*This article is reproduced from the autocarweekly WeChat official account.
Author: Finance Street Lao Li
2021 is destined to be an unusual year in the history of China’s automobile industry, and also a historical year for Great Wall Motors.
Although the overall domestic car sales in 2021 are not good, new energy vehicles have been rising against the trend, and “new energy, intelligence, and carbon neutrality” have echoed throughout the world. Among many car companies, Great Wall Motors is one of the few companies that have seen growth in both fuel and new energy vehicles. The future of the automotive industry will be characterized by new energy and intelligence, and multiple technological synergy. Currently, Great Wall Motors is fully transforming into a global intelligent technology company.
In the capital market, Great Wall Motors has always been the leader in the vehicle sector, reaching a maximum market value of over 600 billion at one point, creating a new valuation method for traditional car companies in the secondary market. Today, Lao Li will talk with everyone from the industry and capital perspectives, why a small step for Great Wall Motors is a big step for capital? How does the capital market define Great Wall Motors’ new mechanism? Where are the future valuation growth points for Great Wall Motors?
A small step for Great Wall Motors, a big step for capital
With the emergence of cross-border car manufacturing, the auto industry has been divided into “new forces” and “traditional car companies,” but new forces won’t always be new forces, and traditional car companies can also not be traditional. For example, Great Wall Motors is transforming into a global intelligent technology company. Lao Li has always been working in the industry and capital markets. The biggest problem encountered by the capital market in recent years is how to value global intelligent technology companies like Great Wall Motors. In the past, their valuation logic was based on the valuation logic of car companies. What kind of logic should be used to value them now? Great Wall Motors took the lead in demonstrating its approach.
As early as the beginning of 2020, many institutions suggested that Chinese car brands represented by Great Wall Motors would exert their efforts in the industry, and their valuations would increase. This has indeed been the case. In 2021, Great Wall Motors’ highest market value reached 600 billion at one point. In the eyes of the capital market, sales expectations, technological expectations, and brand expectations are the core factors driving Great Wall Motors’ high valuation. Great Wall Motors took a small step in its transformation, but it has driven a big step in the capital market valuation.
Looking back at the past year, Great Wall Motors has basically fulfilled the three expectations put forward by the capital market. In the secondary market, traditional car companies need to prove their performance. Many car companies are talking about transforming into intelligent technology companies, but the market has not given them valuation. Without performance support, even the best story cannot be recognized by capital.
The performance of Great Wall Motors this year exceeded expectations, with annual sales of over 1.28 million vehicles, a historical high. As judged by the secondary market investment institutions, the breakthrough of Great Wall Motors stems not only from the increase in sales volume but also from its comprehensive sales structure. Great Wall Motors is walking on two legs in the fields of fuel vehicles and new energy sources. Fuel vehicles provide the valuation basis, while new energy and export are the value generators. In the past year, the cumulative sales of new energy vehicles exceeded 130 thousand, accounting for 10.7% of the total sales, which is an absolute advantage over Tesla. Overseas sales exceeded 140 thousand, a year-on-year increase of 103.7%, with a sales ratio of 11.1%, which is a historical high. However, there is still a long way to go for Great Wall Motors’ new energy vehicles, and the product system needs further improvement. After filling in these gaps, the valuation will be further increased.
In terms of technology, Great Wall Motors has launched a series of innovative technologies in 2021. In terms of power, the 3.0T+9AT/9HAT powertrain was released. Among them, 3.0T+9AT has been successfully equipped with Tank 500, and the successful application of Lemon Hybrid DHT technology has broken the technological monopoly of joint ventures. Dayu Battery is being promoted to the whole industry, and a global hydrogen energy strategy is also released. “Hybrid plus pure electric plus hydrogen energy” technology’s independent and controllable will provide a new benchmark for Great Wall Motors’ valuation in 2022.
In terms of intelligence, Great Wall Motors has released a new intelligent electronic and electrical architecture control chassis, intelligent cockpit platform, and IDC3.0 high computing power intelligent assisted driving calculation platform, and related products will be applied in succession. In fact, from the perspective of researchers, investment is the quickest way to lay out the intelligent supply chain of the whole vehicle, and Great Wall Motors has successively invested in Horizon in 2021, laid out artificial intelligence chips, and its subsidiary MM Motor completes Series A financing, focusing on the development and construction of autonomous driving technology.
If we look at the valuation from the secondary market, Lao Li believes that sales foundation and technological reserves can fully support a market value of 600 billion yuan, as revenue is always the most important.
# Changan Automobile’s Surpassing Capital Market Expectations
Changan Automobile’s series of actions this year far exceeded the expectations of the capital market. In 2021, Changan Automobile released two new brands, Tank and Salon Intelligence, which officially formed a new brand matrix based on its existing brands Haval, WEY, Ora, and Changan Pickups. Based on this new brand matrix, Changan Automobile launched more than 30 new products in 2021, setting a record for the highest number of new products released by a car company in a year. As a result, since this year, the capital market has begun to conduct more reasonable and objective valuations of traditional car companies, just as investment researchers said, that in the past, the valuation approach was to focus on making big single products and big brands. Now, the valuation approach is to create multiple brands and products. In terms of products, branding, and user operations, Changan Automobile has indeed made great strides.
