Great Wall’s H8 Dents Confidence in Asia’s Richest Car Chief

Jan 14, 2014 9:16 pm ET

(Updates with today’s share movement in 12th paragraph.)

Jan. 15 (Bloomberg) -- Great Wall Motor Co.’s billionaire Chairman Wei Jianjun pushed back deliveries of the company’s most expensive SUV after the automotive press panned the Haval H8 in test drives. It turned out to be a $2.4 billion decision.

That’s how much his company lost in market value yesterday after the delay announcement prompted Great Wall shares to plunge 12 percent, the most in five years, in Hong Kong trading. Wei’s personal net worth fell by $51 million to $6.9 billion, putting Hyundai Motor Co. Chairman Chung Mong Koo within striking distance of becoming Asia’s wealthiest car executive at $6.7 billion, according to the Bloomberg Billionaires Index.

The stumble set back investor confidence in Wei, who’s led Great Wall as its shares surged over the past five years as he transformed his company into one that generated higher operating margins than any listed automaker in the world. Jefferies Group LLC to China International Capital Corp. cut their investment ratings on the stock, while Sanford C. Bernstein said the move signals growing pains.

“Great Wall’s ambitions to move up a league in the auto industry rest on this vehicle, which has already been delayed unofficially in the last year,” Max Warburton, an analyst at Bernstein, said in a report. “The latest and very public delay will not be taken well by the market as it confirms Great Wall is struggling with technology and quality.”

Eternal Disappointment

Great Wall decided to push back the H8 by three months after detecting that its 201,800-yuan ($33,400) flagship model had issues ranging from the brakes to low steering resistance and excessive noise, the company said in a statement on Jan. 13.

“We would rather suffer huge costs and continue to improve the quality of the vehicle,” the Baoding, China-based company said. “We would rather let down users for a while than for eternity.”

Journalists and industry professionals found “some issues” after they evaluated the Haval H8 through a week of test drives, though everyone provided “very positive feedback,” it said.

Xu Chengzhi, a Great Wall spokesman, declined to comment beyond what the company said in its statement.

Bernstein’s Warburton estimated the delay may cost Great Wall about 500 million yuan ($83 million) in unrealized operating profit and engineering expenses in the near term. For the pessimist, the reputational damage may be longer lasting and the H8 delay may signal the company will need to crank up its research and development spending, he wrote.

Long Year

The H8 was projected to account for about 10 percent of the company’s revenue and gross profit in 2014, according to estimates by Paul Gong, an analyst at Citigroup Inc. Still, the delay has more impact on investor sentiment than on the company’s fundamentals and will likely have “limited impact” on the broker’s 2014 earnings estimate for Great Wall, he wrote.

It’s been a long year so far for Wei. Last week, a company spokesman posted a sales forecast for 2014 on his personal microblog that signaled growth will slow this year, triggering Great Wall’s shares to tumble 8.5 percent and prompting the company to issue a statement that it did not prepare any sales target and that the prediction was the spokesman’s opinion.

Result: Great Wall’s drop in Hong Kong this year -- 20 percent as of yesterday -- makes it the worst-performing automaker in 2014, though the stock rose today. Last year it surged 75 percent and doubled the preceding year.

Independent Carmaker

Still, Great Wall represents a rare breed of Chinese automakers independent of foreign partners and government, sparing it from having to split profits and endure extra bureaucracy.

Behind the company’s success has been Wei, who has signaled ambitions for Great Wall, which specializes in sport utility vehicles, to eventually outsell Fiat SpA’s Chrysler Jeep globally.

While the Haval H8 setback has dented the company’s reputation, Great Wall stands to gain in the longer term by delaying the release, according to UBS AG.

“It is wise for the company to delay the launch of the new model when it’s not ready,” Yankun Hou, head of Asia autos research at UBS, said in a briefing in Shanghai yesterday. “It will be good for its product and brand growth.”

--Rose Kim and Tian Ying, with assistance from Jack Gao in Shanghai and Patrick Chu in Tokyo. Editors: Chua Kong Ho, Young- Sam Cho