Great Wall Motor Company:Reaffirming GWM as top pick

Great Wall Motor’s (GWM) H-shares plummeted 14% on Friday (the A-sharestraded up 4%) and a further 7% on Monday in the wake of thepreannouncement that its revenues for 2015 were up 21.5% with flat netprofit. The flat net profit was in line with our expectation, but with revenuecoming in above expectations, the implied 4Q2015 operating margin was8.4% vs our estimate of 9.3%. We believe most of the difference relates toone-offs, and we adjust our 2015 forecasts to reflect the preannouncednumbers. We adjust our estimates for 2016-17 on the assumption that R&Dand advertising costs will be higher than in the past.

We adjust our target price from HK$15 to HK$11.70, which is based on 10x2016E (previously 11x), to reflect the weaker Chinese Yuan, which translatesto a lower EPS in HK$. We consider the sell-off an over-reaction and reiterateGreat Wall as our top pick in the China auto sector. We believe that with over80% of its sales coming from SUVs, it is well-placed to benefit from the strongdemand for SUVs, supported by the top-selling H6 and new products comingthis year like the H7 family and Concept Blue.