Hong Kong Equity | Automobile Company in-depth Geely Auto 吉利汽车 (175 HK) ACCUMULATE Sales Rebound Following Mid-2019 Weak Performance Share Price Target Price Geely ranked No. 7 among Chinese auto makers in 2018, according to CAAM. HK$15.36 HK$16.7 Though Geely’s sales volume declined in 2Q2019, it has recovered gradually since 9/2019 and sold 143,234 units (+1.1%/10% YoY/MoM) in 11/2019. We believe the launch of 6-8 new models in 2020E and fuel vehicles sales pick-up in China may China / Automobile / Auto Maker continue to boost its sales volume. Combined with rising contribution from mid-to-high end vehicles to support ASP, we estimate 2020E profit to improve by 9 December 2019 26% YoY to RMB11.3 bn. We initiate Accumulate with TP of HK$16.7, suggesting 9% upside potential. Alison Ho (SFC CE:BHL697) Sales decline narrowed down: Geely sales dropped significantly in 2Q2019 & 3Q2019 (852) 3519 1291 mainly due to 1) the implementation of China VI vehicle emission standard from [email protected] 1/Jul/2019 in some cities resulting in customers squeezing demand for new cars in 1H2019; 2) the uncertainties on relations between China and US; 3) economic downturn to drag consumer’s purchasing power. However, we saw Geely’s auto sales decline has Latest Key Data narrowed since 9/2019 and recorded a growth of 1.1% yoy in 11/2019. Under Total shares outstanding (mn) 9,146 consideration that December and January are regarded as the high season for auto sales, Market capitalization (HK$mn) 140,476 with customers traditionally making purchases before Chinese New Year, we therefore Enterprise value (HK$mn) 126,335 believe Geely’s auto sales growth will keep improving in the near future. 12M average daily turnover (HK$mn) 822 12M volatility (%) 45 6-8 new models will be launched to support ASP in 2020E: Seeing that Geely guided PEG FY18-20E (x) (1.5) they would launch 6-8 models including Lynk & Co 05 and 06, Icon and Preface in 2020E, ROE avg FY18-20E (%) 21 we believe the new models will boost not only sales volume, but also ASP as most of P/B FY19E (x) 2.3 new cars are mid-to-high end vehicles. Since Geely strategically increases the weight of Net debt/equity FY19E (%) NC high-price vehicles sales, it is likely to support its ASP going forward. Further transfer of IPs to Proton to boost reputation and income: The transfer of 3 Performance (%) intellectual properties (IP) to Proton entitle Geely to receive the license fee and auto parts fee in 2018-2020. A win-win situation can be achieved via IP transfer as Proton can 1M YTD 12M Absolute 1 11 5 save huge R&D costs and Geely can receive decent profit. Geely guided that it will Relative to HSI 5 9 4 continue to make IP transfer to Proton, which enhances not only reputation but also income growth. GPM may rebound slowly amid fierce competition: With the sluggish economic growth, Major Shareholders (%) we expect that Geely’s GPM will grow slowly in 2020E due to fierce competition as well Proper Glory Holdings Inc 28.8 as no more room for price hike. Zhejiang Geely Automobile 8.73 BlackRock Inc 4.9 A robust balance sheet: Considering Geely has RMB10.6 bn net cash, we expect that it can plan for expansion even in economic downturn to strengthen its market share. Initiate with Accumulate. Geely’s share price up 20% in the past 3 months as the sales Auditor volume decline narrowed. We believe its profit growth will recover in 2020E resulting Grant Thornton from new cars launch and fuel vehicles demand pick-up. We initiate Accumulate with target price of HK$16.7, which is based on 10-year DCF model. This implies FY20E P/E of 12.4x and FY20E P/B of 2.2x. Price Chart Investment Summary Turnover (HK$mn) Price (HK$) 5000 Geely 20.0 FY-end Dec 2017 2018 2019E 2020E 2021E 4500 HSI 18.0 Turnover (RMB mn) 92,761 106,595 97,598 108,371 120,777 Chg (%) 73 15 (8) 11 11 4000 16.0 Net Profit (RMB mn) 3500 14.0 10,634 12,553 8,952 11,256 13,155 Chg (%) 108 18 (29) 26 17 3000 12.0 EPS (RMB ) 1.190 1.398 0.978 1.215 1.423 2500 10.0 Chg (%) 105 17 (30) 24 17 2000 8.0 P/E (x) 11.6 9.9 14.1 11.4 9.7 1500 6.0 P/B (x) 3.7 2.8 2.3 2.0 1.7 1000 4.0 P/OCF (x) 10.3 8.9 8.0 7.1 6.0 500 2.0 EV/EBITDA (x) 8.1 6.8 8.4 6.8 5.5 DPS (RMB ) 0.074 0.342 0.245 0.308 0.360 0 0.0 18-Dec 19-Mar 19-Jun 19-Sep 19-Dec Yield (%) 0.5 2.5 1.8 2.2 2.6 Source: Company data, Bloomberg, Orient