Great Wall Motor (2333.HK) Target BUY · Great Wall Motor (2333.HK) October 15, 2012 | HK & China Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at

Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report

1

October 15, 2012

Great Wall Motor (2333.HK)

Building the ‘Great Wall’ of China’s auto market

Summary:

SUV is by far the fastest growing category in China. SUVs make up 1/3 of Great Wall’s total

sales. Based on our latest channel checks, Great Wall’s SUV sales may rise to a record level in

the coming months due to pent-up demand. As such, while the company’s strong growth

prospect is mostly priced in, we see further upside, driven by SUV sales. Over the longer term,

we believe the market will reward Great Wall with a valuation premium due to its unique

focused strategy, shared production platforms and earnings outperformance over peers.

Key attractions. Great Wall’s profitability is among the strongest in the industry due to the

ongoing improvement of its product mix and vertical integration of production. In addition, it

has sound financial health with zero debt. It enjoys a dominant position in both the pick-up

truck and SUV markets, while its sedan business is also growing rapidly.

Costs & efficiency. Great Wall adopts a strategy of “fewer production platforms, more

vehicle models” to improve efficiency and flexibility. Its strategy of focusing on selected

segments and sharing production platforms will give it long-term competitive advantages. To

enhance profits, Great Wall has formed technological co-operations with parts suppliers and

it has more than 20 subsidiaries producing parts & engines that are compatible.

Sensitivity analysis. Based on our sensitivity analysis, the SUV business is the most

important growth driver for Great Wall’s 2012E results. Every 10% sales growth of SUVs will

lead to a 7% increase in net profit, while every 10% sales growth of passenger cars will result

in only a 2% increase in earnings.

Major assumptions & risks. We forecast Great Wall’s pick-up trucks, SUV and sedan sales

will reach 132,000, 260,000 and 193,000 units in 2012 respectively, representing a y-o-y

growth of 8%, 77% and -1% respectively. The company’s total vehicle sales should exceed

585,000 units in 2012 (487,000 units in 2011). The selling prices of Great Wall’s vehicles and

the gross profit margin are expected to increase slightly due to product mix upgrade. The key

risk for Great Wall is if market acceptance of its new models is low.

Valuation & recommendation. The counter is trading at 11x 2012 PE, close to its peers.

The company’s strong growth prospects have been largely priced in, we believe. However,

our discussions with dealers suggest demand for its products remains very strong, and we

expect the company to achieve record sales in the coming months. We initiate coverage with

a “BUY” rating and a target price of HK$ 24.1, representing 12.4x 2012 PE.

Financial summary

Year to Dec 2010A 2011A 2012E 2013E 2014E

Turnover (RMB mn) 22,986 30,089 39,629 47,076 53,029

Chg (%) 79 31 32 19 13

Net profit (RMB mn) 2,701 3,426 4,842 5,595 6,117

Chg (%) 169 27 41 16 9

EPS (RMB) 0.99 1.22 1.59 1.84 2.01

CFO per share (RMB) 1.17 1.58 1.65 2.49 2.29

PE (x) 14.78 11.99 11.08 9.59 8.77

P/B (x) 3.85 2.42 2.56 2.10 1.76

Dividend per share (RMB) 0.20 0.30 0.32 0.37 0.41

Source: Guosen Securities (HK), Bloomberg

Target price: HK$ 24.1 BUY Current price: HK$21.5

Company overview

Background

Great Wall Motor has become the biggest private

automaker in China. It manufactures and sells

pick-up trucks, SUVs and sedans. It was ranked

No.1 for pick-up truck sales in China for 14 years,

and it topped its domestic peers for SUV sales for

eight straight years. Wei Jianjun is the company’s

controlling shareholder with 56.04% stake.

Key data

Market cap (HK$ mn) 65,412

Shares outstanding (mn) 3,042

Major shareholder (%) 56.0

Free-float (%) 43.9

Price performance vs HSI

Source: Bloomberg, data as at Oct 14, 2012

Price performance (%)

1M 3M 12M Great Wall Motor 19.8 43.5 126.7

HSI 5.6 7.7 18.1

Guosen vs Consensus

Slightly more optimistic

(HK$) Guosen forecast Consensus

EPS-2012 1.94 1.89

EPS-2013 2.24 2.25

EPS-2014 2.45 2.60

Why?

Our forecast for 2012 is slightly more optimistic

than consensus, as we are more bullish about the

sales momentum of Great Wall’s H6/M4/C50

models in 2H 2012. Based on the sales condition

during the past six months, we observed the ASP

of Great Wall’s models rose due to product-mix

upgrade. As such, we are more confident about

the company’s full-year growth prospects.

16,000

20,000

24,000

6

10

14

18

22

Oct/2011 Oct/2012

HK

$

2333 hk equity (LHS)

HSI index (RHS)

Analyst

John Lu (Auto, Machinery and Transport Equipment)

Tel: (852) 2899 8300 [email protected]

SFC CE No.:AUP546

Sales contact

Roger Chiman

Tel: (852) 2248 3598 [email protected]

Managing Director

Great Wall Motor (2333.HK) October 15, 2012 | HK & China


2

1 A-class sedans refer to sedans that have 2.3 to 2.45-metre-long wheelbases and are 4.3 to 4.6 metres in length.

Business Overview

SUV business. China’s SUV sales enjoy strong growth. Great Wall is set to benefit from the SUV boom as it’s the No.1 domestic

maker and this sub-segment is its largest sales contributor. We are especially positive about the sales prospect of Havel H6, which

is a new SUV model that the company launched last year. Our channel checks show demand for the Havel H6 remains strong and

the waiting time is around one month.

Sedan business. Great Wall entered into the sedan market in 2008. The company has focused on the manufacturing of A-Class

sedan models1 , and its Tengyi C30 model (in terms of sales volume) was among China’s top three sedan models priced between

RMB60,000 and RMB90,000. Besides, the C50 sedan that Great Wall launched last year is expected to start a new wave of

adoption of domestically made vehicles equipped with turbo-charged engines. We believe the C50 model will see sales volume

surge in 2H 2012.

Pick-up truck business. Great Wall has long enjoyed a prominent position in the pick-up truck market. Its pick-up truck sales

topped all other domestic brands for 14 straight years. The development of China’s pick-up truck market was subdued due to

discouraging government policies. Assuming no policy-related catalysts emerge, we expect the company’s pick-up truck business

to continue to grow steadily.

3 numbers to watch

10,000 units SUV sales volume 1% Gross profit margin of

the SUV business 10% SUV ASP

We forecast SUVs will account for around 44%

of Great Wall’s total auto sales, and we expect

the company’s SUV sales to reach 260,000

units in 2012.

Every 10,000-units change in SUV sales

volume will have a 2.6% impact on the

company’s net profit.

We expect the gross profit margin of the

company’s SUV business to be 30% for 2012E.

Every 1% change in SUV gross profit margin

will have a 3.6% impact on the company’s net

profit.

We expect the ASP of the company’s SUV models

to be RMB77,800,

Every 10% change in SUV ASP will have a 6.7%

impact on the company’s net profit.



3

Contents

Overview.............................................................................................................................................................. 4

1 Great Wall has become the largest private automaker in China ........................................................................................ 4

1.1 Great Wall for the first time became one of the top 10 Chinese automakers in terms of sales volume in 2011 ............... 4

1.2 Great Wall is growing rapidly and it has become the largest private automaker in China ................................................ 4

2 Great Wall’s major products include pick-up trucks, SUVs and sedans ........................................................................... 5

3 The company enjoys long-term competitive advantages due to its focus on three major sub-segments and shared

production platforms ............................................................................................................................................................ 6

3.1 Great Wall sticks to the strategy of focusing on selected sub-segments ......................................................................... 6

3.2 The company makes full use of its platforms as it sticks to the strategy of “fewer production platforms, more vehicle

models” ........................................................................................................................................................................... 7

4 Great Wall’s profitability is among the strongest in the industry due to continued improvement in product mix and

vertical integration ................................................................................................................................................................ 9

4.1 Average prices of its flagship products keep rising, and product mix continues to improve............................................. 9

4.2 The company has enhanced its profitability through technological co-operation with auto-parts suppliers ................... 10

4.3 The company dwarfs its peers in terms of profitability due to improvement in its product mix and the vertical integration

of production ................................................................................................................................................................. 11

Catalysts............................................................................................................................................................ 12

1 China’s SUV sales volume is growing rapidly, and SUVs account for 1/3 of Great Wall’s revenue, the largest ratio

among all listed automakers .............................................................................................................................................. 12

1.1 China’s SUV sales volume has grown at a CAGR of 42% over the past six years and is expected to keep increasing

rapidly at a CAGR of 20% to 25% ................................................................................................................................. 12

1.2 Great Wall has topped its domestic peers in terms of SUV sales volume for eight straight years since 2004 ............... 13

