed on the Hong Kong Stock Exchange in December 2003 through an IPO that raised HKD1.7bn. The company’s shareholding structure shortly after the IPO included a 40.45% stake owned by Mr. Wei & family, a 31.78% stake owned by local government and a 27.77% free float. In order to fund the passenger car project, GWM completed the placement of 151.7m new H shares at HK$10.65 per share in May 2007 for HK$1.6bn. Upon completion of the placement, the free float was increased to 37.73%, while Mr. Wei & family and the local government’s stakes were diluted to 38.13% and 24.14%, respectively.
GWM was dual-listed on the Shanghai Stock Exchange in September 2011 through selling 304.2m new A shares at RMB13.0 per share for RMB3.96bn. Upon completion of the A-share IPO, the free float was increased to 43.96% and Mr. Wei & family and the local government’s stakes were diluted to 35.29% and 20.75%, respectively.
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Automobiles & Components Great Wall Motor
Figure 39: Great Wall Motor – latest shareholding structure
Mr. Wei Jianjun Ms. Han Xuejuan Local government
62.35% 0.63% 37.02%
Baoding Innovation Great Wall Asset Management Company Public A shares Public H shares Limited (A shares)
56.04% 10.00% 33.96%
Great Wall Motor 2333.HK
Three vehile production plants at Baoding, Tianjian and Xushui. 28 subsidiaries and 5 associate entities.
Source: Company data
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Automobiles & Components Great Wall Motor
Management profile
Figure 40: Great Wall Motor – senior management profile Name Age Position Key profile Mr. Wei Jianjun 49 Founder and Chairman Joined in 1990; Responsible for formulating management philosophy, determining business strategies and providing guidance for new product development. Graduated from the Committee College of Hebei Province of the PRC Communist party. Mr. Liu Pingfu 63 Vice Chairman Joined in 2001. Sixteen years’ experience in administration and management. Graduated from the Hebei Normal College. Ms. Wang Fengying 42 Executive Director and Joined in 1991. Also the general manager of Baoding Great Wall Automobile Sales Company General Manager Limited. Responsible for formulating operation and management strategies of the company. More than 10 years’ experience in sales and marketing management. Masters degree in economics. Mr. Hu Kegang 67 Executive Director and Joined in 1995. More than 30 years of experience in corporate operations management. Deputy General Manager Graduated from Hebei University in Law. Ms. Yang Zhijuan 46 Executive Director Joined in 1999. Currently the assistant to head of the engineering institute of the company. Bachelor’s degree in Law and PRC lawyer qualification. Mr. He Ping 36 Non-executive Director Currently general manager of its risk control and compliance department. 10 years’ experience in investment banking. Appointed as the non-executive director from 2005. Graduated from Fudan University with a bachelor’s degree in Law. Mr. Niu Jun 38 Non-executive Director Joined in 1996; General manager of Hebei Baocang Expressway Co., Ltd, a shareholder of Great Wall Motor; Many years of experience in sales management; Graduated from Hebei University of Science and Technology in marketing. Mr. Hu Shujie 41 Deputy General Manager Joined in 1996; Currently the general manager of the second Manufacturing Division of the company; Graduated from the Hebei University in History. Mr. Huang Yong 44 Deputy General Manager Joined in 1992. Supervisor of the technology center. Responsible mainly for automobile development. Graduated from the Beijing University of Aeronautics and Astronautics. Mr. Zhang Xin 43 Deputy General Manager Joined in 1992 and was appointed as a deputy general manager of the company in 2006. Graduated from the Hebei Party School in Economics Management in 2003. Mr. Zheng Chunlai 43 Deputy General Manager Joined in 1986. General manager of Baoding Nuobo Rubber Manufacturing Company Limited. Nearly 20 years of experience in corporate management, manufacturing and sales of automobile parts and components. Mr. Hao Jianjun 40 Deputy General Manager Joined in 1997. Head of the engineering institute, general manager of Colin Heating and general manager of automation business department of the company. Mr. Chai Wanbao 65 Deputy General Manager Joined in 2004 and was appointed as a deputy general manager of the company in 2007. Graduated from Air Force Engineering University. Ms. Li Fengzhen 50 Chief Financial Controller Joined in 2001 and was appointed as the chief financial controller of the company in May 2005. Fifteen years of experience as a financial accountant in enterprises. Graduated from Hebei Finance Institute. Majored in Accountancy. Mr. Zhang Wenhui 37 Deputy general manager Joined in 2000. Responsible mainly for strategic management, project management, performance management, investment management, etc. Mr. Zhao Guoqing 35 Deputy general manager Joined in 2000 and was appointed as the deputy director of the technology research institute and the director of the supporting facilities management department of the company in 2006. Responsible for the management of supporting facilities. Mr. Li Yanqing 46 Deputy general manager Joined in 1999 and was appointed as the director of lean management department of the company in 2008. Responsible for the lean production and cost control of the company. Mr. Xing Wenlin 43 Deputy general manager Joined in 1991. General manager of the international department of Great Wall Automobile Sales Company. Responsible for the overall planning of the international department. Mr. Dong Ming 43 Deputy general manager Joined in 2004. Has served in various positions successively, including the manager of the public relations department of a marketing company, assistant to the general manager of the company and deputy general manager of a marketing company. Mr. Xu Hui 34 Deputy general manager Joined in 2008 and was appointed as the Secretary of the Board in 2010. Has been key personnel member in organizing the company’s general meetings and board meetings, as well as coordinating the work in relation to the A shares and H shares of the company. Source: Deutsche Bank
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Automobiles & Components Great Wall Motor Appendix 1
Important Disclosures
Additional information available upon request
Disclosure checklist Company Ticker Recent price* Disclosure Great Wall Motor 2333.HK 45.65 (HKD) 11 Dec 13 6 *Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies
Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes.
6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company calculated under computational methods required by US law.
Important Disclosures Required by Non-U.S. Regulators Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes.
6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of this company calculated under computational methods required by US law.
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=2333.HK
Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Vincent Ha
Deutsche Bank AG/Hong Kong Page 27
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Automobiles & Components Great Wall Motor
Historical recommendations and target price: Great Wall Motor (2333.HK) (as of 12/11/2013)
60.00 Previous Recommendations
Strong Buy 50.00 Buy Market Perform Underperform Not Rated 40.00 Suspended Rating
Current Recommendations 30.00 Buy Hold Security Price Security 20.00 Sell Not Rated Suspended Rating
10.00 *New Recommendation Structure
as of September 9,2002
0.00 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Date
Equity rating key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total 450 56 % share-holder return (TSR = percentage change in 400 share price from current price to projected target price 350 plus pro-jected dividend yield ) , we recommend that 300 36 % 250 investors buy the stock. 200 Sell: Based on a current 12-month view of total share- 150 26 % 8 % holder return, we recommend that investors sell the 100 22 % 50 15 % stock 0 Hold: We take a neutral view on the stock 12-months Buy Hold Sell out and, based on this time horizon, do not recommend either a Buy or Sell. Companies Covered Cos. w/ Banking Relationship Notes: Asia-Pacific Universe 1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12- month period Sell: Expected total return (including dividends)
of -10% or worse over a 12-month period
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Automobiles & Components Great Wall Motor
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