2Q24 earnings bolstered by sales mix improvement and slower EV push; yet profit sustainability lacks of visibility
　　According to positive profit alert, GWM’s 2Q24 net income arrived at RMB3.3bn-4.1bn, while net profit after extraordinary items surged to RMB3.0-4.0bn, but if excluding accounting policy adjustment related to reclassification of VAT refund, adjusted core earnings should range from RMB2bn to 3bn in 2Q24, against RMB 2.0bn in 1Q24, largely in line with expectations. In spite of GWM’s lukewarm sales performance, its 2Q24 profitability was bolstered by improved sales mix by both region and brand. For near-term, we expect its earnings outperformance to sustain in 2H24 with continued product cycle of Tank brand, introduction of flagship gasoline models into multi-markets abroad, as well as slower EV launches. Yet, its profit sustainability lacks visibility given the large export exposure to gasoline cars and Russian market, as well as unverified competency in mainstream NEV market. Thus, we maintain HOLD, despite raising our TP from HK$10.00 to HK$13.00 (10x 2024E P/E).
　　Key Factors for Rating
　　2Q24 core earnings surged QoQ, partially distorted by accounting policy adjustment. Based on the positive profit alert, GWM’s 2Q24 net income came in at RMB3.3bn-4.1bn (vs. RMB 1.2bn in 2Q23 and RMB 3.2bn in 1Q24), whereas net profit after extraordinary items surged to RMB 3.0-4.0bn (vs. RMB1bn in 2Q23 and RMB2.0bn in 1Q24), well above consensus partially attributable to the accounting policy adjustment that reclassified VAT refund and extra-credits into recurring gains. We estimate the financial impacts on 2Q24 core earnings from reclassification of VAT refund and extra credits at c.RMB1bn. Hence, if excluding such factor, adjusted core earnings may range from RMB2bn to 3bn in 2Q24, against RMB2.0bn in 1Q24, which seems in line with expectations.
　　2Q24 earnings bolstered by both improvements in regional and product mix in spite of overall lukewarm sales performance. In 2Q24, GWM’s sales volume lagged behind industry by dipping 5.0% YoY and only edging up 3.3% QoQ, while YTD sales were far behind original sales target and consensus. But the company’s profitability enhanced nicely in 2Q24, in stark contrast with most peers’ margin erosion against stiffening price competition, mainly thanks to its improved product mix either by region or by brand. To be specific, the most lucrative Tank brand accounted for 23.5% in 2Q24 shipments, up from 17.9% in 1Q24. By region, the exports volume made up 38.2% in total 2Q24 sales volume, against 33.7% in 1Q24. Moving forward, we expect improved sales mix could lift margin uptrend in the near term with the continued product cycle of Tank models domestically, introduction of flagship gasoline models into multi-markets, as well as slower EV launches. Yet, the medium-to-long term earnings growth outlook seems to be still lack of visibility.
　　Valuation
　　To reflect weaker-than-expected demand for Haval brand and Ora brand domestically, we revise down our sales volume forecast for 2024-2025E to 1.276m/1.278m units, which is partially offset by our higher sales volume projection for Tank models. Accordingly, we trim our revenue forecasts for 2024- 2025E by 5%-7% to RMB204.8bn/215.9bn, respectively. Accounting for a brighter margin outlook favored by both improvements in regional and product mix, additional gains from domestic VAT refund and extra credits, as well as temporary slow-paced electric transition, we lift our net profit forecast for 2024- 2025E by 23%-32% to RMB10.4bn/9.3bn.
　　GWM’s YTD stock prices outperformed most HK-listed rivalries, mostly fueled by street’s escalated appetite on stocks with strong profit streams amid cutthroat price competition in domestic NEV market. We acknowledge the scarcity of GWM in generating stronger-than-peers earnings performance this year against unfavorable industry environment, driven by its strong product cycle in niche off- road segment with robust demand but less competition, as well as its temporary slower NEV launches with strategic priority on profit quality over NEV transition with poor profitability. However, the larger exports proportion in gasoline cars/Russian market and unverified competency in mainstream NEV market cannot convince us of its profit growth sustainability. Thus, we maintain HOLD, despite raising our TP from HK$10.00 to HK$13.00, with unchanged P/E multiple of 10x 2024E P/E.