Autos

Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

It could be time to hit the reset button on Hong Kong's most-shorted stock.

Investors have piled in to bet against Great Wall Motor Co., with short interest making up 15 percent of the company's shares, even as they cheer other Chinese carmakers benefiting from a surge in vehicle ownership and auto financing.

Stopped Short
Great Wall Motor is the most heavily shorted company among more than 2,000 Hong Kong listed firms
Source: Markit

That trade could soon unravel. 

Great Wall, China's largest seller of SUVs, probably deserved the poor treatment from investors after a series of pretty pathetic attempts to spruce up its signature Haval model. One of the few Chinese carmakers without a foreign partner, Great Wall made the mistake of thinking it could keep raising prices without offering a genuinely improved product. Sales and deliveries floundered, and in came the shorts.

Out of Gas
Great Wall's most recent SUVs failed to resonate with Chinese consumers
Source: Bloomberg Intelligence, CAIN

Meanwhile, investors flocked to Geely Automobile Holdings Ltd. Its Hong Kong-traded stock is up more than 250 percent over the past 12 months, putting it among the top 20 best-performing shares out of the some 2,000 firms listed in the city.

Start Your Motors
Shares in Geely have jumped by more than 250 percent over the past year, versus a 35 percent rise in Great Wall Motor
Source: Bloomberg

Geely, which took market share from Great Wall with new, lower-priced offerings, also made it into the so-called "hindsight portfolio" of Hong Kong-based Wei Capital Management Ltd., an investment firm that keeps tabs (for fun) on the woulda-coulda-shouldas of its investing mishaps.  

Crumbling
Great Wall's share of China SUV sales has slipped from a peak of 15 percent in July 2013
Source: CAIN

The Geely story has mostly played out, but it's just beginning at Great Wall, Wei Capital founder and CIO Yuet Wei Wan said during a presentation at the Sohn Investment Conference in Hong Kong on Wednesday. She's right.

Valuations for Chinese automakers in the world's largest car market are generally out of control, shooting up far past their U.S. peers. Geely is trading at 13.5 times forward earnings, compared to an average 9.1 multiple over the last five years. By contrast, Great Wall is trading below its historical average, at a forward multiple of 6.7.

Joyride
Asia's auto stocks are pricier than peers in North America and Europe
Source: Bloomberg Intelligence

Great Wall is also primed to come out with a new brand of souped-up SUV, called WEY, which promises affordable luxury to a generation of consumers keen on upgrading to a nicer car with more technological bells and whistles.

Named after its Chairman Wei Jianjun, the marque should benefit from the 10 billion yuan ($1.5 billion) spent over the last four years on research and development. And at about 190,000 yuan, it's priced with cost-conscious Chinese buyers in mind: A Honda CRV or Nissan X-Trail can run to as much as 270,000 yuan. Great Wall is also planning to sell the new line in North America.

According to Wei Capital Management, stock in Great Wall could rise by as much as 48 percent within two years under a base-case scenario, stretching to as much as 100 percent in a bull one.

Of course, WEY could ultimately flop if buyers don't like it and revert to competitors like Geely. Success certainly won't happen overnight.

It will take at least the rest of the year for Great Wall to offload old inventory through margin-piercing discounts. The company's stock will probably decline as short sellers keep hammering away. And until demand catches up, monthly sales will remain anemic.

By the time Great Wall starts beating expectations, though, sell-side analysts will probably have already turned bullish, and driven the shares higher. Great Wall could well be another pick for the hindsight portfolio.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Just to be clear, this isn't a real portfolio that Wei Capital invests in after the fact. It's a more of an exercise in remembering mistakes so you don't make them again. 

To contact the author of this story:
Shelly Banjo in Hong Kong at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net