Tag Archives: Great Wall Motor

Struggling Great Wall Faces Head-On Collision with Honda Motors

Great Wall h6 pic

Great Wall Motors, 2333hk, already grappling with declining margins, has been blind-sided by a lawsuit from Japan’s Honda Motors, HMC, according to Caixin.

Japanese automaker Honda Motor Co. is taking legal action against Chinese car-maker Great Wall Motors, claiming it infringed on its two patents.

Honda requests Great Wall to stop selling its SUV model of Haval H6. It is also demanding more than 200 million yuan for what it claims were economic losses it suffered, according to a statement of the Beijing Intellectual Property Court dated on Jan. 31.

Press officers at Great Wall said they were unaware of the lawsuit and declined to comment.

While the suit will take time, a halt in sales of the Haval H6 would decimate the already struggling auto maker.   The H6 has been struggling to maintain its high place among China SUV’s, with its sales representing a major percentage of Great Wall’s total units: 47% in 2017; and 54% in 2016.

Great Wall December 2017

As can be seen, the Haval H6 has been Great Wall’s most popular vehicle, but its sales have been sliding downward despite Great Wall’s increases in promotions.  These promotions have decimated its bottom line – with 2017 annual sales projected of 101 Billion rmb, an increase of 2.8%, from a unit sales drop of .4%, Net Profit plummeted 52%.

Great Wall H6 Monthly Sales Historical

Great Wall Annual 2017

Great Wall’s “profit warning”, with few details, blamed the major drop in net margins on increased promotions and research and development costs.  It does, however, match up with the 9 month interim report where net profit dropped by 59.9% despite a minor sales drop of .6%.

Great Wall 3Q 2017

Great Wall is one of China’s few auto companies to sell only China made and created vehicles.

No H6 Saviors

In SUV’s, which make the bulk of Great Wall’s Sales, the H2 showed promise for the year, with a 9.2% increase but for the month of December was down 48% year on year. Great Wall has touted its new luxury models VV5 and VV7, which have shown sales, but combined with other new models represented only about 15% of the total unit sales for 2017.

Great Wall Other Models

Great Wall Monthly Sales All Units

Room for the Stock to Fall

Great Wall’s stock has failed to match the H.S.C.E.I index performance.  While it has a low p/e of 7, (vs. darling Geely at 38), it has lower to go without a major shakeup. It can’t look to the government. Thus far, the government has shown no intent to stimulate the auto sector, having discontinued the tax discount started in 2016 and halved in 2017.  Passenger sales in China increased only 1.35% in 2017, with a sales tax decline and a booming stock market.  Without outside stimulus, Great Wall will have to look internally.  It’s CEO and founder, Wei Jianjun, has his work cut out for him.  However, the rumors of a tie-up with Fiat Chrysler have been squashed.  This was not surprising given its established and growing relationship with GAC, 2238 hk.

Great Wall Stock

 

 

 

 

 

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Geely Stock Hits the Brakes on 1st Half Earnings

geely first half

Despite a first half where sales prices and units drove upwards,  Geely 175, HK, halted its continued rise. It lost steam after far surpassing the Hang Seng year to date and on a 12-month basis.

GEELY 175

Geely Stock up

Here are a few of the reasons for the rise.

First half gross revenue up 31% on sales volume increase of 11%.

First half sales volume increased by 41% in June over 2015; ytd. up 11.2% over 2015.

First half ex-factory average sales price up 17% year on year.

First half net profits up 34.8% on higher volume, better pricing mix, stable gross margins and lower operating costs as a percent of revenue.

So why the drop?  One analyst at Gutai securities blamed it on the overall auto market in China falling faster than projected in the last half.

Geely’s warning – to investors and regulators:

Despite the improved performance by the indigenous brands in China recently, the implementation of more stringent regulatory requirements in fuel efficiency, product warranty, product recall and emissions standards in China could put tremendous cost pressure on motor vehicle manufacturers in China. The impact could be even bigger for China’s indigenous brands given their relatively weak pricing power, and thus their difficulties to pass on the additional costs to their customers.

