Geely Auto's Big Underrated Potential

seekingalpha09-17

Strong results in the first half of 2024, improved profitability.Balancing efforts to leverage all powertrains, focus on electrified cars.Geely Auto stock is a good value, but the market outlook is ...

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Though just making it to the show was an accomplishment, the models did not make much of an impression then. Fast forward to Geely Auto’s Frankfurt showing this September where its latest electric cars were received very differently. EX5 among them is being rolled out to great enthusiasm in international markets. Geely Auto’s quiet journey over the past couple of decades to the top echelons of the Chinese automotive space has been impressive. Not only that: it earned a spot in the list of the top ten automakers globally based on Q1 sales (which rose 27%), again as the first Chinese company to achieve the feat. Not unlike other homegrown peers, Geely Auto is focusing on electrification and overseas expansion as a twin strategy to push growth further. It is already selling actively across the emerging world. And with Zhejiang Geely, the parent group, owning a broad portfolio of marques including several with a significant presence in the West, the Chinese automaker can, by proxy, gain access even into such high-barrier-to-entry markets like the EU and North America. Holding group structure (not including smaller interests) (Zhejiang Geely) All has not been smooth sailing for Geely Auto. Unfavorable economic conditions in China and relentless competition have challenged the company, with earnings taking a hit in recent years. That, of course, did not bode well for the stock. Still, investors appear to be overly pessimistic about Geely Auto, disregarding its strengths of innovation, customer orientation and global positioning. The stock might prove its worth but only to patient shareholders. Financial update After an upbeat beginning to the year, Geely Auto sustained the positive performance momentum into H1. Exceeding expectations, sales increased 41% in the first six months to 956,000 units and revenue climbed 47%.   1H24 financials (Geely Auto) Despite recent rounds of price slashing by competitors, Geely Auto managed to raise its average selling price slightly while simultaneously lowering operating expenses. Gross margin, as a result, improved by 0.7% percentage points to 15.1%. Net profit jumped 114% (excluding non-recurring items). For all the cost management initiatives, Geely Auto continues to spend heavily on research and development: R&D expenditure increased by 18% year-on-year. It can afford to do so. Cash and equivalents increased by 12.8% in H1; from end-2023, net cash rose by 25%. By segment Higher-margin new energy vehicles (NEVs) — i.e. plug-in hybrids, full-battery and fuel-cell electric vehicles — remain the primary growth driver. On their own, NEVs grew almost 3 times faster, +117%; at 320,000 units, they accounted for 33% of total, up from 22% at end-2023.   1H24 sales mix (Geely Auto) Geographically, Geely Auto continues to grow better abroad, with export sales rising by 67% in H1 to 197,428 units. (That translates to 21% of total sales, so most sales are still happening in China.) The overseas markets are in the Middle East, Asia Pacific, Africa, Latin America and Eastern Europe. Trading update August 2024 sales numbers were released by holding group Zhejiang Geely. Geely Auto, which brought two-thirds of the group total (with 181,229 units), saw an increase of 21%. Notably, the share of electrified vehicles (at 75,484 units) went up to 42%, with sales rising 65%. Part of the reason for stronger demand is the increased government subsidy for NEVs. Geely Auto’s premium brand Lynk & Co sold 20% more than last August (22,528 units), while its premium EV brand Zeekr (ZK) increased sales by 46% (to 18,015 units) — leading the additions among Chinese automakers during the month. Management outlook The outlook for 2H of 2024 is optimistic. Growth rates are expected to be high, even if not as high as in the first half of the year: annual sales are now projected to reach 2 million units (previous guidance 1.9m), up from 1.7m in 2023 — implying an annual growth rate of 17.6% — with sales of NEVs increasing by 70% (48% last year) and exports by 45% (38%).           Geely brand Zeekr brand Lynk & Co brand   2024 sales target  1.48m (2023: 1.31m)   230k (2023: 119k)   290k (2023: 220k)    New models in H2 3 NEVs 7X, MIX 2 BEVs   Strategic focus Global expansion Smart driving features NEV sales network   Click to enlarge Source: Author’s based on Geely Auto 2024 Interim Results presentation For comparison, the largest rival Chinese carmaker BYD Co. (OTCPK:BYDDF) is aiming to sell 4 million units for the whole of 2024 with a growth rate exceeding 30% from a year earlier (when it set a record with over 3 million NEVs sold). Market update The competitive environment in China is as ruthless as ever. Geely, which lost its top spot to BYD last year, has for now settled at number three behind Chery, according to 1H sales numbers compiled by the China Passenger Car Association. Given a loss of market leadership by the company, Geely the brand has inevitably suffered. While BYD (brand value +20%, $12.1b) finds itself in the top 25 