As I highlighted in a previous blog post, automobile ownership in China represents a major theme of emerging market consumer growth, as more people enter the middle class and see their disposable income rise. In this post, I profile a Chinese automobile company in the WisdomTree Emerging Markets Consumer Growth Index (WTEMCG) that has the potential to capitalize from this trend: the Great Wall Motor Company (GWM).
The Great Wall Motor Company, as a brand, is to China what General Motors or Ford is to the United States.
• GWM is currently the number one SUV brand in China and has had the top-selling domestic SUV model for 10 consecutive years.1
• The company’s pick-up truck sales have ranked first in the Chinese market in terms of sales volume of pick-up trucks for 15 consecutive years.2
During the six-month reporting period ending June 2013, the Great Wall Motor Company sold 370,000 units of automobiles, representing a 41.33% increase from the same period in 2012.3 This was outsized growth compared to the Chinese auto industry in general, which saw 10.7 million units sold in the first half of 2013, or a 12.3% increase.4
According to the Great Wall Motor Company, “SUV models, especially those that boasted high price-performance, brand equity and stunning exterior design, continued to maintain a relatively high growth, with aggregate sales volume growth surpassing the overall growth rate of the PRC [People’s Republic of China] automobile market for several years in a row.”5
Great Wall Motor’s Haval H6 model continues to provide strong sales, while the newly launched Haval M4, a smaller SUV model, has also seen robust demand. Overall, the group’s SUV models saw a 77.96% increase in sales during the first six months of 2013 compared to the same period in 2012.
Historical Sales and Profitability
To put the recent growth in context, it is interesting to also note the company’s historical growth rate in sales and profitability:
Figure 1: Great Wall Motor Company Sales and Profitability (RMD Billions)
• Impressive Historical Growth – Similar to its most recent reporting period, the Great Wall Motor Company has seen impressive growth in sales and profitability over the past five years. Revenue is up by a factor of 5, while profits have grown by a factor of 11. Even more impressive than the annual growth rate was Great Wall’s ability to grow profitability twice as fast as sales over the period. Typically, when profitability increases faster than revenues, it’s a sign that a company is experiencing higher margins and increased efficiency, which is also beneficial for future growth.
• Profit Growth Exceeded Stock Return – As a result of these impressive results, Great Wall Motor Company stock appreciated over 511%, or 43.6% on an average annual basis, from December 31, 2007, to December 31, 2012. This is even a more impressive considering the MSCI China was down 16% over the period, or -3.5% on an average annual basis. Although some might be concerned that valuations have become stretched, I think it is important to remember that profitability grew even faster than price over the period, essentially indicating that the valuations have actually improved from a price-to-earnings perspective.