great wall motor (2333.hk) target buy · great wall motor (2333.hk) october 15, 2012 | hk &...
TRANSCRIPT
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report
1
October 15, 2012
Great Wall Motor (2333.HK)
Building the ‘Great Wall’ of China’s auto market
Summary:
SUV is by far the fastest growing category in China. SUVs make up 1/3 of Great Wall’s total
sales. Based on our latest channel checks, Great Wall’s SUV sales may rise to a record level in
the coming months due to pent-up demand. As such, while the company’s strong growth
prospect is mostly priced in, we see further upside, driven by SUV sales. Over the longer term,
we believe the market will reward Great Wall with a valuation premium due to its unique
focused strategy, shared production platforms and earnings outperformance over peers.
Key attractions. Great Wall’s profitability is among the strongest in the industry due to the
ongoing improvement of 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
truck and SUV markets, while its sedan business is also growing rapidly.
Costs & efficiency. Great Wall adopts a strategy of “fewer production platforms, more
vehicle models” to improve efficiency and flexibility. Its strategy of focusing on selected
segments and sharing production platforms will give it long-term competitive advantages. To
enhance profits, Great Wall has formed technological co-operations with parts suppliers and
it has more than 20 subsidiaries producing parts & engines that are compatible.
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
lead to a 7% increase in net profit, while every 10% sales growth of passenger cars will result
in only a 2% increase in earnings.
Major assumptions & risks. We forecast Great Wall’s pick-up trucks, SUV and sedan sales
will reach 132,000, 260,000 and 193,000 units in 2012 respectively, representing a y-o-y
growth of 8%, 77% and -1% respectively. The company’s total vehicle sales should exceed
585,000 units in 2012 (487,000 units in 2011). The selling prices of Great Wall’s vehicles and
the gross profit margin are expected to increase slightly due to product mix upgrade. The key
risk for Great Wall is if market acceptance of its new models is low.
Valuation & recommendation. The counter is trading at 11x 2012 PE, close to its peers.
The company’s strong growth prospects have been largely priced in, we believe. However,
our discussions with dealers suggest demand for its products remains very strong, and we
expect the company to achieve record sales in the coming months. We initiate coverage with
a “BUY” rating and a target price of HK$ 24.1, representing 12.4x 2012 PE.
Financial summary
Year to Dec 2010A 2011A 2012E 2013E 2014E
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
Target price: HK$ 24.1 BUY Current price: HK$21.5
Company overview
Background
Great Wall Motor has become the biggest private
automaker in China. It manufactures and sells
pick-up trucks, SUVs and sedans. It was ranked
No.1 for pick-up truck sales in China for 14 years,
and it topped its domestic peers for SUV sales for
eight straight years. Wei Jianjun is the company’s
controlling shareholder with 56.04% stake.
Key data
Market cap (HK$ mn) 65,412
Shares outstanding (mn) 3,042
Major shareholder (%) 56.0
Free-float (%) 43.9
Price performance vs HSI
Source: Bloomberg, data as at Oct 14, 2012
Price performance (%)
1M 3M 12M Great Wall Motor 19.8 43.5 126.7
HSI 5.6 7.7 18.1
Guosen vs Consensus
Slightly more optimistic
(HK$) Guosen forecast Consensus
EPS-2012 1.94 1.89
EPS-2013 2.24 2.25
EPS-2014 2.45 2.60
Why?
Our forecast for 2012 is slightly more optimistic
than consensus, as we are more bullish about the
sales momentum of Great Wall’s H6/M4/C50
models in 2H 2012. Based on the sales condition
during the past six months, we observed the ASP
of Great Wall’s models rose due to product-mix
upgrade. As such, we are more confident about
the company’s full-year growth prospects.
16,000
20,000
24,000
6
10
14
18
22
Oct/2011 Oct/2012
HK
$
2333 hk equity (LHS)
HSI index (RHS)
Analyst
John Lu (Auto, Machinery and Transport Equipment)
Tel: (852) 2899 8300 [email protected]
SFC CE No.:AUP546
Sales contact
Roger Chiman
Tel: (852) 2248 3598 [email protected]
Managing Director
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report
2
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.
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. The company has focused on the manufacturing of A-Class
sedan models1 , and its Tengyi 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 truck 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
10,000 units SUV sales volume 1% Gross profit margin of
the SUV business 10% SUV ASP
We forecast SUVs will account for around 44%
of Great Wall’s total auto sales, and we expect
the company’s SUV sales to reach 260,000
units in 2012.
Every 10,000-units change in SUV sales
volume will have a 2.6% impact on the
company’s net profit.
We expect the gross profit margin of the
company’s SUV business to be 30% for 2012E.
Every 1% change in SUV gross profit margin
will have a 3.6% impact on the company’s net
profit.
We expect the ASP of the company’s SUV models
to be RMB77,800,
Every 10% change in SUV ASP will have a 6.7%
impact on the company’s net profit.
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report
3
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 advantages due to its focus on three major sub-segments and shared
production platforms ............................................................................................................................................................ 6
3.1 Great Wall sticks to the strategy of focusing on selected sub-segments ......................................................................... 6
3.2 The company makes full use of its platforms as it sticks to the strategy of “fewer 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 ................................................................................................................................................................ 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 co-operation 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 in China ..................................................................... 14
1.4 Havel H6 and M4 will become powerful drivers to prop up Great Wall’s share of the SUV market ............................. 15
2 Sedan buisness: focuses on A-class models, and C50 is expected to increase the popularity of domestic
turbo-charged sedans in China .......................................................................................................................................... 18
2.1 The company entered into the sedan market in 2008, and Voleex C30 was among the top three models priced at
RMB60,000 to RMB90,000 in terms of sales volume in 2011 ....................................................................................... 18
2.2 The company focuses on A-class family sedans, and continues upgrading the product line ......................................... 18
2.3 Capacity expansion of Voleex C50 is likely to begin in 2H 2012 ................................................................................... 19
3 It maintains a strong and leading position in the pick-up truck market, but policy restictions need to be lifted to give
way to stronger growth ....................................................................................................................................................... 20
3.1 The company entered into the pick-up truck market in 1996, and it has maintained the No.1 spot for 14 consecutive
years since 1998 in terms of sales volume. .................................................................................................................. 20
3.2 Policy-based catalysts are needed for further development of the pick-up truck sector in China .................................. 21
Forecasts & Valuation ...................................................................................................................................... 23
1 Profit forecasts .................................................................................................................................................................... 23
1.1 Forecasts ...................................................................................................................................................................... 23
1.2 Sensitivity analysis........................................................................................................................................................ 23
1.3 Valuation screening ...................................................................................................................................................... 24
2 Risks ..................................................................................................................................................................................... 25
3 Closing notes to the buy-side analyst................................................................................................................................ 25
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report Overview 4
Overview
1 Great Wall has become the largest private
automaker in China
1.1 Great Wall for the first time became one of the top 10 Chinese
automakers in terms of sales volume in 2011
There are numerous automakers in China. However, the auto sector is highly
concentrated. In 2011, the top 10 automakers accounted for 87% of the total auto sales
volume in China. The concentration ratio of the sector was even higher in 2010.
According to data from the China Association of Automobile Manufacturers, Great Wall
sold 487,000 units in 2011, and became one of China’s top 10 automakers in terms of
sales volume for the first time, with a domestic market share of 2.6%. Its sales volume
growth reached 22% in 2011, far higher than the growth in total auto sales volume in
China (3%). In fact, the company’s sales volume growth was the fastest among the top
10 automakers by sales volume (Exhibit 1).