1.3 SUVs make up 1/3 of Great Wall’s total sales volume, the largest ratio among the major listed automakers, and the

company is likely to benefit from the rapid growth of SUV sales in China ..................................................................... 14

1.4 Havel H6 and M4 will become powerful drivers to prop up Great Wall’s share of the SUV market ............................. 15

2 Sedan buisness: focuses on A-class models, and C50 is expected to increase the popularity of domestic

turbo-charged sedans in China .......................................................................................................................................... 18

2.1 The company entered into the sedan market in 2008, and Voleex C30 was among the top three models priced at

RMB60,000 to RMB90,000 in terms of sales volume in 2011 ....................................................................................... 18

2.2 The company focuses on A-class family sedans, and continues upgrading the product line ......................................... 18

2.3 Capacity expansion of Voleex C50 is likely to begin in 2H 2012 ................................................................................... 19

3 It maintains a strong and leading position in the pick-up truck market, but policy restictions need to be lifted to give

way to stronger growth ....................................................................................................................................................... 20

3.1 The company entered into the pick-up truck market in 1996, and it has maintained the No.1 spot for 14 consecutive

years since 1998 in terms of sales volume. .................................................................................................................. 20

3.2 Policy-based catalysts are needed for further development of the pick-up truck sector in China .................................. 21

Forecasts & Valuation ...................................................................................................................................... 23

1 Profit forecasts .................................................................................................................................................................... 23

1.1 Forecasts ...................................................................................................................................................................... 23

1.2 Sensitivity analysis........................................................................................................................................................ 23

1.3 Valuation screening ...................................................................................................................................................... 24

2 Risks ..................................................................................................................................................................................... 25

3 Closing notes to the buy-side analyst................................................................................................................................ 25


Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at the end of this report Overview 4

Overview

1 Great Wall has become the largest private

automaker in China

1.1 Great Wall for the first time became one of the top 10 Chinese

automakers in terms of sales volume in 2011

There are numerous automakers in China. However, the auto sector is highly

concentrated. In 2011, the top 10 automakers accounted for 87% of the total auto sales

volume in China. The concentration ratio of the sector was even higher in 2010.

According to data from the China Association of Automobile Manufacturers, Great Wall

sold 487,000 units in 2011, and became one of China’s top 10 automakers in terms of

sales volume for the first time, with a domestic market share of 2.6%. Its sales volume

growth reached 22% in 2011, far higher than the growth in total auto sales volume in

China (3%). In fact, the company’s sales volume growth was the fastest among the top

10 automakers by sales volume (Exhibit 1).

Exhibit 1: Top 10 automakers in terms of sales volume in 2011: Great Wall was on the list for the first time and its sales volume

grew by the fastest among the top 10 automakers

Ranking in 2011

Company Sales volume in 2011

(‘000) y-o-y

growth Ranking in

2010 Company

Sales volume in 2010 (‘000)

1 SAIC Motor 3,966 11% 1 SAIC Motor 3,558

2 Dongfeng Motor 3,059 12% 2 Dongfeng Motor 2,725

3 FAWAY Automobile 2,601 2% 3 FAWAY Automobile 2,558

4 Changan

Automobile 2,009 -16% 4 Changan Automobile 2,379

5 Beijing Auto 1,526 2% 5 Beijing Auto 1,490

6 GAC Group 740 2% 6 GAC Group 724

7 Chery 642 -6% 7 Chery 682

8 Brilliance 567 13% 8 BYD 520

9 JAC 495 8% 9 Brilliance 501

10 Great Wall 487 22% 10 JAC 459

TOP10 16,091 3%

TOP10 15,596

Great Wall 399

Total auto sales in China

18,505

Total auto sales in China

18,061.9

CR10 87.0%

CR10 86.3%

Note: Data from the China Association of Automobile Manufacturers may be different from those in the companies’ annual reports

Source: China Association of Automobile Manufacturers, Guosen Securities (HK)

1.2 Great Wall is growing rapidly and it has become the largest private

automaker in China

In China, large SOEs and joint ventures dominate the auto manufacturing industry. Six

state-owned automakers, including SAIC Motor, Dongfeng Motor, FAWAY Automobile,

Changan Automobile, Beijing Auto and GAC Group, make up about 3/4 of the total auto

sales volume in China.

Great Wall’s sales volume grew by

22% in 2011, considerably

outpacing the industry’s growth of

only 3% that year.

In fact, Great Wall’s sales volume

grew by the fastest in 2011 among

China’s top 10 automakers.



Exhibit 2: Major automakers in China

Company Major shareholder Notes

SAIC Motor SASAC One of China’s big four auto groups and has established joint ventures with Volkswagen, GM, Volvo and Iveco.

Dongfeng Motor SASAC One of China’s big four auto groups and has established joint ventures with Nissan, Honda, Citroen, Yulon, Kia and Peugeot.

FAWAY Automobile

SASAC One of China’s big four auto groups and has established joint ventures with Volkswagen, Mazda, Toyota and GM.

Changan Automobile

SASAC One of China’s big four auto groups and has established joint ventures with Ford, Mazda and Suzuki.

Beijing Automobile

SASAC Joint ventures with Hyundai and Benz.

GAC Group SASAC Joint ventures with Honda, Toyota and Fiat.

Chery Automobile

SASAC Joint ventures with Jaguar and Land Rover.

Brilliance SASAC Joint venture with BMW.

JAC SASAC Domestic brand, specialises in the production of sedans, trucks and MPVs.

Great Wall Motor

Privately-owned (Wei Jianjun)

Domestic brand, specialises in the production of pick-up trucks, SUVS and sedans.

BYD Privately-owned（Wang Chuanfu）

Domestic brand, specialises in the production of sedans, SUVs and new energy-fueled vehicles

Geely Privately-owned（Li Shufu） Self-owned brand, specialises in the production of sedans. It acquired Volvo in 2010.

Source: Guosen Securities (HK)

Major Chinese privately owned automakers, including Great Wall, Geely Automobile and

BYD Auto, are in the 10th to 15th places in terms of sales volume in China, and their

combined sales volume accounts for 7% of total auto sales in China.

Based on sales volume in 2011, Great Wall has surpassed Geely and BYD to become

the largest privately owned automaker in China.

Exhibit 3: Great Wall has been developing rapidly since 2008, and outpaced BYD

and Geely in three years

Source: China Association of Automobile Manufacturers, Guosen Securities (HK)

2 Great Wall’s major products include pick-up

trucks, SUVs and sedans

Auto sales make up the majority of Great Wall’s revenue. The company’s 2011 revenue

totaled RMB29.3 billion, out of which RMB28.1 billion, or 96%, was from auto sales.

0

100

200

300

400

500

600

2005 2006 2007 2008 2009 2010 2011

'000

Great Wall Geely BYD

Great Wall has surpassed Geely

and BYD to become the largest

privately owned automaker in

China.

Great Wall’s sales of SUVs and

sedans have experienced

explosive growth since after 2008.



Great Wall mainly sells three types of vehicles, namely pick-up trucks, SUVs and sedans,

which contribute about 23%, 38% and 31% respectively to the company’s total revenue.

SUV sales were the major source of income (Exhibit 4).

Pick-up trucks and SUVs are traditional flagship products of the company. Its sales

volume of pick-up trucks grows at a steady pace each year, and sales of SUVs and

sedans have experienced explosive growth since after 2008.

Exhibit 4: Pick-up trucks, SUVs and sedans make up the

major contribution to Great Wall’s revenue

Exhibit 5: Revenue from Great Wall’s SUV and sedan

businesses experienced explosive growth in 2010-2011, and

revenue from pick-up trucks continues to grow steadily

Source: Company data, Guosen Securities (HK) Source: Company data, Guosen Securities (HK)

3 The company enjoys long-term competitive

advantages due to its focus on three major

sub-segments and shared production platforms

3.1 Great Wall sticks to the strategy of focusing on selected

sub-segments

Great Wall distinguishes itself from other automakers by focusing on selected

sub-segments. The company has clear product positioning for the three major categories

(SUV, sedan and pick-up truck), with the aim of becoming the leader in China’s pick-up

truck and SUV markets, and the so-called “King” in China’s family sedan market. The

company always keeps the product positioning in mind when it develops a new model.

The company has achieved tremendous success thanks to the strategy of focusing on

three major product categories. The company’s Wingle model has been the No.1 pick-up

truck in terms of sales volume in China for 14 consecutive years, while its Havel SUV has

topped its domestic peers in terms of sales volume for eight straight years. The Voleex

C30 sedan launched in 2010 was one of the top three sedans (priced at RMB60,000 to

RMB90,000) in terms of sales volume in 2011. We believe Great Wall enjoys strong and

long-term competitive advantages over other domestic automakers due to its strategy of

focusing on three major sub-segments.

