October 10, 2012 Target price: HK$ 24.1 Great Wall Motor (2333.HK) Current price: HK$21.5 BUY Company overview Building the „Great Wall‟ of China‟s auto market Background Great Wall Motor is the biggest private auto maker in China. Wei Jianjun, the company‟s controlling Summary: shareholder, holds 56.04% stake. The company is engaged in the production and sales of pick-up Great Wall is the largest private auto maker in China. It was ranked No.1 for pick-up truck trucks, SUVs and sedans, and it enjoys a sales in China for 14 years, and topped its domestic peers for SUV sales for eight straight pre-dominant position in these sub-segments. years. We believe Great Wall is the top pick to benefit from China‟s booming SUV market. Key data Market cap (HK$ mn) 65,412 Shares outstanding (mn) 3,042 Major shareholders (%) 56.0 Key attractions. Great Wall‟s profitability is among the strongest in the industry due to the Free-float (%) 43.9 ongoing improvement in its product mix and vertical integration of production. In addition, it has sound financial health with zero debt. It enjoys a dominant position in both the pick-up Price performance vs HSI truck and SUV markets, while its sedan business is also growing rapidly. We consider Great 22 24,000 Wall as a good proxy to share China‟s booming SUV market. 18 Costs & efficiency. Great Wall adopts a strategy of “less production platforms, more vehicle 14 20,000 models” to improve efficiency and flexibility. The strategy of focusing on selected segments HK$ 10 and shared production platforms will give the company long-term competitive advantages. To 6 16,000 enhance profitability, Great Wall has technological cooperation with parts suppliers and it has Oct/2011 Oct/2012 over 20 subsidiaries producing parts and engines that are compatible. 2333 hk equity (HK$,LHS) hsi index (RHS) Major assumptions & risks. We forecast Great Wall‟s pick-up trucks, SUV and sedan sales will reach 132,000, 261,000 and 193,000 units in 2012 respectively, representing a y-o-y Source: Bloomberg, data as at Oct 11, 2012 growth of 8%, 77% and -1% respectively. The company‟s total auto sales should exceed 585,000 units in 2012. The selling prices of Great Wall‟s vehicles and the gross profit margin Price performance (%) 1M 3M 12M are expected to slightly increase due to product mix upgrade. Great Wall might face risks if Great Wall Motor 19.8 43.5 126.7 market acceptance of its new models is low. HSI 5.6 7.7 18.1 Sensitivity analysis. Based on our sensitivity analysis, the SUV business is the most important growth driver for Great Wall‟s 2012E results. Every 10% sales growth of SUVs will Guosen vs Consensus lead to a 7% increase in net profit, while every 10% sales growth of passenger cars will lead Slightly optimistic to only a 2% increase in earnings. (HK$) Guosen forecast Consensus EPS-2012 1.94 1.89 Valuation & recommendation. The counter is trading at 11x 2012 PE, close to its peers. Its EPS-2013 2.24 2.25 rosy growth prospects have been largely priced in we believe. However, our channel check EPS-2014 2.45 2.60 shows there are still very keen demand on its products, and we expect the company to achieve record high sales in the coming months. We initiate coverage of the company with a Why? BUY rating and a target price of HK$ 24.1, representing 12.4x 2012 PE. Our forecast for 2012 is slightly optimistic compared to consensus, as we are more bullish about the sales momentum of H6/M4 models in 2H 2012. Based on the sales condition during the past six months, we observed the ASP of Great Financial summary Wall‟s models rose due to product mix upgrade. As such, we are more confident about the Year to Dec 2010A 2011A 2012E 2013E 2014E company‟s full-year growth prospects. Turnover (RMB mn) 22,986 30,089 39,629 47,076 53,029 Chg (%) 79 31 32 19 13 Net profit (RMB mn) 2,701 3,426 4,842 5,595 6,117 Chg (%) 169 27 41 16 9 EPS (RMB) 0.99 1.22 1.59 1.84 2.01 CFO per share (RMB) 1.17 1.58 1.65 2.49 2.29 PE (x) 14.78 11.99 11.08 9.59 8.77 P/B (x) 3.85 2.42 2.56 2.10 1.76 Dividend per share (RMB) 0.20 0.30 0.32 0.37 0.41 Source: Guosen Securities (HK), Bloomberg Analyst Sales contact John Luo (Machinery & Transport Equipment) Roger Chiman Tel: (852) 2899 8300 [email protected] Tel: (852) 2248 3598 [email protected] SFC CE No.:AVT518 Managing Director Guosen Securities (HK) 1 Please read the Interest Disclosures and the Disclaimers at the end of this report Great Wall Motor (2333.HK) October 10, 2012 | HK & China Business Overview SUV business. China‟s SUV sales enjoy strong growth. Great Wall is set to benefit from the SUV boom as it‟s the No.1 domestic maker and this sub-segment is its largest sales contributor. We are especially positive about the sales prospect of Havel H6, which is a new SUV model that the company launched last year. Our channel checks show demand for the Havel H6 remains strong and the waiting time is around one month. Sedan business. Great Wall entered into the sedan market in 2008. Since 2008, the company has focused on the manufacturing of A-Class sedan models1 , and its Voleex C30 model (in terms of sales volume) was among China‟s top three sedan models priced between RMB60,000 and RMB90,000. Besides, the C50 sedan that Great Wall launched last year is expected to start a new wave of adoption of domestically made vehicles equipped with turbo-charged engines. We believe the C50 model will see sales volume surge in 2H 2012. Pick-up truck business. Great Wall has long enjoyed a prominent position in the pick-up truck market. Its pick-up truck sales topped all other domestic brands for 14 straight years. The development of China‟s pick-up market was subdued due to discouraging government policies. Assuming no policy-related catalysts emerge, we expect the company‟s pick-up truck business to continue to grow steadily. 