Great Wall Motor GM to Reach 20% As Haval Recovers and WEY Beats

Equity Research January 2, 2018 Great Wall Motor GM to reach 20% as Haval recovers and WEY beats Investment Focus Upgrade to BUY Ticker 601633.SH 02333.HK Action CICC investment rating BUY BUY We stated that Great Wall Motor’s GM will likely recover in our report Last close Rmb11.49 HK$8.95 published on November 27, 2017, after we surveyed GWM’s dealers. CICC target Rmb13.50 HK$11.40 Recently, we notice further improvement in GWM’s operation. The destocking of old models, better-than-expected sales volume of WEY 52wk price range Rmb14.74~10.50 HK$12.08~6.78 models in November and strong MoM growth in Haval sales volume Market cap (bn) Rmb92 HK$111 prompt us to expect a 20% GM in 4Q17. We upgrade GWM-A/H to Daily value (mn) Rmb83.61 HK$324.47 BUY, and lift TP to Rmb13.5/HK$11.4. Shares outstanding (mn) 9,127 9,127 Free float (%) 66 34 What’s changed? Daily volume (mn sh) 7.16 36.66 Business sector Auto & Parts ► WEY models: Sales volume will likely top 300,000 units in 2018 02333.HK HSCEI and boost GWM’s GM. The two WEY models both recorded over 168 10,000 units of sales volume in November, driven by oppotunity in medium SUV market, WEY’s high product competiveness and 151 new design. 4S stores for WEY models reached 100 as of 134 end-2017, and the figure will likely reach 300 in 2018. 117 Relative Value (%) Value Relative ► Haval models: GWM is streamlining Haval’s production and will 100 83 differentiate red and blue label models; the new powertrain Jan-2017 Apr-2017 Jun-2017 Sep-2017 Dec-2017 enhances products’ price premium and lowers production cost. ► GWM increases marketing expense, spurring dealers to open (Rmb mn) 2016A 2017E 2018E 2019E more stores. GWM’s advertising expense ratio is lower than its Revenue 98,616 98,119 121,853 137,949 competitors. GWM sponsors the 2018 new year concerts of (+/-) 29.7% -0.5% 24.2% 13.2% Hunan TV and Jiangsu TV, implying its great determination of Net profit 10,551 4,801 8,235 9,707 putting effort in marketing. (+/-) 30.9% -54.5% 71.5% 17.9% EPS 1.16 0.53 0.90 1.06 How do we differ from the market? We believe that the growth of BPS 5.18 5.36 6.10 6.89 GWM’s 4Q17/2018e GM will be stronger than expected, and sales DPS 0.35 0.16 0.27 0.32 volume of WEY in 2018 will also beat market expectation. CPS 0.97 1.10 0.98 1.28 Potential catalysts: Strong GM growth, stellar WEY sales volume and P/E 6.9 14.6 8.2 7.0 P/B 1.5 1.4 1.2 1.1 new powertrain product well accepted by the market. EV/EBITDA 4.8 7.6 4.8 3.9 Dividend yield 4.4% 2.1% 3.7% 4.3% Financials and valuation ROAA 12.9% 5.1% 8.0% 8.2% We lift 2017/18e earnings forecast by 5.0%/13.6% to ROAE 24.6% 10.0% 15.7% 16.4% Rmb4.8bn/8.2bn, and introduce 2019e net profit of Rmb9.7bn. Risks Source: Wind, Bloomberg, company data, CICC Research Sales volume of new products and GM disappoint. Wei FENG Jing CHANG Analyst Associate [email protected] [email protected] SAC Reg. No.: S0080513110002 SAC Reg. No.: S0080116080077 SFC CE Ref: BCK590 Please read carefully the important disclosures at the end of this report CICC Research: January 2, 2018 Financial summary Financial statement (Rmb mn) 2016A 2017E 2018E 2019E Financial ratios 2016A 2017E 2018E 2019E Income statement Growth ability Revenue 98,616 98,119 121,853 137,949 Revenue 29.7% -0.5% 24.2% 13.2% COGS -74,377 -79,035 -95,512 -107,685 Operating profit 34.2% -45.0% 54.6% 16.4% Selling expenses 3,175 4,612 5,605 6,346 EBITDA 27.4% -41.6% 48.6% 14.0% Administrative expenses 4,575 5,397 6,702 7,587 Net profit 30.9% -54.5% 71.5% 17.9% Other ops income (expense) 0 0 0 0 Profitability Operating profit 16,488 9,076 14,034 16,331 Gross margin 24.6% 19.5% 21.6% 21.9% Finance costs 4 43 42 93 Operating margin 16.7% 9.3% 11.5% 11.8% Other income (expense) -4,091 -3,334 -4,155 -4,728 EBITDA margin 15.3% 8.9% 10.7% 10.8% Profit before income tax 12,483 5,784 9,921 11,695 Net margin 10.7% 4.9% 6.8% 7.0% Income tax -1,929 -983 -1,687 -1,988 Liquidity Minority interest -3 0 0 0 Current ratio 1.25 1.23 1.27 1.32 Net profit 10,551 4,801 8,235 9,707 Quick ratio 1.11 1.09 1.13 1.18 EBITDA 15,041 8,778 13,041 14,867 Cash ratio 0.05 0.09 0.12 0.17 Recurrent net income 0 0 0 0 Liabilities / assets 48.7% 48.7% 50.0% 49.9% Balance sheet Net debt / equity net cash net cash net cash net cash Cash and bank balances 2,154 3,956 6,252 10,098 Return Trade and bill receivables 41,625 41,487 51,485 58,279 RoA 12.9% 5.1% 8.0% 8.2% Inventories 6,061 6,441 7,783 8,775 RoE 24.6% 10.0% 15.7% 16.4% Other current assets 4,088 3,202 3,202 3,202 Per-share data Total current assets 53,928 55,085 68,722 80,354 EPS (Rmb) 1.16 0.53 0.90 1.06 Fixed assets and CIP 29,574 31,471 33,310 35,175 BPS (Rmb) 5.18 5.36 6.10 6.89 