Pickup 23%

SUV 38%

Sedan 31%

Others 8%

Pickup

SUV

Sedan

Others

0

5,000

10,000

15,000

20,000

25,000

30,000

2006A 2007A 2008A 2009A 2010A 2011A

RMB mn

Pickup SUV Sedan Others

The Voleex C30 sedan launched in

2010 was one of the top three

sedans (priced at RMB60,000 to

RMB90,000) in terms of sales

volume in 2011.



Exhibit 6: Great Wall focuses on three selected sub-segments and it has achieved tremendous success

Pick-up truck

Leader in China’s pick-up truck

market?

No.1 among global economic pick-

up truck manufacturers

Wingle has been the pick-up truck

model with the largest sales

volume in China for 14

consecutive years

SUV

Leader in SUV market

No.1 among global economic SUV

manufacturers

Haval SUV has been the SUV

model with the largest sales

volume among all domestic

brands for eight straight years

Sedan

The king of family sedans

No.1 in the economic sedan

market segment in China

Voleex C30 was among the top

three models priced at RMB60,000

to RMB90,000 by sales volume in

2011

Positioning

Target

Current

situation

Source: Great Wall Motor Growth Analysis Report, www.auto.sohu.com, Guosen Securities (HK)

3.2 The company makes full use of its platforms as it sticks to the

strategy of “fewer production platforms, more vehicle models”

Great Wall sticks to the strategy of “fewer production platforms, more vehicle models”,

which enables it to produce models with different exteriors and various types of market

positioning on one platform. More importantly, through this strategy the company is able

to stop or reduce production of unpopular models in time, and replace them with new

models. In this way the capacity utilisation is increased, which props up the profitability of

the company as a whole.

Currently the company has three production platforms: one is the K platform which

produces vehicles with body-chassis frame construction, and the other two are the CH

and CHB platforms, which produce vehicles with integral body construction.

The K platform was first designed to mainly produce pick-up trucks. The Wingle pick-up

truck series and the Safe SUV series are now produced on this platform.

The CH platform was the company’s first platform to produce vehicles with integral body

construction. Sedan and Mini SUV models are now produced on this platform.

The CHB platform is used for production of sedans and SUVs in the company’s Tianjin

plant.

By having a flexible production set

up, this allows Great Wall to

quickly adjust its output based on

market response.



Exhibit 7: Great Wall makes full use of its production platforms

Cars with body-chassis

frame constructionK platform

Deer pick-up

trucks

Wingle 3/

Wingle 5

Cars with integral body

construction

CH platform

Peri Haval M1

platform type of vehicle

Florid Haval M4

Coolbear Haval M2

Lingao C20R

C30 C30i

Safe Haval H3/H5

C50 CHB012

Haval H6 CHB022

CHB

platform


Great Wall sticks to its strategy to share platforms. It develops various types of sedans

and SUVs that share the same types of chassis to reduce costs. The company produces

a variety of models with different exteriors on a same production platform. Once a model

is unpopular, the company is able to quickly cease production of the model and launch a

new model after changing the equipment and exterior of the original one. Over the past

few years, this strategy has proven to be successful, as the company has seen

remarkable increases in sales volume of new models compared to that of the old ones

before the re-fittings.

Exhibit 8: Great Wall has produced a variety of models with different exteriors on

shared platforms

Peri Haval M1

Voleex C20RLingao

Coolbear Haval M2

Voleex C30 Florid Haval M4

Same

Chassis

Same

Chassis

Fine-tuning

Chassis

Same

Chassis

Same

Chassis

Source: Wind, Guosen Securities (HK)

Great Wall also produces various

types of sedans and SUVs that

share the same types of chassis to

reduce costs.



For popular models produced on a shared platform, Great Wall always changes their

exterior shape and the colours of interior decorations, or equips them with a different

engine to form a different model, so as to cater to different customers. For example, as

the H3 and H5 Series SUVs were well received by the market, the company immediately

launched several versions of models based on the same chassis and the same

production platform.

Exhibit 9: Various models with different exteriors and engines produced on the

same platform

H3 RUIYI H5 OUFENG

H5 ZHIZUNH3 IINGXIAN

Same

Chassis


4 Great Wall’s profitability is among the strongest

in the industry due to continued improvement in

product mix and vertical integration

4.1 Average prices of its flagship products keep rising, and product mix

continues to improve

In recent years, Great Wall was quick to launch new models and was able to rapidly

adjust the product mix according to the market response. It concentrated on producing

competitive models and upgrading them, which has proven to be highly successful.

Take sedans for example. The demand for the Florid, Peri and Coolbear models, which

were launched by the company earlier, was weak as they were priced at the low end and

their exteriors were not appealing to car buyers. The company adjusted the product mix

instantly and launched the Voleex C30 in 2010. The model was returned to a more

regular design and it offered excellent performance for a competitive price. Quickly the

sedan became popular with monthly sales of over 10,000 units. This has accelerated the

growth of Great Wall’s sedan business. The company then launched the C50 model in

2011, whose average selling price was higher than that of the C30.

The equipment of Great Wall’s new pick-up trucks, SUVs and Mini SUVs have been

significantly upgraded, and average prices have also increased compared to the older

models (Exhibit 10).

Great Wall rolls out facelifts of

popular models to drive sales

growth.

Great Wall has over 20 subsidiaries

that produce auto parts, such as

engines, transmissions, front and

rear axles, panels, air conditioners,

seats, interior decorations and

wiring harnesses.



We believe Great Wall’s profit growth, which is driven by continued improvement in its

product mix, is of good quality.

Exhibit 10: Average prices of various series of models launched by Great Wall

continue to rise, and the product mix continues to be optimised

Source: Yiche.com, auto.sina.com.cn, auto.sohu.com, Guosen Securities (HK)

4.2 The company has enhanced its profitability through technological

co-operation with auto-parts suppliers

Great Wall has more than 20 subsidiaries that produce auto parts, such as engines,

transmissions, front and rear axles, panels, air conditioners, seats, interior decorations

and wiring harnesses, etc. All these parts are compatible with each other.

Unlike most other automakers, Great Wall co-operates with the world’s leading auto parts

suppliers to develop technologies instead of just simply buying products from them,

which has not only significantly enhanced its own R&D strength, but also retained the

profit generated from the production of auto parts through vertical integration.

Exhibit 11: Great Wall has the highest gross profit margin

among the major listed passenger vehicle manufacturers

Exhibit 12: Great Wall has a leading position among the listed

passenger vehicle manufacturers in terms of profitability

Source: Wind, Guosen Securities (HK) Source: Wind, Guosen Securities (HK)

0 20 40 60 80 100 120 140 160 180

Safe

Sing

Pegasus

HavalH3

HavalH5

HavalH6

Peri

Florid

Coolbear

Lingao

VoleexC30

VoleexC20R

VoleexC50

Deer

Sailor

Socool

Wingle3

Wingle5

HavalM1

HavalM2

HavalM4

RMB '000

Mini SUV

Pick-up truck

Sedan

SUV

2012

2010

2009

2009

2007

2004

2001

1996

2011

2011

2010

2009

2009

2009

2008

2011

2010

2008

2005

2003

2002

Lauch time

24.9%

20.1% 18.8% 18.2% 17.2% 16.5%

14.8% 13.3% 13.2%

4.5%

0%

5%

10%

15%

20%

25%

30%

Gre

at W

all

Mo

tor

Do

ng

fen

g

Au

to

SA

IC M

oto

r

Ge

ely

Au

to

BY

D

Co

mp

an

y

FA

W C

ar

Ch

on

gq

ing

Changan

Brilli

ance

C

hin

a

Anhui

Jia

ng

hu

ai

Tia

njin

Fa

w

Xia

li

Gross margin(%)(2011)

27.2% 25.6% 24.8% 24.0%

17.5%

11.1%

7.6% 7.0%

3.0% 2.6%

0%

5%

10%

15%

20%

25%

30%

Brilli

ance

C

hin

a

Gre

at W

all

Mo

tor

Do

ng

fen

g

Au

to

SA

IC M

oto

r

Geely

Auto

Anhui

Jia

ng

hu

ai

Ch

on

gq

ing

C

ha

ng

an

BY

D C

om

pa

ny

Tia

njin

Fa

w

Xia

li

FA

W C

ar

ROE（%)(2011)



Exhibit 13: Great Wall has enhanced technological co-operation with world-renowned auto parts suppliers to boost its R&D

Date Partner Description Areas of collaboration

2011/3/23 Ricardo Plc Ricardo Plc is a leading global provider of strategic consulting for the auto industry and innovative R&D of engines.

Gasoline engines and six-speed DCT

2011/6/20 Mahle Mahle ranks among the top three system suppliers worldwide for piston systems, cylinder components, as well as valve train, air management, and liquid management systems.

Key engine parts in air management systems etc.