Exhibit 1: Top 10 automakers in terms of sales volume in 2011: Great Wall was on the list for the first time and its sales volume
grew by the fastest among the top 10 automakers
Ranking in 2011
Company Sales volume in 2011
(‘000) y-o-y
growth Ranking in
2010 Company
Sales volume in 2010 (‘000)
1 SAIC Motor 3,966 11% 1 SAIC Motor 3,558
2 Dongfeng Motor 3,059 12% 2 Dongfeng Motor 2,725
3 FAWAY Automobile 2,601 2% 3 FAWAY Automobile 2,558
4 Changan
Automobile 2,009 -16% 4 Changan Automobile 2,379
5 Beijing Auto 1,526 2% 5 Beijing Auto 1,490
6 GAC Group 740 2% 6 GAC Group 724
7 Chery 642 -6% 7 Chery 682
8 Brilliance 567 13% 8 BYD 520
9 JAC 495 8% 9 Brilliance 501
10 Great Wall 487 22% 10 JAC 459
TOP10 16,091 3%
TOP10 15,596
Great Wall 399
Total auto sales in China
18,505
Total auto sales in China
18,061.9
CR10 87.0%
CR10 86.3%
Note: Data from the China Association of Automobile Manufacturers may be different from those in the companies’ annual reports
Source: China Association of Automobile Manufacturers, Guosen Securities (HK)
1.2 Great Wall is growing rapidly and it has become the largest private
automaker in China
In China, large SOEs and joint ventures dominate the auto manufacturing industry. Six
state-owned automakers, including SAIC Motor, Dongfeng Motor, FAWAY Automobile,
Changan Automobile, Beijing Auto and GAC Group, make up about 3/4 of the total auto
sales volume in China.
Great Wall’s sales volume grew by
22% in 2011, considerably
outpacing the industry’s growth of
only 3% that year.
In fact, Great Wall’s sales volume
grew by the fastest in 2011 among
China’s top 10 automakers.
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report Overview 5
Exhibit 2: Major automakers in China
Company Major shareholder Notes
SAIC Motor SASAC One of China’s big four auto groups and has established joint ventures with Volkswagen, GM, Volvo and Iveco.
Dongfeng Motor SASAC One of China’s big four auto groups and has established joint ventures with Nissan, Honda, Citroen, Yulon, Kia and Peugeot.
FAWAY Automobile
SASAC One of China’s big four auto groups and has established joint ventures with Volkswagen, Mazda, Toyota and GM.
Changan Automobile
SASAC One of China’s big four auto groups and has established joint ventures with Ford, Mazda and Suzuki.
Beijing Automobile
SASAC Joint ventures with Hyundai and Benz.
GAC Group SASAC Joint ventures with Honda, Toyota and Fiat.
Chery Automobile
SASAC Joint ventures with Jaguar and Land Rover.
Brilliance SASAC Joint venture with BMW.
JAC SASAC Domestic brand, specialises in the production of sedans, trucks and MPVs.
Great Wall Motor
Privately-owned (Wei Jianjun)
Domestic brand, specialises in the production of pick-up trucks, SUVS and sedans.
BYD Privately-owned(Wang Chuanfu)
Domestic brand, specialises in the production of sedans, SUVs and new energy-fueled vehicles
Geely Privately-owned(Li Shufu) Self-owned brand, specialises in the production of sedans. It acquired Volvo in 2010.
Source: Guosen Securities (HK)
Major Chinese privately owned automakers, including Great Wall, Geely Automobile and
BYD Auto, are in the 10th to 15th places in terms of sales volume in China, and their
combined sales volume accounts for 7% of total auto sales in China.
Based on sales volume in 2011, Great Wall has surpassed Geely and BYD to become
the largest privately owned automaker in China.
Exhibit 3: Great Wall has been developing rapidly since 2008, and outpaced BYD
and Geely in three years
Source: China Association of Automobile Manufacturers, Guosen Securities (HK)
2 Great Wall’s major products include pick-up
trucks, SUVs and sedans
Auto sales make up the majority of Great Wall’s revenue. The company’s 2011 revenue
totaled RMB29.3 billion, out of which RMB28.1 billion, or 96%, was from auto sales.
0
100
200
300
400
500
600
2005 2006 2007 2008 2009 2010 2011
'000
Great Wall Geely BYD
Great Wall has surpassed Geely
and BYD to become the largest
privately owned automaker in
China.
Great Wall’s sales of SUVs and
sedans have experienced
explosive growth since after 2008.
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report Overview 6
Great Wall mainly sells three types of vehicles, namely pick-up trucks, SUVs and sedans,
which contribute about 23%, 38% and 31% respectively to the company’s total revenue.
SUV sales were the major source of income (Exhibit 4).
Pick-up trucks and SUVs are traditional flagship products of the company. Its sales
volume of pick-up trucks grows at a steady pace each year, and sales of SUVs and
sedans have experienced explosive growth since after 2008.
Exhibit 4: Pick-up trucks, SUVs and sedans make up the
major contribution to Great Wall’s revenue
Exhibit 5: Revenue from Great Wall’s SUV and sedan
businesses experienced explosive growth in 2010-2011, and
revenue from pick-up trucks continues to grow steadily
Source: Company data, Guosen Securities (HK) Source: Company data, Guosen Securities (HK)
3 The company enjoys long-term competitive
advantages due to its focus on three major
sub-segments and shared production platforms
3.1 Great Wall sticks to the strategy of focusing on selected
sub-segments
Great Wall distinguishes itself from other automakers by focusing on selected
sub-segments. The company has clear product positioning for the three major categories
(SUV, sedan and pick-up truck), with the aim of becoming the leader in China’s pick-up
truck and SUV markets, and the so-called “King” in China’s family sedan market. The
company always keeps the product positioning in mind when it develops a new model.
The company has achieved tremendous success thanks to the strategy of focusing on
three major product categories. The company’s Wingle model has been the No.1 pick-up
truck in terms of sales volume in China for 14 consecutive years, while its Havel SUV has
topped its domestic peers in terms of sales volume for eight straight years. The Voleex
C30 sedan launched in 2010 was one of the top three sedans (priced at RMB60,000 to
RMB90,000) in terms of sales volume in 2011. We believe Great Wall enjoys strong and
long-term competitive advantages over other domestic automakers due to its strategy of
focusing on three major sub-segments.
Pickup 23%
SUV 38%
Sedan 31%
Others 8%
Pickup
SUV
Sedan
Others
0
5,000
10,000
15,000
20,000
25,000
30,000
2006A 2007A 2008A 2009A 2010A 2011A
RMB mn
Pickup SUV Sedan Others
The Voleex C30 sedan launched in
2010 was one of the top three
sedans (priced at RMB60,000 to
RMB90,000) in terms of sales
volume in 2011.
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report Overview 7
Exhibit 6: Great Wall focuses on three selected sub-segments and it has achieved tremendous success
Pick-up truck
Leader in China’s pick-up truck
market?
No.1 among global economic pick-
up truck manufacturers
Wingle has been the pick-up truck
model with the largest sales
volume in China for 14
consecutive years
SUV
Leader in SUV market
No.1 among global economic SUV
manufacturers
Haval SUV has been the SUV
model with the largest sales
volume among all domestic
brands for eight straight years
Sedan
The king of family sedans
No.1 in the economic sedan
market segment in China
Voleex C30 was among the top
three models priced at RMB60,000
to RMB90,000 by sales volume in
2011
Positioning
Target
Current
situation
Source: Great Wall Motor Growth Analysis Report, www.auto.sohu.com, Guosen Securities (HK)
3.2 The company makes full use of its platforms as it sticks to the
strategy of “fewer production platforms, more vehicle models”
Great Wall sticks to the strategy of “fewer production platforms, more vehicle models”,
which enables it to produce models with different exteriors and various types of market
positioning on one platform. More importantly, through this strategy the company is able
to stop or reduce production of unpopular models in time, and replace them with new
models. In this way the capacity utilisation is increased, which props up the profitability of
the company as a whole.
Currently the company has three production platforms: one is the K platform which
produces vehicles with body-chassis frame construction, and the other two are the CH
and CHB platforms, which produce vehicles with integral body construction.
The K platform was first designed to mainly produce pick-up trucks. The Wingle pick-up
truck series and the Safe SUV series are now produced on this platform.
The CH platform was the company’s first platform to produce vehicles with integral body
construction. Sedan and Mini SUV models are now produced on this platform.
The CHB platform is used for production of sedans and SUVs in the company’s Tianjin
plant.
By having a flexible production set
up, this allows Great Wall to
quickly adjust its output based on
market response.
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report Overview 8
Exhibit 7: Great Wall makes full use of its production platforms
Cars with body-chassis
frame constructionK platform
Deer pick-up
trucks
Wingle 3/
Wingle 5
Cars with integral body
construction
CH platform
Peri Haval M1
platform type of vehicle
Florid Haval M4
Coolbear Haval M2
Lingao C20R
C30 C30i
Safe Haval H3/H5
C50 CHB012
Haval H6 CHB022
CHB
platform
Source: Guosen Securities (HK)
Great Wall sticks to its strategy to share platforms. It develops various types of sedans
and SUVs that share the same types of chassis to reduce costs. The company produces
a variety of models with different exteriors on a same production platform. Once a model
is unpopular, the company is able to quickly cease production of the model and launch a
new model after changing the equipment and exterior of the original one. Over the past
few years, this strategy has proven to be successful, as the company has seen
remarkable increases in sales volume of new models compared to that of the old ones
before the re-fittings.
