Chinese carmaker Great Wall worries investors as it spends 1b yuan on SUV discounts
Great Wall, China’s biggest maker of SUVs, has raised investor concerns over its heavy discount promotion policy amid intensifying competition, even though it posted 30 per cent earnings growth in 2016.
Price cutting is “unavoidable” and will continue amid intense competition, Wei Jianjun, chairman of the carmaker, said on Monday. The company, based in Hebei province close to the capital of Beijing, announced a 1 billion yuan (US$145 million) discount promotion for its Haval SUVs last Thursday.
“Sales promotion will not stop but it helps to consolidate the market,” said Wei, who expects a promotional costs for the company’s flagship Haval SUV reach at 500 million yuan this year.
Great Wall reported that its net profit rose 30.9 per cent to 10.55 billion yuan for 2016. Basic earnings per share were 1.16 yuan compared with 0.88 yuan in 2015.
However, operating costs surged on rising promotion costs, up 30.1 per cent to 7.4 million yuan in 2016 from 5.7 million yuan the previous year. Gross profit margin decreased 0.62 percentage point to 24.58 per cent in 2016 from 25.20 per cent the year before.
“Margins will continue to contract in coming years and we maintain our ‘sell’ rating on Great Wall due to new product launches, competition and its new brand Wey,” said Lo Ka-leong, an analyst from Kim Eng Securities. “Great Wall may spend even more on promotions in the second half of this year amid a series of new H6 launches.”
As a result, it will be difficult for the company to maintain market share and profitability, Lo added.
Goldman Sachs also expects the carmaker’s margins will come under further pressure due to price reductions on its SUVs.
However, Great Wall’s chairman said the company’s gross profit margin for 2017 will rise to 26 or 27 per cent thanks to margins for its new Wey SUV model, which will be unveiled at the Shanghai auto show in April.
“The margins for new SUV model will be higher and we expect sales of 5,600 Wey units this year without offering discount prices,” said Wei. “The promotion cost for Wey are expected to be 200 million yuan and we will upgrade 150 sales stores for [the model].”
Lo said the Wey brand would target the mid-to-high end market – the 150,000 to 200,000 yuan price range – which means Great Wall will compete with new rivals entering the SUV market.
Great Wall said it expects a new energy vehicle to be unveiled by the end of next year.
Wei also said the company has terminated its battery supply deal with Korean battery-maker LG amid the increased tensions between Beijing and Seoul over the US anti-missile system being installed in Korea. While Great Wall is now sourcing batteries from China’s Contemporary Amperex Technology, Wei added; “I think the performance of the battery from the new supplier will be slightly worse than LG.”