Based on the preliminary results, GWM’s total revenue added 8.8% QoQ in 4Q23, but core net profit plummeted 71.4% QoQ to RMB875m for the period, mainly due to the higher year-end expense accruals. If excluding the year-end bonus accruals of RMB2.3bn, the adj. core earnings per vehicle remained flattish QoQ at above RMB 8.5k; but considering the QoQ improvement of export volume and regional/brand mix in overseas market, we reckon margin in domestic market seemed weaker than expected. As GWM’s largest overseas market, we reckon Russia will play a bigger role in GWM’s overseas volume growth and profitability for the whole company. Though we anticipate the company’s growth in Russian market will persist over the short term, its sustainability deserve our attention considering demand instability of the Russian market historically. Maintain HOLD and lower TP to HK$8.5 by adopting a lower P/E multiples of 10x.
　　Preliminary results missed on the upsurge of year-end bonus accruals and margin decline in domestic market. Based on the preliminary results, GWM’s total sales revenue added 8.8% QoQ to RMB53.9bn in 4Q23, while core net profit plummeted 71.4% QoQ to RMB875m in 4Q23, below our initial estimates of RMB1.1bn. If excluding the impacts from year-end bonus accruals that dragged bottom line by c.RMB2.3bn, the adjusted core earnings could pick up 3.8% QoQ to RMB3.2bn in 4Q23, with the core earnings per vehicle roughly remaining high at above 8.5k. But considering the constant QoQ improvement of export volume and regional/brand mix in overseas market (incl. greater sales proportion of profitable Russian market and Tank lineups), we estimate margin in domestic market would be lower than expected.
　　Successful achievement of 95% performance goals set for 2023.
　　Thanks to the net income of RMB7.0bn in addition to the annual sales volume of 1.07m units, the company successfully reached 95% of 2023 performance targets to exercise stock scheme in 2021 equity incentive plan. With the end of the 3-year stock incentive plan started from 2021, the company disclosed new- round 2023 incentive plan on 13 Dec, 2023. In comparison with the former, the latter differed in the minimum performance target and weight allocation between volume and net profit, assigning lower target at threshold to obtain minimum bonus (80% for new scheme vs. 85% for previous scheme) and greater weight for net profit (50% for new plan vs. 45% for previous plan), which we view as a pragmatic adjustment for the execution team to reach the minimum operational requirements given the inability to continuously reach the performance threshold of 2021 inventive plan .
　　Russia market plays a bigger role in GWM’s overseas/export growth and profitability for the whole company, but long-term go-global target lacks visibility. By region, the Russia market plays a bigger role to GWM’s exports and overall profitability, which accounted for 52% in 4Q23 exports with each preceding quarter marking sequential improvements from 3Q22, and to a greater proportion in overall net profit. Towards the end of 2023, monthly sales of GWM to Russia market jumped to nearly 20k units. Separately, the overall car sales in Russia market have recovered to c.1m units, but still far below the normalised new car sales of 1.5-1.6m units before the sanctions . Thus, we anticipate GWM may continue to see growth in Russian market over the short term, but its sustainability deserve our attention considering demand instability of the Russian market. For other regions, although the company has great ambition to take on market share from comparable Japanese and Korean brands with competitive NEV offerings, the medium-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.
　　Lack of NEV blockbusters in mainstream segment awaits a systematic and effective push to regain market presence. By power types, the sales performance of GWM’s NEV fleets, in particular flagships Xiaolong twin models and Wey Lanshan, continuously fell short of expectation during the past year. In 2024, the company is slated to take a shift with more aggressive price tactics for Ora brand to defend market presence. Meanwhile, it plans to further enhance the product competency with the rollouts of revamped blockbuster PHEV models, adding the most advanced vehicle intelligent features to compete with the intensive rivalries. However, we reckon the company has yet to find systematic and effective approaches to tackle with the cutthroat and constantly changing competition dynamics.
　　Earnings Forecast and Valuation
　　We lifted our sales forecast for 2024E-2025E from 1.312m/1.307m units to 1.332m/1.347m units, essentially to reflect our higher exports assumption of 450k/500k units, partially offsetting our lower sales volume forecasts for domestic market. Accordingly, we raise our revenue forecasts for 2024-2025E by 3%-4% to RMB197bn/214bn, respectively.
　　For overseas market, we anticipate Russia market will remain a key driver for GWM to achieve the target of export this year, given that net increase of Russia sales (c.100k units) accounted for over 70% of the overall incremental foreign shipments in 2023 (c. 140k units). But for the domestic market, accounting for the lack of blockbuster NEV products so far and the intensifying competition dynamics, we reckon the GWM’s market share is likely to continuously slide as the increasing NEV counterparts ramp up competition with either new techs or affordability edges.
　　In light of increasing sales proportion of overseas market that boasts much stronger profitability than domestic market, in particular the greater contribution from Russia shipments, we nudged up our reported net profit forecasts for 2024E-2025E by 10%-11% to RMB6.5bn/6.6bn, respectively. Currently, its shares are trading at 10.6x 2024E P/E, which looks fair in our view. We reduce our TP to HK$ 8.50 from HK$10.00 with lower P/E multiples of 10x 2024E (vs.13x 2023E P/E previously). Maintain HOLD.