Exhibit 8: Great Wall has produced a variety of models with different exteriors on
shared platforms
Peri Haval M1
Voleex C20RLingao
Coolbear Haval M2
Voleex C30 Florid Haval M4
Same
Chassis
Same
Chassis
Fine-tuning
Chassis
Same
Chassis
Same
Chassis
Source: Wind, Guosen Securities (HK)
Great Wall also produces various
types of sedans and SUVs that
share the same types of chassis to
reduce costs.
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report Overview 9
For popular models produced on a shared platform, Great Wall always changes their
exterior shape and the colours of interior decorations, or equips them with a different
engine to form a different model, so as to cater to different customers. For example, as
the H3 and H5 Series SUVs were well received by the market, the company immediately
launched several versions of models based on the same chassis and the same
production platform.
Exhibit 9: Various models with different exteriors and engines produced on the
same platform
H3 RUIYI H5 OUFENG
H5 ZHIZUNH3 IINGXIAN
Same
Chassis
Source: Guosen Securities (HK)
4 Great Wall’s profitability is among the strongest
in the industry due to continued improvement in
product mix and vertical integration
4.1 Average prices of its flagship products keep rising, and product mix
continues to improve
In recent years, Great Wall was quick to launch new models and was able to rapidly
adjust the product mix according to the market response. It concentrated on producing
competitive models and upgrading them, which has proven to be highly successful.
Take sedans for example. The demand for the Florid, Peri and Coolbear models, which
were launched by the company earlier, was weak as they were priced at the low end and
their exteriors were not appealing to car buyers. The company adjusted the product mix
instantly and launched the Voleex C30 in 2010. The model was returned to a more
regular design and it offered excellent performance for a competitive price. Quickly the
sedan became popular with monthly sales of over 10,000 units. This has accelerated the
growth of Great Wall’s sedan business. The company then launched the C50 model in
2011, whose average selling price was higher than that of the C30.
The equipment of Great Wall’s new pick-up trucks, SUVs and Mini SUVs have been
significantly upgraded, and average prices have also increased compared to the older
models (Exhibit 10).
Great Wall rolls out facelifts of
popular models to drive sales
growth.
Great Wall has over 20 subsidiaries
that produce auto parts, such as
engines, transmissions, front and
rear axles, panels, air conditioners,
seats, interior decorations and
wiring harnesses.
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report Overview 10
We believe Great Wall’s profit growth, which is driven by continued improvement in its
product mix, is of good quality.
Exhibit 10: Average prices of various series of models launched by Great Wall
continue to rise, and the product mix continues to be optimised
Source: Yiche.com, auto.sina.com.cn, auto.sohu.com, Guosen Securities (HK)
4.2 The company has enhanced its profitability through technological
co-operation with auto-parts suppliers
Great Wall has more than 20 subsidiaries that produce auto parts, such as engines,
transmissions, front and rear axles, panels, air conditioners, seats, interior decorations
and wiring harnesses, etc. All these parts are compatible with each other.
Unlike most other automakers, Great Wall co-operates with the world’s leading auto parts
suppliers to develop technologies instead of just simply buying products from them,
which has not only significantly enhanced its own R&D strength, but also retained the
profit generated from the production of auto parts through vertical integration.
Exhibit 11: Great Wall has the highest gross profit margin
among the major listed passenger vehicle manufacturers
Exhibit 12: Great Wall has a leading position among the listed
passenger vehicle manufacturers in terms of profitability
Source: Wind, Guosen Securities (HK) Source: Wind, Guosen Securities (HK)
0 20 40 60 80 100 120 140 160 180
Safe
Sing
Pegasus
HavalH3
HavalH5
HavalH6
Peri
Florid
Coolbear
Lingao
VoleexC30
VoleexC20R
VoleexC50
Deer
Sailor
Socool
Wingle3
Wingle5
HavalM1
HavalM2
HavalM4
RMB '000
Mini SUV
Pick-up truck
Sedan
SUV
2012
2010
2009
2009
2007
2004
2001
1996
2011
2011
2010
2009
2009
2009
2008
2011
2010
2008
2005
2003
2002
Lauch time
24.9%
20.1% 18.8% 18.2% 17.2% 16.5%
14.8% 13.3% 13.2%
4.5%
0%
5%
10%
15%
20%
25%
30%
Gre
at W
all
Mo
tor
Do
ng
fen
g
Au
to
SA
IC M
oto
r
Ge
ely
Au
to
BY
D
Co
mp
an
y
FA
W C
ar
Ch
on
gq
ing
Changan
Brilli
ance
C
hin
a
Anhui
Jia
ng
hu
ai
Tia
njin
Fa
w
Xia
li
Gross margin(%)(2011)
27.2% 25.6% 24.8% 24.0%
17.5%
11.1%
7.6% 7.0%
3.0% 2.6%
0%
5%
10%
15%
20%
25%
30%
Brilli
ance
C
hin
a
Gre
at W
all
Mo
tor
Do
ng
fen
g
Au
to
SA
IC M
oto
r
Geely
Auto
Anhui
Jia
ng
hu
ai
Ch
on
gq
ing
C
ha
ng
an
BY
D C
om
pa
ny
Tia
njin
Fa
w
Xia
li
FA
W C
ar
ROE(%)(2011)
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report Overview 11
Exhibit 13: Great Wall has enhanced technological co-operation with world-renowned auto parts suppliers to boost its R&D
Date Partner Description Areas of collaboration
2011/3/23 Ricardo Plc Ricardo Plc is a leading global provider of strategic consulting for the auto industry and innovative R&D of engines.
Gasoline engines and six-speed DCT
2011/6/20 Mahle Mahle ranks among the top three system suppliers worldwide for piston systems, cylinder components, as well as valve train, air management, and liquid management systems.
Key engine parts in air management systems etc.
2011/7/5 Brose Brose is the biggest manufacturer of door systems worldwide
Car lock systems, cooling fans and motors for wind-up windows
2011/7/6 Autoliv Autoliv is a global leader in automotive safety systems Active and passive safety systems and integrated control systems
2011/8/4 Baosteel Baosteel is the biggest steel producer in China and ranks among the top three steel makers worldwide in terms of comprehensive competitive capacity
High-strength steel and laser-welded tailored boards.
2011/9/22 TRW TRW is one of the top 10 suppliers of auto parts and a leading manufacturer of automotive safety systems worldwide
Active and passive safety technologies
2011/9/26 Bosch Bosch is the biggest provider of automotive technologies
Engine management systems and chassis systems.
2011/9/29 BorgWarner BorgWarner is a leading global provider of power system solutions
Drivetrain systems and superior torque distribution and management systems and etc.
2011/11/1 Delphi Delphi is the biggest manufacturer of wiring harness worldwide.
Electronic & electrical framework, electronic & safety systems and etc.
2011/11/18 TNO TNO is one of the top three applied science research organisations and responsible for drafting Collision Regulations (EU).
Active and passive safety, emission and new-energy technologies
2012/2/25 Pohang Iron and Steel Co. Ltd (POSCO)
POSCO is one of the world’s biggest steel producers. New materials like advanced high-strength steel and third-generation high-strength steel and new technologies like hot embossing and hydroforming
2012/5/14 Fuyao Group Fuyao Group is the world’s second largest supplier of automotive safety glass
Automotive glass, window frames, window guide rail, trim parts, beltline molding and etc.
2012/5/31 Minth Group Minth Group holds the biggest market share for trim, decorative and body structural parts in China
Door frames and window guide rail, front grille, roof racks, other automotive accessories and etc.
2012/7/2 Hella Hella is the global provider of lighting and electronics for the automotive industry
Automotive body electronics, body control module and lighting systems
Source: Company data, Guosen Securities (HK)
4.3 The company dwarfs its peers in terms of profitability due to
improvement in its product mix and the vertical integration of
production
Thanks to its well-received models and the vertical integration of production, Great Wall
is able to maintain a leading position in the industry in terms of profitability (Exhibit 11).