Further, the planned expiration of sales and purchase tax reduction policy by the end of 2016 could potentially shift some demand forwards from early 2017 to 2016, thus affecting demand for small and mid-size vehicles in early part of 2017.

Road Bumps

Export Declines

Exports remain challenging.  As I reported back in May,  hometown Geely and Great Wall have struggled with declining exports.  This has continued into July of 2016 and with political and economic turmoil in its targets in the Mid-East, South America and Africa is expected to continue throughout 2016.

Geely Greatwall Exports From HK filings 

Fortunately for Geely, year to date unit exports were 12,871 or only 4.5% of the total sold. This is not great for Geely’s international plans but does show what a minimal effect it has on current and projected sales.  (In 2015  Geely exported 24,342 units or about 9.6% of units sold).

Electric Vehicle Fraud and Subsidy Pains

After an initial surge toward electric vehicles, China has been coming to grips with subsidy fraud and lagging infrastructure support.  Geely admitted to a change in subsidy stance as a reason for selling two electric car related jv’s: Kandi and Ninghai Zhidou, which had combined 1st quarter losses of 137.5 million rmb.  A proposed agreement to a 3rd, independent party fell through with the company now proposing a sale of its interests to its parent, Geely Holding.  The breakdown is as follows:

Geely jv

The circular for the proposal had been delayed so is still not resolved.  Although losses are of concern, jv income has been a tiny proportion of net income.

SUV Reliance As Sedans Slip

As mentioned above, Geely has been helped by increased sale prices which has been due in part by SUV’S.  Geely has continued to move toward greater emphasis on SUV’S, while its sedans sales continue to slide.  Geely Monthly Type

Geely appears to have had success with this move.  It introduced 2 new vehicles in the first half, a new SUV crossover, the Emgrand GS and the Boyue SUV which replaced the NL3. The Boyue sold 10,128 in July, its first month while the Emgrand GS has sold 14,128 since its introduction – beating company expectations.  For the second half, a new compact SUV, the Vision will be launched as well as a Emgrand GL sedan and an Emgrand sedan hybrid. All of these cars have at least one version that would be under the 1.6 liter engine maximum to qualify for the 50% tax reduction effective in China until the end of December.

Great Expectations for the Last Stretch

While June was good, July was even better in terms of unit sales.  Geely reported that July sales were up over 64% from 2015 and up 16.75% year to date from 2015.  With Geely raising its annual projections from 600,000 to 660,000 units, it appears to be expecting this run to continue.  This will mean a shift of its sales at year end from 2015.

Geely august through dec.PNG

Geely’s sales definitely have been picking up steam.  If they continue as the company projected, they will be on track for the projected unit increase of 29%.  Momentum and the looming tax incentive deadline could push them there. Geely beat 1st half forecasts easily with eps up 36% vs. 18.9% and 30% vs. 23% projected on revenues.

geely first half forec

Forecasts from the Financial Times

Annual Projections

Currently, projections are for a bit over 46% increase in annual revenues and eps.  If this is an achievable target, it would leave room for the stock to climb with its moderate p/e even after its dramatic climb over the last 12 months.

Geely annual

Forecast from the Financial Times

China July Auto Sales Up, BAIC Skids Downhill From June to July

July Car 1

The China Passenger Car Association reported that July year on year sales increased by 23%. Ytd increases were 11% over 2015. Three Hong Kong car stocks with a combined market cap of 205 Billion hkd, (23 Billion usd equivalent), beat that rise. Geely 175 hk, Great Wall 2333 hk, and BAIC  1958 hk, all reported year on year monthly and year to date sales increases. Geely and Great Wall managed to drive up over 4% from June, but BAIC dove 27%.

3 car stock july changes

BAIC sells its own brand, Beijing Benz, but relies on Hyundai and Mercedes Benz for the bulk of its sales and profits.

