1Q22: Net Profit Down 8% qoq, Missing Consensus Forecast
GWM’s 1Q22 net profit came in below estimates at Rmb1,634m (-0.3% yoy/-8.3% qoq),
due to higher-than-expected SG&A and R&D expenses. Looking ahead, we expect
earnings to dip along with sales in 2Q22, as the COVID-19 containment measures
disrupt supply chains. GWM will probably delay the launches of new models due to the
lockdowns. We cut 2022 net profit forecast by 10%. Maintain BUY on the expected
recovery from 3Q22 and cheap valuation. Cut target price to HK$20.00.
RESULTS
• 1Q22 net profit came in below expectations at Rmb1,634m (-0.3% yoy/-8.3% qoq), vs our
estimate of Rmb1.7b and consensus estimate of Rmb1.74b. This compared with our fullyear 2022 net profit forecast of Rmb7,463m and consensus full-year 2022 net profit forecast
of Rmb9,259m The earnings miss came from higher-than-expected SG&A and R&D
expenses, which offset the gross margin expansion.
• Gross margin boosted by higher ASP. Great Wall Motor’s (GWM) ASP spiked by 29.1%
yoy and 2.4% qoq to Rmb118,600 in 1Q22, as the share of the pricier WEY- and Tankbranded SUVs (>Rmb180,000) in sales volume mix soared by 6.4ppt yoy and 1.2ppt qoq to
14.1% in 1Q22. As such, gross margin hiked by 2.1ppt yoy and 1.9ppt qoq to 17.2%.
• SG&A and R&D expenses above estimates. SG&A expenses and R&D expenses as a
percentage of revenue increased by 0.8ppt/1.0ppt yoy and 0.2ppt/0.3ppt qoq to 6.6% in
3.9% respectively in 1Q22, due to the additional expenses for new model launches.
STOCK IMPACT
• Sales expected to drop in 2Q22 due to lockdowns. GWM has more than 200,000 units of
orders on hand, two times the monthly sales in March and thus in the next couple of months
the company’s sales will be more driven by supplies. We expect GWM’s sales to drop by at
least 19-20% yoy and qoq in 2Q22 due to the shortage in parts and components, eg Bosch’s
electronic stability control (ESC) units, against the backdrop of lockdowns in over 90 cities
across China. Although the state is fine-tuning the lockdown policy by allowing some
automobile companies to resume production in a closed loop system, we expect full recovery
to come only after the lockdowns are lifted, as many automobile parts companies are still
halting production, and people are getting trapped at home, reining in effective demand for
vehicles. As such, GWM will probably delay the launches of new models from 2Q22 to 2H22.
We cut 2022 sales volume estimate for GWM by 10% from 1.5m units to 1.35m units, based
on the assumption that production will return to normalcy from Jul 22.
• Strong product pipeline to sustain sales growth after the unlocking. We keep 2023-24
sales volume estimates unchanged at 2m units and 2.5m units respectively, on the back of
the strong product pipeline in the next 2-3 years. In 2022-25, GWM will roll out at least 10
new models every year, eg Tank 500, Tank 300 (HEV), the all-new plug-in hybrid electric
vehicles (PHEV) built on the Lemon Platform, the WEY Coffee-series, Haval Dog series, etc.
The ramp-up of the sales of these high-end new models will boost the blended ASP of
GWM. We expect GWM’s ASP to increase by 5-10% p.a. in 2022-24.
• Production volume at overseas plants to ramp up over the next 2-3 years. GWM’s
Thailand plant has started operation since 1Q22, and it is rolling out new electric vehicle (EV)
models like Haval H6 hybrid electric vehicle (HEV), Haval H6 PHEV, Haval Jolion HEV, Ora
Good Cat, Tank 300 HEV in the Southeast Asian market. GWM in Jan 22 completed the
acquisition of the Mercedes-Benz plant in Sao Paulo, Brazil, and it plans to invest BRL10b
(about Rmb11.5b) to revamp the plant. In the years to come, GWM will launch 10 intelligent
EV models under three EV series, Tank, Haval and Poer in the Brazilian market. GWM’s
overseas sales grew 1.8% yoy to 29,322 units in 1Q22, representing 10% of total sales
volume, and we expect overseas sales’ share in total sales to increase to 15% in 2-3 years.
EARNINGS REVISION/RISK
• We trim 2022 net profit by 10% to Rmb6.72b and keep those for 2023 and 2024
unchanged at Rmb10.96b and Rmb13.77b, which are 27%, 13% and 11% below
consensus estimates given our lower assumptions on margins. On a quarterly basis, we
anticipate net profit to drop from Rmb1.6b in 1Q22 to Rmb900m in 2Q22 and rebound to
Rmb1.9b/Rmb2.2b in 3Q22/4Q22.
• Risks. Downside to our earnings estimates lies in the COVID-19 pandemic and China’s
zero-COVID policy. If China’s draconian COVID-19-containment measures last longer
than expected, that would hammer China’s automobile sales harder.
VALUATION/RECOMMENDATION
• Maintain BUY and cut target price from HK$21.50 to HK$20.00, based on our 10-year
DCF (WACC: 9%/10-year FCF growth: 10%/terminal growth: 4%). Under our assumed bearcase scenario (WACC: 9%/10-year FCF growth: 5%/terminal growth: 4%), we estimate the
fair value of GWM at HK$14.50, 25% above current stock price.