Great Wall’s gross profit margin was 24.9% for 2011, substantially above the industry
average of 17%-18% and is the highest among other major listed passenger vehicle
manufacturers.
In addition, Great Wall’s ROE reached 25.6% in 2011, far higher than the industry
average of 9.6% (according to data from the National Bureau of Statistics in 2011),
ranking it No.2 among the major listed passenger vehicle makers in China (Exhibit 12).
Great Wall’s gross margin of 24.9%
for 2011 was substantially above the
industry average and was the highest
among major listed automakers
(Exhibit 11).
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report
Catalysts 12
Catalysts
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
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%
China’s SUV sales volume has been increasing since 2000. SUV sales volume in China
was 196,000 units in 2005, accounting for 4.9% of the sales volume of all passenger
vehicles. But by 2011, China’s SUV sales volume had exceeded 1.6 million units, over
eight times more than that in 2005 and representing a CAGR of 42%.
SUV sales volume grew robustly by 23% in 2011, while the sales volume of passenger
vehicles in China rose by only 5%. SUVs now account for 11.2% of the total sales volume
of passenger vehicles in China (Exhibit 15).
Exhibit 14: Sales volume growth of SUVs has far outpaced
that of passenger vehicles and the auto industry as a whole
Exhibit 15: SUVs accounted for 11.2% of the total sales volume
of passenger vehicles, more than doubled from the previous
six years
Source: Wind, Guosen Securities (HK) Source: Wind, Guosen Securities (HK)
SUVs have gained in popularity in China thanks to the vehicles’ vast interior space, better
visibility and the combination of comfort and high off-road performance.
As income rises, more and more consumers are willing to purchase SUVs. Consumers
who seek to buy a second car particularly prefer SUVs. According to market research
firm Sinotrust, over 20.4% of consumers prefer SUVs as their second car (Exhibit 16).
As a result, we believe SUV sales will continue to boom. We expect by 2015, SUV sales
volume in China would reach 3.5 million units, which would account for 14.3% of the total
auto sales in China.
0%
20%
40%
60%
80%
100%
120%
2006 2007 2008 2009 2010 2011
SUV sales volume growth Total sales volume growth passenger vehicle sales volume growth
4.9% 4.4%
5.7% 6.6% 6.4%
9.6%
11.2%
0%
2%
4%
6%
8%
10%
12%
2005 2006 2007 2008 2009 2010 2011
The proportion of SUV to total passenger cars
SUV sales volume grew robustly
by 23% in 2011, while sales volume
of passenger vehicles in China
rose by only 5% (Exhibit 14).
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report
Catalysts 13
Exhibit 16: 20.4% of consumers prefer SUVs as their second car
Source: Sinotrust, Guosen Securities (HK)
1.2 Great Wall has topped its domestic peers in terms of SUV sales
volume for eight straight years since 2004
Great Wall started to produce SUVs in 2002, and it has topped its domestic peers in
terms of SUV sales for eight straight years since 2004. The company’s SUVs target the
mid-end market, and offer excellent performance at a competitive price. Great Wall
enjoys obvious competitive advantages over peers, as it does not only avoid direct
competition with joint-venture brands, but it also offers better quality than its domestic
peers. The company’s SUV sales volume for 2009, 2010 and 2011 was 58,000 units,
137,000 units and 147,000 units respectively, representing a CAGR of 59%. In 2011, the
company made up 9.4% of China’s SUV market.
The sales boom of SUVs is attracting more market entrants and competition is becoming
increasingly fierce. Although the company’s share of the SUV market has declined in
recent years, it remains one of the top three automakers and the No. 1 domestic car
manufacturer in terms of SUV sales volume. As the company’s Tianjin plant has been put
into operation this year, the H6, which was launched in 2011, and the M4, which was
launched in 2012, have become two new engines to boost the company’s growth, and
may prop up the company’s share of the SUV market.
13.5%
22.9%
34.5%
10.3%
1.1%
3.2%
1.4%
9.6%
3.4%
2.7%
9.7%
20.0%
21.1%
10.2%
20.4%
3.1%
2.0%
10.9%
0% 5% 10% 15% 20% 25% 30% 35% 40%
Mini Sedan
Small Sedan
Compact Sedan
Mid-size Sedan
Mid-large sedan
SUV
MPV
Mini Bus
Others
The second car The first car
In 2011, Great Wall accounted for
9.4% of China’s SUV market.
The new H6 and M4 SUV models
will become the new growth
drivers.
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report
Catalysts 14
Exhibit 17: Great Wall’s SUV sales volume has quintupled
over the past six years
Exhibit 18: Although Great Wall’s market share in the SUV
market has declined, it maintains a leading position
Source: Company data, Guosen Securities (HK)
Source: Company data, China Association of Automobile
Manufacturers, Guosen Securities (HK)
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 in China
Great Wall’s SUV sales volume was 147,000 units in 2011, representing 32% of the
company’s total sales volume (Exhibit 19). This ratio is far higher than that of other listed
passenger vehicle manufacturers. In addition, Great Wall’s newly launched SUV models
are generating strong sales. As such, we believe Great Wall is likely to continue to benefit
from the rapid growth of the SUV industry.
Exhibit 19: SUVs accounted for 32% of Great Wall’s total sales volume, the largest
ratio among major listed automakers (2011)
Source: Company reports, Guosen Securities (HK)
28,568
51,855 44,006 58,299
136,982
147,341
82%
-15%
32%
135%
8%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
160%
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
2006A 2007A 2008A 2009A 2010A 2011A
Un
it
SUV sales volume (LHS,Unit) SUV sales growth (RHS)
14.6%
17.5% 18.1%
13.9%
10.9% 11.4%
9.4%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
2005 2006 2007 2008 2009 2010 2011
Market share of Great Wall SUV
0%
0%
0%
0%
0%
2%
4%
13%
14%
32%
0% 5% 10% 15% 20% 25% 30% 35%
Brilliance China(1114.HK)
Geely Auto(0175.HK)
Chongqing Changan(000625.SZ)
Tianjin Faw Xiali(000927.SZ)
FAW Car(000800.SZ)
Anhui Jianghuai(600418.SH)
SAIC Motor(600104.SH)
BYD Company(1211.HK)
Dongfeng Auto(0489.HK)
Great Wall Motor(2333.HK)
SUV sales volume accounting for total motor sales(2011)
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report
Catalysts 15
1.4 Havel H6 and M4 will become powerful drivers to prop up
Great Wall’s share of the SUV market
Great Wall’s Havel H6, which was launched in 2011, is the company’s first urban SUV
model, and also the major product of its Tianjin plant. The model continues to offer
excellent performance at a competitive price, and it’s popular due to its robust and grand
exterior. We believe Havel H6 will become a major catalyst to prop up the company’s
share of the SUV market in China and boost its profit growth for 2012 and 2013.
The Havel H6 is precisely positioned: the price for the model ranges from RMB95,800
to RMB141,800 (depending on the specs), which is lower compared to joint-venture
brands and higher versus domestic brands. The H6’s product and price differentiation
from other models ensures the company generates relatively decent profits.
Exhibit 20: The Havel H6 is precisely positioned: priced below joint-venture brands
but higher than domestic brands
Source: auto.sohu.com, Guosen Securities (HK)
Havel H6 is highly competitive compared to other domestic SUV brands at the same
price range.
We selected four major domestic SUV models priced from RMB100,000 to RMB110,000
(lowest price for Trumpchi GS5 is RMB123,800) for comparison, and found that the Havel
H6 enjoys obvious advantages in terms of both equipment and after-sale maintenance
(Exhibit 21).
Havel H6 features multiple engine choices: it is equipped with a 2.0 litre petrol engine,
and the 2.0T diesel and 1.5T diesel versions were also launched this year. In terms of
after-sale maintenance, it comes with a five-year/100,000 kilometres warranty for the
entire vehicle, far superior to other competitors.