BAIC July Sales Type

The drop was striking and defied continued increases by home-grown competitors Geely and Great Wall.

great wall july monthly

geely july monthly

baic july monthly %

Much has been made over the Chinese voracious appetite for SUV’S.  Geely and Great Wall are polar opposites in their reliance on SUV’S, with Great Wall relying heavily on SUV’S, particularly its Haval H6, which is considered a close clone of the 4th generation Honda CRV.  Other types have had little growth, including  the Wingle pickup, with pickups banned  in major cities although some restrictions are easing along with a hope for more acceptance. BAIC only breaks down the sales by type for its own brand, with SUV’s ramping up to 50% of 2016 unit sales from only 7% in 2015.

Geely Monthly Type

great wall july types 2

Based on 2015 unit sales for Geely and Great Wall, there do appear to be seasonal sales variances with the highest sales occurring in the last quarter.  (BAIC was excluded since it didn’t provide monthly sales data for the full year of 2015).

great wall geely seasonal

China sales growth is critical for these companies, with Geely and Great Wall exports shriveling, (BAIC doesn’t report any exports).

Geely Greatwall Exports

Note: All charts and data were prepared from HK Filings with the exception of the stock data, which was from Bloomberg.  March was primarily used as the starting point since January and February are extremely variable due to Chinese New Year.

Despite the year on year overall increases, the stocks in Hong Kong are showing  a moderate trailing p/e ratio; with Geely outperforming the Hang Seng on a year to date and 12 month return basis.  Geely has recently completed the acquisition of two subsidiaries, Shanxi & Baoji, with combined capacity of 300,000 vehicles, construction completion expected in 3Q 2016.

3 car stocks

None of these companies provide sales dollars in their monthly updates.  Interim results have not yet been presented.  BAIC’s Q1 showed an increase in revenue of 30% but a drop in net profit of 25% due to lower JV numbers with Hyundai and increasing operating losses for its own brand.  The increase in profit was mainly due to Beijing Benz, which is owned 49% by Daimler.  Greatwall’s Q1 showed an 8% increase in revenues but a 4.5% decrease in profit, thanks to a lower gm and operating margin. Geely doesn’t provide quarterly statements.

Great Wall Q1

BAIC Q1

 

 

Auto Exports Hit the Brakes for Geely and Greatwall

China Cars

Over the weekend, China reported an a year on year April increase  in overall exports of  4.1 percent in yuan terms from a year earlier equivalent to a  1.8 percent decline in dollar terms. Cumulative export data for the year showed more weakening. Shipments declined 2.1 percent in yuan terms in January to April versus the same period a year earlier, while slumping 7.6 percent in dollar terms.

For Chinese auto manufacturers Geely, 175 HK, and Greatwall, 2333 HK, however, the decrease in exports was much more pronounced.

Autos April

(HKex Filings)

Looking at just 2016, it would appear that for both, exports are incidental.  However, going back to 2013, they had ambitious goals for exports and had achieved much higher sales abroad.

annual exports

(Hk Filings, production reports)

Geely, which bought Volvo, is the smaller of the 2 in terms of units produced and sold and market cap.  For Geely, exports dove from 21.6% of units in 2013 to just 5% in 2015. Greatwall, the maker of Haval and Great Wall Brands, didn’t reach the heights that Geely had in exports but went from 9.7% in 2013 to 2.7% of total units sold in 2015.  Both companies blamed political and economic instability in their overseas markets.  With China growth in car sales slowing, (domestic manufacturers reported a 7.3% increase in passenger car units in 2015 but this was a 2.6% decline from the prior year’s growth), these manufacturers could use an injection from exports.

