Great Wall Motor: Favorable Changes To Sales Mix Warrant Valuation Upgrade

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Great Wall Motor Company Limited's sales generated by NEVs (New Energy Vehicles) and international markets have been rising as per its latest monthly disclosures.Great Wall Motor is currently trading ...

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The earlier March 11, 2024, article looked at GWLLF's financial prospects. In this update, I draw attention to Great Wall Motor's growing sales exposure to NEVs (New Energy Vehicles) and international markets, which, I believe, will support a positive re-rating of the stock's valuations. As such, I have turned bullish on Great Wall Motor considering the favorable changes to the company's sales mix. The company's shares are traded on the Stock Exchange of Hong Kong and the OTC (Over-The-Counter) market. The trading liquidity for Great Wall Motor's OTC shares is poor. But readers can deal in Great Wall Motor's liquid Hong Kong-listed shares with US brokerages like Interactive Brokers or Hong Kong brokers like Boom Securities. As a reference, Great Wall Motor's Hong Kong shares boasted an average daily trading value of roughly $40 million for the past three months, as per S&P Capital IQ data. New Energy Vehicle Sales Exposure Has Increased Great Wall Motor's most recent monthly sales metrics offer an indication of the positive change in the company's sales mix. GWLLF published an announcement at the start of this month revealing the company's key operating metrics for September 2024. The company's New Energy Vehicle or NEV sales volume rose by +38% YoY and +21% MoM (Month-on-Month) to 30,129 units in the previous month. As a comparison, GWLLF's overall sales volume contracted by -11% YoY and increased by +15% MoM in September 2024. NEVs accounted for 27.8% of Great Wall Motor's total sales volume for September this year, representing a +9.8 percentage points expansion on a YoY basis and a +1.5 percentage points increase in MoM terms. In the first nine months of the current year, Great Wall Motor's NEV sales volume grew by +24% YoY to approximately 211,492 units. On the flip side, the company's total sales volume declined by -1% YoY in 9M 2024. GWLLF's sales contribution from NEVs as a proportion of total sales volume went up by +5.4 percentage points YoY to 29.3% for the first nine months of 2024. As per the data presented above, Great Wall Motor's NEV segment has outperformed the company as a whole for September this year and 9M 2024, and the company has been growing its sales contribution from NEVs. GWLLF's growing NEV exposure is likely to translate into a higher valuation multiple for the stock. According to Thailand's media publication Khaosod English's February 12, 2024, news report, GWLLF has plans to roll out “15 new models of electric vehicles” in the Thai market next year. This shows how Great Wall Motor intends to increase NEV sales contribution by having more new model launches in the NEV segment. Great Wall Motor is now trading at 0.87 times consensus next twelve months' Enterprise Value-to-Sales or EV/S. Pure-play Chinese NEV makers NIO (NIO) and XPeng (XPEV) are currently valued by the market at relatively more demanding consensus forward EV/S multiples of 1.03 times and 1.22 times, respectively. These valuation metrics were sourced from S&P Capital IQ. NIO and XPEV are loss-making, and this is why the EV/S metric was chosen for the purpose of valuation comparison. A June 17, 2024 article posted on the World Economic Forum website cited a survey done by AlixPartners indicating that 97% of respondents in China have suggested that “their next vehicle purchase is likely to be an EV” or Electric Vehicle. The Chinese consumers' preference for NEVs or EVs over ICE (Internal Combustion Engine) vehicles explains why Great Wall Motor's valuation multiple should expand in tandem with an increasing sales volume contribution from NEVs. Diversification Beyond Home Market Has Been Successful GWLLF's sales mix has become better in terms of both its exposure to NEVs and international markets. Great Wall Motor's sales volume for foreign markets outside Mainland China expanded by +47% YoY and +9% MoM to 44,105 units for September this year. The company's 9M 2024 sales volume for international markets jumped by +53% YoY to around 324,244 units. The company derived 38.0% of its total sales volume from overseas sales in the first nine months of 2024. GWLLF's international sales volume as a proportion of total sales volume was a much lower 25.5% for full-year FY 2023 as disclosed in its annual report. It is reasonable to think that Great Wall Motor's sales contribution from international markets will continue to rise in the future, considering the company's recent disclosures at an investor event. Singapore sell-side broker UOB Kay Hian organized an investor event known as Asian GEM conference this month, which Great Wall Motor took part in. An October 14, 2024, UOB Kay Hian report (not publicly available) titled “Takeaways From Asian GEM Conference” highlighted that Great Wall Motor has ambitious growth targets in markets outside its home market China. Specifically, GWLLF is expecting a +42% foreign markets sales volume expansion this year and targeting a sales volume increase of at least +30% for 2025 and 2026 in international markets. This October 14 UOB Kay Hian research report also cited comments from GWLLF's management suggesting that China's automotive companies in general are grabbing a growing slice of international sales due to “cheaper prices and more updated products.” I see Great Wall Motor's profitability improving over time, as the company's sales contribution from foreign markets continues to increase. An August 29, 2024, Dow Jones news article on GWLLF mentioned “the higher price tag” for the company's vehicles “in overseas markets” vis-à-vis its home market, China. In its 1H 2024 results announcement, Great Wall Motor also highlighted that it saw an “increase in average revenue per vehicle” driven by “the increase in the proportion of sales of overseas” vehicles for the 2024 interim period. Great Wall Motor is trading at a meaningful discount to another Chinese automotive peer, BYD Company Limited (OTCPK:BYDDF, OTCPK:BYDDY) [1211:HK] based on the P/E metric. The consensus next twelve months' normalized P/E multiples for Great Wall Motor and BYD Company were 9.9 times and 19.9 times, respectively, as per S&P Capital IQ. One of the key factors contributing to BYD Company's premium valuation is the company's ambitious international expansion target, with BYDDF setting a goal of having 50% of its sales generated by international markets. It is likely that Great Wall Motor can trade at a higher P/E ratio in the future, as its sales derived from overseas markets grow going forward. Key Risks The major risk factors for GWLLF relate to the company's efforts to optimize its sales mix. Great Wall Motor's actual top line in the future might be below expectations, if the company fails to grow its NEV sales in a meaningful way. EVs are in favor among Chinese consumers as mentioned above, and it is important for GWLLF to expand its NEV business segment to cater to rising demand. GWLLF's future profit margins could be weaker than what the market anticipates, assuming that it doesn't expand significantly in foreign markets where vehicle ASPs (Average Selling Prices) are higher as compared to the domestic market. Bottom Line I have upgraded my rating for GWLLF to a Buy, as I think that Great Wall Motor can trade at higher valuations closer to that of its peers. GWLLF has optimized the company's sales mix favorably, with an increase in sales contribution from foreign markets and NEVs.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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