0
50
100
150
200
250
300
350
400
CR
-V
Ha
va
lH6
Tig
ua
n
QA
SH
QA
I
ix3
5
RA
V4
Tig
go
Hig
hla
nd
er
ZO
TY
E A
uto
50
08
Sp
ort
ag
e
BY
DS
6
Price:RMB'000
Joint-venture brands
China self-owned brands
Great Wall’s popular Havel H6 is
highly competitive compared with
other domestic SUV brands at the
same price range
The Havel H6 offers a five-year
warranty, far superior to its
competitors
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report
Catalysts 16
Exhibit 21: Great Wall Havel H6 enjoys marked competitiveness over other SUV models at the same price range
Name BYD S6 Great Wall Havel H6 Chery Tiggo Brilliance V5 Guangqi Trumpchi
Price RMB107,900 RMB105,800 RMB100,800 RMB109,800 RMB123,800
Model
BYD S6 [2011] Great Wall Havel H6[2011]
Chery Tiggo [2012] Brilliance V5 [2012] Guangqi Trumpchi GS5 [2012]
BYD S6 2.0L manual Deluxe
Havel H6 2.0L Elite Chery tiggo 1.8 AMT Comfort
Brilliance V5 1.6L manual Comfort
Guangqi Trumpchi 2.0L manual Comfort
Engine 2.0L 140 hp L4 2.0L 133 hp L4 1.8L 132 hp L4 1.6L 118 hp L4 2.0L 147 hp L4
Warranty 4-year/100,000 km 5-year/100,000 km 2-year/60,000 km 5-year/60,000 km 3-year/100,000 km
Engine type BYD483QB 4G63S4M ACTECO-SQR481FC 4A92S -
Max torque(N·m/rpm)
186/4000-4500 186/4000 170/4300-4500 151/4000 187/4500
Rear suspension
Multi-link independent rear suspension
Double wishbone independent rear suspension
Torsion beam semi-independent rear suspension
Twist beam semi-independent rear suspension
Multi-link independent rear suspension
Wheelbase (cm) 2720 2680 2510 2630 2710
Gear-box five-speed manual five-speed manual five-speed semi-auto five-speed manual five-speed manual
Source: auto.sohu.com, Guosen Securities (HK)
Sales boom of Havel M4 will further increase the company’s SUV market share.
Havel M4 is a modified mini SUV based on the Florid sedan, and is the automaker’s third
mini SUV after M1 and M2.
M4 is well positioned as a mini SUV priced at around RMB70,000 to fill the gap in
the market: Chinese consumers like SUVs. However, almost all the most popular SUVs
now are large-size models, while mini SUVs priced at around RMB70,000 are almost
absent from the market. Great Wall has subtly spotted the gap in the market, and
launched the M4 after modifying the Florid sedan on the Florid production platform. Most
cars at this price range are sedans, while M4 enjoys competitive advantages over other
models thanks to its better visibility, excellent off-road ability and the combination of
comfort and high performance.
Stylish exterior and powerful equipment: M4 features a stylish and hard-edged
exterior despite its small size, which is particularly attractive to female consumers. The
luxury version of the M4 is equipped with a multi-media console with “MP5+GPS+
rear-view camera display+parking sensor”.
M4 is well-received by the market: Thanks to the sales boom of the M4, Great Wall
saw sales volume of M Series SUVs increased to 9,000 units in September, representing
a sharp rise from the average monthly sales volume of 1,600 units last year. Data from
our channel checks also show that M4 demand remains strong, and that most customers
have to wait about two weeks or longer for delivery of the vehicle. We believe sales
volume of the M4 is likely to continue until 1H 2013.
We believe despite increasing competition in the market, Great Wall is still likely to
maintain its advantages in the SUV market due to its excellent product positioning and
production experience. The launch of the H6 and M4 will lead to a rebound in Great
Wall’s SUV market share.
Channel check shows very strong demand for the H6/M4 models (Exhibit 22).
According to our channel checks, the waiting time for the Havel H6 or M4 model is
usually more than one month, and this situation is not getting better in three months.
Great Wall’s mini SUV priced at
RMB70,000 fills a gap in the market
and it’s an alternative to sedans
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report
Catalysts 17
Most dealers that we spoke with say that these two models are very popular in the
market and their sales are reaching an historic high this year.
We believe that the major factor weighing on sales volume growth of Great Wall’s SUVs
is its manufacturing capacity constraint. But as the capacity is being boosted in the
Tianjin plant, we expect Great Wall’s SUV sales can reach a record high in the coming
months.
Exhibit 22: Our channel checks show demand for the Havel H6 remains strong and the waiting time is around one month
Distributor City Waiting Time
(2012/06/28) Dealers’ comments
Waiting Time
(2012/10/11) Dealers’ comments
Shenzhen Benjue Shenzhen H6:
45 working days
H6 not available, not even for extra payment. Pre-sales are only available for the economic model
H6:
2.0L - 1 month
2.0T - 2 months
1.5T - 3 months
M4: Until Jan. 2013
H6/M4 very popular, sales much better than last year; no stock on their side;
Shenzhen Jinda Automobile Trade Co., Ltd.
Shenzhen H6:
One month
H6 not available, not even for extra payment. Pre-sales are only available for economic and low-end models, with advance deposit of RMB20,000
H6:
2.0L - 2 month
2.0T - 50 days
1.5T - 40 days
M4: 40-50 days
H6 has been very popular since it was launched; enough inventory for C30/C50 models
Guangzhou Youdao Automobile Trade Co., Ltd.
Guangzhou H6:
2.0L: 1 unit available
2.0T - 1.5 months
H6 not available even for extra payment. Pre-sales not available for high-end model; need to place order for any models except H5
H6:
2.0L - 1 month
2.0T - 1 month
1.5T - 1 month
M4: 45 days
Auto purchase restriction in Guangzhou slightly affected their sales, they only take in standard models for H6
Zhangjiakou Pangda Huaqing Automobile Sales and Service Co., Ltd.
Zhangjiakou H6:
Small quantity in stock
Three units were in stock. Pre-sales are not available for mid- and low-end models
H6:
2.0L - 1 month
2.0T - 2 months
1.5T - 20 days
M4: 40-50 days
Maintenance cost is only a little higher for the 2.0T model; but this model is noisier than 2.0L/1.5T models
Baoding Wuzhou Automobile Sales and Service Co,. Ltd.
Baoding H6:
About 20 days
Zero stock. H6 not available even for extra payment.
H6:
1 month for all series
M4: 45 days
M4 model is very popular and it’s said that Great Wall’s orders on hand have exceeded 10,000 units
Tianjin Haifeng Automobile Service Co., Ltd.
Tianjin H6:
One month
Zero stock. Pre-sales not available for low-end models
H6:
2.0L - 1 month
2.0T - 1 month
1.5T - 40 days
M4: 1 month
Although they are close to Great Wall’s plant, they have to wait for the same amount of time as other dealers to receive the H6/M4
Shanghai Jinhu Automobile Sales Co., Ltd.
Shanghai H6:
One month
Zero stock. H6 not available even for extra payment. Pre-sales not available for low-end models
H6:
2.0L - 45 days
2.0T - 45 days
1.5T - 45days
M4: 45 days
M4 model can enjoy RMB3,000 subsidy
Even in Shanghai, the demand for H6/M4 is very high
Chengdu Qingshan Automobile Trade Co., Ltd.
Chengdu H6:
Product in stock
Product in stock. No discount. High-end model not available
H6:
2.0T - 1 month
1.5T - 40 days
M4: 1 month
Customers prefer SUVs because of the mountainous conditions in Chengdu
Source: Guosen Securities (HK)
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report
Catalysts 18
2 Sedan buisness: focuses on A-class models,
and C50 is expected to increase the popularity of
domestic turbo-charged sedans in China
2.1 The company entered into the sedan market in 2008, and Voleex C30
was among the top three models priced at RMB60,000 to RMB90,000
in terms of sales volume in 2011
At the end of 2007, Great Wall was approved by the National Development and Reform
Commission to produce sedans. It sold less than 9,800 sedans in 2008, but increased by
nearly 150% to 187,000 units in 2011.
The rapid growth of the sedan business is also attributable to the precise market
positioning by Great Wall. When it entered into the sedan market in 2008, Great Wall first
launched the A00-class sedan, the Peri, and then it introduced the A0-class Florid,
Coolbear and Ling'ao. It then rolled out the Voleex C30 in 2010, and the Voleex C50 in
2011. All these models target the A-class family sedan market segment, which is the
largest and the fastest growing.
The precise product positioning has also boosted the rapid growth in the sales volume of
sedans for the company. Florid ranked No.1 among all A0-class hatchbacks in China in
terms of sales volume in 2010, and the Voleex C30 was among the top three models
priced at RMB60,000 to RMB90,000 in terms of sales volume in 2011 (Exhibit 25).
