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In Line with Expectations; Mix Improved but Share at Risk; Neutral

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In Line with Expectations; Mix Improved but Share at Risk; Neutral August 26, 2016 EARNINGS REVIEW Great Wall Motor Co. (H) (2333.HK) Neutral Equity Research In line with expectations; mix improved but share at risk; Neutral What surprised us Investment Profile On Aug 26, Great Wall announced 2Q2016 revenue/ earnings at Low High Rmb20.8bn/2.5bn, +17%/+16% yoy and in-line with the pre-announcement. Growth Growth Returns * Returns * Although Great Wall SUV sales volume recorded strong growth (17% yoy) Multiple Multiple in 2Q16, the company’s SUV market share in the China retail market Volatility Volatility declined from 1Q16’s 10.3% to 10.0% in 2Q16. It also reported GPM (after Percentile 20th 40th 60th 80th 100th depreciation and amortization) at 22.7% for 2Q16, higher than 1Q16’s Great Wall Motor Co. (H) (2333.HK) 21.7% and GHe of 22.2% due to a higher mix of upgraded SUV models Asia Pacific Autos & Autoparts Peer Group Average * Returns = Return on Capital For a complete description of the investment (H7/Coupe) and better capacity utilization. In the analyst briefing, profile measures please refer to the management highlighted: 1) Coup/H7 volume to increase further in 2H16; disclosure section of this document. 2) Blue label versions of H2/H6 to be launched in 2H16; 3) a new SUV Key data Current model (Concept B) to be launched by the end of 2016; 4) a higher level of Price (HK$) 7.44 12 month price target (HK$) 7.90 G&A expenses as percentage of revenue in 2H16 on higher R&D and 601633.SS Price (Rmb) 10.23 601633.SS 12 month price target (Rmb) 8.18 seasonality in expenses booking. Market cap (HK$ mn / US$ mn) 30,558.1 / 3,940.6 Foreign ownership (%) -- 12/15 12/16E 12/17E 12/18E What to do with the stock EPS (Rmb) New 0.88 1.00 0.93 0.89 EPS revision (%) 0.0 6.3 11.9 4.8 We increase our 2016E-18E EPS by 6%/12%/5% mainly on high visibility of EPS growth (%) 0.2 13.1 (6.6) (4.3) EPS (dil) (Rmb) New 0.88 1.00 0.93 0.89 the new product cycle and higher GPM. Accordingly, we raise our 12m P/E (X) 11.5 6.4 6.8 7.1 P/B (X) 2.4 1.3 1.1 1.0 2016E P/B vs. 2018E ROE-based TPs for Great Wall H/A to HK$7.90/ EV/EBITDA (X) 7.9 4.0 4.0 3.9 Rmb8.18 from HK$7.63/Rmb7.98 (on unchanged valuation multiples). H/A Dividend yield (%) 1.1 4.7 4.4 4.2 ROE (%) 22.5 22.0 17.9 15.2 shares currently trade at 6.8X/12.3X 2017E P/E vs. our H/A share coverage CROCI (%) 25.2 24.9 21.1 18.7 average at 7.5X/12.1X. We maintain Neutral ratings relative to coverage. Price performance chart Key risks: Higher/lower volume/GPM of SUV new launches; quicker/slower 11 11,000 price erosion. 