Great Wall Motor Can Drive Higher Says Jefferies

Shares in Great Wall Motor (2333.HK) have slipped more than 16% since reaching a 2-year high in October as new car sales growth remained weak.

However, things are beginning to look up for China's biggest maker of sports utility vehicles following the launch of its new 1.5T version of the H6 last weekend, according to Jefferies. Analyst Patrick Yuan expects the car maker to regain growth and expand margin with the new H6 and WEY brands:

New 1.5T version of H6 to boost sales. Great Wall launched its new 1.5T version H6 last weekend, 7 months after the launch of its 1.3T and 2.0T versions in April. In 2016, 1.5T represented 93% of old H6 sales. Half of the H6s sold in Oct were already new H6s (with only 1.3T & 2.0T). Now with an improved 1.5T engine (higher power but less fuel consumption), we expect it to lead the growth soon.

Margin expansion with new cars. The new H6 1.5T's listing price was lifted 12% from Rmb113,000 to Rmb126,000. The company also guided that the new H6 has a higher margin than the corporate level (24.6% in 2016). Next year, new H6 cars will adopt a self-developed 7DCT gear box, which may reduce the cost further.

More WEY dealerships = more sales. Current WEY sales are partially restricted by limited dealerships as dealers were concerned about the new brand's sustainability and thus slow in store construction. Right now, the clearer portfolio of WEY (VV3, VV5&6, VV7) and proven monthly sales may rule out concerns, in our view. More stores will be built up next year as Great Wall will introduce non-Haval dealers to enter WEY's distribution channel.

Yuan, who also believes the market is overly concerned with new energy vehicle credit scheme, has upgraded the stock to buy from hold and raised his target price to HKD10.50 a share (from HKD9.60), implying 11% upside.

Shares in Great wall Motor were up 1.8% Friday bring the gain for the year to 30%.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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