Introducing Wuling Motors

In this article, we introduce Wuling Motors (五菱汽车)(HKEX: 0305), a state-owned auto-manufacturer that produces engines and other automotive components for Wuling-branded cars as well as for other high profile automobile companies in China. Wuling-branded cars are primarily utility-based (e.g. pick-up trucks and vans), and have particularly gained traction among price sensitive, lower income consumers, with the Wuling Hongguang (五菱宏光) van becoming known as the iconic "farmer's car" in China, and the Wuling Hongguang Mini EV (五菱宏光 Mini EV) attaining the number one spot as the bestselling electric vehicle in China in terms of number of units sold.


It is noted that Wuling Motors as a company primarily manufactures auto components, whereas the actual sales of Wuling-branded end product automobiles are undertaken by SAIC-GM-Wuling (SGMW), a joint venture between state-owned SAIC Group, General Motors, and Wuling, formed in 2002. Wuling's ultimate parent holding company, Guangxi Automobile Group (广西汽车集团), currently holds a 5.8% share of this joint venture.


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Corporate History

What is now Wuling Motors traces its origins to a factory established by the Liuzhou city government, Guangxi province, to produce agricultural vehicles (e.g. farm tractors) in 1958.


In 1982, during the prelude years of China's opening up and economic reforms, the Liuzhou city government transitioned its agriculture vehicle factory to produce more generic commercial and passenger vehicles. Two years later, the Liuzhou Small Vehicle Factory was officially established.


In 1987, the Factory imported technology from Japan to start producing utility vans and trucks.


In 1988, the Factory signed an official agreement with numerous Hong Kong-based holding companies to establish a joint venture named Wuling Motors (五菱汽车).


In 1996, Wuling Motors fully acquired the Factory and established Liuzhou Wuling Motors (柳州五菱汽车).


In 2002, Shanghai Automotive Industry Corporation (SAIC) Group (上汽集团) and General Motors entered a joint venture with Liuzhou Wuling Motors to produce Wuling-branded passenger vehicles.


In 2007, Liuzhou Wuling Motors acquired Magnum International (万能国际集团), a small brokerage company listed on the Hong Kong Stock Exchange, as part of a shell company acquisition to go public.


In 2010, the best-selling Wuling Hongguang (五菱宏光) auto series was launched, with the Wuling Hongguang van later on becoming known as the iconic "farmer's car" in China.


In 2015, Liuzhou Wuling Motors was renamed Guangxi Automobile Group (广西汽车集团).


Note: unless otherwise stated, we use the term "Wuling Motors" interchangeably with "Guangxi Automobile Group" in this article, as business operations are conducted by Wuling Motors Holdings, a subsidiary of Guangxi Automobile Group listed on the Hong Kong Stock Exchange (HKEX: 0305).


In 2020, the Wuling Hongguang Mini EV (五菱宏光 Mini EV) was launched, and has since become the bestselling electric vehicle in China in terms of number of vehicles sold.


Segment Overview

Wuling Motors comprises of three different segments.


#1: Vehicles' Power Supply Systems

Formerly known as the Engines and Parts segment, the Vehicles' Power Supply Systems segment involves the manufacturing of automobile engines and electric motor control systems for new energy vehicles.


SGMW is the segment's largest customer, although management plans to expand the company's customer base across the commercial and passenger autovehicle industry. In 2021, external (i.e. non-SGMW) customers accounted for 52.9% of the segment's total revenue.


#2: Automotive Components And Other Industrial Services

This segment is responsible for providing the majority of SGMW's petrol and electric vehicle automotive components, including brake and chassis components, car axles, body parts, and interior and exterior trims such as seat sets, cockpits, and bumpers.


SGMW is the segment's largest customer, although Wuling is making diversification efforts by promoting the company's components to other customers, with noteworthy mentions including Great Wall Motor (长城汽车), Beijing Automotive Group (北汽集团), Chery Automobile (奇瑞汽车), and Dongfeng Sokon (DFSK) Automobile (东风小康). External customers accounted for 25% of the segment's total revenue in 2021.