Neither companies have fared too well this year on the Hong Kong exchange compared to the Hang Seng, which has dropped 8.23% ytd.

car stocks

Although both produce popular SUV’S, with Greatwall claiming to be the largest SUV manufacturer in China, competition is stiff between domestic and international producers.  Both companies saw a cumulative increase in the January to April period, but it was far below the projected 6% plus hoped for.  This is particularly worrying given the 50% cut in  in the 10% sales tax on cars with engines lower than 1.6 liters, placed in October, 2015 and effective through the end of this year.  (In 2015, per CAAM, the Chinese Association of Automotive Manufacturers, stated that cars with engines of 1.6L or less made up 68.8% of the 21.1 million domestically sold Chinese passenger vehicles. )

April sales

Sequentially, units actually declined from March, but based on prior years there is seasonality involved.

seasonal sales

 

(Sources -HK filings on monthly sales and production reports)

While both companies publish monthly sales figures by units, the fight for market share has led to profit declines.  Although Great Wall showed an 8% increase in revenue for the first quarter, thanks to a 9.8% increase in operating costs as well as a 13.7% increase in other costs, Net Profit After Tax declined by 5.5%.  This decline came despite an increase in autos sold of 5.7%.

gr wall q1

(HK Filing)

For 2015, Greatwall increased revenues by 21%, but, as costs increases surpassed revenue increases, net profit rose only an .2%. NOI as a percent of revenue dropped from 12.8% to 10.6%. Greatwall annual units sold increased by 19%.

Geely hasn’t published its quarterly report as of this time. Annually, Geely increased revenue by 38.7% with an increase in net profits of 58%, thanks partly to lower costs as well as higher JV income and government grants representing 37% of net to shareholders. Geely sold 22% more cars in 2015 than 2014.

cars annual

In short, despite the tax decline and hopes for sales increases, neither of these made in China companies is a sure bet.

China AutoMakers Show Increase in Unit Sales

Geely Greatwall

Geely Filing

Greatwall Filing

Chinese automakers Geely, HK 175, and Greatwall, hk 2333, filings showed ytd increases of unit sales at 4% and 4.65%, respectively.  For April alone, increases diverged with Geely showing a higher increase year on year.  Both declined more than the Hang Seng;’s overall daily drop of .37% .  Exports for the month of April plunged for both, Geely dropping by 56% while Greatwall declined by 17%.  Only Greatwall reported ytd. export volume for April : a 27% decline.

China Indexes Stall

sh hk upd

China indexes stalled, with slight drop despite gdp meeting estimates.  Apparently, after earlier export data, all the good news had been absorbed.  Both indexes held onto impressive gains for the week.

China met projected gdp growth target of 6.7% for the first quarter, down from last quarter’s 6.8%.  (Compared to full year 2014 gdp growth of 7.3%). Growth fueled by debt, primarily for SOE’S and local government infrastructure. Per WSJ,

Higher investment in property and infrastructure is also providing a boost to many of the industries that are beset by the excess capacity government has vowed to eliminate.

While investment in factories, buildings and other fixed assets grew 10.7% over the quarter, the rate was up 23.3% for state-owned firms and only 5.7% at private firms. China’s state-owned enterprises tend to be less profitable; last year their profits fell 21.9%, compared with a 3.7% increase for private companies. And the government has made nurturing the private sector—and the job growth it brings—a priority.

Cement production rose 24% year on year in March compared with an 8.2% decline in January and February combined, while crude steel rose 2.9% last month, compared with a decline of 5.7% in January-February.

Both of these industries are on the “over-capacity” list of industries which the government has promised to curtail.  Unfortunately, the conflict of interest between SOE majority ownership in these industries and SOE reform makes that less than likely.  For steel alone, the China Iron & Steel Association, CISA, reported that China had a capacity surplus of around 400 million tons, with utilization rates falling to 67% in 2015.  To put it in perspective, publicly traded steel major Arcelor Mittal, MT, NYX, in 2015 stated that capacity rates of it’s 4 large US hot strip mills, running at 70%, were well below optimal and would require some sort of change. (Andy Harshaw, CEO Arcelor USA).” It is not sustainable to operate multiple HSMs at low utilization rates when the same volume of steel could be produced by fewer HSMs at higher utilization rates.” Arcelor Mittal shipped 84.6 million tons of steel in 2015 per the annual report.  In that same report, it was stated that China exported 112 million tons, up 18 million tons from the prior year. This was on an overall reported production decline in China of 2%.  Exports were made to offset the Chinese consumption yoy decline of 4.5%.

