Maintain BUY. We believe strong 1H24 earnings could extend into 2H24 and FY25, as the Tank brand’s competitive edge and Great Wall’s overseas sales growth could last at least for another year, especially as Great Wall is to start local production in Brazil. On the other hand, we believe it needs a new “H6” in the NEV era no later than 2025, by leveraging its current strong earnings.
Strong 2Q24 earnings aided by overseas and Tank. Great Wall’s 1H24 net profit of RMB7.1bn was in line with its preliminary announcement in Jul (within RMB6.5-7.3bn). Average selling price (ASP) in 2Q24 rose 12% QoQ, higher than our prior forecast. GPM in 2Q24 rose 1.4ppts QoQ, aided by higher sales volume contribution from both overseas and the Tank brand. Overseas now account for about half of Great Wall’s operating profit, according to management. We therefore estimate that OPM for overseas sales could be about 3.7ppts wider than China’s OPM in 1H24.
Latin America could be a new sales driver in FY25. Great Wall now prioritizes Latin America (mainly Brazil, Argentina and Mexico) as its key new overseas market and aims to grab 7% of sales volume in these markets (about 300,000 units a year), as it is to start local production later this year with an initial annual production capacity of 50,000 units.
FY25E earnings could still be resilient, which gives Great Wall more time to roll out a competitive mainstream market NEV model. We expect strong earnings in 1H24 to extend into 2H24 and FY25 despite our forecast of mild overall sales growth, as we believe the Tank brand’s competitive edge and Great Wall’s overseas sales growth could last at least for another year. We estimate sales volume of 1.22/1.3mn units for FY24/25E and net profit of RMB13.5bn/13.1bn for FY24/25E, implying a net profit per vehicle of RMB11,000/10,000 for FY24/25E, respectively. It appears to us that the automaker has postponed or even redesigned four new NEV models (two each for Wey and Ora) which were scheduled for this year. We view FY24 as a transitional year for Great Wall with much stronger earnings than we expected at the beginning of 2024. It also means FY25 could be crucial for Great Wall to showcase its capabilities in the mainstream market in the NEV era.
Valuation/Key risks. We maintain our BUY rating and target price of HK$14.00, based on 9x our revised FY25E EPS (prior 11x FY24E) to reflect Great Wall’s slower-than-peer electrification transformation. Key risks to our rating and target price include lower sales volume and margins, especially for NEVs, slower tech transformation than we expect, and a sector de-rating.