automotive names globally, Geely ranks 36th (brand value -46%, $3.1b): among 22 Chinese automotive brands included in the 2024 list by Brand Finance, Geely came third behind Great Wall Motor's Haval in second place. Nonetheless, Geely has been singled out for an increase in its brand strength, contributed by factors such as customer service, innovation, CSR and growth forecasts. The twin strategy adopted by Geely Auto mirrors the trends seen in the wider Chinese auto industry. NEVs are becoming more and more entrenched, their market share rising steadily: by 1H 2024, they accounted for 35% of all new vehicle sales. While overall sales increased by 6% year-on-year, sales of NEVs rose by 32% as consumers continue to favor electrified models over alternatives, local brands preferred. Electrification aside, Chinese automakers are all moving overseas in search of new growth. China has officially overtaken Japan as the world’s biggest vehicle exporter, with NEV exports leading: they grew 78% last year totalling 1.2 million units and may reach 3.5 million in 2025. Increased tariffs in certain jurisdictions are a hurdle, but that could be managed with some ingenuity. Geely Auto, like few others, is considering setting up production in Europe. Partnering with automakers outside of China, like Renault and Mercedes-Benz, has been another way. It also helps that Zhejiang Geely’s Volvo Cars and Polestar — which will start building in Renault’s South Korean plant as soon as this year and later in Europe — are well established in Western markets. This may potentially be leveraged by Geely Auto, particularly its Zeekr brand whose tech-filled vehicles are showing good promise even with more sophisticated crowds. Versus BYD In financial terms, Geely Auto does not compare well to BYD. Not only BYD sells twice as many cars as Geely Auto, it also earns more per car. The difference in product value perception might be the reason. BYD also has an easier time selling its cars than Geely Auto given the lower selling, admin and general expenses (although this is not a completely accurate estimation of customer acquisition costs).         2023 Revenue Cars sold Revenue per car   BYD $83.2b 3m $27,730   Geely Auto $25.25b 1.68m $15,028   2023 SG&A Cars sold SG&A per car   BYD $5.4b 3m $1,800   Geely Auto $3.45b 1.68m $2,054   2023 Net profit Cars sold Net profit per car   BYD $4.2b 3m $1,400   Geely Auto $0.747b 1.68m $445   Click to enlarge Source: Seeking Alpha With both better revenue and lower cost per vehicle sold, it is no wonder that BYD is able to earn three times the profit. Greater earnings generate greater cash flows which the company has been using to support aggressive scaling and intensive R&D. Geely Auto does hold an edge in some things. It has a more robust existing export network, whilst BYD is reliant almost completely on China, for now. GELYF is also a much more affordable investment compared to BYDDF which has climbed 461% over the past five years, despite comparable growth rates in recent reporting periods. Valuation Geely Auto’s primary Hong Kong listing (SEHK:0175) has risen 15% since the earnings announcement on August 21. But longer-term performance has been disappointing: the price slid 30% in the last five years against a 60% rise of the Hong Kong auto industry. At 5.9x, the price-to-earnings ratio is at a five-year low. Geely Auto is also cheaper compared to a number of its peers — BYD (SEHK:1211) at 19.4x, Changan (SZSE:000625) at 17.8x, Great Wall Motor (SEHK:2333) at 6.7x — and on par with BAIC Motor (SEHK:1958) at 6x. A notable difference between them and Geely Auto is in the expected earnings growth, with Geely Auto being the only stock assigned a negative rate, -5.1%, by analysts. The industry’s annualized earnings are forecast to grow by 14%. Conclusion Geely Auto may no longer be the top automaker in China, but it is not backing down. BYD’s scale is genuinely hard to match, but Geely Auto’s latest growth numbers have come higher: the former’s all-NEV sales increased by 29% in 1H of 2024 (2023: 62%), while the latter’s NEV segment sales rose by 117% (2023: 48%) during the same period. The fact that NEVs keep on boosting their share of Geely Auto’s total sales year to year is proof that the management is growth oriented. Heavy investments in growth could explain the company’s struggle with profitability since, excepting the latest numbers, net profit growth had been weak (just 1% in 1H23 when gross margin contracted by 0.2 percentage points). All the same, Geely Auto remains true to its mission of “Making Refined Cars for Everyone”, so hybrids and ICEs are getting attention, too. And that really is the main reason why Geely Auto should keep on growing business. While other automakers are scrapping electric-only plans (spooked by a slowdown in the EV market) — including fellow Zhejiang Geely subsidiary Volvo — Geely Auto is already ready to meet the demand for all types of powertrains. It is strategically paring down its product line where necessary focusing on popular ICE models and varying offerings of NEVs. The stock has promise but, because of market doubts around the company, returns — other than dividends, at 2.4% currently — may not be realized in the near term.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2468331864"}