Photographer: Qilai Shen/Bloomberg

Stock Bears See Hong Kong's Top Short in Great Wall Motor

  • Short bets on Great Wall rose to 16% of HK shares this month
  • BNP Paribas Investment says avoiding China auto stocks for now

Short-sellers crowding into Great Wall Motor Co. are being vindicated -- and they’re lining up for more.

Shares in China’s largest SUV maker have retreated 18 percent from a February peak in Hong Kong as sales of its aging Haval H6 model fell and the company reported a quarterly profit decline. Now bears are doubling down: short interest in Great Wall rose to the highest since December 2011 this month, and was the most among more than 2,000 stocks listed in the city.

The automaker is banking on a rebound in sales with new models hitting the showrooms over the next two months and hopes that its WEY brand will gain traction with consumers. It’s projecting full-year vehicle sales will gain 16 percent to a record 1.25 million units. And Great Wall’s Hong Kong shares have a powerful ally in mainland investors, who’ve boosted their buying through the city’s exchange links to hold a 24 percent stake.

“Investors are very divided about the stock’s outlook," said Castor Pang, head of research at Core-Pacific Yamaichi HK. “They have almost opposite views about Great Wall’s business strategy and the overall sales outlook in China’s auto market."

Great Wall is sticking to its guns. Short sellers just “see on the surface," General Manager Wang Fengying told Bloomberg in an interview. “We feel we are on the right path."

Short interest in Great Wall’s Hong Kong-listed shares stood at 16 percent of outstanding shares as of May 10, more than a 5-year high, and was at 14.5 percent as of May 18, data from IHS Markit Ltd. show.

Competition in China’s SUV market is intensifying. Geely Automobile Holdings Ltd. plans to sell its first SUV model under the upscale Lynk & Co. brand from the fourth quarter, while Guangzhou Automobile Group Co. plans to launch at least five new SUV models this year, according to its 2016 annual report.

Great Wall is being targeted by shorts because its revenue is most exposed to that segment of China’s auto market, making it vulnerable to price pressure, according to Caroline Maurer, Hong Kong-based head of Greater China equities at BNP Paribas Investment Partners.

Sales Target

Baoding, Hebei-based Great Wall has set a companywide sales target of 2 million units by 2020, almost double what it sold last year.

That may be difficult to pull off, according to Sanford C Bernstein. Initial orders for the WEY brand totaled about 10,000 units, based on Bernstein’s recent channel checks with dealers.

“The sales target is just way too aggressive," said Bernstein analyst Robin Zhu, who estimates Great Wall’s profit margin will fall to 6 percent in 2019 from this year’s estimated 9 percent. “Bears are skeptical about the new brand and are expecting further price cuts as more players are joining the SUV party in China."

Other analysts are more optimistic about Great Wall’s prospects, pointing to the company’s proprietary technology and low valuation. The company is the second-cheapest Chinese automaker listed in Hong Kong, according to the BI China Automobiles H-Shares Valuation Peer Group and data compiled by Bloomberg, with shares trading at about 6 times their 12-month estimated earnings.

China International Capital Corp. analyst Wei Feng and ICBC International Research Ltd. analyst Philip Shi say newly developed vehicles such as the WEY brand’s initial model and a revamped version of the company’s best-selling H6 will underpin a sales recovery in the second half. The analysts said the WEY VV7’s transmission system is impressing potential buyers.

“We believe sales of the new models will beat market expectations,” said ICBC’s Shi, who has a hold rating on the stock. “The WEY brand’s new technology should win over a lot of consumers."

Mainland Money

Mainland investors are siding with the bulls -- at least in Hong Kong -- pumping money into Great Wall’s H shares via the Hong Kong exchange links even as the stock slid.

Aggregate onshore purchases through the programs accounted for 24 percent of outstanding shares as of Monday, up from 17 percent in mid-March, according to the Hong Kong Stock Exchange. That makes Great Wall the eighth most-owned stock by link investors in terms of the percent stake they hold, the data show. Yet the company’s shares traded in mainland China have slumped, falling 18 percent from an April peak.

Great Wall shares fell 1 percent at the Hong Kong close on Tuesday and rose 1.3 percent in Shanghai.

After a report on April 11 showed China’s quarterly passenger-vehicle deliveries fell for the first time in at least 17 years, some investors are shunning both bull and bear extremes.

"We’re cautious about the industry’s near-term prospects," said BNP Paribas Investment’s Maurer. "We prefer not to hold any automaker name for now."

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