Hold Great Wall Motor
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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.