3 numbers to watch Gross profit margin of 10,000 units SUV sales volume SUV ASP 1% the SUV business 10% We forecast that SUV accounts for around 44% We expect the gross profit margin of the We expect the ASP of the company‟s SUV models of Great Wall‟s total auto sales, and we expect company‟s SUV business to be 30% for 2012E. to be RMB77,800, the company‟s SUV sales to reach 260,000 Every 1% movement in SUV GPM will have Every 10% movement in SUV ASP will have 6.7% units in 2012. 3.6% impact on the company‟s net profit. impact on the company‟s net profit. Every 10,000-units movement in SUV sales volume will have 2.6% impact on the company‟s net profit. 1 A-class sedans refer to sedans that have 2.3 to 2.45-metre-long wheelbases and are 4.3 to 4.6 metres in length. Guosen Securities (HK) 2 Please read the Interest Disclosures and the Disclaimers at the end of this report Great Wall Motor (2333.HK) October 10, 2012 | HK & China Contents Overview.............................................................................................................................................................. 4 1 Great Wall has become the largest private automaker in China ........................................................................................ 4 1.1 Great Wall for the first time became one of the top 10 Chinese automakers in terms of sales volume in 2011 ............... 4 1.2 Great Wall is growing rapidly and it has become the largest private automaker in China ................................................ 4 2 Great Wall‟s major products include pick-up trucks, SUVs and sedans ........................................................................... 5 3 The company enjoys long-term competitive edges due to its strategy to focus on three major product categories and share production platforms .................................................................................................................................................. 6 3.1 Great Wall sticks to the strategy to focus on selected market segments ......................................................................... 6 3.2 The company makes full use of its platforms as it sticks to the strategy of “less production platforms, more vehicle models” ........................................................................................................................................................................... 7 4 Great Wall‟s profitability is among the strongest in the industry due to continued improvement in product mix and vertical integration of production ......................................................................................................................................... 9 4.1 Average prices of its flagship products keep rising, and product mix continues to improve............................................. 9 4.2 The company has enhanced its profitability through technological cooperation with auto parts suppliers ..................... 10 4.3 The company dwarfs its peers in terms of profitability due to improvement in its product mix and the vertical integration of production ................................................................................................................................................................. 11 Catalysts............................................................................................................................................................ 12 1 China‟s SUV sales volume is growing rapidly, and SUVs account for 1/3 of Great Wall‟s revenue, the largest ratio among all listed automakers .............................................................................................................................................. 12 1.1 China‟s SUV sales volume has grown at a CAGR of 42% over the past six years and is expected to keep increasing rapidly at a CAGR of 20% to 25% ................................................................................................................................. 12 1.2 Great Wall has topped its domestic peers in terms of SUV sales volume for eight straight years since 2004 ............... 13 1.3 SUVs make up 1/3 of Great Wall‟s total sales volume, the largest ratio among the major listed automakers, and the company is likely to benefit from the rapid growth of SUV sales volume ......................................................................