2011/7/5 Brose Brose is the biggest manufacturer of door systems worldwide

Car lock systems, cooling fans and motors for wind-up windows

2011/7/6 Autoliv Autoliv is a global leader in automotive safety systems Active and passive safety systems and integrated control systems

2011/8/4 Baosteel Baosteel is the biggest steel producer in China and ranks among the top three steel makers worldwide in terms of comprehensive competitive capacity

High-strength steel and laser-welded tailored boards.

2011/9/22 TRW TRW is one of the top 10 suppliers of auto parts and a leading manufacturer of automotive safety systems worldwide

Active and passive safety technologies

2011/9/26 Bosch Bosch is the biggest provider of automotive technologies

Engine management systems and chassis systems.

2011/9/29 BorgWarner BorgWarner is a leading global provider of power system solutions

Drivetrain systems and superior torque distribution and management systems and etc.

2011/11/1 Delphi Delphi is the biggest manufacturer of wiring harness worldwide.

Electronic & electrical framework, electronic & safety systems and etc.

2011/11/18 TNO TNO is one of the top three applied science research organisations and responsible for drafting Collision Regulations (EU).

Active and passive safety, emission and new-energy technologies

2012/2/25 Pohang Iron and Steel Co. Ltd (POSCO)

POSCO is one of the world’s biggest steel producers. New materials like advanced high-strength steel and third-generation high-strength steel and new technologies like hot embossing and hydroforming

2012/5/14 Fuyao Group Fuyao Group is the world’s second largest supplier of automotive safety glass

Automotive glass, window frames, window guide rail, trim parts, beltline molding and etc.

2012/5/31 Minth Group Minth Group holds the biggest market share for trim, decorative and body structural parts in China

Door frames and window guide rail, front grille, roof racks, other automotive accessories and etc.

2012/7/2 Hella Hella is the global provider of lighting and electronics for the automotive industry

Automotive body electronics, body control module and lighting systems

Source: Company data, Guosen Securities (HK)

4.3 The company dwarfs its peers in terms of profitability due to

improvement in its product mix and the vertical integration of

production

Thanks to its well-received models and the vertical integration of production, Great Wall

is able to maintain a leading position in the industry in terms of profitability (Exhibit 11).

Great Wall’s gross profit margin was 24.9% for 2011, substantially above the industry

average of 17%-18% and is the highest among other major listed passenger vehicle

manufacturers.

In addition, Great Wall’s ROE reached 25.6% in 2011, far higher than the industry

average of 9.6% (according to data from the National Bureau of Statistics in 2011),

ranking it No.2 among the major listed passenger vehicle makers in China (Exhibit 12).

Great Wall’s gross margin of 24.9%

for 2011 was substantially above the

industry average and was the highest

among major listed automakers

(Exhibit 11).



Catalysts 12

Catalysts

1 China’s SUV sales volume is growing rapidly,

and SUVs account for 1/3 of Great Wall’s revenue,

the largest ratio among all listed automakers

1.1 China’s SUV sales volume has grown at a CAGR of 42% over the

past six years and is expected to keep increasing rapidly at a CAGR

of 20% to 25%

China’s SUV sales volume has been increasing since 2000. SUV sales volume in China

was 196,000 units in 2005, accounting for 4.9% of the sales volume of all passenger

vehicles. But by 2011, China’s SUV sales volume had exceeded 1.6 million units, over

eight times more than that in 2005 and representing a CAGR of 42%.

SUV sales volume grew robustly by 23% in 2011, while the sales volume of passenger

vehicles in China rose by only 5%. SUVs now account for 11.2% of the total sales volume

of passenger vehicles in China (Exhibit 15).

Exhibit 14: Sales volume growth of SUVs has far outpaced

that of passenger vehicles and the auto industry as a whole

Exhibit 15: SUVs accounted for 11.2% of the total sales volume

of passenger vehicles, more than doubled from the previous

six years

Source: Wind, Guosen Securities (HK) Source: Wind, Guosen Securities (HK)

SUVs have gained in popularity in China thanks to the vehicles’ vast interior space, better

visibility and the combination of comfort and high off-road performance.

As income rises, more and more consumers are willing to purchase SUVs. Consumers

who seek to buy a second car particularly prefer SUVs. According to market research

firm Sinotrust, over 20.4% of consumers prefer SUVs as their second car (Exhibit 16).

As a result, we believe SUV sales will continue to boom. We expect by 2015, SUV sales

volume in China would reach 3.5 million units, which would account for 14.3% of the total

auto sales in China.

0%

20%

40%

60%

80%

100%

120%

2006 2007 2008 2009 2010 2011

SUV sales volume growth Total sales volume growth passenger vehicle sales volume growth

4.9% 4.4%

5.7% 6.6% 6.4%

9.6%

11.2%

0%

2%

4%

6%

8%

10%

12%

2005 2006 2007 2008 2009 2010 2011

The proportion of SUV to total passenger cars

SUV sales volume grew robustly

by 23% in 2011, while sales volume

of passenger vehicles in China

rose by only 5% (Exhibit 14).



Catalysts 13

Exhibit 16: 20.4% of consumers prefer SUVs as their second car

Source: Sinotrust, Guosen Securities (HK)

1.2 Great Wall has topped its domestic peers in terms of SUV sales

volume for eight straight years since 2004

Great Wall started to produce SUVs in 2002, and it has topped its domestic peers in

terms of SUV sales for eight straight years since 2004. The company’s SUVs target the

mid-end market, and offer excellent performance at a competitive price. Great Wall

enjoys obvious competitive advantages over peers, as it does not only avoid direct

competition with joint-venture brands, but it also offers better quality than its domestic

peers. The company’s SUV sales volume for 2009, 2010 and 2011 was 58,000 units,

137,000 units and 147,000 units respectively, representing a CAGR of 59%. In 2011, the

company made up 9.4% of China’s SUV market.

The sales boom of SUVs is attracting more market entrants and competition is becoming

increasingly fierce. Although the company’s share of the SUV market has declined in

recent years, it remains one of the top three automakers and the No. 1 domestic car

manufacturer in terms of SUV sales volume. As the company’s Tianjin plant has been put

into operation this year, the H6, which was launched in 2011, and the M4, which was

launched in 2012, have become two new engines to boost the company’s growth, and

may prop up the company’s share of the SUV market.

13.5%

22.9%

34.5%

10.3%

1.1%

3.2%

1.4%

9.6%

3.4%

2.7%

9.7%

20.0%

21.1%

10.2%

20.4%

3.1%

2.0%

10.9%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Mini Sedan

Small Sedan

Compact Sedan

Mid-size Sedan

Mid-large sedan

SUV

MPV

Mini Bus

Others

The second car The first car

In 2011, Great Wall accounted for

9.4% of China’s SUV market.

The new H6 and M4 SUV models

will become the new growth

drivers.



Catalysts 14

Exhibit 17: Great Wall’s SUV sales volume has quintupled

over the past six years

Exhibit 18: Although Great Wall’s market share in the SUV

market has declined, it maintains a leading position

Source: Company data, Guosen Securities (HK)

Source: Company data, China Association of Automobile

Manufacturers, Guosen Securities (HK)

1.3 SUVs make up 1/3 of Great Wall’s total sales volume, the largest ratio

among the major listed automakers, and the company is likely to

benefit from the rapid growth of SUV sales in China

Great Wall’s SUV sales volume was 147,000 units in 2011, representing 32% of the

company’s total sales volume (Exhibit 19). This ratio is far higher than that of other listed

passenger vehicle manufacturers. In addition, Great Wall’s newly launched SUV models

are generating strong sales. As such, we believe Great Wall is likely to continue to benefit

from the rapid growth of the SUV industry.

Exhibit 19: SUVs accounted for 32% of Great Wall’s total sales volume, the largest

ratio among major listed automakers (2011)

Source: Company reports, Guosen Securities (HK)

28,568

51,855 44,006 58,299

136,982

147,341

82%

-15%

32%

135%

8%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

2006A 2007A 2008A 2009A 2010A 2011A

Un

it

SUV sales volume (LHS,Unit) SUV sales growth (RHS)

14.6%

17.5% 18.1%

13.9%

10.9% 11.4%

9.4%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2005 2006 2007 2008 2009 2010 2011

Market share of Great Wall SUV

0%

0%

0%

0%

0%

2%

4%

13%

14%

32%

0% 5% 10% 15% 20% 25% 30% 35%

Brilliance China(1114.HK)

Geely Auto(0175.HK)

Chongqing Changan(000625.SZ)

Tianjin Faw Xiali(000927.SZ)

FAW Car(000800.SZ)

Anhui Jianghuai(600418.SH)

SAIC Motor(600104.SH)

BYD Company(1211.HK)

Dongfeng Auto(0489.HK)

Great Wall Motor(2333.HK)

SUV sales volume accounting for total motor sales(2011)



Catalysts 15

1.4 Havel H6 and M4 will become powerful drivers to prop up

Great Wall’s share of the SUV market

Great Wall’s Havel H6, which was launched in 2011, is the company’s first urban SUV

model, and also the major product of its Tianjin plant. The model continues to offer

excellent performance at a competitive price, and it’s popular due to its robust and grand

exterior. We believe Havel H6 will become a major catalyst to prop up the company’s

share of the SUV market in China and boost its profit growth for 2012 and 2013.

