Summary of Key Points
Great Wall Motor saw growth in revenue and sales in the first half of 2026, but its net profit declined by nearly 60% year-on-year (by about 4 billion yuan). Although its annual revenue in 2025 reached a new high, its net profit also decreased by 22%. The apparent reasons for this are the postponement of overseas subsidies and exchange rate fluctuations. However, the underlying issue lies in the practice of capitalizing research and development (R&D) expenses over the past few years, which has resulted in the accumulation of nearly 20 billion yuan in assets to be amortized over time. Each year, 4.5 to 5 billion yuan of this amount is expensed, consuming nearly 40% of the company's profits. The next three years will see a concentrated period of amortization for these assets, and coupled with the difficulty of meeting sales targets, Great Wall faces a structural challenge of having to pay off past debts while struggling to generate new revenue.
I. Surface Profit Decline: Subsidies and Exchange Rates Are the Culprits, but Not the Whole Story
Wei Jianjun stated that the 4-billion-yuan decrease in profits in the first half was mainly due to a 2.274-billion-yuan overseas subsidy that did not arrive this year, as well as an exchange rate loss of 2.66 billion yuan (a difference of 1.7 billion yuan). While these factors do explain the surface situation, there is a more hidden issue: the gradually increasing amount of "amortizable assets" that is eroding profits.
II. R&D Capitalization: Saving Today's Costs for the Future, Like Buying a Long-Term Fitness Membership
In a normal company, R&D expenses are recognized as current costs and deducted from profits in the same year. However, Great Wall has chosen to capitalize a portion of its R&D expenses, recording them as assets on the balance sheet and amortizing them over time. This is similar to buying a year-long fitness membership for 1,200 yuan; the gym does not count the entire amount as revenue for that month but spreads it out over 12 months. The difference is that the fitness membership expires after use, but Great Wall's "R&D assets" continue to grow as new capitalizations are made. By the end of 2025, the total amount of amortizable assets amounted to nearly 20 billion yuan, including 12.2 billion yuan for unfinished development expenses and 7.7 billion yuan for completed non-patented technologies.
III. Rigid Amortization: A Fixed Annual Expense of 4.5 Billion Yuan, Eroding Nearly 40% of Profits
According to accounting rules, these amortizable assets must be written off over 4 to 5 years, with 4.5 to 5 billion yuan being deducted from profits each year—regardless of the number of cars sold or the amount of revenue generated. From 2023 to 2025, Great Wall amortized a total of 11.6 billion yuan, which accounted for nearly 40% of its net profit. In 2025 alone, 43% of R&D expenses were used to pay off past debts, rather than for new R&D investments.
IV. Structural Dilemma: Should R&D Expenses Be Continued to Be Capitalized or Expensed?
Great Wall is in a difficult position:
- If it continues to capitalize R&D expenses, the amount to be amortized in the future will increase, putting more pressure on the company.
- If it stops capitalization and recognizes the expenses as current costs, its profits will plummet in the short term, making the financial statements look worse.
Moreover, some of the capitalized R&D efforts have not translated into competitive advantages. For example, its autonomous driving subsidiary, MoMo Zhixing, has ceased operations, and the associated costs still need to be amortized.
V. The Next Three Years: A Concentrated Period of Amortization, with Difficult Sales Targets
The years 2026 to 2028 will see a concentrated period of amortization for these assets, with annual expenses of 4.5 to 5 billion yuan. Great Wall's targets for 2026 are a net profit of 10 billion yuan and sales of 1.8 million vehicles. However, it only sold 692,000 vehicles in the first seven months, achieving a completion rate of 38%, making it unlikely to meet its annual targets. Deloitte has identified R&D capitalization as a key audit issue for Great Wall for eight consecutive years, indicating that this issue is significant and carries high risk. Investors will closely monitor this situation. Only if Great Wall can overcome these challenges over the next three years will its financial reports in 2030 truly reflect its actual strength. Otherwise, past mistakes will drag down its future profits.
In summary: The current decline in Great Wall's profits is due to external factors, but the real cause is the consequence of carrying current costs forward from previous years. Over the next three years, the company will need to balance selling cars to generate revenue while paying off the debts from past R&D investments. Whether it can survive this period will depend on its ability to manage its finances effectively.