#3: Commercial Vehicles Assembly

The Commercial Vehicles Assembly segment was formerly known as the Specialized Vehicles segment and focuses on the production of various types of specially designed vehicles to serve the needs of different markets, including sightseeing buses, golf carts, container wagons, refrigerator trucks, police cars, fire engines, and electric logistics vehicles. Although the segment's operations are currently mostly redecoration-based, management aims to develop a proper car assembly business with self-designed commercial vehicles to meet various clients' needs going forward.


The segment's clients range from government departments and public institutions to private enterprises and individuals, predominantly based in China but also abroad.


Wuling Specialized Vehicle
Wuling Specialized Vehicle (Source: Wuling Motors)

Wuling Specialized Vehicle
Wuling Specialized Vehicle (Source: Wuling Motors)

Wuling Specialized Vehicle
Wuling Specialized Vehicle (Source: Wuling Motors)

Brand Portfolio

Excluding the specialized commercial vehicles mentioned above, there are currently 20 Wuling-branded vehicles on the market, all sold by SGMW. The 20 vehicles comprise of five pick-up trucks, seven mini-vans, two mini electric vehicles (EVs), two SUVs, and four multi-purpose vehicles (MPVs).


Wuling-Branded Vehicles
Wuling-Branded Vehicles (Source: Wuling Motors)


The best-selling Wuling-branded vehicles are the Wuling Hongguang (五菱宏光) series mini vans and mini EVs.


Wuling Hongguang Van
Wuling Hongguang Van (Source: SGMW)

The Wuling Hongguang van is commonly known as the iconic "farmer's car" in China.



Wuling Hongguang Mini EV
Wuling Hongguang Mini EV (Source: Wuling)

The Wuling Hongguang Mini EV is China's best-selling electric vehicle in terms of number of units sold, with 395,451 Wuling Hongguang Mini EVs sold in 2021, compared with 187,227 runner-up BYD Qin cars (see here) sold the same year.


Financial Overview

This section provides a financial overview of Wuling Motors.


We reiterate that Wuling Motors the company is only responsible for the production of automotive components to SGMW for Wuling-branded cars (with the exception of the specialized vehicles shown previously), so the financials related to the sales of Wuling-branded end product vehicles are not reflected below. Additionally, the performance of the SGMW joint venture is also not reflected in the financial results below, as it is the Guangxi Automobile Group private holding entity that holds a share in the joint venture, not the publicly listed Wuling Motors Holdings subsidiary which the data below is based on.


Revenue and Profit Margins


#1: Wuling Generated Total Revenue of RMB14.4 Billion In 2021

Wuling's top line did not vary significantly over the past decade, with a lower level of RMB11.9 billion in 2012, a peak of RMB16.7 billion in 2016, and most recently, recorded total revenue of RMB14.4 billion in 2021. Management explains that revenue in 2021 was dampened due to the global semiconductor shortage which resulted in disruptions to production plans.


Wuling Motors Revenue and Income
Data Sources: Wuling Motors (click image to enlarge)


#2: Sales To SGMW Accounted For 43.8% of Total Revenue In 2021

Wuling made substantial customer diversification efforts over the past three years, reducing the company's percentage of sales to SGMW from the 60% to 70% level during 2012 to 2018 to the 40% level in 2019 to 2021. The last fiscal year, sales to SGMW accounted for 43.8% of Wuling's total revenue.


Wuling Motors Sales to SGMW
Data Sources: Wuling Motors (click image to enlarge)


#3: Wuling's Profit Margins Are Declining, With The Company's Operating Profit Margin Turning Negative In 2021

Wuling's gross profit margin declined from the 10% to 11% range during the first half of the decade to a low of 7.5% in 2021, largely driven by the rising costs of raw materials in recent years as well as the shortage of semiconductor chips the previous year. The lower gross profit margins are passed on to Wuling's operating profit margin, which decreased from the 1% to 2% range to a low of -0.9% the last fiscal year, in spite of operating expenses having declined slightly as a percentage of total revenue over the decade.