The Havel H6 is precisely positioned: the price for the model ranges from RMB95,800

to RMB141,800 (depending on the specs), which is lower compared to joint-venture

brands and higher versus domestic brands. The H6’s product and price differentiation

from other models ensures the company generates relatively decent profits.

Exhibit 20: The Havel H6 is precisely positioned: priced below joint-venture brands

but higher than domestic brands

Source: auto.sohu.com, Guosen Securities (HK)

Havel H6 is highly competitive compared to other domestic SUV brands at the same

price range.

We selected four major domestic SUV models priced from RMB100,000 to RMB110,000

(lowest price for Trumpchi GS5 is RMB123,800) for comparison, and found that the Havel

H6 enjoys obvious advantages in terms of both equipment and after-sale maintenance

(Exhibit 21).

Havel H6 features multiple engine choices: it is equipped with a 2.0 litre petrol engine,

and the 2.0T diesel and 1.5T diesel versions were also launched this year. In terms of

after-sale maintenance, it comes with a five-year/100,000 kilometres warranty for the

entire vehicle, far superior to other competitors.

0

50

100

150

200

250

300

350

400

CR

-V

Ha

va

lH6

Tig

ua

n

QA

SH

QA

I

ix3

5

RA

V4

Tig

go

Hig

hla

nd

er

ZO

TY

E A

uto

50

08

Sp

ort

ag

e

BY

DS

6

Price:RMB'000

Joint-venture brands

China self-owned brands

Great Wall’s popular Havel H6 is

highly competitive compared with

other domestic SUV brands at the

same price range

The Havel H6 offers a five-year

warranty, far superior to its

competitors



Catalysts 16

Exhibit 21: Great Wall Havel H6 enjoys marked competitiveness over other SUV models at the same price range

Name BYD S6 Great Wall Havel H6 Chery Tiggo Brilliance V5 Guangqi Trumpchi

Price RMB107,900 RMB105,800 RMB100,800 RMB109,800 RMB123,800

Model

BYD S6 [2011] Great Wall Havel H6[2011]

Chery Tiggo [2012] Brilliance V5 [2012] Guangqi Trumpchi GS5 [2012]

BYD S6 2.0L manual Deluxe

Havel H6 2.0L Elite Chery tiggo 1.8 AMT Comfort

Brilliance V5 1.6L manual Comfort

Guangqi Trumpchi 2.0L manual Comfort

Engine 2.0L 140 hp L4 2.0L 133 hp L4 1.8L 132 hp L4 1.6L 118 hp L4 2.0L 147 hp L4

Warranty 4-year/100,000 km 5-year/100,000 km 2-year/60,000 km 5-year/60,000 km 3-year/100,000 km

Engine type BYD483QB 4G63S4M ACTECO-SQR481FC 4A92S -

Max torque(N·m/rpm)

186/4000-4500 186/4000 170/4300-4500 151/4000 187/4500

Rear suspension

Multi-link independent rear suspension

Double wishbone independent rear suspension

Torsion beam semi-independent rear suspension

Twist beam semi-independent rear suspension

Multi-link independent rear suspension

Wheelbase (cm) 2720 2680 2510 2630 2710

Gear-box five-speed manual five-speed manual five-speed semi-auto five-speed manual five-speed manual

Source: auto.sohu.com, Guosen Securities (HK)

Sales boom of Havel M4 will further increase the company’s SUV market share.

Havel M4 is a modified mini SUV based on the Florid sedan, and is the automaker’s third

mini SUV after M1 and M2.

M4 is well positioned as a mini SUV priced at around RMB70,000 to fill the gap in

the market: Chinese consumers like SUVs. However, almost all the most popular SUVs

now are large-size models, while mini SUVs priced at around RMB70,000 are almost

absent from the market. Great Wall has subtly spotted the gap in the market, and

launched the M4 after modifying the Florid sedan on the Florid production platform. Most

cars at this price range are sedans, while M4 enjoys competitive advantages over other

models thanks to its better visibility, excellent off-road ability and the combination of

comfort and high performance.

Stylish exterior and powerful equipment: M4 features a stylish and hard-edged

exterior despite its small size, which is particularly attractive to female consumers. The

luxury version of the M4 is equipped with a multi-media console with “MP5+GPS+

rear-view camera display+parking sensor”.

M4 is well-received by the market: Thanks to the sales boom of the M4, Great Wall

saw sales volume of M Series SUVs increased to 9,000 units in September, representing

a sharp rise from the average monthly sales volume of 1,600 units last year. Data from

our channel checks also show that M4 demand remains strong, and that most customers

have to wait about two weeks or longer for delivery of the vehicle. We believe sales

volume of the M4 is likely to continue until 1H 2013.

We believe despite increasing competition in the market, Great Wall is still likely to

maintain its advantages in the SUV market due to its excellent product positioning and

production experience. The launch of the H6 and M4 will lead to a rebound in Great

Wall’s SUV market share.

Channel check shows very strong demand for the H6/M4 models (Exhibit 22).

According to our channel checks, the waiting time for the Havel H6 or M4 model is

usually more than one month, and this situation is not getting better in three months.

Great Wall’s mini SUV priced at

RMB70,000 fills a gap in the market

and it’s an alternative to sedans



Catalysts 17

Most dealers that we spoke with say that these two models are very popular in the

market and their sales are reaching an historic high this year.

We believe that the major factor weighing on sales volume growth of Great Wall’s SUVs

is its manufacturing capacity constraint. But as the capacity is being boosted in the

Tianjin plant, we expect Great Wall’s SUV sales can reach a record high in the coming

months.

Exhibit 22: Our channel checks show demand for the Havel H6 remains strong and the waiting time is around one month

Distributor City Waiting Time

(2012/06/28) Dealers’ comments

Waiting Time

(2012/10/11) Dealers’ comments

Shenzhen Benjue Shenzhen H6:

45 working days

H6 not available, not even for extra payment. Pre-sales are only available for the economic model

H6:

2.0L - 1 month

2.0T - 2 months

1.5T - 3 months

M4: Until Jan. 2013

H6/M4 very popular, sales much better than last year; no stock on their side;

Shenzhen Jinda Automobile Trade Co., Ltd.

Shenzhen H6:

One month

H6 not available, not even for extra payment. Pre-sales are only available for economic and low-end models, with advance deposit of RMB20,000

H6:

2.0L - 2 month

2.0T - 50 days

1.5T - 40 days

M4: 40-50 days

H6 has been very popular since it was launched; enough inventory for C30/C50 models

Guangzhou Youdao Automobile Trade Co., Ltd.

Guangzhou H6:

2.0L: 1 unit available

2.0T - 1.5 months

H6 not available even for extra payment. Pre-sales not available for high-end model; need to place order for any models except H5

H6:

2.0L - 1 month

2.0T - 1 month

1.5T - 1 month

M4: 45 days

Auto purchase restriction in Guangzhou slightly affected their sales, they only take in standard models for H6

Zhangjiakou Pangda Huaqing Automobile Sales and Service Co., Ltd.

Zhangjiakou H6:

Small quantity in stock

Three units were in stock. Pre-sales are not available for mid- and low-end models

H6:

2.0L - 1 month

2.0T - 2 months

1.5T - 20 days

M4: 40-50 days

Maintenance cost is only a little higher for the 2.0T model; but this model is noisier than 2.0L/1.5T models

Baoding Wuzhou Automobile Sales and Service Co,. Ltd.

Baoding H6:

About 20 days

Zero stock. H6 not available even for extra payment.

H6:

1 month for all series

M4: 45 days

M4 model is very popular and it’s said that Great Wall’s orders on hand have exceeded 10,000 units

Tianjin Haifeng Automobile Service Co., Ltd.

Tianjin H6:

One month

Zero stock. Pre-sales not available for low-end models

H6:

2.0L - 1 month

2.0T - 1 month

1.5T - 40 days

M4: 1 month

Although they are close to Great Wall’s plant, they have to wait for the same amount of time as other dealers to receive the H6/M4

Shanghai Jinhu Automobile Sales Co., Ltd.

Shanghai H6:

One month

Zero stock. H6 not available even for extra payment. Pre-sales not available for low-end models

H6:

2.0L - 45 days

2.0T - 45 days

1.5T - 45days

M4: 45 days

M4 model can enjoy RMB3,000 subsidy

Even in Shanghai, the demand for H6/M4 is very high

Chengdu Qingshan Automobile Trade Co., Ltd.

