Strong product margins boosted by high value models
- 1H22 net earnings in line with company’s preliminary estimates
- Focus on high value models to enhance profit margins; 1H22 GPM +2.1ppts to 18.4%
- Launching several new models to boost vehicle sales
- Maintain BUY; HK$18 TP pegged to 14x rolling PE
Focusing on advanced technology development. Great Wall Motor’s (GWM) strategy to enhance its vehicle technology content is seeing positive results. 1H22 GP margin was lifted by 2.1ppts to 18.4%, despite a tough operating environment. R&D investment into advanced technology is key to development of new models and vehicle platforms. In 1H22, R&D expense surged 70% y-o-y to Rmb3.2bn, representing c.5% of total revenue. We expect spending on R&D to remain at similar ratio going forward.
GWM is leveraging on its LEMON Hybrid DHT, TANK, COFFEE Intelligence technology to embark on a faster track to roll out new vehicle models. In 2H, several new models including Haval Cool Dog, Tank 700, WEY Yuanmeng, and ORA (Cat series) have been lined up for launch. In fact, GWM is converting certain of its vehicle series into electric and for a start, the new Haval models will all be supported by its LEMON Hybrid DHT technology.
In order to support the new electrification strategy, GWM is planning to invest some Rmb3.8bn into a semiconductor facility to support its NEV business growth. In 1H22, total NEV sales rose c.21% y-o-y to 72.4k units.
While the pandemic lockdowns and chip shortage had affected 1H22’s volume sales (declined c.17% to 518,525 units), we anticipate the sales outlook to improve in 2H (+30%), driven by new models and policy support.
Margin enhancement on higher ASP products. Due to rising raw material cost, sales of high margin models is important to protect profitability. Blended ASP has increased to about Rmb110k, up from Rmb80k in FY19. As a result, blended GP margins also rose to 18.4% from 17.2% over the same period. We estimate GP margins to head closer to the 19% range by FY23.
Expanding overseas footprint. Vehicle exports rose 11% in 1H to 68.4k units, as the company expands its footprint. Revenue from overseas markets surged 40% to Rmb9.3bn. In fact, the Brazil factory is progressing on schedule to commence operations in the coming 1-2 quarters. Thailand factory is currently producing the NEV models and has generated some Rmb1.1bn of revenue in 1H.
Strong financial position to support growth. At end of Jun-22, GWM has net cash of Rmb18bn to drive growth. While net cash from operations fell 46% to Rmb8.2bn and total investments amounted to Rmb12.2bn, we believe its financial position will improve on better sales performance.
Auto sector hit by market volatility and macro uncertainty. The sector valuation has been hit and GWM is no exception. The stock is currently trading at 11x/8x FY22/23F PE. Hence, we have also lowered our target PE to 14x 12-month rolling PE (prev: 18x FY22F), benchmarking to its 5-year historical average to reflect the current trading sentiment. Our new TP is HK$18. Maintain BUY.