KEY HIGHLIGHT: On 25 Oct 2019, GWM announced its 3Q19 results with an earning surprise. Revenue achieved RMB21.2bn in 3Q19, up 18% YoY, slightly missed consensus estimate of RMB22.4bn. Profit attributable to the equity holders was RMB1.4bn, up 506% YoY, well above consensus estimate of RMB330mn. The earning surprise comes from margin improvement and cost control on S&D expense and finance expense. We upgrade our TP to HK$5.86 but maintain HOLD rating given that the upside potential was less 10% threshold.
- In 3Q19, total sales volume of GWM was 230,575 units, an increase of 12% YoY. The YoY increase in sales volume was partially due to the low base in 2018. GWM's cumulative sales in the first three quarters of 2019 were 724,000 units, representing nearly 68% of its revised annual targets (1.07 mn). As entering into the 4Q19, the high base in 2018 will create more challenges in sales volume.
- In 3Q19, GPM increased to 19% compared with 15% in 1H19 due to production cost and VAT reduction. The retail price increase of Stage-6 vehicles also leads to margin improvement. In addition, great cost control on S&D expense and finance expense contributes to the bottom line surprise. We believe the margin will revert back to 16% to 17% range going forward while the cost control measure will only be effective in short-term period.
- In Sep, GWM exported a total of 5,318 units, an increase of 20.3% YoY. GWM's cumulative exports in the first three quarters of 2019 was a total of 50,754 units, up by 40.9% YoY. With the completion Tula factory in Russia, GWM has sold over 1K units in the Russian market for three consecutive months, with a growth rate of 458% YoY. However, we believe the percentage contribution from oversea market is still limited.
- The share incentive plan was vetoed by H share shareholders on October 25, 2019. The company launched the SIP which consists of two components, namely sales volume performance (65%) and net profit performance (35%). The specific sales volume targets in 2019E/20E/21E are not less than 1.07mn, 1.15mn and 1.25mn respectively whereas net profit targets in 2019E/20E/21E are not less than RMB4.2bn, RMB4.5bn and RMB5.0bn respectively.
- We maintain our topline forecast and raised our earnings forecast in 2019E/20E/21E by 30%/17%/15% due to margin improvement and cost control. Our TP is revised up from HK$4.99 to HK$5.86 (based on same 11x 2020E P/E) with an upside of 7.16%. Even though the Company has an excellent performance in short-term, we believe the stock price has limited upside given its current price. Reiterate HOLD.