Chengdu H6:

Product in stock

Product in stock. No discount. High-end model not available

H6:

2.0T - 1 month

1.5T - 40 days

M4: 1 month

Customers prefer SUVs because of the mountainous conditions in Chengdu




Catalysts 18

2 Sedan buisness: focuses on A-class models,

and C50 is expected to increase the popularity of

domestic turbo-charged sedans in China

2.1 The company entered into the sedan market in 2008, and Voleex C30

was among the top three models priced at RMB60,000 to RMB90,000

in terms of sales volume in 2011

At the end of 2007, Great Wall was approved by the National Development and Reform

Commission to produce sedans. It sold less than 9,800 sedans in 2008, but increased by

nearly 150% to 187,000 units in 2011.

The rapid growth of the sedan business is also attributable to the precise market

positioning by Great Wall. When it entered into the sedan market in 2008, Great Wall first

launched the A00-class sedan, the Peri, and then it introduced the A0-class Florid,

Coolbear and Ling'ao. It then rolled out the Voleex C30 in 2010, and the Voleex C50 in

2011. All these models target the A-class family sedan market segment, which is the

largest and the fastest growing.

The precise product positioning has also boosted the rapid growth in the sales volume of

sedans for the company. Florid ranked No.1 among all A0-class hatchbacks in China in

terms of sales volume in 2010, and the Voleex C30 was among the top three models

priced at RMB60,000 to RMB90,000 in terms of sales volume in 2011 (Exhibit 25).

Exhibit 23: Great Wall’s sedan sales have accelerated in the

past three years

Exhibit 24: Great Wall’s Voleex C30 was among the top three

models priced at RMB60,000 to RMB90,000 in terms of sales

volume in 2011

Source: Company data, Guosen Securities (HK) Source: auto.sohu.com, Guosen Securities (HK)

2.2 The company focuses on A-class family sedans, and continues

upgrading the product line

All the sedan models launched by the company since 2008 are A-class sedans, and it

continues to upgrade the product line: it launched the A00-class Peri in 2008, and then

introduced the A0-class Florid, Coolbear and Ling'ao. It launched the Voleex C50 in 2011.

The grade of the models continues to be improved and the ASP also keeps rising. The

company’s sedan business has been growing robustly thanks to its strategy to focus on

A-class family sedans and the ongoing improvement of its product line.

0 0 9,754

69,790

122,843

187,504 616%

76% 53%

0%

100%

200%

300%

400%

500%

600%

700%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

2006A 2007A 2008A 2009A 2010A 2011A

Un

it

Sedan sales volume (LHS,Unit)

Sedan sales growth (RHS)

11%

9%

8%

5%

4% 63%

Volkswagen Jetta Chevrolet Sail NB

Great WallC30 Volkswagen Santana

JAC Heyue Others

Great Wall first started to

produce sedans in 2007.

All of Great Wall’s sedan models

target the family market, which

is the largest and fastest

growing in this category.

The company’s focus on

A-class sedans has helped to

drive rapid growth.



Catalysts 19

Exhibit 25: Great Wall continues to upgrade its product line

MSRP(‘000)

A

VoleexC30 VoleexC20R 54.0-84.5

A0

Cool bear

63.9-87.9

A0

Lingao

54.8-80.9

A0 Florid

59.9-63.9

A00 Peri

36.9-44.9

Year

2008 2009 2010 2011


2.3 Capacity expansion of Voleex C50 is likely to begin in 2H 2012

Voleex C50 is a new sedan launched by Great Wall in 2011, which is priced by the

manufacturer at RMB78,000 to RMB91,800.

“Turbo-charged engine” and “super long warranty period” are two important selling

points of the C50.

“Turbo-charged engine” and “super long warranty period” are two important selling points

of the C50, which makes the model unmatchable among sedans priced at RMB70,000 to

RMB90,000.

C50 is the only sedan that is priced at below RMB90,000 but equipped with a

turbo-charged engine. The turbo-charging technology can efficiently boost the power of

the vehicle without increasing the size of the engine, and has been widely used in

European-made vehicles. Cars with a turbo-charged engine are becoming increasingly

popular among consumers amid high oil prices. Great Wall spotted the opportunity and

launched the C50 to attract consumers with its high performance at an attractive price.

The other competitive edge of C50 is that its warranty period is extremely long. Great

Wall provides a five-year/150,000 kilometres warranty for the entire vehicle for the C50,

plus four comprehensive maintenance services for free. The warranty period is longer as

compared to four years/150,000 kilometres for the C30, four years/100,000 kilometres for

most of other domestic brands, and only two years/60,000 kilometres for regular

joint-venture brands (Exhibit 26). The longer warranty period may add to the company’s

cost in after-sale services, but as Great Wall is at the early stage of brand building, this

strategy can help boost consumer confidence and sales.

Exhibit 26: Warranty policies of different automakers

Warranty policy

Great Wall C50 five years/150,000 kilometres

Great Wall C30 four years/150,000 kilometres

Other domestic brands four years/100,000 kilometres

Regular joint-venture brands two years/ 60,000 kilometres


Taken together, we expect sales volume of C50 would total 33,000 units this year, while

that of C30 would decline by 15% y-o-y to 127,000 units, as C50 acts as a substitute of

the C30, and the increase in sales volume of C50 would offset the decline in that of the

C30.

The C50 is the only sedan priced

below RMB90,000 to be equipped

with a turbo-charged engine.

Great Wall offers extremely long

warranty periods for its models,

which can help it to build brand

recognition and consumer

confidence, thereby driving up

sales growth.



Catalysts 20

With C50 acting as the substitution of the C30, this will further optimise the product mix of

the company’s sedan business. In addition, if sales of the C50 exceeds 100,000 units

next year, this would help secure Great Wall’s competitive edge in the market for sedans

priced at RMB70,000 to RMB90,000.

3 It maintains a strong and leading position in the

pick-up truck market, but policy restictions need

to be lifted to give way to stronger growth

3.1 The company entered into the pick-up truck market in 1996, and it

has maintained the No.1 spot for 14 consecutive years since 1998 in

terms of sales volume.

Pick-up trucks were the company’s first business and Great Wall is the most competitive

in this sub-segment among peers. The company started to produce pick-up trucks in

1996. Its trucks have improved from the Deer, Sailor and Socool during the early years to

the current Wingle series, which are now the major products promoted by the company.

Great Wall now has a full range of high-end, mid-end and economic pick-up trucks.

The Wingle is China’s first pick-up truck brand to install the ABS+EBD brake systems as

standard equipment. Besides, Great Wall was the first automaker to equip pick-up trucks

with electronic immobilisers and racks, and pinion hydraulic power steering systems,

which have significantly enhanced the competitiveness of its pick-up trucks.

Great Wall has been No.1 in China’s pick-up truck market in terms of sales volume,

market share, exports and vehicle population for 14 consecutive years since 1998.

Besides, it can compete with foreign pick-up truck brands and it has reduced the latter’s

market share in China (Exhibits 27-28). Great Wall’s share of the pick-up truck market

has remained at around 30% for the past seven years, and it rose to 32% in 1H2012,

implying a strong and stable position in the market.

The company maintains a strong

and leading position in the pick-up

truck market. But more

policy-based catalysts are needed

for further development of the

pick-up truck sector in China.



Catalysts 21

Exhibit 27: Great Wall had 31% share of the domestic pick-up

truck market in 2011

Exhibit 28: Great Wall’s share of China’s pick-up truck market

recovered to 32% in 1H 2012

Source: China Association of Automobile Manufacturers, Guosen

Securities (HK)

Source: China Association of Automobile Manufacturers, Guosen

Securities (HK)

Pick-up truck sales in China have grown strongly in recent years. Sales increased to

394,000 units in 2011 from 145,000 units in 2006, representing a CAGR of 22% (Exhibit

29).

Likewise, Great Wall’s pick-up truck business has also been growing at a rapid and

steady pace over the past few years. The company’s pick-up truck sales increased to

122,000 units in 2011 from 45,000 units in 2006, representing a CAGR of 27%, outpacing

the industry average (Exhibit 30).

Exhibit 29: Growth in pick-up truck sales volume in China is

steady

Exhibit 30: Great Wall’s pick-up truck sales volume has been

growing at a rapid and steady pace

Source: Data from companies, Guosen Securities (HK) Source: Data from the company, Guosen Securities (HK)

3.2 Policy-based catalysts are needed for further development of the

pick-up truck sector in China

Pick-up trucks have multiple uses as they have the features of a sedan, a truck as well as

a recreational vehicle. It is a good substitute for other types of vehicles, and they have

huge market potential.

