In 3Q23, total revenue rose by 32.6% YoY, while core net profit soared 34.0% YoY to RMB3.1bn, beating our prior estimate of RMB2bn. Core earnings per vehicle surprisingly returned to high level of RMB9k in 3Q23, mainly propelled by cost reduction from suppliers on expanding scale, improving sales mix with profitable brands and exports, plus lower OPEX ratio. YTD the company’s overseas growth and margin have been a bright spot but structurally mixed by region and product. We acknowledge 3Q23 upbeat results could reflect the company’s fundamental resilience, but its sustainability is yet to be seen. Beyond that, we view its ambitious overseas growth story a bit unconvincing after taking into account current overseas regional structure, foreseeable head-on-head competition with Chinese counterparts abroad, as well as volatility of overseas margin historically. Thus, we maintain HOLD with unchanged TP of HK$10.
　　Key Factors for Rating
　　Both ASP and revenue hit record high in 3Q23 supported by rising proportion of higher-priced models and overseas shipments. In 3Q23, GWM’s sales volume rose by 21.5% YoY and 15.2% QoQ to 344,819 units. The ASP nicely extended 9.2% YoY and 5.0% QoQ to RMB144k. To be specific, models priced above RMB150k accounted for 23.5% in total sales in 3Q23, driven by the delivery ramp-up of Tank 500 Hi4-T, Tank 300 and Wey Lanshan. Besides, the proportion of overseas shipments went uptrend with 25.5% in 3Q23. Looking ahead, we expect blended ASP to sustain its uptrend with increasing overseas sales proportion, given that overseas market boasts 30%+ higher ASP than domestic market as a whole.
　　Margin beat propelled by cost reduction from suppliers plus improving sales mix with profitable brands and overseas sales. Gross margin leaped 4.3ppts QoQ to 21.7% in 3Q23, well above the market anticipation driven by: i) cost reduction benefits from suppliers by c.RMB1bn that boosted gross margin by 2ppts; ii) increasing sales mix of higher-margin models and profitable overseas sales; and iii) better economies of scale. By brands, we estimate negative gross margin for Ora brand, single-digit gross margin for Wey brand, followed by Pickup at around 20% and more profitable Tank brand. By regions, the management indicated that gross margin for the same model sold abroad was 5-10% higher than those delivered domestically. However, we render margin may still face headwind and fluctuation going forward, given intensified competition domestically and complex overseas market environment with volatile profitability in the past.
　　YTD exports beat with Russia market as a primary driver in both volume and profitability. In 9M23, GWM’s export volume surged 89.4% YoY to 211,696 units but was structurally mixed. By vehicle types, PV sales handsomely soared 129.2% YoY to 177k units whereas the iconic pickup trucks exports only flattened YoY with 34k shipments. By region, the Russia market became the principle volume driver and accounted for 40% of total overseas shipments YTD, doubling the sales proportion in 2022 . Candidly, we view the company’s swifter market expansion in Russia market is reasonable given the tense geopolitical relationship between Russia and the West, which is favourable for Chinese self-own brands (incl. Chery, Geely, and GWM) to take much bigger slices of market share as Western and Japanese marques exit. By product mix, the conventional gasoline vehicles made up the majority of the exports as the trio flagships Haval Chulian, Haval H6 and Haval F7 accumulatively contributed c.70% in total PV shipments, with the remainder from NEV fleets under Ora brand and Tank brand that have started global deliveries since 2Q23 .
　　Yet we deem the ambitious target for overseas market lacks visibility given unverified product competency and head-on-head rivalries with leading Chinese counterparts. At the earnings call, the management reiterated the full-year exports target of 300k units, and presented the mid-run overseas business outlook with the ambition to deliver one million shipments in 2025, within which 400k units to be produced in local facilities. Aside from the Russia plant and Thailand facility under operation now, the company plans to start Brazil plant operations in 2H24 and build cars in locality to cater the Europe market needs in the mid-run. Although the management added that they aim to take on global market share with innovative NEV lineups from comparable Japanese and Korean brands that significantly lagged behind the NEV race, the mid-term exports target still looks a bit challenging in our view given the company’s unverified product competency even in homeland mainstream segment and foreseeable head-on-head battle in multiple overseas markets (ASEAN, Europe, Latin America etc.) with the remarkable NEV leader BYD and direct counterpart Geely.
　　Earnings Forecasts and Valuation
　　To reflect the blowout earnings of export sales YTD that far outpaced our prior estimate, we raise net profit forecasts for 2023-24E to RMB6.1bn/5.9bn, respectively. Assuming the annual sales volume of 1.26m units this year, we calculate net profit is required to reach RMB5.6bn-7.6bn in order to exercise stock incentives.
　　Against the backdrop of record-breaking overseas performance, the company’s NEV transition progress fell short of expectation YTD. For one thing, the absence of pure electric new launches and weakening demand for Ora brand further undermine the company in the BEV battlefield. For another thing, the tepid sales performances of its blockbustre PHEV lineups, Haval Xiaolong twin models and Wei Lanshan, possibly suggest weak product competency in home market. Under such circumstances, it is understandable that the management increasingly poised for the global growth story to regain investors’ confidence.
　　Nonetheless, we reckon the ambitious overseas growth story looks unconvincing at current stage. Firstly, the high growth of the company’s largest export destination Russia market seems unsustainable in spite of the favourable geopolitical climate, which could be somewhat evidenced by the fact that management do not include Russia in its strategic overseas markets, compared with Europe and ASEAN. Secondly, the company may face competition from not only the legacy global marques (incl. Toyota, Hyundai) but also leading Chinese counterparts. For instance, in Thailand this year, the market presence of BYD has surpassed GWM notwithstanding BYD’s latecomer’s position, which implies the first priority to explore the global market still depends on product strength itself. Thirdly, the huge volatility of GWM’s overseas gross margin in the past years deserves increasing scrutiny , as the abnormal profit margins are always made possible by several unsustainable drivers, and further added to the difficulty for making accurate forecast in future trend.
　　Overall speaking, we acknowledge the upbeat earnings in 3Q23 could reflect the company’s fundamental resilience amid the electric migration stage, but its sustainability is yet to be seen, considering the great volatility of quarterly results over the past three years. Beyond that, we view the overseas growth story a bit unconvincing at this point.
　　During the past two weeks, the company’s stock price has outperformed the entire sector, which has priced in the street’s positive bets on its upbeat 3Q23 results. Now its shares trade at 14.1x 2023E P/E and 1.3x 2023E P/B, which is fair in our view. Maintain HOLD with TP of HK$10.00 unchanged, equivalent to 13x 2023E P/E, against 16x 2023E P/E previously as we reckon the company’s volatile quarterly results, overseas growth structure as well as below- expectation NEV transition may lead to valuation discounts over peers.