BMI View : We have initiated a constructive view on Great Wall Motors, the largest SUV manufacturer in China, on the back of our expectation for the SUV segment to handily outperform the broader Chinese auto market. As the firm puts its Haval H8 model delay issues behind it, we see further upside in its share price over the the coming months.
In this piece, we highlight our constructive view on Great Wall Motors, the largest SUV manufacturer in China. We see the firm as a good proxy to play our bullish view on the Chinese SUV market.
While BMI forecasts growth in Chinese auto sales to slow down in 2014 compared with 2013, we expect vehicle sales growth to post a print of 9.1% in 2014, which highlights the still sanguine prospects in the market. However, it has been our long-held view that the SUV segment will continue to handily outperform the broader market and despite already posting high double-digit sales growth in 2013, we expect the segment to continue on a similar growth trajectory in 2014.
Great Wall, which listed on the Hong Kong stock exchange in late 2003, saw its domestic sales explode after 2009. As the accompanying chart shows, its share price has had a strong correlation with the automaker's monthly sales, and it too surged spectacularly after 2009.
|Rising In Tandem|
|Great Wall Motor - Domestic Auto Sales, Units (LHS); Share Price (Monthly), HKD (RHS)|
Haval H8 Delay Caused Some Pain
Alas, the carmaker hit a snag recently. In mid January 2014, the firm's shares dropped by more than 20% when it announced a delay in the introduction of its Haval H8 model by three months (see the circle in the chart below). This was taken negatively by the market as that particular model is the carmaker's key product for 2014 and would aid the company in penetrating the higher-end SUV segment. At the same time, the delay jeopardised the company's sales target of 890,000 units in 2014.
|Recovered Since The Decline|
|Great Wall Motor - Share Price (Daily), HKD|
Further Upside As Firm Rectifies Problems
However, on March 24 2014, the chairman of Great Wall, Wei Jianjun, came out to say that the problems with the H8 have been resolved and the model will go on sale in April 2014, at a price range of CNY200,000-230,000 (US$32,260-37,100). We see this as a positive development for the company.
The Haval model line-up is crucial to the firm, given that total Haval SUV sales made up about 48% of the firm's total 2013 sales. The automaker is targeting about 25,000-35,000 sales of the H8 in 2014, and has assured investors that it is on track to meet its full-year sales target of 890,000 units, an increase of 18%. We see these targets as realistic given that we forecast passenger vehicle sales to grow by 10.2% in 2014 and our view is that the SUV segment will outperform.
Additionally, Great Wall's share price has recovered from its recent lows (see chart above) as the uncertainty surrounding the company's operations has cleared. We see room for further gains in the coming months as the more upmarket Haval H8 model improves the automaker's margins.
Further supporting our constructive view is the firm's trailing 12 months price to earnings (P/E) ratio of 11.2x, which has come off its lofty highs of 15x back in October 2013, when the firm's share price was on a tear. We believe the current P/E ratio is reasonable given the firm's position as the top selling manufacturer in a fast growing segment.