Breakthrough Mechanisms Are the Source of Innovation
Many people may wonder why Changan Automobile can transform from a traditional car company to a globalized intelligent technology company and why it has exceeded all expectations of the capital market. In Mr. Li’s view, Changan Automobile has experienced transformation in 2021 and created a new moat for the company during the transformation process.
Zhang Lei of Hillhouse Capital has always emphasized that innovation is the moat of a company. In Mr. Li’s opinion, the moat of Changan Automobile comes from Mr. Wei, which is derived from his executive ability, creativity, and openness. This is an excellent management system of private companies, which is most favored by capital. Changan Automobile’s rapid transformation benefited from the mechanism breakthrough led by Mr. Wei from the top down. This mechanism breakthrough has brought innovative power to the development of Changan Automobile.
As an automotive company, Changan Automobile not only has to inherit excellent engineering culture but also has to innovate boldly as a globalized technology travel company. Therefore, Changan Automobile has reconstructed the company’s organization, mechanism, process, and enterprise ecology, forming a 3.0 version of the organizational structure of “strong backstage, large middle tier, and small front desk.” In Mr. Li’s view, the “strong backstage, large middle tier, and small front desk” mechanism can always keep the company standing with the users. After the front desk discovers market demand and positioning, the existing technical reserves of the “strong backstage” provide support, and the “large middle tier” provides technical transformation, design, supply chain security, and marketing resource matching to respond quickly and carry out updates and iterations. For car companies, this is a significant production organization and supply chain reform, which greatly improves enterprise operation efficiency.
The efficient operation of the organizational structure must rely on a strong team. In light of this, Changan Automobile has initiated comprehensive incentives from top to bottom. Many researchers believe that this is an important driving force for the rapid development of Changan Automobile, and human resources will always be the most precious resource.## A Bright Management Business Card in the Tech Industry – President Rotation System
The President Rotation System is a beautiful management business card in the technology industry. It was originally applied in China’s largest technology companies, such as Huawei and Alibaba, with excellent results. In 2020, Great Wall Motors implemented the President Rotation System and, based on this system, created a diverse and complementary executive team, becoming the first Chinese carmaker to launch this system.
In grassroots motivation, Great Wall Motors has implemented the broadest and largest equity incentive plan in the A-share market in history. Between 2020 and 2021, Great Wall implemented two stock incentive plans, accumulating more than 12,000 employee participations, achieving full coverage of all job levels, business areas, and key positions, transforming the “workers” into “partners.”
An excellent company must have both external hard power and internal soft power. A company with vitality is often built on soft power, which keeps the enterprise full of vitality in the changing times. The soft power of Great Wall Motors cannot be seen in its financial statements but is deeply embedded in its core.
Making Customers the Main Driver of Great Wall’s Valuation
“Whether hard power or soft power, for a company, it will be explicitly or implicitly reflected in its financial statements and valuation.” Although the annual report has not yet been published, judging from the third-quarter report, Great Wall Motors’ 2021 financial report is bound to be impressive.
In the first three quarters of this year, Great Wall Motors achieved a total operating income of 90.797 billion yuan, a year-on-year increase of 46.11%, and a net profit of 4.945 billion yuan, a year-on-year increase of 91.13%. This is the highest revenue that Great Wall Motors has achieved in nearly five years. From 2017 to the third quarter of 2021, Great Wall Motors’ revenue was 63.429 billion yuan, 66.645 billion yuan, 62.578 billion yuan, 62.143 billion yuan, and 90.797 billion yuan, respectively. Great Wall Motors has already entered a new revenue range.
Many analysts asked Mr. Li how much Great Wall Motors is worth in the future. Mr. Li believes that it is over 1 trillion yuan. In fact, as early as 2020, a head sell-side in China mentioned the view that Great Wall Motors’ market value was over 1 trillion yuan during the roadshow. At that time, Great Wall Motors’ market value was less than one-third of its current value. In just over a year, Great Wall Motors’ highest market value has exceeded 6 trillion yuan.# Li Auto shares the valuation logic with everyone: User-driven business model, C2B mode and market value of RMB 6,000 billion or even RMB 10,000 billion
Li Auto shares the valuation logic with everyone: Why is the market value of Li Auto up to RMB 6,000 billion or even RMB 10,000 billion? After transforming into a global intelligent technology company, Li Auto plans to adopt the valuation approach of technology + Internet companies, with two key elements:
Firstly, the user base drives Li Auto’s C2B business model, and the “Product + Software + Service” mode will be the new value growth point. Secondly, the trillion-dollar valuation of Li Auto is driven by the user scale and annual value. Just like Internet companies compete for user scale, car companies used to compete for user scale as well. Li Auto has a user base of tens of millions. Under the million-level system, the launch of any service means objective economic benefits. The core of value-added services is to capture the group of people with the highest degree of user stickiness. In the eyes of the capital market, this is a typical strategy for user operation in Internet companies, but different from other car companies, Li Auto puts “users” in the center.
In 2022, Li Auto still has a long way to go, and how to maintain high sales growth, how to maintain the incremental growth of new energy products, how to quickly achieve mass production of batteries, intelligent products, etc., are all issues that the industry and the capital market are concerned about, but under the new mechanism, challenges are also motivation.
In 2021, Li Auto’s highest market value was RMB 6,000 billion, and RMB 10,000 billion in 2022 is not far away.
This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.