Wuling Motors Profit Margins
Data Sources: Wuling Motors (click image to enlarge)


#4: Automotive Components And Other Industrial Services Accounted For Half of Wuling's Total Revenue in 2021

Breaking down Wuling's revenue by segment over the past decade, we see that Automotive Components And Other Industrial Services account for 50% to 70% of total revenue, while Vehicles' Power Supply Systems and Commercial Vehicles Assembly comprise 20% to 30% and 13% to 33% of total revenue respectively. Additionally, the dollar revenue contribution of Automotive Components And Other Industrial Services peaked during the middle of the decade, whereas revenue generated by Commercial Vehicles Assembly doubled and revenue from Vehicles' Power Supply Systems declined slightly over the ten year period.


Wuling Motors Revenue Breakdown By Segment
Data Sources: Wuling Motors (click image to enlarge)

Note: Others refers to rental income from Wuling's investment properties



#5: Domestic Sales Account For Almost The Entirety Of Wuling's Revenues

More than 99% of Wuling's annual revenues are generated in the mainland China market (excluding Hong Kong Special Administrative Region). Other markets include Hong Kong Special Administrative Region, Indonesia, India, and etc.


Wuling Motors Revenue Breakdown By Geographical Segment
Data Sources: Wuling Motors (click image to enlarge)


Financial Fundamentals


Wuling's financial fundamentals are relatively weak for a mature company, with a couple of notable highlights presented below.


#1: Wuling Operates With A Working Capital Shortage

Wuling has been operating with a working capital shortage for the past nine years, with yearly current ratios fluctuating in the 0.85 to 0.92 range.


Wuling Motors Current Ratio
Data Sources: Wuling Motors (click image to enlarge)


#2: Wuling's Operating Cash Flows Are Growing Increasingly Negative

Wuling's net operating cash flows turned negative in 2016 and has remained negative for the past six years, with a decade low of negative RMB8 billion in 2020 and a most recent level of negative RMB6.8 billion in 2021.


Wuling Motors Net Operating Cash Flows
Data Sources: Wuling Motors (click image to enlarge)


Vehicle Sales Data


Wuling branded cars are predominantly sold by the SGMW joint venture, which also manufactures and sells the Baojun (宝骏) in-house automobile brand launched by the joint venture in 2010. Both Wuling and Baojun cars target relatively sensitive lower tier city (see here) consumers, although Wuling generally focuses on utility-oriented cars such as vans and pick-up trucks whereas Baojun focuses more on lifestyle, everyday use cars such as city sedans and urban SUVs.


We include SGMW's vehicle sales data below for reference.


#1: SGMW Sold 1,660,166 Vehicles in 2021 and 622,074 Vehicles In 1H2022

SGMW sold 1,660,166 vehicles in 2021 and 622,074 vehicles in the first half of 2022, down from a peak of more than two million cars sold annually during the middle of the decade.


SGMW Vehicle Sales
Data Sources: SGMW (click image to enlarge)

Future

We conclude with some of management's key future strategies for the company.


#1: Shifting To Electric Vehicles

In line with the structural shift towards new energy vehicles in the Chinese auto industry, Wuling intends to maintain its competitiveness and potentially increase profits by further developing and marketing EV components for SGMW and third-party clients.


#2: Expanding Production Capacity

Wuling is continuing to expand its production capacity both domestically in China and abroad via production bases in India and Indonesia. Management also specifically hopes to increase the company's market share in the Indonesian auto industry, where Wuling already has a presence.


#3: Customer Diversification

Wuling will continue to make diversification efforts and reduce its heavy single exposure to SGMW.



A Note on Wuling's Financial Standing...

Although Wuling's financial position is deteriorating, we don't think this is a cause for significant concern given that the company is state-owned and benefits from the financial backing of the local government. At the same time, Chinese state-owned companies are somewhat less profit-driven than equivalent private companies, as state-owned managers tend to focus more on implementing government directives (e.g. promoting "innovation-driven development" in accordance with the 14th Five-Year Plan) rather than prioritizing profit-maximization as the ultimate goal. Consequently, it may be a while before Wuling can restore its balance sheet and cash flows to fuller health.

 

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