In the US, pick-up trucks make up 13% of the total auto sales volume. However, the

pick-up truck market has always been a niche market in China. Total pick-up truck sales

31%

16%

14%

13%

7%

6%

13%

Great Wall Motor

Jiangling Motors

Nissan

ZX Auto

GONOW

FOTON

Others

32%

29% 27%

28% 27%

31% 32%

0%

5%

10%

15%

20%

25%

30%

35%

2006 2007 2008 2009 2010 2011 2012H1

145

187 199

256

379 394

222

24%

29%

6%

29%

48%

4%

18%

0%

10%

20%

30%

40%

50%

60%

0

50

100

150

200

250

300

350

400

450

2006 2008 2010 2012H1

Un

it '000

Domestic Pick-up truck sales volume Sales volume(LHS,000)

Domestic Pick-up truck sales volume Growth（RHS）

44,726 54,955

63,235

75,341

98,643

121,673

23%

15% 19%

31%

23%

0%

5%

10%

15%

20%

25%

30%

35%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2006A 2007A 2008A 2009A 2010A 2011A

Un

it

Pick-up truck sales volume (LHS,Unit)

Pick-up truck sales growth (RHS)



Catalysts 22

in China were only 394,000 units in China, accounting for only 2% of China’s total auto

sales volume.

Two major factors holding back the growth of China’s pick-up truck sales volume are: 1)

almost all capital cities and most prefectural cities impose restrictions on pick-up trucks in

downtown areas because pick-up trucks are classified as light trucks. 2) Pick-up truck

owners are required to apply for a business license plate for their vehicle, and pay higher

taxes for pick-up trucks than that for passenger cars. Pick-up trucks are even required to

undergo quarterly or monthly mechanical examinations.

As a result, more policy-based support is needed for further development of the pick-up

truck sector in China. Although we believe that restrictions on pick-up trucks are unlikely

to be lifted in the short term, we noticed that some large pick-up truck manufacturers

have already made proposals to the National People’s Congress, suggesting to scrap the

restrictions on pick-up trucks in downtown areas. If these proposals are passed, Great

Wall will be the biggest beneficiary.



Forecasts & Valuation 23

Forecasts & Valuation

1 Profit forecasts

1.1 Forecasts

Our profit forecasts for 2012/13/14 are as follows:

Exhibit 31: Earnings forecasts

2012E 2013E 2014E

Revenue (RMB mn) 39,629 47,076 53,029

y-o-y chg (%) 32 19 13

Pre-tax profit (RMB mn) 5,790 6,694 7,321

y-o-y chg (%) 40 16 9

Profit attributable to shareholders (RMB mn) 4,842 5,595 6,117

y-o-y chg (%) 41 16 9

EPS (RMB) 1.59 1.84 2.01


1.2 Sensitivity analysis

We assume no material changes in government restrictions on the use of pick-up trucks

in the coming three years, which will weigh on the growth of this business segment.

However, given the low penetration rate of vehicles in tier-three and tier-four cities,

demand for pick-up trucks will grow steadily due to features such as comfort and load

capability. As a leading producer, Great Wall’s sales growth will be basically in line with

the industry average. Besides, capacity bottlenecks will constrain the growth of the

pick-up truck business, if the company does not expand capacity (its production capacity

is 125,000 units currently).

SUVs and passenger cars are two potential explosive growth drivers for Great Wall,

whose performance will greatly affect its profitability and growth prospects going forward.

Therefore, we conducted a sensitivity analysis on the sales volume of SUVs and

passenger cars and the company’s 2012 net profit.

Exhibit 32: Sensitivity analysis on the sales volume of SUVs & passenger cars and

Great Wall’s 2012E net profit (RMB bn)

The sales volume of passenger cars (unit)

152,867 171,975 191,083 210,192 229,300

The sales volume of SUVs (Unit)

208,289 4,043 4,119 4,195 4,272 4,348

234,325 4,366 4,443 4,519 4,595 4,671

260,362 4,690 4,766 4,842 4,918 4,995

286,398 5,013 5,089 5,166 5,242 5,318

312,434 5,336 5,413 5,489 5,565 5,641

Note: The benchmark is highlighted in grey.





Exhibit 33: Sensitivity analysis on the sales volume of SUVs and passenger cars

and Great Wall’s 2012E net profit

The sales volume of PC (Relative to base assumption)

-20% -10% 0% 10% 20%

The sales volume of SUVs (Relative to base assumption)

-20% -17% -15% -13% -12% -10%

-10% -10% -8% -7% -5% -4%

0% -3% -2% 0% 2% 3%

10% 4% 5% 7% 8% 10%

20% 10% 12% 13% 15% 17%


Based on our sensitivity analysis, the SUV business is the most important growth driver

for Great Wall’s 2012E results. Every 10% sales growth of SUVs will lead to a 7%

increase in net profit, while every 10% sales growth of passenger cars will result in only a

2% increase in earnings.

Under our assumptions for Great Wall, the sales volume of SUVs and passenger cars are

260,000 and 191,000 respectively, which are different from management’s growth targets

(of 205,000 and 220,000 respectively in 2012). We estimate 2012E sales of SUVs will

exceed the target set by management, mainly because the H6 will continue to be well

received in the market and the redesigned M4 SUV will also contribute a portion of the

SUV sales. The better-than-expected growth of the SUV business will be a major support

for its performance, as the ASP of SUVs is higher than pick-up trucks and sedans.

1.3 Valuation screening

We believe Great Wall is one of the self-branded automakers with the biggest potential,

and its ‘Focus Strategy’ and ‘Platform Sharing Strategy’ will give the company more

competitive advantages than peers in the long term. The company has already gained

first-mover advantages in the pick-up truck and SUV businesses, and it has maintained

steady growth in its passenger car business. As such, its business expansion should be

steadier than its peers.

We used PE as our primary method for valuing Great Wall. We forecast a prospective PE

of 11.2x/9.6x/8.8x for 2012/13/14 respectively. Its valuation is in the medium range of the

industry average (Exhibit 34).

Exhibit 34: Valuation comparison (PE x)

Stock Code Company 2012E 2013E 2014E

0175.HK Geely Automobile Holdings 11.8 10.3 8.9

0489.HK Dongfeng Motor Group Company 6.6 6.1 5.7

1114.HK Brilliance China Automotive Holdings 16.6 13.1 10.8

2238.HK Guangzhou Automobile Group 7.7 6.0 5.2

1211.HK BYD 31.9 21.9 18.4

2333.HK Great Wall Motor 11.4 9.6 8.3

Average 14.3 11.2 9.6

Our estimates Great Wall Motor 11.2 9.6 8.8

Source: Wind, Guosen Securities (HK)

Trading at 11x 2012E PE, we think that the current price already factored in most of

the growth potential for this year. However, our channel checks show that the

demand for Great Wall’s SUV models are still very strong at the moment and it’s likely




that the company can achieve record sales in the coming months once capacity

constraints are eased. We derived a 12-month target price of HK$24.1 based on

12.4x 2012F PE.

2 Risks

The sales growth of vehicles in China, passenger vehicles in particular, will be

negatively affected by the economic slowdown.

A fierce price war erupts in the medium to low-end auto market, as JV automakers

might launch a large number of models to compete in this market segment.

Unfavourable central government policies that hinder the survival and development

of self-branded automakers.

Major large-scale quality issues with its key models (H6 and C50) significantly

damaging its brand reputation.

3 Closing notes to the buy-side analyst

We believe Great Wall is one of the self-branded automakers with the biggest growth

potential and the highest investment value. The company firmly sticks to its ‘Focus

Strategy’, and its three major models are all appropriately positioned and have

already made considerable achievements. Its manufacturing facilities are highly

effective, as the company has completed development of a large number of models

with various configurations and shapes by making good use of its existing

manufacturing platforms. Besides, the company has the highest profitability and the

strongest financial position in the industry, as it has robust cash flow and maintains a

‘zero-debt’ strategy. The aforementioned advantages will give Great Wall a higher

valuation premium than peers in the long term.

The government is highly unlikely to launch another massive stimulus package for

auto purchases. More than 56% of oil consumption in China was satisfied by imports

in 2011. As a major consumer of oil, the rapid growth in auto sales will significantly

threaten China’s energy safety. In addition, the congestion issues in cities and

environmental problems caused by surging automobiles have become major

concerns for the government and citizens alike. All these factors will reduce the

possibility of another major stimulus package. We think that stimulus focused on

small-engine vehicles is probable. But this will only marginally improve Great Wall’s

sales as the growth driver of the company is large-engine SUVs.

Over 98% of Great Wall’s sales are by car dealers, and most of the dealers have

adopted the third-party agreement as their means of settlement for loans. Under the

third-party agreement, Great Wall’s revenues will not be recognised until car dealers

make the payment by honouring the notes and receive the automobile certificate

pledge from banks. Therefore, its revenue-recognition policy is highly sound, and it is

not necessary for the company to build up high inventory at dealers.




