HONG KONG Great Wall Motor Company 2333 HK Outperform Margins rebound Price (at 12:51, 26 Aug 2016 GMT) HK$7.44 Valuation HK$ 12.50 Event - PER 12-month target HK$ 12.50 . Great Wall Motor (GWM) reported 1H16 results after the market close and Upside/Downside % +68.0 hosted a conference call for investors Friday evening. As previewed in its 12-month TSR % +72.8 release of headline numbers on 28 July, NPAT rose 5% YoY to Rmb4,825m Volatility Index High on a 12.1% gain in revenues to Rmb41,672m. The OPM recovered to 14.0% GICS sector Automobiles & from 9.4% in 2H15. NPAT represents 59% of consensus and 56% of our own Components NPAT estimate, suggesting there should be upward revisions ahead. Market cap HK$m 67,905 Impact Market cap US$m 8,757 Free float % 33 . Volume target of 950k achievable backed by new models: GWM launched 30-day avg turnover US$m 42.6 the new Haval H7 in April equipped with a 2.0T double current direct injection Number shares on issue m 9,127 engine, and sales continue to ramp by 1-2k per month. Demand exceeds supply, and feedback from consumers has been positive due to the lack of Investment fundamentals Year end 31 Dec 2015A 2016E 2017E 2018E competing models in this price range. It will launch the H7 Red Label model Revenue bn 76.0 86.3 103.1 112.0 and a 7-seat version in the future to complement this. It also launched a new EBIT bn 9.4 10.0 12.4 13.1 Haval H6 Coupe with a 1.5T engine and new trims of the H6 and H2 in 1H. EBIT growth % 3.4 6.4 24.2 5.6 Reported profit bn 8.1 8.5 10.5 11.1 . New model pipeline: In addition to expanding the line-up of the H7, in 2H it EPS rep Rmb 0.88 0.94 1.15 1.22 EPS rep growth % 0.2 6.0 23.1 5.9 will introduce a blue label H2 and H6 (sporty version). In 4Q it will launch the PER rep x 7.2 6.8 5.5 5.2 Concept B, which will be positioned between the H1 and H2 in terms of size Total DPS Rmb 0.26 0.28 0.35 0.37 Total div yield % 4.2 4.4 5.4 5.7 and price. Sales volume should be comparable to the H2 in the future. The ROA % 14.1 13.4 14.7 13.6 Concept B will be assembled at the sedan factory in Baoding, boosting its ROE % 22.5 21.5 23.4 21.2 EV/EBITDA x 4.9 4.6 3.7 3.5 utilisation. It will begin sales of its first pure electric sedan in 2H, the C30 EV, Net debt/equity % -8.6 -6.2 -11.6 -17.9 and a PHEV version of the H7 in 2017. P/BV x 1.5 1.4 1.2 1.0 2333 HK rel HSI performance, & rec . Margins improving: The gross profit margin improved in 1H to 25.9% in history 1H16 from 23.5% in 2H15 and was up QoQ. Management attributed the recovery to improved capacity utilisation at Xushui following the relocation of H2 production to Xushui (which freed up capacity for the H6 in Tianjin) and higher volumes of the H6 Coupe; the rising proportion of SUVs in total sales, especially high priced models like the H7 and H6 Coupe; and lower parts costs. The impact of the price cuts was less than the market expected. The H7 and H6 Coupe should have margins above the company average in 2H. SGA up YoY but down HoH: GWM noted that a key factor behind the rising administrative costs is higher R&D. R&D expenses rose 10% YoY to Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Rmb1,257bn, representing 3.0% of revenues. R&D is likely to trend from Source: FactSet, Macquarie Research, August 2016 3-3.5% of sales. Selling expenses have been boosted by higher transportation (all figures in Rmb unless noted, TP in HKD) expenses (+10.8% YoY) and a rise in after-sales service expenses (+27.2% YoY). Advertising and media, mainly on-line, increased 10.7% YoY. Earnings and target price revision . No change. We will review after discussing the results with management. Analyst(s) Price catalyst Janet Lewis, CFA +852 3922 5417 [email protected] . 12-month price target: HK$12.50 based on a PER methodology. Zhixuan Lin +86 21 2412 9006 [email protected] . Catalyst: Monthly sales; 9M results in late October 2016. Allen Yuan +86 21 2412 9009 [email protected] Action and recommendation 26 August 2016 . GWM is one of our top picks in the China auto sector due to its high exposure Macquarie Capital Limited to the fast growing SUV segment, low PER valuations relative to peers and high yield. We reiterate our Outperform and TP of HK$12.50. Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. Macquarie Research Great Wall Motor Company Macquarie Quant View The quant model currently holds a reasonably positive view on Great Wall Attractive Displays where the Motor Company. The strongest style exposure is Earnings Momentum, company’s ranked based on indicating this stock has received earnings upgrades and is well liked by s l the fundamental consensus a sell side analysts. The weakest style exposure is Price Momentum, t n Price Target and indicating this stock has had weak medium to long term returns which often e Macquarie’s Quantitative persist into the future. m a Alpha model. d n 159/389 u Two rankings: Local market F (Hong Kong) and Global Global rank in sector (Automobiles & Automobiles & Components Quant Components) % of BUY recommendations 56% (14/25) Local market rank Global sector rank Number of Price Target downgrades 0 Number of Price Target upgrades 13 Macquarie Alpha Model ranking Factors driving the Alpha Model A list of comparable companies and their Macquarie Alpha model score For the comparable firms this chart shows the key underlying styles and their (higher is better). contribution to the current overall Alpha score. Chongqing Changan Auto 2.2 Chongqing Changan Auto Geely Automobile 1.4 Geely Automobile Guangzhou Automobile Grou… 1.1 Guangzhou Automobile Grou… Dongfeng Motor Group 0.9 Dongfeng Motor Group Great Wall Motor Company 0.6 Great Wall Motor Company Brilliance China Automoti… -0.8 Brilliance China Automoti… -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Valuations Growth Profitability Earnings Price Quality Momentum Momentum Macquarie Earnings Sentiment Indicator Drivers of Stock Return The Macquarie Sentiment Indicator is an enhanced earnings revisions Breakdown of 1 year total return (local currency) into returns from dividends, changes signal that favours analysts who have more timely and higher conviction in forward earnings estimates and the resulting change in earnings multiple. revisions. Current score shown below. Chongqing Changan Auto Chongqing Changan Auto -1.1 Geely Automobile Geely Automobile 1.3 Guangzhou Automobile Grou… Guangzhou Automobile Grou… 1.0 Dongfeng Motor Group Dongfeng Motor Group 0.0 Great Wall Motor Company Great Wall Motor Company 0.7 Brilliance China Automoti… -0.3 Brilliance China Automoti… -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 -100% -50% 0% 50% 100% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years How it looks on the Alpha model Which factor score has had the greatest correlation with the company’s A more granular view of the underlying style scores that drive the alpha (higher is returns over the last 5 years. better) and the percentile rank relative to the sector and market. ⇐ Negatives Positives ⇒ Normalized Percentile relative Percentile relative EV/EBITDA FY0 39% Score to sector(/389) to market(/714) Alpha Model Score 0.56 Sales to EV FY0 35% Valuation 0.18 Net Buybacks to Mkt Cap 29% Growth 0.36 EV/EBITDA (NTM) 24% Profitability NaN Earnings Momentum 0.45 DPS Growth FY1 -28% Price Momentum -0.12 Return on Assets NTM -28% Quality NaN Capital & Funding 0.08 Turnover (USD) 20 Day -30% Liquidity -1.30 Turnover(USD) 125 Day -32% Risk -0.94 Technicals & Trading -0.40 -40% -20% 0% 20% 40% 0 50 100 0 50 100 0 0 1 1 Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected]) 26 August 2016 2 Macquarie Research Great Wall Motor Company Great Wall Motor Company (2333 HK, Outperform, Target Price: HK$12.50) Interim Results 1H/16A 2H/16E 1H/17E 2H/17E Profit & Loss 2015A 2016E 2017E 2018E Revenue m 41,672 44,630 50,617 52,475 Revenue m 76,033 86,303 103,092 111,964 Gross Profit m 10,775 10,262 13,039 12,621 Gross Profit m 19,169 21,036 25,660 27,949 Cost of Goods Sold m 30,898 34,368 37,577 39,855 Cost of Goods Sold m 56,864 65,266 77,432 84,016 EBITDA m 7,048 4,966 7,808 6,953 EBITDA m 11,217 12,014 14,761 15,720 Depreciation m 1,167 749 1,072 1,161 Depreciation m 1,727 1,916 2,233 2,486 Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0 Other Amortisation m 42 36 40 44 Other Amortisation m 70 78 84 90 EBIT m 5,839 4,181 6,696 5,748 EBIT m 9,420 10,020 12,444 13,145 Net Interest Income m -24 90 25 27 Net Interest Income m -139 66 52 113 Associates m 0 0 0 0 Associates m 0 0 0 0 Exceptionals m 0 0 0 0 Exceptionals m 0 0 0 0 Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0 Other Pre-Tax Income m 106 229 158 171 Other Pre-Tax Income m 408 335 328 321 Pre-Tax Profit m 5,920 4,500 6,878 5,946 Pre-Tax Profit m 9,689 10,421 12,824 13,579 Tax Expense m -992 -884 -1,108 -1,200 Tax Expense m -1,628 -1,876 -2,308 -2,444 Net Profit m 4,928 3,617 5,770 4,746 Net Profit m 8,060 8,545 10,516 11,135 Minority Interests m -3 2 -1 -1 Minority Interests m -1 -1 -1 -1 Reported Earnings m 4,926 3,618 5,770 4,745 Reported Earnings m 8,059 8,544 10,515 11,134 Adjusted Earnings m 4,926