Great Wall Motor Company:1H18NPAT +52%;profitability weakens QoQ

Event

Great Wall Motor (GWM) reported 1H18 preliminary results after the marketclose on 17 July.

NPAT is expected to grow 52% YoY, and the implied EPS of Rmb0.40 pershare is 22% above Bloomberg consensus but 6% below our estimate. Webelieve the difference is due partly to the consensus estimates’ lag in fullyfactoring in the positives for earnings from the accounting policy change forR&D.

Impact

Product mix upgrade and accounting treatment changes supportearnings; profitability weakens QoQ: GWM’s total revenue and net profit for1H18 are expected to grow 18% and 52% YoY to Rmb48.7bn and Rmb3.7bn,respectively. We attribute the earnings growth to 1) the change in accountingtreatment for R&D spending, with the ratio of capitalized R&D rising from 0%until 2018 to 50–60% afterwards; 2) improved product mix – the WEY brandsold 78k units in 1H18, up from only 3k units in 1H17; 3) moderate salesgrowth, with total wholesale shipments up 2% YoY at 472k units in 1H18. Thatsaid, GWM’s profitability weakened QoQ, with the net profit margin contracting0.6ppt QoQ to 7.2% in 2Q18. We believe this mainly reflects the rising rebateson Great Wall’s key models.

Why we have a Neutral rating: As we have detailed (More effective productplanning needed, 14 June 2018), we are concerned about the cannibalisationamong the key models under the Haval and WEY brands and the company’sweakness in marketing. The focus on SUVs limits upside potential for salesexpansion in the long term until it moves overseas, which in itself bears marginrisk. We would turn more positive if we see more effective product planningand marketing strategies to improve product differentiation or major synergiesfrom the co-operation with BMW (Formal announcement of the JV with BMW,10 July 2018).

Action and recommendation

We maintain our Neutral rating.