Securities (Hong Kong) Source: Bloomberg, Orient Securities (Hong Kong) Orient Securities (Hong Kong) Limited Please read the analyst certification, company disclosure and disclaimer in the last page 1 Hong Kong Equity | Automobile Company in-depth Chinese brands bear the brunt of a dip in Chinese auto sales See rebound in auto sales Figure 1: Regions complied to China VI vehicle emission standards starting from 1/Jul/2019 The Chinese auto sales dropped for a 16th consecutive month in 10/2019, but figure 2 1 Shenzhen shows the decline narrowed. The auto market declined significantly in 1H2019 resulting 2 Shanghai from some regions like Shenzhen, Shanghai, Guangdong, and Henan to implement China 3 Tianjin VI vehicle emission standard in 7/2019, ahead of the original 1/Jul/2020 deadline, hence 4 Chongqing 5 Anhui the car dealers were rushing to clean up the China V standard vehicles by offering big 6 Nanjing discount. But most of car buyers were waiting for buying China VI standard vehicles, 7 Hangzhou which led to the inventory buildup and slump in vehicles sales. Meanwhile, the 8 Sichuan 9 Hainan uncertainties on relations with US as well as economic downturn also weigh on 10 Guangdong consumer’s purchasing power. In 2H2019, thanks to the implementation of China VI 11 Shandong vehicle emission standard by some cities and peak season-induced demand, the Chinese 12 Henan 13 Hebei auto sales rebounded with sales down by 9.7% yoy to 20.6 mn units in 10M2019 vs Source: Internet data, Orient Securities (Hong Kong) -12.4% in 1H2019, according to CAAM. Figure 2: Monthly Auto sales in China Figure 3: Monthly auto sales by brands Automobile sales volume China auto sales recorded YoY growth Domestic brands sales (LHS) negative growth since (%) declined since 9/2018 Unit % YOY growth(%) (RHS) 7/2018, but the decline but we see a sign of narrowed in 2H2019 vs 20 improvement now. 3,000,000 1H2019. 15 10 0 2,500,000 10 Chinese brands -10 2,000,000 5 0 -20 Japanese 1,500,000 (5) -30 brands* Germany 1,000,000 (10) -40 500,000 -50 brands* (15) US brands* 0 (20) 2018-03 2018-05 2018-07 2018-09 2018-11 2019-01 2019-03 2019-05 2019-07 2019-09 *Autoinfo no long release the data since 6/2019 Source: CAAM, Orient Securities (Hong Kong) Source: AutoInfo, Wind, Orient Securities (Hong Kong) Domestic brands suffer most from auto sales slump The domestic brand vehicle sales fell by 17.5% yoy to 6.67 mn units in 10M2019 with Figure 4: China NEVs sales market shares dropping by 3.1ppt to 38.9%, according to CAAM, underperforming the market. The domestic brands suffered most as consumers who buying low-to-mid end Accumulated NEVs Sales (LHS) % vehicles, cut discretionary spending amid economy slowdown, which further intensifies Unit YoY growth(%) (RHS) 1,400,000 200 the competitions among Chinese car makers in 1H2019. Figure 3 shows that domestic 180 1,200,000 brand sales decline narrowed in 3Q2019, we believe it may continue to rebound in 160 1,000,000 140 4Q2019 since November and December are regarded as the high season for auto sales, 120 800,000 100 with customers traditionally making purchases before Chinese New Year. 600,000 80 400,000 60 40 200,000 NEVs sales slump amid the subsidies cut 20 0 0 The government announced the new NEVs subsidy policy in Q1/2019, saying that subsidies will be cut by half on average starting from 26/Jun/2019. The car buyers then 2018-07 2018-10 2019-01 2019-04 2019-07 2019-10 2018-04 rushed to purchase NEVs before deadline, and NEVs sales surged 49.7% yoy to 0.616mn units in 6M2019, according to CAAM, way outperforming the auto market. But after the Source: CAAM, Orient Securities (Hong Kong) implementation of new policy in the late June, NEVs sales dropped for the 4th straight month in 10/2019 (45.6% yoy decline comparing to 51.5% yoy growth in the same month last year). With an expected continuous decrease in subsidies provided in 2020E, we believe the potential decrease in demand for NEVs will put pressure on NEVs makers. See last page for disclaimer. 2 Hong Kong Equity | Automobile Company in-depth Geely is gaining market share SAIC accounted for 25% of total Chinese auto sales Figure 5: 2018 Market shares of According to CAAM, SAIC is the largest car maker in China, with sales volume of 7.01 mn auto makers units, its market share reached 25.2% in 2018.