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Geely Automobile Holdings Starting the Year with Robust Growth; Sector Competition Intensifying

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Geely Automobile Holdings Starting the Year with Robust Growth; Sector Competition Intensifying Equity Research February 7, 2018 Geely Automobile Holdings Starting the year with robust growth; sector competition intensifying Company Update Maintain BUY What's new Ticker 00175.HK Geely announced it sold 155,089 PVs (+51% YoY & +1% MoM) in CICC investment rating BUY January, marking 10% of its 2018 target. Last close HK$22.30 CICC target HK$27.00 Comments 52wk price range HK$29.80~9.78 Market cap (bn) HK$200 Geely starts 2018 by maintaining robust growth; with a boost to mid-range/low-end products; GS marks new high. Geely’s January Daily value (mn) HK$1,746.21 Shares outstanding (mn) 8,972 sales volume continued to hit new highs and it maintained Free float (%) 100 December’s pace of >150,000 PV monthly sales. With 11 months to Daily volume (mn sh) 68.79 meet the remaining 90% of its target, Geely looks set to exceed its Business sector Auto & Parts 2018 sales target. In January, New Emgrand and New Vision sold a respective 26,122 (-1% YoY & +4% MoM) and 20,055 (+36% YoY & 00175.HK HSCEI +38% MoM) units, contributing 30% aggregate sales and showing its 292 strong mid-range/low-end demand. GS sold 20,087 units (+94% YoY & 244 +7% MoM), Geely’s fourth model to top 20,000 monthly sales. 196 Sector demand pressured by rising funding costs and raw material 148 prices; competition intensifying. The auto sector’s funding costs and (%) Value Relative 100 raw material prices are both rising, and will put pressure on PV 52 demand as well as the GPM levels of OEMs. Sector competition is Feb-2017 May-2017 Aug-2017 Nov-2017 Feb-2018 intensifying, and several JV brands have released new competitively-priced compact SUVs, expanding the profitability (Rmb mn) 2016A 2017E 2018E 2019E uncertainty. Our channel checks imply that Geely’s main models – Boyue, New Emgrand, New Vision, and Borui – are all selling at Revenue 53,722 96,763 118,782 130,329 Rmb2,000-10,000 price cuts, a move which may spurs sales, but will (+/-) 78.3% 80.1% 22.8% 9.7% sacrifice GPM. Net profit 5,112 10,436 14,132 16,439 (+/-) 126.2% 104.1% 35.4% 16.3% Lynk & Co 01 still needs time to ramp up. Lynk & Co 01 sold 6,173 EPS 0.57 1.16 1.58 1.83 units (+3% MoM) in January. Channel checks show the waiting period BPS 2.75 3.83 5.21 6.78 for Inter Pro and Louder Pro are around 2-3 months, and the DPS 0.11 0.22 0.29 0.34 production capacity still needs to ramp up. CPS 0.93 1.40 2.02 2.44 P/E 35.0 16.4 11.2 9.6 Valuation and recommendation P/B 7.3 5.0 3.4 2.6 EV/EBITDA 21.7 10.3 6.7 5.3 We maintain our BUY rating, but lower our target price by -19.4% from HK$33.50 to HK$27 (implying HK$240bn market cap), as: Dividend yield 0.5% 1.1% 1.7% 1.9% 1) investors’ risk appetite plunges; 2) sector competition is ROAA 9.3% 12.7% 12.8% 12.2% intensifying, lifting profitability uncertainty; and, 3) channel checks ROAE 23.0% 35.3% 34.8% 30.6% show its main models’ discount is expanding, leading to lower GPM. Risks Sales volume of new models misses expectations. Source: Wind Info, Bloomberg, company