Exhibit 23: Great Wall’s sedan sales have accelerated in the
past three years
Exhibit 24: Great Wall’s Voleex C30 was among the top three
models priced at RMB60,000 to RMB90,000 in terms of sales
volume in 2011
Source: Company data, Guosen Securities (HK) Source: auto.sohu.com, Guosen Securities (HK)
2.2 The company focuses on A-class family sedans, and continues
upgrading the product line
All the sedan models launched by the company since 2008 are A-class sedans, and it
continues to upgrade the product line: it launched the A00-class Peri in 2008, and then
introduced the A0-class Florid, Coolbear and Ling'ao. It launched the Voleex C50 in 2011.
The grade of the models continues to be improved and the ASP also keeps rising. The
company’s sedan business has been growing robustly thanks to its strategy to focus on
A-class family sedans and the ongoing improvement of its product line.
0 0 9,754
69,790
122,843
187,504 616%
76% 53%
0%
100%
200%
300%
400%
500%
600%
700%
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
2006A 2007A 2008A 2009A 2010A 2011A
Un
it
Sedan sales volume (LHS,Unit)
Sedan sales growth (RHS)
11%
9%
8%
5%
4% 63%
Volkswagen Jetta Chevrolet Sail NB
Great WallC30 Volkswagen Santana
JAC Heyue Others
Great Wall first started to
produce sedans in 2007.
All of Great Wall’s sedan models
target the family market, which
is the largest and fastest
growing in this category.
The company’s focus on
A-class sedans has helped to
drive rapid growth.
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report
Catalysts 19
Exhibit 25: Great Wall continues to upgrade its product line
MSRP(‘000)
A
VoleexC30 VoleexC20R 54.0-84.5
A0
Cool bear
63.9-87.9
A0
Lingao
54.8-80.9
A0 Florid
59.9-63.9
A00 Peri
36.9-44.9
Year
2008 2009 2010 2011
Source: Guosen Securities (HK)
2.3 Capacity expansion of Voleex C50 is likely to begin in 2H 2012
Voleex C50 is a new sedan launched by Great Wall in 2011, which is priced by the
manufacturer at RMB78,000 to RMB91,800.
“Turbo-charged engine” and “super long warranty period” are two important selling
points of the C50.
“Turbo-charged engine” and “super long warranty period” are two important selling points
of the C50, which makes the model unmatchable among sedans priced at RMB70,000 to
RMB90,000.
C50 is the only sedan that is priced at below RMB90,000 but equipped with a
turbo-charged engine. The turbo-charging technology can efficiently boost the power of
the vehicle without increasing the size of the engine, and has been widely used in
European-made vehicles. Cars with a turbo-charged engine are becoming increasingly
popular among consumers amid high oil prices. Great Wall spotted the opportunity and
launched the C50 to attract consumers with its high performance at an attractive price.
The other competitive edge of C50 is that its warranty period is extremely long. Great
Wall provides a five-year/150,000 kilometres warranty for the entire vehicle for the C50,
plus four comprehensive maintenance services for free. The warranty period is longer as
compared to four years/150,000 kilometres for the C30, four years/100,000 kilometres for
most of other domestic brands, and only two years/60,000 kilometres for regular
joint-venture brands (Exhibit 26). The longer warranty period may add to the company’s
cost in after-sale services, but as Great Wall is at the early stage of brand building, this
strategy can help boost consumer confidence and sales.
Exhibit 26: Warranty policies of different automakers
Warranty policy
Great Wall C50 five years/150,000 kilometres
Great Wall C30 four years/150,000 kilometres
Other domestic brands four years/100,000 kilometres
Regular joint-venture brands two years/ 60,000 kilometres
Source: Guosen Securities (HK)
Taken together, we expect sales volume of C50 would total 33,000 units this year, while
that of C30 would decline by 15% y-o-y to 127,000 units, as C50 acts as a substitute of
the C30, and the increase in sales volume of C50 would offset the decline in that of the
C30.
The C50 is the only sedan priced
below RMB90,000 to be equipped
with a turbo-charged engine.
Great Wall offers extremely long
warranty periods for its models,
which can help it to build brand
recognition and consumer
confidence, thereby driving up
sales growth.
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report
Catalysts 20
With C50 acting as the substitution of the C30, this will further optimise the product mix of
the company’s sedan business. In addition, if sales of the C50 exceeds 100,000 units
next year, this would help secure Great Wall’s competitive edge in the market for sedans
priced at RMB70,000 to RMB90,000.
3 It maintains a strong and leading position in the
pick-up truck market, but policy restictions need
to be lifted to give way to stronger growth
3.1 The company entered into the pick-up truck market in 1996, and it
has maintained the No.1 spot for 14 consecutive years since 1998 in
terms of sales volume.
Pick-up trucks were the company’s first business and Great Wall is the most competitive
in this sub-segment among peers. The company started to produce pick-up trucks in
1996. Its trucks have improved from the Deer, Sailor and Socool during the early years to
the current Wingle series, which are now the major products promoted by the company.
Great Wall now has a full range of high-end, mid-end and economic pick-up trucks.
The Wingle is China’s first pick-up truck brand to install the ABS+EBD brake systems as
standard equipment. Besides, Great Wall was the first automaker to equip pick-up trucks
with electronic immobilisers and racks, and pinion hydraulic power steering systems,
which have significantly enhanced the competitiveness of its pick-up trucks.
Great Wall has been No.1 in China’s pick-up truck market in terms of sales volume,
market share, exports and vehicle population for 14 consecutive years since 1998.
Besides, it can compete with foreign pick-up truck brands and it has reduced the latter’s
market share in China (Exhibits 27-28). Great Wall’s share of the pick-up truck market
has remained at around 30% for the past seven years, and it rose to 32% in 1H2012,
implying a strong and stable position in the market.
The company maintains a strong
and leading position in the pick-up
truck market. But more
policy-based catalysts are needed
for further development of the
pick-up truck sector in China.
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report
Catalysts 21
Exhibit 27: Great Wall had 31% share of the domestic pick-up
truck market in 2011
Exhibit 28: Great Wall’s share of China’s pick-up truck market
recovered to 32% in 1H 2012
Source: China Association of Automobile Manufacturers, Guosen
Securities (HK)
Source: China Association of Automobile Manufacturers, Guosen
Securities (HK)
Pick-up truck sales in China have grown strongly in recent years. Sales increased to
394,000 units in 2011 from 145,000 units in 2006, representing a CAGR of 22% (Exhibit
29).
Likewise, Great Wall’s pick-up truck business has also been growing at a rapid and
steady pace over the past few years. The company’s pick-up truck sales increased to
122,000 units in 2011 from 45,000 units in 2006, representing a CAGR of 27%, outpacing
the industry average (Exhibit 30).
Exhibit 29: Growth in pick-up truck sales volume in China is
steady
Exhibit 30: Great Wall’s pick-up truck sales volume has been
growing at a rapid and steady pace
Source: Data from companies, Guosen Securities (HK) Source: Data from the company, Guosen Securities (HK)
3.2 Policy-based catalysts are needed for further development of the
pick-up truck sector in China
Pick-up trucks have multiple uses as they have the features of a sedan, a truck as well as
a recreational vehicle. It is a good substitute for other types of vehicles, and they have
huge market potential.
In the US, pick-up trucks make up 13% of the total auto sales volume. However, the
pick-up truck market has always been a niche market in China. Total pick-up truck sales
31%
16%
14%
13%
7%
6%
13%
Great Wall Motor
Jiangling Motors
Nissan
ZX Auto
GONOW
FOTON
Others
32%
29% 27%
28% 27%
31% 32%
0%
5%
10%
15%
20%
25%
30%
35%
2006 2007 2008 2009 2010 2011 2012H1
145
187 199
256
379 394
222
24%
29%
6%
29%
48%
4%
18%
0%
10%
20%
30%
40%
50%
60%
0
50
100
150
200
250
300
350
400
450
2006 2008 2010 2012H1
Un
it '000
Domestic Pick-up truck sales volume Sales volume(LHS,000)
Domestic Pick-up truck sales volume Growth(RHS)
44,726 54,955
63,235
75,341
98,643
121,673
23%
15% 19%
31%
23%
0%
5%
10%
15%
20%
25%
30%
35%
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
2006A 2007A 2008A 2009A 2010A 2011A
Un
it
Pick-up truck sales volume (LHS,Unit)
Pick-up truck sales growth (RHS)
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report
Catalysts 22
in China were only 394,000 units in China, accounting for only 2% of China’s total auto
sales volume.