Filings

Jiangxi Copper, HK 00358, down .922%, announces delay in circular from 3/18 to 4/15, now extending to 5/12/2016.  Delay reportedly related to financial details regarding its new share issuance and confirmations over “indebtedness statement.”  Got approval to issue new, non-public shares at last annual board meeting.  2016 has brought no clarity and lots of red flags:

  • Profit to Owners decline of 93%.
  • CFO resigns: 2/26/2016
  • Litigation: 3/22/2016: Trial over monies owed to Jingxi Subsidiary.  Principal and interest owed of 392.5 and 33.2 million rmb, respectively.  Court ruled in Jiangxi’s favor but plaintiffs appealed.  Ability to pay is another story.

See my weekend edition for more insight into this company.

China Shanshui Cement, HK 691, suspended. saga continues.  The company, which has had trading suspended since May 2015 in a brutal ownership fight, filing states that corporate seal held by former directors is invalid.  Is applying for new seal.  In the meantime, everything signed with that seal, (origination date is unclear), is invalid – including any and all filings.  As of the announcement, the company was aware of 102 lawsuits from creditors.

Great Wall Motor, HK 0233, down 2.446% responds to questions over declining gross margins from first quarter to last, risks on reliance on SUV’S.  Answers aren’t pretty. Promotions and competition are the underlying causes. Haval H8 & H9, were released in 2014 and 2015 but weren’t shown under specific sales.  Company states they were below expectations, with no material impact on earnings.  Haval H7 was projected to launch in 2015 – no explanation had been given why it didn’t. Company stated it adjusted the schedule to April, 2016. It was also asked to explain why the gross profit margin decreased from 26.6% in q1 to 22.9% in q2. Company stated it was focusing on its SUV sales, 82% of 2015 sales, which required promotions and employee compensation increases.

 

Shanghai Comp Hang Seng Maintain Upward Momentum

SH HK UP

China stayed positive as the Hang Seng inched upwards to go black for the year.

Notable Movers:

Life Insurance Companies: 

Life insurers got a boost thanks to an upgrade by Deutschebank, Although it recognized the potential negative impact on earnings of lower rates, it believed that the sector could benefit from a relatively mild rate decline, low guarantee rates, sufficient long-term assets (more than 10 years) to cover fixed-rate liabilities and low penetration. The research house reiterated all of the Chinese H-share life insurers under coverage at Buy. Industry top picks are CHINA LIFE and CHINA TAIPING, 00966 with upward adjustments of target prices to $29.9/ $30.8 from $27.8/ $27.4. Both stocks were rated at Buy.

China Life, HK 02628, up 3.027%

Ping An, 02318.HK, up 1.864%

AIA, 01299.HK up 1.613%

China Tiaping,  00966 HK, up 3.151%

Autos

Great Wall Motor, 02333.HK, up 3.645%, announced a pending release of it’s new SUV, Haval, H7.  While passenger car sales were up only about 6.9% overall in 2015, SUV’S have shown stronger in the Chinese market, up 46% in March over 2015, as reported in the Wall Street Journal.

Banks

Beleaguered HSBC, 00005.HK, up 1.98%,  rallied thanks to rumors that shareholders were opposing Executive Douglas Flint’s pay and continued position.

Computers/Electronics

Lenovo, 00992.HK, up  3.71%, continued its 3-day winning streak on the tails of its announcement that its PC deliveries ranked #1 in the world.

Filings of Note:

Zoomlion, 01157. HK, down 2.976%,  Profit Warning,  1st quarter loss to increase from 383.3 Mill rmb  in 2015 to 600 to 680 million rmb.  The opaque bidder on Terex, TEX NYX was equally opaque on its reasons but did mention personnel changes as well as currency fluctuations.  Year end 2015 saw a negative currency impact of 470 million rmb exacerbating a revenue drop of 22% and a profit after tax  drop of 95% thanks to an increase in finance costs of 70%. (An analysis in this blog to follow this weekend.)