Despite predictions that auto sales in China would be grow around 5% in 2017 thanks to the tax increase from 5% to 7.5% on smaller engine liter cars, homegrown Great Wall Motors, 2333 hk, sold 8.8% more cars in the first quarter than the prior year. Unfortunately, in its battle for sales, its gross margin dropped from 25.3 to 22.1. This, coupled with an increase in selling and administration expense increases as percent of sales resulted in a net profit decline of 18.3% for the first quarter. (Without subsidies represented in non-operating income and an apparently lower tax rate, the decline would have been closer to 22%).
The decline came despite Great Wall’s success and emphasis in the popular SUV segment.
As shown above, SUV’s continue to make up the majority of Great Wall’s sales and grew 15.2% in the first quarter. It’s most popular model, the Haval 6, however, is showing its age and actually declined in the first quarter. While the year to date decline is small, the month of March 2017 is the first monthly year on year decline in sales of the Haval H6 since 2015. March is generally a more stable month than January or February since year on year comparisons are skewed by the differing time of the Chinese New Year. It is also, therefore, a more critical month to predict future performance.
As shown in the earlier chart, the new Haval H2 which has been characterized as a sub-compact SUV, has picked up some of the Haval H6’s slack but its March sales are still just a little over half of the H6. The quarterly release neglected to provide any data on gross margins per vehicle although it could be assumed that the smaller H2 has a lower gross margin than the H6. The H6 has been refreshed for 2017 and featured at the Shanghai Motor Show but hasn’t yet hit dealers. Since buyers were aware of the new model, this could have negatively impacted sales year to date and also forced the company to reduce prices to make room for the new model.
Exports, while showing an increase both monthly and year to date, are still a tiny portion of Great Walls sales. Reviews from car sites in Australia and New Zealand have been lukewarm with an emphasis on low price for lots of options.
Great Wall’s stock, particularly given its year to date performance, should be under pressure due to its declining profits.