Two major factors holding back the growth of China’s pick-up truck sales volume are: 1)
almost all capital cities and most prefectural cities impose restrictions on pick-up trucks in
downtown areas because pick-up trucks are classified as light trucks. 2) Pick-up truck
owners are required to apply for a business license plate for their vehicle, and pay higher
taxes for pick-up trucks than that for passenger cars. Pick-up trucks are even required to
undergo quarterly or monthly mechanical examinations.
As a result, more policy-based support is needed for further development of the pick-up
truck sector in China. Although we believe that restrictions on pick-up trucks are unlikely
to be lifted in the short term, we noticed that some large pick-up truck manufacturers
have already made proposals to the National People’s Congress, suggesting to scrap the
restrictions on pick-up trucks in downtown areas. If these proposals are passed, Great
Wall will be the biggest beneficiary.
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report
Forecasts & Valuation 23
Forecasts & Valuation
1 Profit forecasts
1.1 Forecasts
Our profit forecasts for 2012/13/14 are as follows:
Exhibit 31: Earnings forecasts
2012E 2013E 2014E
Revenue (RMB mn) 39,629 47,076 53,029
y-o-y chg (%) 32 19 13
Pre-tax profit (RMB mn) 5,790 6,694 7,321
y-o-y chg (%) 40 16 9
Profit attributable to shareholders (RMB mn) 4,842 5,595 6,117
y-o-y chg (%) 41 16 9
EPS (RMB) 1.59 1.84 2.01
Source: Guosen Securities (HK)
1.2 Sensitivity analysis
We assume no material changes in government restrictions on the use of pick-up trucks
in the coming three years, which will weigh on the growth of this business segment.
However, given the low penetration rate of vehicles in tier-three and tier-four cities,
demand for pick-up trucks will grow steadily due to features such as comfort and load
capability. As a leading producer, Great Wall’s sales growth will be basically in line with
the industry average. Besides, capacity bottlenecks will constrain the growth of the
pick-up truck business, if the company does not expand capacity (its production capacity
is 125,000 units currently).
SUVs and passenger cars are two potential explosive growth drivers for Great Wall,
whose performance will greatly affect its profitability and growth prospects going forward.
Therefore, we conducted a sensitivity analysis on the sales volume of SUVs and
passenger cars and the company’s 2012 net profit.
Exhibit 32: Sensitivity analysis on the sales volume of SUVs & passenger cars and
Great Wall’s 2012E net profit (RMB bn)
The sales volume of passenger cars (unit)
152,867 171,975 191,083 210,192 229,300
The sales volume of SUVs (Unit)
208,289 4,043 4,119 4,195 4,272 4,348
234,325 4,366 4,443 4,519 4,595 4,671
260,362 4,690 4,766 4,842 4,918 4,995
286,398 5,013 5,089 5,166 5,242 5,318
312,434 5,336 5,413 5,489 5,565 5,641
Note: The benchmark is highlighted in grey.
Source: Guosen Securities (HK)
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report
Forecasts & Valuation 24
Exhibit 33: Sensitivity analysis on the sales volume of SUVs and passenger cars
and Great Wall’s 2012E net profit
The sales volume of PC (Relative to base assumption)
-20% -10% 0% 10% 20%
The sales volume of SUVs (Relative to base assumption)
-20% -17% -15% -13% -12% -10%
-10% -10% -8% -7% -5% -4%
0% -3% -2% 0% 2% 3%
10% 4% 5% 7% 8% 10%
20% 10% 12% 13% 15% 17%
Source: Guosen Securities (HK)
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 lead to a 7%
increase in net profit, while every 10% sales growth of passenger cars will result in only a
2% increase in earnings.
Under our assumptions for Great Wall, the sales volume of SUVs and passenger cars are
260,000 and 191,000 respectively, which are different from management’s growth targets
(of 205,000 and 220,000 respectively in 2012). We estimate 2012E sales of SUVs will
exceed the target set by management, mainly because the H6 will continue to be well
received in the market and the redesigned M4 SUV will also contribute a portion of the
SUV sales. The better-than-expected growth of the SUV business will be a major support
for its performance, as the ASP of SUVs is higher than pick-up trucks and sedans.
1.3 Valuation screening
We believe Great Wall is one of the self-branded automakers with the biggest potential,
and its ‘Focus Strategy’ and ‘Platform Sharing Strategy’ will give the company more
competitive advantages than peers in the long term. The company has already gained
first-mover advantages in the pick-up truck and SUV businesses, and it has maintained
steady growth in its passenger car business. As such, its business expansion should be
steadier than its peers.
We used PE as our primary method for valuing Great Wall. We forecast a prospective PE
of 11.2x/9.6x/8.8x for 2012/13/14 respectively. Its valuation is in the medium range of the
industry average (Exhibit 34).
Exhibit 34: Valuation comparison (PE x)
Stock Code Company 2012E 2013E 2014E
0175.HK Geely Automobile Holdings 11.8 10.3 8.9
0489.HK Dongfeng Motor Group Company 6.6 6.1 5.7
1114.HK Brilliance China Automotive Holdings 16.6 13.1 10.8
2238.HK Guangzhou Automobile Group 7.7 6.0 5.2
1211.HK BYD 31.9 21.9 18.4
2333.HK Great Wall Motor 11.4 9.6 8.3
Average 14.3 11.2 9.6
Our estimates Great Wall Motor 11.2 9.6 8.8
Source: Wind, Guosen Securities (HK)
Trading at 11x 2012E PE, we think that the current price already factored in most of
the growth potential for this year. However, our channel checks show that the
demand for Great Wall’s SUV models are still very strong at the moment and it’s likely
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report
Forecasts & Valuation 25
that the company can achieve record sales in the coming months once capacity
constraints are eased. We derived a 12-month target price of HK$24.1 based on
12.4x 2012F PE.
2 Risks
The sales growth of vehicles in China, passenger vehicles in particular, will be
negatively affected by the economic slowdown.
A fierce price war erupts in the medium to low-end auto market, as JV automakers
might launch a large number of models to compete in this market segment.
Unfavourable central government policies that hinder the survival and development
of self-branded automakers.
Major large-scale quality issues with its key models (H6 and C50) significantly
damaging its brand reputation.
3 Closing notes to the buy-side analyst
We believe Great Wall is one of the self-branded automakers with the biggest growth
potential and the highest investment value. The company firmly sticks to its ‘Focus
Strategy’, and its three major models are all appropriately positioned and have
already made considerable achievements. Its manufacturing facilities are highly
effective, as the company has completed development of a large number of models
with various configurations and shapes by making good use of its existing
manufacturing platforms. Besides, the company has the highest profitability and the
strongest financial position in the industry, as it has robust cash flow and maintains a
‘zero-debt’ strategy. The aforementioned advantages will give Great Wall a higher
valuation premium than peers in the long term.
The government is highly unlikely to launch another massive stimulus package for
auto purchases. More than 56% of oil consumption in China was satisfied by imports
in 2011. As a major consumer of oil, the rapid growth in auto sales will significantly
threaten China’s energy safety. In addition, the congestion issues in cities and
environmental problems caused by surging automobiles have become major
concerns for the government and citizens alike. All these factors will reduce the
possibility of another major stimulus package. We think that stimulus focused on
small-engine vehicles is probable. But this will only marginally improve Great Wall’s
sales as the growth driver of the company is large-engine SUVs.
Over 98% of Great Wall’s sales are by car dealers, and most of the dealers have
adopted the third-party agreement as their means of settlement for loans. Under the
third-party agreement, Great Wall’s revenues will not be recognised until car dealers
make the payment by honouring the notes and receive the automobile certificate
pledge from banks. Therefore, its revenue-recognition policy is highly sound, and it is
not necessary for the company to build up high inventory at dealers.