Exhibit 35: Income statement Unit: RMB mn 2010A 2011A 2012E 2013E 2014E Note

Total operating revenue 22,986 30,089 39,629 47,076 53,029 Rising ASP and sales volume drive up income growth

Total operating costs -20,073 -26,105 -33,926 -40,524 -45,862

Including: Operating costs -17,298 -22,594 -29,486 -35,201 -39,867 Gross profit margin rises as product mix improves

Business taxes and surcharges -811 -1,052 -1,387 -1,648 -1,856

Selling expenses -1,070 -1,193 -1,466 -1,789 -2,015 Assume selling expenses are equivalent to 3.8% of sales revenue

Administrative expenses -874 -1,284 -1,664 -1,977 -2,227

Financial expenses 8 23 119 141 159 The company adopts “zero-debt” strategy

Impairment losses of assets -27 -5 -42 -50 -56

Add: Gains or losses from changes

in fair values

-2 - 4 6

Investment income 56 24 8 43 43

Including: share of profit of associate

and jointly controlled entities

42 12 -3 23 21

Operating profit 2,968 4,012 5,711 6,600 7,215 Operating profit keeps increasing

Add: Non-operating income 82 126 119 141 159 Assume the share it takes up as % of income declines to 0.3%

Less: Non-operating expenses 9 8 40 47 53

Including: Loss from disposal of

non-current assets

4 3 1 3 4

Total profit 3,041 4,131 5,790 6,694 7,321

Less: Income tax expenses 214 620 868 1,004 1,098 Assume the income tax rate remains at 15%

Net profit 2,827 3,511 4,921 5,690 6,223

Net profit attributable to shareholders

of the parent company

2,701 3,426 4,842 5,595 6,117


Exhibit 36: Balance sheet

Unit: RMB mn 2010A 2011A 2012E 2013E 2014E Comment

Cash 3,095 7,107 8,603 12,426 15,605 The company has ample cash

Bills receivable 7,726 8,703 11,889 13,887 15,909 The company recoups investment mainly through bills receivables

Accounts receivable and other receivables 1,529 1,330 2,180 2,448 2,917

Prepayments 355 361 793 942 1,061 Assume it makes up 2% of revenue

Inventories 2,104 2,777 3,547 3,916 4,457 Inventory turnover days are kept at 39 days

Other current assets 16 96 119 141 159

Total current assets 14,825 20,374 27,129 33,761 40,107

Long-term equity investment 147 70 151 151 151 Assume it remains unchanged

Fixed assets 5,360 7,392 9,146 10,548 11,983

Construction in progress 1,953 3,050 2,378 2,589 2,651 It began the construction of plants in Tianjin and Xushui

Intangible assets 1,111 1,869 2,180 2,354 2,386

Deferred income tax assets 297 352 515 612 689

Other non-current assets 6 27 27 27 27

Total non-current assets 8,874 12,761 14,397 16,281 17,888

Bills payables 3,376 3,978 5,152 6,355 7,424

Accounts payable 4,904 6,034 8,155 9,415 10,341

Prepaid deposits from customers 2,440 2,711 3,383 4,237 4,773

Salaries payable 341 502 616 732 824

Taxes payable 179 284 282 335 377

Other current liabilities 648 1,205 1,609 2,138 2,505

Total current liabilities 11,887 14,714 19,197 23,212 26,244

Non-current liabilities 1,410 1,400 1,357 1,307 1,250 The company continues to adopt the “zero-debt” strategy

Total liabilities 13,298 16,113 20,554 24,519 27,494

Total equity 10,400 17,022 20,971 25,523 30,501 Assume the company doesn’t issue new shares

Total liabilities and shareholders’ equity 23,698 33,135 41,526 50,042 57,995

Guosen Securities (HK)



27

Information Disclosures

Stock ratings, sector ratings and related definitions

Stock Ratings:

Buy: A return potential of 10 % or more relative to overall market within 6 – 12 months.

Neutral: A return potential ranging from -10% to 10% relative to overall market within 6 – 12 months.

Sell: A negative return of 10% or more relative to overall market within 6 –12 months.

Sector Ratings:

Buy: The sector will outperform the overall market by 10% or higher within 6 –12 months.

Neutral: The sector performance will range from -10% to 10% relative to overall market within 6 –12 months.

Sell: The sector will underperform the overall market by 10% or lower within 6 – 12 months.

Interest disclosure statement

The analyst is licensed by the Hong Kong Securities and Futures Commission. Neither the analyst nor his/her associates serves as an

officer of the listed companies covered in this report and has no financial interests in the companies.

Guosen Securities (HK) Brokerage Co., Ltd. and its associated companies (collectively “Guosen Securities (HK)”) has no disclosable

financial interests (including securities holding) or make a market in the securities in respect of the listed companies. Guosen Securities

(HK) has no investment banking relationship within the past 12 months, to the listed companies. Guosen Securities (HK) has no

individual employed by the listed companies.

Disclaimers

The prices of securities may fluctuate up or down. It may become valueless. It is as likely that losses will be incurred rather than profit

made as a result of buying and selling securities.

The content of this report does not represent a recommendation of Guosen Securities (HK) and does not constitute any buying/selling or

dealing agreement in relation to the securities mentioned. Guosen Securities (HK) may be seeking or will seek investment banking or

other business (such as placing agent, lead manager, sponsor, underwriter or proprietary trading in such securities) with the listed

companies. Individuals of Guosen Securities (HK) may have personal investment interests in the listed companies.

This report is based on information available to the public that we consider reliable, however, the authenticity, accuracy or completeness

of such information is not guaranteed by Guosen Securities (HK). This report does not take into account the particular investment

objectives, financial situation or needs of individual clients and does not constitute a personal investment recommendation to anyone.

Clients are wholly responsible for any investment decision based on this report. Clients are advised to consider whether any advice or

recommendation contained in this report is suitable for their particular circumstances. This report is not intended to be an offer to buy or

sell or a solicitation of an offer to buy or sell the securities mentioned.

This report is for distribution only to clients of Guosen Securities (HK). Without Guosen Securities (HK)’s written authorization, any form

of quotation, reproduction or transmission to third parties is prohibited, or may be subject to legal action. Such information and opinions

contained therein are subject to change and may be amended without any notification. This report is not directed at, or intended for

distribution to or use by, any person or entity who is a citizen or resident of or located in any jurisdiction where such distribution,

publication, availability or use would be contrary to applicable law or regulation or which would subject Guosen Securities (HK) and its

group companies to any registration or licensing requirement within such jurisdiction.”



28

Research Coverage (H-Shares)

Analyst Sector coverage Desk line e-mail

Michael Wu Responsible Officer 0086-755-28995338 [email protected]

Rock Chen Macro & Banking 0086-755-61865350 [email protected]

Albert Xu Quantitative Analysis & Market Strategy 00852-28996158 [email protected]

Peter Cao Property, Hospitality & Gaming 0086-755-61865385 [email protected]

Helena Qiu Healthcare 00852-28998328 [email protected]

Stephy Wong Consumer & Retail 00852-28993141 [email protected]

Todd Yang Food & Beverage 0086-755-61865350 [email protected]

Bill Fan Electronics & Home Appliances 00852-28998331 [email protected]

Eric Qiu Media, Software & Internet 00852-28993120 [email protected]

Steven Lu Oil & Gas 00852-28998327 [email protected]

Ethane Cheng Construction & Building Materials 00852-28998329 [email protected]

Maggie Zheng Furniture & Office Supplies 0086-755-61865397 [email protected]

John Lu Auto, Machinery & Transport Equipment 0086-755-61865359 [email protected]

David Lam Coal & Steel 00852-28993130 [email protected]

Richard Gao Non-Ferrous Metals & Futures 00852-28993141 [email protected]

Thomas Zhang Futures & Non-ferrous Metal 00852-28996756 [email protected]

Vivian Fu Power & New Energy 00852-28993143 [email protected]

Helen Tang Education & Entertainment 0086-755-61865351 [email protected]

Sales Contact

Roger Chiman Managing Director +852 2248 3598 [email protected]

Cancy Kong Vice President +852 2248 3538 [email protected]

Chris Berney Managing Director +852 2248 3568 [email protected]

Cecilia Liu Associate +852 2248 3588 [email protected]

Andrew Collier Director +852 2248 3528 [email protected]

Gary Wong Analyst +852 2248 3548 [email protected]

Joe Chan Director +852 2248 3578 [email protected]

Ma Ning Sales Assistant +852 2248 3536 [email protected]

mailto:[email protected]


















Documents

Great Wall Motor (2333.HK) Target BUY · Great Wall Motor (2333.HK) October 15, 2012 | HK & China Guosen Securities (HK) Please read the Interest Disclosures and the Disclaimers at