data, CICC Research Wei FENG Danlin REN Analyst Associate [email protected] [email protected] SAC Reg. No.: S0080513110002 SAC Reg. No.: S0080116060043 SFC CE Ref: BCK590 Please read carefully the important disclosures at the end of this report CICC Research: February 7, 2018 Financial summary Financial statement (Rmb mn) 2016A 2017E 2018E 2019E Financial ratios 2016A 2017E 2018E 2019E Income statement Growth ability Revenue 53,722 96,763 118,782 130,329 Revenue 78.3% 80.1% 22.8% 9.7% COGS -43,880 -78,146 -95,789 -105,128 Operating profit 111.6% 113.4% 28.7% 11.4% Selling expenses -2,503 -4,177 -4,633 -4,822 EBITDA 92.2% 92.8% 27.9% 10.7% Administrative expenses -2,560 -2,903 -3,207 -3,389 Net profit 126.2% 104.1% 35.4% 16.3% Other ops income (expense) 0 0 0 0 Profitability Operating profit 5,911 12,615 16,236 18,080 Gross margin 18.3% 19.2% 19.4% 19.3% Finance costs -30 -10 -11 -12 Operating margin 11.0% 13.0% 13.7% 13.9% Other income (expense) -42 -25 -25 -25 EBITDA margin 14.1% 15.1% 15.7% 15.8% Profit before income tax 6,204 12,700 17,137 19,935 Net margin 9.5% 10.8% 11.9% 12.6% Income tax -1,034 -2,116 -2,856 -3,322 Liquidity Minority interest -58 -148 -150 -174 Current ratio 1.16 1.19 1.29 1.42 Net profit 5,112 10,436 14,132 16,439 Quick ratio 1.09 1.13 1.23 1.36 EBITDA 7,565 14,583 18,650 20,645 Cash ratio 0.37 0.36 0.45 0.59 Recurrent net income 5,112 10,436 14,132 16,439 Liabilities / assets 63.5% 64.7% 62.2% 58.3% Balance sheet Net debt / equity net cash net cash net cash net cash Cash and bank balances 15,085 22,463 34,679 50,171 Return Trade and bill receivables 29,041 48,249 59,879 64,629 RoA 9.3% 12.7% 12.8% 12.2% Inventories 3,066 3,822 4,685 5,141 RoE 23.0% 35.3% 34.8% 30.6% Other current assets 58 87 103 112 Per-share data Total current assets 47,249 74,621 99,346 120,053 EPS (Rmb) 0.57 1.16 1.58 1.83 Fixed assets and CIP 10,650 11,909 12,544 11,962 BPS (Rmb) 2.75 3.83 5.21 6.78 Intangible assets and others 9,684 10,799 11,829 13,739 DPS (Rmb) 0.11 0.22 0.29 0.34 Total non-current assets 20,334 22,708 24,374 25,700 Cash flow per share (Rmb) 0.93 1.40 2.02 2.44 Total assets 67,583 97,329 123,720 145,754 Valuation Short-term borrowings 174 194 214 234 P/E 35.0 16.4 11.2 9.6 Trade and bill payables 39,779 61,875 75,844 83,815 P/B 7.3 5.0 3.4 2.6 Other current liabilities 677 677 677 677 EV/EBITDA 21.7 10.3 6.7 5.3 Total current liabilities 40,630 62,746 76,735 84,726 Dividend yield 0.5% 1.1% 1.7% 1.9% Long-term borrowings 0 0 0 0 Total non-current liabilities 2,266 198 198 198 Total liabilities 42,897 62,944 76,934 84,924 Share capital 8,889 8,889 8,889 8,889 Retained profit 15,548 25,098 37,350 51,219 Equity 24,686 34,385 46,786 60,829 Total liabilities & equity 67,583 97,329 123,720 145,754 Cash flow statement Pretax profit 6,204 12,700 17,137 19,935 Depreciation & amortization 1,654 1,967 2,414 2,566 Change in working capital 1,538 2,102 1,460 2,756 Others -1,058 -4,184 -2,856 -3,322 Cash flow from operations 8,338 12,586 18,155 21,935 Capital expenditure -3,168 -4,221 -3,143 -2,000 Others 611 -120 -937 -1,893 Cash flow from investing -2,557 -4,341 -4,080 -3,893 Equity financing 0 0 0 0 Bank borrowings 163 20 20 20 Others -133 -955 -1,949 -2,639 Cash flow from financing 29 -935 -1,929 -2,619 Foreign exchange gain (loss) 