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report
Forecasts & Valuation 26
Exhibit 35: Income statement Unit: RMB mn 2010A 2011A 2012E 2013E 2014E Note
Total operating revenue 22,986 30,089 39,629 47,076 53,029 Rising ASP and sales volume drive up income growth
Total operating costs -20,073 -26,105 -33,926 -40,524 -45,862
Including: Operating costs -17,298 -22,594 -29,486 -35,201 -39,867 Gross profit margin rises as product mix improves
Business taxes and surcharges -811 -1,052 -1,387 -1,648 -1,856
Selling expenses -1,070 -1,193 -1,466 -1,789 -2,015 Assume selling expenses are equivalent to 3.8% of sales revenue
Administrative expenses -874 -1,284 -1,664 -1,977 -2,227
Financial expenses 8 23 119 141 159 The company adopts “zero-debt” strategy
Impairment losses of assets -27 -5 -42 -50 -56
Add: Gains or losses from changes
in fair values
-2 - 4 6
Investment income 56 24 8 43 43
Including: share of profit of associate
and jointly controlled entities
42 12 -3 23 21
Operating profit 2,968 4,012 5,711 6,600 7,215 Operating profit keeps increasing
Add: Non-operating income 82 126 119 141 159 Assume the share it takes up as % of income declines to 0.3%
Less: Non-operating expenses 9 8 40 47 53
Including: Loss from disposal of
non-current assets
4 3 1 3 4
Total profit 3,041 4,131 5,790 6,694 7,321
Less: Income tax expenses 214 620 868 1,004 1,098 Assume the income tax rate remains at 15%
Net profit 2,827 3,511 4,921 5,690 6,223
Net profit attributable to shareholders
of the parent company
2,701 3,426 4,842 5,595 6,117
Source: Guosen Securities (HK)
Exhibit 36: Balance sheet
Unit: RMB mn 2010A 2011A 2012E 2013E 2014E Comment
Cash 3,095 7,107 8,603 12,426 15,605 The company has ample cash
Bills receivable 7,726 8,703 11,889 13,887 15,909 The company recoups investment mainly through bills receivables
Accounts receivable and other receivables 1,529 1,330 2,180 2,448 2,917
Prepayments 355 361 793 942 1,061 Assume it makes up 2% of revenue
Inventories 2,104 2,777 3,547 3,916 4,457 Inventory turnover days are kept at 39 days
Other current assets 16 96 119 141 159
Total current assets 14,825 20,374 27,129 33,761 40,107
Long-term equity investment 147 70 151 151 151 Assume it remains unchanged
Fixed assets 5,360 7,392 9,146 10,548 11,983
Construction in progress 1,953 3,050 2,378 2,589 2,651 It began the construction of plants in Tianjin and Xushui
Intangible assets 1,111 1,869 2,180 2,354 2,386
Deferred income tax assets 297 352 515 612 689
Other non-current assets 6 27 27 27 27
Total non-current assets 8,874 12,761 14,397 16,281 17,888
Bills payables 3,376 3,978 5,152 6,355 7,424
Accounts payable 4,904 6,034 8,155 9,415 10,341
Prepaid deposits from customers 2,440 2,711 3,383 4,237 4,773
Salaries payable 341 502 616 732 824
Taxes payable 179 284 282 335 377
Other current liabilities 648 1,205 1,609 2,138 2,505
Total current liabilities 11,887 14,714 19,197 23,212 26,244
Non-current liabilities 1,410 1,400 1,357 1,307 1,250 The company continues to adopt the “zero-debt” strategy
Total liabilities 13,298 16,113 20,554 24,519 27,494
Total equity 10,400 17,022 20,971 25,523 30,501 Assume the company doesn’t issue new shares
Total liabilities and shareholders’ equity 23,698 33,135 41,526 50,042 57,995
Guosen Securities (HK)
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report
27
Information Disclosures
Stock ratings, sector ratings and related definitions
Stock Ratings:
Buy: A return potential of 10 % or more relative to overall market within 6 – 12 months.
Neutral: A return potential ranging from -10% to 10% relative to overall market within 6 – 12 months.
Sell: A negative return of 10% or more relative to overall market within 6 –12 months.
Sector Ratings:
Buy: The sector will outperform the overall market by 10% or higher within 6 –12 months.
Neutral: The sector performance will range from -10% to 10% relative to overall market within 6 –12 months.
Sell: The sector will underperform the overall market by 10% or lower within 6 – 12 months.
Interest disclosure statement
The analyst is licensed by the Hong Kong Securities and Futures Commission. Neither the analyst nor his/her associates serves as an
officer of the listed companies covered in this report and has no financial interests in the companies.
Guosen Securities (HK) Brokerage Co., Ltd. and its associated companies (collectively “Guosen Securities (HK)”) has no disclosable
financial interests (including securities holding) or make a market in the securities in respect of the listed companies. Guosen Securities
(HK) has no investment banking relationship within the past 12 months, to the listed companies. Guosen Securities (HK) has no
individual employed by the listed companies.
Disclaimers
The prices of securities may fluctuate up or down. It may become valueless. It is as likely that losses will be incurred rather than profit
made as a result of buying and selling securities.
The content of this report does not represent a recommendation of Guosen Securities (HK) and does not constitute any buying/selling or
dealing agreement in relation to the securities mentioned. Guosen Securities (HK) may be seeking or will seek investment banking or
other business (such as placing agent, lead manager, sponsor, underwriter or proprietary trading in such securities) with the listed
companies. Individuals of Guosen Securities (HK) may have personal investment interests in the listed companies.
This report is based on information available to the public that we consider reliable, however, the authenticity, accuracy or completeness
of such information is not guaranteed by Guosen Securities (HK). This report does not take into account the particular investment
objectives, financial situation or needs of individual clients and does not constitute a personal investment recommendation to anyone.
Clients are wholly responsible for any investment decision based on this report. Clients are advised to consider whether any advice or
recommendation contained in this report is suitable for their particular circumstances. This report is not intended to be an offer to buy or
sell or a solicitation of an offer to buy or sell the securities mentioned.
This report is for distribution only to clients of Guosen Securities (HK). Without Guosen Securities (HK)’s written authorization, any form
of quotation, reproduction or transmission to third parties is prohibited, or may be subject to legal action. Such information and opinions
contained therein are subject to change and may be amended without any notification. This report is not directed at, or intended for
distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution,
publication, availability or use would be contrary to applicable law or regulation or which would subject Guosen Securities (HK) and its
group companies to any registration or licensing requirement within such jurisdiction.”
Great Wall Motor (2333.HK) October 15, 2012 | HK & China
Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report
28
Research Coverage (H-Shares)
Analyst Sector coverage Desk line e-mail
Michael Wu Responsible Officer 0086-755-28995338 [email protected]
Rock Chen Macro & Banking 0086-755-61865350 [email protected]
Albert Xu Quantitative Analysis & Market Strategy 00852-28996158 [email protected]
Peter Cao Property, Hospitality & Gaming 0086-755-61865385 [email protected]
Helena Qiu Healthcare 00852-28998328 [email protected]
Stephy Wong Consumer & Retail 00852-28993141 [email protected]
Todd Yang Food & Beverage 0086-755-61865350 [email protected]
Bill Fan Electronics & Home Appliances 00852-28998331 [email protected]
Eric Qiu Media, Software & Internet 00852-28993120 [email protected]
Steven Lu Oil & Gas 00852-28998327 [email protected]
Ethane Cheng Construction & Building Materials 00852-28998329 [email protected]
Maggie Zheng Furniture & Office Supplies 0086-755-61865397 [email protected]
John Lu Auto, Machinery & Transport Equipment 0086-755-61865359 [email protected]
David Lam Coal & Steel 00852-28993130 [email protected]
Richard Gao Non-Ferrous Metals & Futures 00852-28993141 [email protected]
Thomas Zhang Futures & Non-ferrous Metal 00852-28996756 [email protected]
Vivian Fu Power & New Energy 00852-28993143 [email protected]
Helen Tang Education & Entertainment 0086-755-61865351 [email protected]
Sales Contact
Roger Chiman Managing Director +852 2248 3598 [email protected]
Cancy Kong Vice President +852 2248 3538 [email protected]
Chris Berney Managing Director +852 2248 3568 [email protected]
Cecilia Liu Associate +852 2248 3588 [email protected]
Andrew Collier Director +852 2248 3528 [email protected]
Gary Wong Analyst +852 2248 3548 [email protected]
Joe Chan Director +852 2248 3578 [email protected]
Ma Ning Sales Assistant +852 2248 3536 [email protected]