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Geely Automobile Equity Research 8 January 2021 Company update Research Team Geely Automobile China | Automobiles Rating BUY (as at 8 January 2021) Last Close HKD 27.80 Fair Value HKD 32.80 Recovery gathers momentum Security information • Solid December 2020 sales volumes, up +19% from a Ticker 175 HK year ago and marking the highest monthly volumes Market Cap (HKD bn) 272.93 achieved over the past twenty-three months. Daily Turnov er (HKD m) 1,654.84 • 2021 passenger vehicle sales target of 1.53mn units Free Float 58% was set, implying a bullish growth of +16% yoy Shares Outstanding (m) 9,167 expected. Top Shareholder PROPER GLORY HOLDING 26.86% • Lifting our estimates and fair value to HKD32.80, reflecting management’s latest positive guidance of Price performance chart an improved business outlook, solid model cycle 50 120 which includes NEV vehicles and should help 40 100 underpin Geely’s valuations. 80 30 60 20 Investment thesis 40 As one of China’s leading auto-manufacturers, Geely 10 20 differentiates itself through the successful development 0 0 and launch of its own lower-priced models. Despite Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 intense competition, Geely has seen steady domestic 175 HK Equity MXCN Index (RHS) retail market share gains over the past decade to ~6.5%, with sales of more than 1.3 mn cars in 2019. Given Financial summary the highly competitive, cyclical and capital-intensive CNY mn 2019 2020E 2021E characteristics of the global auto manufacturing industry, we are selective within the sector. Within the Rev enues 97401 94587 108704 China auto space, we favour Geely for its stronger Cost of sales 80485 84256 89180 financial health and solid pipeline of new products, Operating profit 8669 8443 10572 which includes new energy and electrified vehicles. The Net profit 8190 7838 10477 Chinese government’s 14th Five-year plan includes a target to raise NEV sales penetration to 20% by 2025 EPS (CNY) 0.89 0.86 1.15 DPS (CNY) 0.25 0.21 0.27 (from 2020E’s ~5-6% level) which implies stronger growth prospects and more intense competition ahead. Amongst the traditional auto manufacturers, Geely is Key ratios expected to be one of the key runners in the race, CNY mn 1H19 1H20 YoY% which should help to offset potential future decline in internal combustion engine (ICE) sales. The impending Rev enues 47,559 36,820 -23% merger with Volvo should solidify its global presence Cost of sales 39090 30518 -22% and reap R&D and cost benefits over the medium term. Gross profit 8,469 6,302 -26% Investment summary Profit before tax 4764.6 2640.1 -45% Net profit 4047 2320 -43% • Solid Dec 2020 sales, FY20 volume target achieved – EPS (CNY cts) 44.4 24.7 -44% Geely reported December 2020 sales of 154,202 units, which grew 19% from a year ago (2% month-on- Source: Company, Bloomberg, Internal estimates month) and marked the highest monthly sales volume achieved over the past 23 months. 1 Equity Research 8 January 2021 • FY20 volume target of 1.32mn reached, representing a modest -3% decline from a year ago - With the latest December 2020 numbers, the company’s FY20 sales target of 1.32mn units has been hit, representing a modest decline of -3% from a year ago dragged by the pandemic impact. Excluding exports, which more than doubled from a year ago to ~12k units, domestic sales for December 2020 grew 12% yoy (or 2.6% month on month). Out of the total sales volume in Dec 20, 7171 units were new energy and electrified vehicles (~5% of total December volumes). • More bullish guidance for 2021 issued – Geely guided for 2021 passenger vehicle sales volume target of Source: Company 1.53mn units (which includes targets for LYNK and co- branded vehicles), implying a bullish growth outlook of +16% yoy this year, helped by a low base effect in 2020 and underscoring the cyclical demand recovery underway. In its recent investor updates, management shared its autonomous driving roadmap over the next five years, which will move from partial autonomous driving in 2021, highway autonomous driving by 2023 to full autonomous driving on open roads by 2025. To optimize costs and efficiency, it will continue to work with solution providers (e.g. Mobileye, Weymo, Baidu Apollo). • Lifting fair value to HKD32.80 implying 24.3x FY21E PER. We continue to like Geely for its new products line-up. The company is expected to launch four