Maintain BUY. Great Wall’s 3Q23 net profit significantly beat market expectations on strong gross margin resulting from cost reduction from suppliers, exports and better-than-expected PHEV margins. Such profitability has underscored our previous argument that Great Wall’s resilient margins could provide more room for EV transition. We revise up our FY23-24E earnings forecasts accordingly. Meanwhile, we turn a bit more cautious on Great Wall’s valuation amid rising competition and slower-than-expected BEV model rollouts.
　　3Q23 earnings a strong beat. Great Wall’s 3Q23 net profit tripled QoQ to RMB 3.6bn, largely due to its 21.7% gross margin (+4.3 ppts QoQ). Management attributes such growth partially to the cost reduction of about RMB1bn from parts suppliers (2 ppts contribution to the GPM or RMB 2,900 per vehicle). Still, such gross-margin increase also means much better profitability for Great Wall’s PHEVs than we had expected. Great Wall’s SG&A and R&D expenses in 3Q23 were also RMB400mn lower than our prior forecast.
　　Better-than-expected profitability provides more room for EV transition. It appears to us that Great Wall’s vertical integration has aided its better-than- expected PHEV gross margin. It could also be a harvest season for Great Wall’s overseas business after exporting vehicles for more than 20 years. Management expects overseas gross margin could be 5-10 ppts higher than that in China. This could provide more room for Great Wall’s PHEV attempts, after sales of the Wey Lanshan and Haval Xiaolong Max still trail its rival models. On the other hand, Great Wall will still lack competitive BEV models at least throughout 2024, as the company plans to launch its 800V platform in 2026. Management believes that fast-charging family BEVs will only become the mainstream from 2027.
　　Earnings/Valuation. It appears to us that such PHEV margins could be sustainable after earnings beat for two consecutive quarters. Therefore, we revise up FY23E net profit forecast to RMB7.3bn, after a strong 3Q23, implying RMB2.3bn for 4Q23E to account for year-end bonus and dealers’ rebates. We raise our FY24E net profit by 68% to RMB8.2bn. We maintain our BUY rating and lift our target price from HK$12.00 to HK$13.00, based on 13x (prior 20x) our revised FY24E earnings. Key risks to our rating and target price include lower sales volume and margins, especially for NEVs, slower tech transformation than we expect, and sector de-rating.