Intangible assets and others 8,807 8,900 9,549 10,095 DPS (Rmb) 0.35 0.16 0.27 0.32 Total non-current assets 38,381 40,372 42,859 45,271 Cash flow per share (Rmb) 0.97 1.10 0.98 1.28 Total assets 92,309 95,457 111,581 125,625 Valuation Short-term borrowings 250 250 250 250 P/E 6.9 14.6 8.2 7.0 Trade and bill payables 25,007 26,573 32,113 36,206 P/B 1.5 1.4 1.2 1.1 Other current liabilities 17,995 17,945 21,713 24,406 EV/EBITDA 4.8 7.6 4.8 3.9 Total current liabilities 43,252 44,768 54,077 60,863 Dividend yield 4.4% 2.1% 3.7% 4.3% Long-term borrowings 50 75 110 154 Total non-current liabilities 1,703 1,728 1,763 1,807 Total liabilities 44,956 46,496 55,840 62,670 Share capital 9,127 9,127 9,127 9,127 Retained profit 38,168 39,774 46,555 53,769 Equity 47,295 48,901 55,682 62,896 Total liabilities & equity 92,309 95,457 111,581 125,625 Cash flow statement Pretax profit 12,483 5,784 9,921 11,695 Depreciation & amortization 2,562 3,036 3,162 3,264 Change in working capital -1,994 1,301 -2,360 -1,223 Others -4,215 -68 -1,739 -2,081 Cash flow from operations 8,835 10,054 8,985 11,655 Capital expenditure -6,684 -5,499 -5,559 -5,699 Others -1,683 496 247 246 Cash flow from investing -8,367 -5,003 -5,312 -5,453 Equity financing 0 0 0 0 Bank borrowings -28 5 35 45 Others -1,088 -3,152 -1,412 -2,400 Cash flow from financing -1,116 -3,147 -1,377 -2,355 Foreign exchange gain (loss) 82 0 0 0 Net changes in cash -567 1,904 2,296 3,847 Source: Company data, CICC Research Company description Great Wall Motors is China’s largest non-SOE Auto OEM. Its product portfolio includes SUVs, sedans, and pick-ups under the respective brands Haval, Voleex, and Feng Jun. In 2016, total sales volume of GWM ranked 8th, reaching 1mn units for the first time, and has maintained the 1st place of SUV sales volume for 14 years. In 2017, new brand WEY targeting on mid-to-high end market will be launched. Please read carefully the important disclosures at the end of this report 2 CICC Research: January 2, 2018 Contents WEY: Sales volume to beat expectation and boost GM .......................................................................................................... 4 Haval: Product line improved; red/blue label models to be differentiated ............................................................................. 6 Increasing effort in marketing to stimulate dealers ................................................................................................................ 9 Sales volume and earnings forecasts .................................................................................................................................... 11 Figures Figure 1: Sales volumes of WEY models ..................................................................................................................................... 4 Figure 2: SUV discount rate by different submarkets ..................................................................................................................... 5 Figure 3: SUV sales volume growth by different submarkets ......................................................................................................... 5 Figure 4: Sales volume of Haval surged MoM in November 2017.................................................................................................. 6 Figure 5: Prices of 2017-/2018 vision H6 and H2 (1.5T/2.0T) ......................................................................................................... 7 Figure 6: Details of new 1.5T direct injection engine ..................................................................................................................... 8 Figure 7: Advertising expense ratios at major Chinese automobile makers .................................................................................. 9 Figure 8: Advertising and sponsorship expenses for 2017 new year concerts ............................................................................... 9 Figure 9: Haval sponsors Hunan TV 2018 new year’s concert ...................................................................................................... 10 Figure 10: Net profit estimation ................................................................................................................................................... 11 Figure 11: Revision to earnings forecasts ..................................................................................................................................... 12 Figure 12: P/E and P/B .................................................................................................................................................................

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