Great Wall Motor: Consider Both Growth And Profitability (OTCMKTS:GWLLF)

Elevator Pitch

Great Wall Motor Company’s (OTCPK:GWLLF) [2333:HK] stock is awarded a Hold investment rating. GWLLF calls itself “China’s largest SUV (Sport Utility Vehicle) and pickup manufacturer” on its LinkedIn page.

I previously reviewed Great Wall Motor’s quarterly results with my previous update written on April 29, 2021. The current write-up analyzes GWLLF’s latest sales figures and its business outlook.

Great Wall Motor’s sales growth momentum is strong as seen with its year-to-date unit sales metrics. On the flip side, the company suffered from margin compression in Q4 2023 based on an assessment of its FY 2023 preliminary earnings estimates, and third-party research indicates that GWLLF has been discounting its vehicles in an aggressive manner in the last month. Taking into account both robust sales growth and weaker profitability, I assign a Hold rating to Great Wall Motor.

Readers should be aware that Great Wall Motor’s shares can be traded on the Over-The-Counter market and in Hong Kong. The company’s OTC shares aren’t very liquid, but the three-month mean daily trading value of its Hong Kong-listed shares was as high as $25 million (source: S&P Capital IQ). Investors can buy and sell the company’s relatively more liquid shares listed on the Hong Kong Stock Exchange with US financial services firms such as Interactive Brokers.

January-February 2024 Sales Were Strong With NEVs And Exports In The Spotlight

Great Wall Motor published an announcement on March 5, 2024 disclosing the company’s most recent sales numbers for January and February this year.

The company’s aggregate unit sales for the first two months of the current year grew by +35% YoY to 175,057. New Energy Vehicles or NEVs and exports were the major drivers of GWLLF’s robust sales growth in 2024 year-to-date.

The number of NEVs sold by Great Wall Motor surged by +155% YoY to 37,300 units in 2M 2024. In late February, the company issued a media release highlighting that it introduced “its flagship off-road model, the GWM TANK 700 Hi4-T” to the market which is positioned as a “top-class luxury off-road vehicle.” This new model is anticipated to boost Great Wall Motor’s NEV and overall sales for 2024. Mainland Chinese research firm SDIC Securities came up with a research report (not publicly available and translated using Google) titled “700 Hi4-T Launch To Create Luxury Off-Road SUV” on February 27, 2024. As per SDIC Securities’ estimates, the Tank 700 Hi4-T is projected to achieve reasonably significant monthly sales of around 3,000 units in a steady state.

For the first two months of the current year, GWLLF’s unit sales for foreign markets outside of China jumped by +92% YoY to 56,963. In its 2023 interim report, Great Wall Motor emphasized that the company “has been stepping up efforts in developing overseas markets” last year by establishing new “strategic partnerships” with international “dealers and distributors” and setting up new production facilities in foreign markets. The company’s efforts to venture abroad appeared to have paid off, considering its strong export sales for the January-February 2024 period.

The current sell side analysts’ consensus FY 2024 revenue growth forecast for Great Wall Motor, in local currency or RMB terms, is +21% (source: S&P Capital IQ). As a comparison, the company’s actual 2M 2024 unit sales growth was +35% YoY. Therefore, it is reasonable to claim that GWLLF’s year-to-date sales were better than what the market anticipated.

Price Competition In Chinese Automotive Market Poses Downside Risks To Future Profitability

The company’s audited financial results for fiscal 2023 are expected to be revealed at the end of the current month, or March 29, 2024 to be exact. But GWLLF had already announced its preliminary FY 2023 numbers in late January.

But Great Wall Motor’s preliminary results announcement has unfavorable read-throughs. Based on my calculations, the company’s normalized net margin contracted from 6.2% in the third quarter of 2023 to 1.6% for the final quarter of the prior year. It is likely that price competition in the Mainland Chinese automotive market has gotten worse towards the end of last year which had a negative impact on GWLLF’s Q4 2023 profitability.

Mainland Chinese sell side broker CMB International’s recent March 5, 2024 research report on China’s automotive sector indicated that GWLLF’s “average discounts at dealers widened slightly MoM to a record high” in the previous month which it attributed to “stiffer competition” among Chinese automakers.

The sell side analysts are now estimating a +90 basis points improvement in Great Wall Motor’s normalized net profit margin from 2.7% for full-year FY 2023 to 3.6% in 2024 as per S&P Capital IQ data. It is realistic to expect that GWLLF can report higher margins this year. The company is expanding in international markets which are relatively less competitive as compared to its home market China, so that translates into a favorable sales mix with an increase in revenue contribution from higher-margin non-Chinese markets.

But the company still generated 70% (source: interim report) of its 1H 2023 sales from the domestic or Mainland China market. In that respect, there is the risk of Great Wall Motor’s actual FY 2024 margins and earnings falling short of expectations assuming that price competition in China’s automotive industry remains intense.

Final Thoughts

I have a mixed view of Great Wall Motor as a potential investment candidate. On one hand, the company’s recent sales for January and February 2024 were good. On the other hand, there are downside risks pertaining to GWLLF’s future profitability considering the ongoing price war in the Chinese automotive sector. While the stock’s current consensus next twelve months’ normalized P/E multiple of 9.4 times (source: S&P Capital IQ) isn’t very demanding, further valuation multiple expansion is challenging as there is uncertainty about the company’s profit margins going forward in the face of price competition.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.