69 69 69 69 Net changes in cash 5,879 7,379 12,216 15,492 Source: Company data, CICC Research Company description Geely Auto is a leading domestic auto brand in China. It sells most of its products in the China market, and has expanded its sales through exports to other developing countries as well. Geely sales 766thd vehicles in China, achieving 3rd place among domestic brands, and it realized 53.7bn of revenue in 2016, ranking 10th among China's auto brands. The company (50%), Geely Holding (20%), and Volvo (30%) establish Lynk & Co JV, and Lynk & Co 01 was launched in November. Please read carefully the important disclosures at the end of this report 2 CICC Research: February 7, 2018 Figure 1: Geely’s monthly sales volume 180,000 167% 180% 160,000 160% 140,000 140% 120,000 120% 100,000 101% 100% 94% 94% 91% 80,000 82% 80% 80% 74% 71% 67% 60,000 64% 60% 51% 40,000 41% 42% 42% 40% 30% 20,000 19% 20% 0 2% 1% 0% Jul-16 Jul-17 Apr-16 Oct-16 Apr-17 Oct-17 Jan-16 Jun-16 Jan-17 Jun-17 Jan-18 Feb-16 Mar-16 Feb-17 Mar-17 Nov-16 Dec-16 Nov-17 Dec-17 Aug-16 Sep-16 Aug-17 Sep-17 May-16 May-17 Total sales volume YoY Source: Company data, CICC Research Figure 2: Monthly sales volume of models launched in 2016 59% 58% 90,000 57% 57% 62% 54% 52% 51% 80,000 48% 50% 49% 46% 47% 52% 70,000 42% 60,000 35% 27% 50,000 32% 19% 40,000 22% 30,000 9% 12% 2% 20,000 0% 0% 2% 10,000 0 -8% Boyue GS Vison SUV GL As % of monthly sales Source: Company data, CICC Research Please read carefully the important disclosures at the end of this report 3 CICC Research: February 7, 2018 Figure 3: Monthly sales volume of Boyue 35,000 30,884 30,381 30,000 26,317 25,000 21,263 21,282 22,037 20,377 20,137 20,000 18,402 16,779 14,053 15,000 10,128 10,000 8,142 6,049 4,002 5,000 1,018 0 Source: Company data, CICC Research Figure 4: Geely’s growth rate of net profit per car may be slower in 2018e 10,000 (Rmb/unit) 60% 9,000 51% 50% 8,000 40% 7,000 29% 30% 25% 6,000 20% 15% 5,000 13% 10% 4,000 0% 3,000 -10% 2,000 -20% 1,000 -29% -30% 0 -40% 2012 2013 2014 2015 2016 2017E 2018E Net profit per car YoY Source: Company data, CICC Research Figure 5: P/E & P/B bands P/E Band P/B Band Geely 4x 8x 12x 16x Geely 1x 2x 3x 4x 35 (HK$) 35 (HK$) 30 30 25 25 20 20 15 15 10 10 5 5 0 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Wind Info, CICC Research Please read carefully the important disclosures at the end of this report 4 CICC Research: February 7, 2018 Figure 6: Valuations of comparable companies Company Category Price Market Cap P/E P/B EV/EBITDA 2018/2/6 US$ mn 16A 17E 18E 16A 17E 18E 16A 17E 18E China A-Share Listcos CICC Coverage Rmb Chang'an Auto A PV 12.65 9,679 5.9 7.6 8.0 1.4 1.3 1.1 38.3 41.1 38.8 Great Wall Motor PV 12.32 17,915 10.7 23.2 13.7 2.4 2.3 2.0 7.2 12.3 8.3 SAIC Motor PV 34.15 63,567 12.5 11.3 10.5 2.1 1.9 1.8 12.2 11.0 9.8 BYD PV 58.51 25,431 31.6 39.0 25.8 3.4 2.9 2.6 15.9 15.7 12.6 Jianghuai Auto PV/CV 7.33 2,211 11.9 40.7 26.2 1.0 1.0 1.0 12.5 15.2 14.1 Weichai Power A Parts/CV 8.66 11,034 28.4 10.7 9.8 2.2 1.9 1.6 12.6 8.3 8.1 CNHTC Jinan Truck CV 16.73 1,789 26.8 11.5 11.1 2.3 2.0 1.7 30.8 13.2 12.9 Yutong Bus CV 21.97 7,749 12.0 15.2 11.5 3.6 3.6 2.7 11.6 10.3 9.3 King Long Motor CV 10.61 1,026 n.a.
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