Great Wall Motor’s shares rally on upbeat Morgan Stanley research

Great Wall’s shares jumped 6 per cent in intraday action in Hong Kong on Thursday after Morgan Stanley assigns overweight rating

PUBLISHED : Thursday, 06 July, 2017, 3:55pm
UPDATED : Thursday, 06 July, 2017, 3:55pm

Great Wall Motor, China’s biggest maker of sports utility vehicles (SUVs), saw its shares rise sharply in Hong Kong trade on Thursday, reflecting its biggest daily rise in a month, after Morgan Stanley issued an upbeat research report which highlighted the company’s new automotive brand Wey.

The Chinese carmaker, based in Hebei province close to Beijing, surged 6 per cent to HK$10.4 at midday on Thursday, its biggest intraday rise since June 12.

Morgan Stanley upgraded its rating for Great Wall to overweight from equal-weight and lifted its Hong Kong share price target to HK$13.0 from HK$8.7.

“We expect SUVs to be the major growth driver of the passenger vehicle sector, which will benefit leading SUV players such as Great Wall Motor,” according to Morgan Stanley equity analysts Jack Yeung and Eddy Wang. “We are positive on Great Wall’s initiatives to tap into the mid-to-high-end SUV segment and believe the WEY brand will improve its sales growth and profitability in the long run.”

Morgan Stanley forecast China domestic SUV sales to increase at a 16 per cent compound annual growth rate from 2016 to 2020. Domestic brands should account for about a third of the mid-to-high-end SUV segment by the end of 2020.

“Wey will lift our company’s gross profit margin to 26 per cent or 27 per cent this year,” said Wei Jianjun, chairman of Great Wall earlier this year. “We will spend 200 million yuan to promote the Wey and upgrade 150 sales stores around the country for the model.”

Wei said he chose the name the new SUV brand after his own family name.

Morgan Stanley analysts said sales of the Wey brand would likely ramp up quickly in the second half and emerge as a growth driver for Great Wall in the next five to 10 years.

“We expect the increasing contribution from the Wey brand will help to improve overall profitability of Great Wall,” said Morgan Stanley’s Yeung.

However, Morgan Stanley warned that Great Wall will likely announce relatively weak results at its interim report in August, owing to rising expenses and consumer price deflation.

In the first half of this year, chairman Wei said price cutting is “unavoidable” and would continue amid intense competition. The company announced a 1 billion yuan (US$145 million) discount promotion for its Haval SUVs in March.

“Great Wall’s channel destocking in the second quarter of 2017, which included some price cut

initiatives, has successfully lowered inventory levels on the dealer side, but it has also dragged down margins in the second quarter of 2017,” Yeung said.

He added that promotional activities for the Wey brand in the second quarter will likely bear fruit in the second half.