An Estimated 30% Increase in Net Profit

Great Wall Motor (GWM) has released its preliminary results for 2016, reporting a net profit attributable to parent company at RMB 10.547 billion, representing a year on year increase by nearly 31%, equivalent to a basic EPS of RMB 1.16, which outperform our expectations. Total revenue for the period was recorded at RMB 98.616 billion, up by 29.7%. Such a positive profit alert is mainly due to the increase in vehicle sales, as well as the sales structure optimization caused by a higher sales volume of SUV that sells at higher price.

GWM Outperformed 2016 Sales Targets

In 2016, GWM sold 1.0745 million vehicles, representing a yoy growth of 26%, exceeding the target of 950,000 vehicles. The fact that revenue growth was higher than that of sales continued to illustrate the price increase of a single vehicle sold by GWM, with the average single vehicle price rose from RMB 89,167 to RMB 91,778 over the same period, an annual growth of 3%. The new SUV models, Haval H7 and Haval H6 coupe received positive market feedback, resulting in a steady growth of orders, which effectively makes up for the negative impact from the several price drops of H6. Moreover, after the H6 price reductions, the product stimulated a strong growth in demand and maintained the company's profitability at a high level.

By models, GWM shipped approximately 200,000 H2 vehicles. The H6 sales volume was nearly 600,000. H1, H7, H5 and H9 achieved about 70,000, 50,000, 20,000 and 10,000 vehicles of sales volume, respectively. GWM shipped 30,000 sedans and 100,000 pickup trucks. The company's sales target for 2017 was set at 1.25 million vehicles, an increase of 16% yoy.

Y-o-Y Sales in January Were Barely Equal

According to the latest data of GWM's vehicle sales, non-major models faced downward pressure since the sales of H1 and H5 slumped by 90% and 54%, respectively. Meanwhile, the major models maintained strong momentum, with the H6 sales increased by 9% yoy to 45,993 vehicles, H2 sales soared by 44% yoy to 24,917 vehicles, and the H7 recorded a 7,005 sales volume. Influenced by the drained demand at the end of 2016, the total sales in January was recorded at 91,233 in a tie with that in the same period in the previous year.

In 2017, GWM will release two new models under its new high-end brand system called WEY, probably at the Shanghai International Automobile Industry Exhibition and in Q3, respectively. The price interval will be RMB 150,000 to RMB 200,000. The updated and new models for the existing brands system will also be launched with its encryption strategy is carried out steadily.

Investment Thesis

GWM maintains strong momentum in the domestic SUV market with a continuously encrypted and expanding layout of models facilitating the company to enjoy more SUV bonus in the domestic market. However, as various competitive products are expected to usher, GWM would start to face fierce competition and challenges in H2 2017, which we suggest to pay close attention to. In terms of valuation, taking into account the offset of the outperforming annual result and the underperforming sales in January, we slightly lift the target price to HKD 9.67, equivalent to 7.4/6.5x P/E ratio in 2016/2017. The rating will be maintained to Accumulate. (Closing price as at 13 Feb 2017)

Risk

New vehicle sales fall short of expectations

The SUV market dramatically worsens

The progress of new energy vehicle project is poorer than expectations