Maintain BUY. Great Wall’s 3Q24 core earnings were in line with our estimates. We expect its overseas sales growth to continue in FY25E to support its earnings. Seven new models in FY25E could also provide a positive surprise for China market sales.
3Q24 net profit miss on FX loss and VAT refund. Great Wall’s 3Q24 revenue was about 5% higher than our prior forecast and gross margin was 0.8ppts lower than our projection, which resulted in an in-line gross profit. R&D and SG&A expenses combined were also in line with our forecast. Its net profit of RMB3.4bn in 3Q24, which was RMB570mn lower than our estimates, was largely due to unexpected forex loss on overseas receivables and payables and a portion of VAT refund postponement.
Overseas growth could be more resilient than some investors’ expectation. Great Wall targets 0.58mn units of overseas sales in FY25E (+29% YoY) by increasing local content, such as KD plants. We believe the target is feasible given Great Wall’s rich experience in overseas markets and its new plant in Brazil. We also expect margins in the overseas market to remain stable in FY25E, as it takes some time for Chinese automakers to build a foundation. We project Great Wall’s gross margin to narrow in FY26E, as we expect overseas market to be more competitive by then.
A plethora of news models in FY25E may revive its China market sales. We expect Great Wall’s sales volume in China to decline 17% YoY to 0.76mn units in FY24E, partially as it has postponed most new model launches into FY25E. The company targets 4 new models for Wey (2 sedans, 1 large-size SUV), 2 new models for Haval (likely compact and medium-size SUVs) and 1 new model for Ora. Although we are not too optimistic about its PHEV sedans priced above RMB250,000, the large and medium-size SUVs could contribute additional sales volume. As noted in our previous report, Great Wall needs a new “H6” in the NEV era and FY25E could be a crucial year for the automaker to showcase its NEV capabilities.
Earnings/valuation. We raise FY25E sales volume forecast from 1.3mn units to 1.36mn units, implying a 3% sales volume growth in China in FY25E, aided by new models. With a higher sales volume contribution (43%) from overseas and better product mix, we revise up FY25E net profit by 7% to RMB14bn. We cut FY24E net profit by 5% due to 3Q24 earnings miss. We maintain our BUY rating and raise target price from HK$14.00 to HK$17.00, based on 10x (prior 9x) our revised FY25E P/E amid the recent market sentiment improvement. 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.