10 10,500 Great Wall 2Q16 earnings review 9 10,000 8 9,500 (Rmb mn) 2Q2016 GH 2Q2016E Var% 2Q2015 YoY% 1Q2016 QoQ% 7 9,000 Revenue 20,793 20,805 ‐0.1% 17,806 16.8% 20,880 ‐0.4% 6 8,500 Gross profit (excl. D&A) 4,714 4,626 1.9% 4,238 11.2% 4,523 4.2% 5 8,000 EBIT 2,965 2,853 3.9% 2,767 7.2% 2,963 0.1% 4 7,500 Investment income 345 345 0.0% 360 ‐4.2% 248 39.2% Aug-15 Dec-15 Mar-16 Jun-16 Pretax profit 2,957 2,976 ‐0.6% 2,613 13.2% 2,963 ‐0.2% Great Wall Motor Co. (H) (L) Hang Seng China Ent. Index (R) Reported net profit 2,529 2,532 ‐0.1% 2,177 16.2% 2,396 5.6% Reported EPS (Rmb) 0.28 0.28 ‐0.1% 0.24 16.2% 0.26 5.6% Source: Company data, Gao Hua Securities Research. Share price performance (%) 3 month 6 month 12 month Absolute 31.2 31.7 20.5 INVESTMENT LIST MEMBERSHIP Rel. to Hang Seng China Ent. Index 17.1 10.8 19.0 Neutral Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 8/26/2016 close. Coverage View: Neutral Yipeng Yang +86(10)6627-3189 [email protected] Beijing Gao Hua Securities Company Limited Goldman Sachs does and seeks to do business with companies Yuqian Ding covered in its research reports. As a result, investors should be +86(10)6627-3327 [email protected] Beijing Gao Hua Securities Company Limited aware that the firm may have a conflict of interest that could Longjin Li affect the objectivity of this report. Investors should consider +65-6654-5141 [email protected] Goldman Sachs (Singapore) Pte this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non- US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research August 26, 2016 Great Wall Motor Co. (H) (2333.HK) Great Wall Motor Co. (H): Summary Financials Profit model (Rmb mn) 12/15 12/16E 12/17E 12/18E Balance sheet (Rmb mn) 12/15 12/16E 12/17E 12/18E Total revenue 76,033.1 89,251.6 94,046.5 95,778.2 Cash & equivalents 3,641.8 5,538.3 6,530.3 9,093.3 Cost of goods sold (57,780.9) (67,787.4) (71,915.4) (73,942.9) Accounts receivable 28,847.5 33,862.6 35,681.9 36,338.9 SG&A (6,872.2) (8,200.8) (9,111.6) (9,087.8) Inventory 4,119.8 4,833.3 5,127.6 5,272.2 R&D (2,761.0) (3,241.0) (3,415.1) (3,478.0) Other current assets 3,781.0 3,781.0 3,781.0 3,781.0 Other operating profit/(expense) 0.0 0.0 0.0 0.0 Total current assets 40,390.0 48,015.2 51,120.8 54,485.3 EBITDA 11,380.1 13,263.4 13,019.5 12,747.5 Net PP&E 25,397.0 29,276.0 33,362.1 36,287.0 Depreciation & amortization (1,969.3) (2,455.4) (2,583.9) (2,908.5) Net intangibles 3,137.9 3,051.2 2,964.5 2,877.7 EBIT 9,410.8 10,808.1 10,435.6 9,839.1 Total investments 46.7 169.3 267.4 370.4 Interest income 71.5 0.0 0.0 0.0 Other long-term assets 2,939.0 3,194.5 3,280.3 3,310.5 Interest expense (217.9) (121.7) (171.7) (171.7) Total assets 71,910.6 83,706.1 90,995.0 97,331.0 Income/(loss) from uncons. subs. 0.0 0.0 0.0 0.0 Others 424.2 272.6 (1.9) 153.0 Accounts payable 21,083.8 24,735.1 26,241.4 26,981.1 Pretax profits 9,688.6 10,959.0 10,262.0 9,820.4 Short-term debt 383.3 383.3 383.3 383.3 Income tax (1,628.2) (1,841.7) (1,745.1) (1,670.0) Other current liabilities 10,319.4 12,080.6 11,900.5 11,790.5 