Moving fast in NEV development
- Fine-tuning NEV strategy to better ride on rapid industry expansion especially in the high-end segment
- Improving product mix supports margin recovery
- Export strategy intact despite short-term volatility
- Maintain BUY; HK$24 TP based on 18x FY22F PE
Revamping NEV strategy to adapt to rapid market transformation. GWM posted robust NEV sales in FY21 (+134% y-o-y), demonstrating its ability to catch the industry sales trend (+160%). NEV sales ratio increased from 4% in FY19 to c.11% in FY21. However, NEV sales in Jan-Apr 22 is expected to be unexciting, as the operating environment has been challenging due to supply chain disruption (Russia-Ukraine conflict causing major volatility in the commodity market), auto chip shortage, and pandemic lockdown. As a result, GWM is fine-tuning its NEV strategy, focusing on high-value NEV models with strong technology support from LEMON Hybrid, TANK and COFFEE Intelligence, cutting across hybrid vehicles (DHT hybrid for both HEV and PHEV, powertrain, lemon platform) as well as electric vehicles (battery). New NEV models in 2022 include Haval (Cool Dog), WEY (Yuanmeng), ORA (Ballet Cat, Punk Cat, Lightning Cat), TANK 700, Pickup King Kong Poer and SALOON Mecha Dragon. We estimate NEV sales CAGR of c.70% to about 370k units from FY21-23F.
Product margin recovery is possible. FY21 gross margin slipped 1.1pppts to 16.2%, relatively mild compared to industry peers (some in excess of 5ppts reduction). We believe the smaller decline was due to its relatively high proportion of ICE vehicle sales, thus avoiding the severe impact from the battery raw material cost escalation. We believe GWM will take a balanced approach between ICE-NEV business development, given that the ICE business is a profitable and cash generative operation that is supporting the rapid NEV expansion.
However, a better product mix is positive to mitigate the cost pressure. Therefore, we estimate gross margin to recover to 18% by FY23F, an increase of 1.8ppts from FY21.
Globalisation strategy facing some headwinds. Export volume surged about 100% in FY21 to c.140k units. However, the Russia-Ukraine conflict has derailed its development in the Russian market and is expected to incur some losses this year, at around Rmb500m. However, the company is still embarking on its overseas business expansion, particularly in the more predictable markets such as Thailand.
Long-term outlook remains positive; but cut earnings estimates on higher cost assumptions. We cut FY22/23F net earnings by 8%/5% to factor in lower margin assumptions given the current high raw material cost environment. We kept our target FY22F PE unchanged at 18x to arrive at new TP of HK$24. Maintain BUY with FY21-23F net earnings CAGR of about 40%.