In recent years, GAC Group, once a dominant player in China's automotive market, has found itself in a precarious positionIts annual sales, which peaked at 2.5 million vehicles, have plummeted sharply, signaling a significant decline in both revenue and net profitThis downward trend has led to a pivotal change in leadership, with longtime chairman Zeng Qinghong stepping down as Feng Xingya takes the helmThis transition marks the beginning of a new journey for GAC Group, but the road ahead seems fraught with challenges.

On February 5, GAC Group (601238.SH, 02238.HK) officially announced the retirement of Zeng Qinghong, who has been a pivotal figure in the company for almost three decades, including serving as the leader for over eight yearsHis departure draws significant attention to the state of GAC Group's development as he leaves the company amid a troubling period.

From its glory days to its current struggles, GAC Group has experienced dramatic fluctuations in sales performanceIn Zeng Qinghong's tenure, GAC Group enjoyed triumphant sales momentsFor instance, in 2016, the company and its joint ventures achieved sales of 1.65 million units, marking a year-on-year increase of nearly 27%. This growth positioned GAC as a leader among China's top six automotive groups, and the trend continued in 2017 when sales first surpassed 2 million units, maintaining a robust growth rate of 21%.

The sales continued to soar, peaking at 2.505 million vehicles in 2023. However, this success could not be sustainedThe year 2024 saw GAC plummet to just 2.003 million units sold, a staggering 20.04% decrease, representative of figures not seen since 2017.

The challenges extend to its major subsidiaries

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GAC Honda's sales fell to 470,600 units, down by over 26%. Similarly, GAC Toyota reported a decrease of 22%, selling 950,000 vehicles, while GAC Aion's figures dropped by around 22% to 374,900 vehiclesThe only subsidiary that managed slight growth was GAC Trumpchi, which saw sales increase by nearly 2%.

With sales slumping dramatically, GAC Group's financial performance has also dwindled swiftlyFrom 2016 to 2018, GAC's revenue and net profit figures showed promising growth trends, with net profits exceeding 6 billion and 10 billion yuan respectivelyYet, beginning in 2019, the earnings narrative took a steep downturn, and although 2022 marked a return to over 100 billion yuan in revenues, net profit growth could not keep pace, with a notable 45.08% decline in net profit recorded for 2023.

The forecasts for 2024 paint an even bleaker pictureGAC projects a net profit between 800 million and 1.2 billion yuan, which translates to a staggering decrease of 73% to 82% year-on-yearThe predicted non-net profit is set to plunge to figures indicating a profound loss, marking the first annual loss since records began in 2012.

GAC Group cites several reasons for this downturn, notably the intense competition within the automotive industry leading to price wars and a changing market landscape that has significantly diminished car salesIn response, the company and its subsidiaries have invested approximately 18 billion yuan in sales subsidies and other business strategies to combat competitive pressures, which has further tightened profit margins.

Moving forward, GAC's new leadership, which includes Feng Xingya, who has worked at GAC since 2004, is entrusted with navigating the group through these turbulent waters

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Unlike the glory years, they now must contend with dwindling sales and profits.

The pressure for transformation weighs heavily as GAC pushes to innovate and regain momentumOn January 14, 2025, Feng announced GAC's collaboration with tech giant Huawei, aiming to launch a series of intelligent new vehicle models, including a luxury smart electric vehicle expected to be priced at around 300,000 yuanWhether this partnership can provide a lifeline for GAC Group remains to be seen, as the automotive landscape becomes increasingly competitive.

Furthermore, GAC's 25% stake in Hozon Auto is proving to be a liability, facing severe operational challengesAs of late November 2024, Hozon has suffered a staggering 75% drop in revenue, accumulating losses of 1.1 billion yuan over the yearsDespite its struggles, GAC has stepped in to provide loans to ensure employee salaries and support Hozon's after-sales service through its subsidiary Aion.

Additionally, on December 3, 2024, GAC Group announced it would sell an 18.82% stake in joint venture Guangzhou JuWan Technology Research Co., amid a backdrop of significant financial losses for the companyIn 2023 alone, JuWan's total losses reached 533 million yuan.

As the electric and intelligent transformation of the automotive sector accelerates, GAC Group's ambitious goals to achieve sales of 3.3 million vehicles by the end of the "14th Five-Year Plan" (2025) seem increasingly unattainableThe long-term target of over 4.75 million vehicles and a revenue of 1 trillion yuan by 2030 now appears daunting given the current climate.

Examining broader economic variables, the commercial vehicle market remains vulnerable to environmental and regulatory shifts

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This was particularly evident in 2021 when the transition to new emission standards led to a 6.6% decrease in commercial vehicle salesThe ongoing ripple effects from the pandemic and fluctuating oil prices further complicated this market's trajectory.

Sales of commercial vehicles in China in 2023 reached 4.031 million units, up 22.1% from previous yearsYet the forecast for 2024 suggests a decline, with production and sales projected to fall to approximately 3.805 million vehicles, reflecting ongoing challenges in the sector.

Market performance for GAC Group has seen a deterioration in stock value, particularly since 2021. GAC’s A-share price peaked in early 2021 at about 13.50 yuan per share but plummeted to around 7.80 yuan per share by February 7, 2025, marking a 42% reductionSimilarly, in the Hong Kong market, shares fell from 10.50 HKD to 6.20 HKD in the same timeframe, reflecting a nearly 41% drop.

This dramatic decrease in share price has severely eroded GAC Group's market capitalizationIn early 2021, its total market cap was approximately 100 billion yuan on the A-share market, with an equal amount on the Hong Kong stock exchangeAs of February 7, 2025, GAC's A-share market cap had dropped to 63.68 billion yuan, while in Hong Kong, it sank to 35.96 billion HKD - representing declines of approximately 36% and 64% respectively.

The declining share price, coupled with reduced institutional investor confidence, has placed GAC Group in a precarious position regarding future financingIn 2021, five mutual funds accounted for around 10% of the A-shares in circulation

However, by the end of 2024, this number had halved to only two funds with a total holding of about 5%. Similar trends were observed in the Hong Kong market.

The reduced market cap and dwindling institutional holdings have led to challenges in refinancing and further compounded the negative perception of GAC Group in the marketplace, raising questions about its future sustainability.

According to a report by Jiao Yin International, the potential upside for GAC Group lies in disproportionately better-than-expected profit margins in its self-branded vehicles, whereas the downside risk remains tied to the persistent decline in sales of its joint venture brands.

In September 2024, the penetration rate of new energy vehicles among mainstream joint venture brands remained a paltry 7%, exacerbating the woes of major joint ventures that saw their retail market share sink to unprecedented lows of 28.3%.

Notably, Japanese brands, long regarded as profit powerhouses for GAC, reported a significant drop in retail market share, falling to 12.6% in September 2024, down 4 percentage points compared to the previous yearGAC's net profits in the third quarter of 2024 amounted to a loss of 1.396 billion yuan, furthering concerns about financial stability as losses expanded.

With a dual decline in both sales and performance, the drop in stock prices, and a significant shrinkage in market cap, can Feng Xingya, under this new leadership, navigate GAC Group through these challenging times and foster recovery?

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