Minorities (1.0) (1.2) (1.3) (1.3) Total current liabilities 31,786.4 37,199.0 38,525.1 39,155.0 Long-term debt 50.0 50.0 50.0 50.0 Net income pre-preferred dividends 8,059.3 9,116.1 8,515.6 8,149.1 Other long-term liabilities 1,687.3 1,687.8 1,688.3 1,688.8 Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 1,737.3 1,737.8 1,738.3 1,738.8 Net income (pre-exceptionals) 8,059.3 9,116.1 8,515.6 8,149.1 Total liabilities 33,523.7 38,936.7 40,263.4 40,893.7 Post-tax exceptionals 0.0 0.0 0.0 0.0 Net income 8,059.3 9,116.1 8,515.6 8,149.1 Preferred shares 0.0 0.0 0.0 0.0 Total common equity 38,330.9 44,712.1 50,673.1 56,377.5 EPS (basic, pre-except) (Rmb) 0.88 1.00 0.93 0.89 Minority interest 56.0 57.3 58.5 59.8 EPS (basic, post-except) (Rmb) 0.88 1.00 0.93 0.89 EPS (diluted, post-except) (Rmb) 0.88 1.00 0.93 0.89 Total liabilities & equity 71,910.6 83,706.1 90,995.0 97,331.0 DPS (Rmb) 0.110.300.280.27 Dividend payout ratio (%) 12.1 30.0 30.0 30.0 BVPS (Rmb) 4.20 4.90 5.55 6.18 Free cash flow yield (%) 4.5 4.9 6.4 8.8 Growth & margins (%) 12/15 12/16E 12/17E 12/18E Ratios 12/15 12/16E 12/17E 12/18E Sales growth 21.5 17.4 5.4 1.8 CROCI (%) 25.2 24.9 21.1 18.7 EBITDA growth 5.1 16.5 (1.8) (2.1) ROE (%) 22.5 22.0 17.9 15.2 EBIT growth 2.8 14.8 (3.4) (5.7) ROA (%) 12.1 11.7 9.7 8.7 Net income growth 0.2 13.1 (6.6) (4.3) ROACE (%) 25.0 24.6 20.5 17.9 EPS growth 0.2 13.1 (6.6) (4.3) Inventory days 24.0 24.1 25.3 25.7 Gross margin 24.0 24.0 23.5 22.8 Receivables days 127.1 128.2 135.0 137.2 EBITDA margin 15.0 14.9 13.8 13.3 Payable days 124.2 123.4 129.4 131.4 EBIT margin 12.4 12.1 11.1 10.3 Net debt/equity (%) (8.4) (11.4) (12.0) (15.3) Interest cover - EBIT (X) 64.3 88.8 60.8 57.3 Cash flow statement (Rmb mn) 12/15 12/16E 12/17E 12/18E Valuation 12/15 12/16E 12/17E 12/18E Net income pre-preferred dividends 8,059.3 9,116.1 8,515.6 8,149.1 D&A add-back 1,969.3 2,455.4 2,583.9 2,908.5 P/E (analyst) (X) 11.5 6.4 6.8 7.1 Minorities interests add-back 1.0 1.2 1.3 1.3 P/B (X) 2.4 1.3 1.1 1.0 Net (inc)/dec working capital 145.2 (2,077.4) (607.3) (61.8) EV/EBITDA (X) 7.9 4.0 4.0 3.9 Other operating cash flow (141.2) (377.6) (183.4) (132.7) EV/GCI (X) 2.1 1.1 0.9 0.8 Cash flow from operations 10,033.7 9,117.7 10,310.1 10,864.4 Dividend yield (%) 1.1 4.7 4.4 4.2 Capital expenditures (5,856.8) (6,247.6) (6,583.3) (5,746.7) Acquisitions 0.0 0.0 0.0 0.0 Divestitures 0.0 0.0 0.0 0.0 Others (660.1) 0.0 0.0 0.0 Cash flow from investments (6,516.9) (6,247.6) (6,583.3) (5,746.7) Dividends paid (common & pref) (2,433.9) (973.6) (2,734.8) (2,554.7) Inc/(dec) in debt (30.6) 0.0 0.0 0.0 Common stock issuance (repurchase) 0.0 0.0 0.0 0.0 Other financing cash flows (804.7) 0.0 0.0 0.0 Cash flow from financing (3,269.3) (973.6) (2,734.8) (2,554.7) Total cash flow 247.5 1,896.5 992.1 2,563.0 Note: Last actual year may include reported and estimated data.
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