new models in FY21E, including the first sedan from its EV- dedicated SEA (Sustainable Experience Architecture) platform with level 3 autonomous driving hardware set-up named Zero Concept - expected launch in 2H21 and targeted to be sold overseas in developed markets of U.S. and Europe. Our latest upgrade incorporates our expectation of both volume and margin improvement this year (as auto-makers trim cash support to dealers amid the ongoing sector recovery). Other potential catalysts could come from its plans for A-share IPO and further progress in its sales and development of electrified autonomous and smart vehicles. Add in stages following the rally over the past months. Potential catalysts Investment risks • Attractive valuation for a potential merger with • Sharper-than-expected cost inflation leads to Volvo, currently owned by Geely’s parent, which margin erosion. Weaker economic growth both should help expand the Volvo branding in the domestically and globally could dampen auto luxury auto market in China and support plans to sales. Protectionism and lack of brand awareness expand Geely’s and Lynk’s brands in Europe. Less could lead to slower-than-expected global intense competition or stronger-than- expected expansion. Stricter environmental regulations new product sales could lift margins and earnings. could increase auto production costs and impact Market share gains from improved brand margins. Policy/regulatory risks, overcapacity & awareness and new product launches (in pricing pressure concerns in the Chinese auto 2 Equity Research 8 January 2021 particular EV vehicles). Margin and volume industry. Weaker demand for Geely’s products as expansion. Stimulus policy to boost demand. competition intensifies with new models being Consolidation in the auto industry benefitting brought to the market. leading players like Geely and easing competitive pressures. Valuation analysis Price/Earnings Price/Book Dividend Yield (%) ROE (%) 2020E 2021E 2020E 2021E 2020E 2021E 2020E 2021E GEELY AUTOMOBILE HOLDINGS LT (175 HK) 30.4 21.4 3.5 3.0 0.9 1.3 12.3 14.8 GUANGZHOU AUTOMOBILE GROUP-H (2238 HK) 10.2 7.8 0.8 0.8 3.0 4.0 8.0 9.6 BRILLIANCE CHINA AUTOMOTIVE (1114 HK) 3.5 3.2 0.7 0.6 5.1 6.1 21.7 20.2 DONGFENG MOTOR GRP CO LTD-H (489 HK) 7.0 5.5 0.5 0.5 4.1 5.0 7.4 8.7 GREAT WALL MOTOR COMPANY-H (2333 HK) 44.2 27.7 3.8 3.4 1.0 1.6 8.6 12.7 BYD CO LTD-H (1211 HK) 119.8 101.2 8.8 8.1 0.1 0.1 7.8 8.7 BYD CO LTD -A (002594 CH) 139.7 114.2 10.4 11.8 0.1 0.1 7.6 8.0 SAIC MOTOR CORP LTD-A (600104 CH) 11.5 9.3 1.0 0.9 3.8 4.7 8.8 10.1 GREAT WALL MOTOR CO LTD-A (601633 CH) 78.1 47.6 6.6 6.0 0.6 0.9 8.6 12.7 NIO INC - ADR (NIO US) NA NA 49.1 70.3 0.0 0.0 (33.1) (83.3) TESLA INC (TSLA US) 334.5 193.7 43.1 34.7 0.0 0.0 13.3 19.2 XPENG INC - ADR (XPEV US) NA NA 9.2 13.2 0.0 0.0 (85.4) (15.9) LI AUTO INC - ADR (LI US) NA 5,864.4 9.8 9.2 0.0 0.0 (15.9) (49.7) Source: Bloomberg Price/Earnings chart Price/Book chart 25 6.0 20 5.0 4.0 15 3.0 10 2.0 5 1.0 0.0 0 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 PE Avg +2SD PB Avg +2SD +1SD -1SD -2SD +1SD -1SD -2SD Source: Bloomberg Source: Bloomberg 3 Equity Research 8 January 2021 Additional highlights Source: Company 4 Equity Research 8 January 2021 Company overview (as of 31 December 2019) Company description Geely Automobile is engaged in the research, production, marketing and sales of passenger vehicles and related automobile components in China. Unlike many other Chinese automakers, Geely is privately owned with majority stake of ~44% held by Mr Li Shu Fu, the chairman and executive director of the company who has been part of the enterprise’s growth journey. The company operates in two segments, namely, automobiles and related parts and components, as well as gearboxes. Its parent company, Zhejiang Geely, is the owner of Volvo Cars. Geely has a joint venture with 5:3:2 shareholding structure between itself, Volvo Car and Zhejiang Geely under the Lynk brand name, which targets global higher end market segment and offers designs targeted to appeal to millennials (high tech interiors). This supplements current market coverage by Geely (mass) and Volvo brands (premium). As of 1H2019, Lynk has 263 dealers in China. The company owns 50% stake in Lynk & Co, a new high-end brand that is positioned to compete with foreign joint ventures with models priced at similar price points.
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