Equity Research Auto Sector Apr 18, 218 Geely Auto (175 HK) Buy (maintained) Target price: HK$33.29 Chongjing Deng SFC CE No. BEY953 dengchongjing@gf.com.cn +86 2 8757 6482 GF Securities (Hong Kong) Brokerage Limited 29-3/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Strong model pipeline and rising contribution from key models; valuation still undemanding March sales advanced 39.1% YoY, 1Q18 sales rose 38.7% YoY The company s March sales came in at 12,964 units, up 39.1% YoY/9.7% MoM, continuing its strong Feb sales momentum, while its 1Q18 sales rose 38.7% YoY to 386,296 units, representing 24.4%/23.3% of its 218 annual sales target/our estimate. Lynk & Co 1 March sales volume reached a new high as capacity continued to be ramped up Geely sold 8,57 Lynk & Co 1 models during March, up 112% MoM. The model has seen a positive sales ramp-up so far and we expect sales to pick up further on the back of the strong pipeline and an improving product mix (2/3 models to be launched in 2Q18/2H18 respectively). Lynk & Co s capacity bottleneck should be partly resolved soon as its second factory in Zhangjiakou begins operation after its pilot production period. With the ramp-up of production capacity and the development of its dealer network, we expect Lynk & Co to contribute 16, unit sales in 218. Geely s 217 results: Revenue up 72.7% YoY to Rmb92.8bn and net profit up 18% YoY to Rmb1.6bn GPM was up 1.1pp YoY to 19.4%, and OPM was up 2.2pp YoY to 13.2%. Cash dividend per share surged 142% YoY to HK$.29. Despite substantial capex (up 95.8% YoY to Rmb7.8bn) given new production facilities for Lynk & Co, the company s net cash stood at Rmb12.2bn, down 5.4% YoY, indicating a strong cash flow position. What to expect over the long run? Overseas expansion under way, GKUI interface to enhance driving experience, platform sharing strategy to unleash synergies With Geely s production facilities in Belarus (which commenced operation at end-217) and Malaysia (acquired at end-217), we think the company is shifting its overseas strategy from exporting to localizing production and sales activities. Geely is now developing an intelligent network for cars with Tencent (7 HK) and has implemented the GKUI user interface on its upgraded Boyue 218 model to enhance its appeal to younger customers. Further, new models are being developed under the Geely brand using Volvo s CMA platform, which will improve Geely s branding and reduce costs by optimizing operations via joint procurement and R&D from our view. Stock performance 2% 15% 1% 5% Maintain Buy and TP of HK$33.29 218 will be a key product year for Geely Auto, with a total of seven new Geely models (including two NEV models) and two Lynk & Co models to be launched after April. We expect these new models, as well as upgraded versions and NEV versions of its existing line up, to drive 33% YoY sales growth in 218. The stock is currently trading at 9.7x our 218 EPS estimate, undemanding in our view. We maintain our Buy rating and target price of HK$33.29, based on 15x 218E P/E, 1SD above its three-year historical average of 12x. Risks Monthly sales miss expectations; market downside risk. % Apr-17 Jul-17 Oct-17 Jan-18 Source: Bloomberg Key data Source: Bloomberg Geely Auto Hang Seng April 17(HK$) 22.4 Shares in issue (m) 8,973 Major shareholder Li Shufu (46.2%) Market cap (HK$ bn) 2.993 3M avg. vol. (m) 59.56 52W high/low (HK$) 29.8/1.16 Stock valuation Turnover Net profit EPS EPS YoY P/E BPS P/B ROE (Rmb m) (Rmb m) (Rmb) (%) (Rmb) (%) 216 5,27 5,114.58 126 35.2 2.8 6.5 2.4 217 92,761 1,634 1.19 15 15.2 3.9 4.7 35.7 218E 136,49 16,75 1.867 57 9.7 4.4 4.1 45.2 219E 188,496 25,448 2.836 52 6.4 5.2 3.5 59. 22E 235,154 34,131 3.83 34 3.2 6.4 2.8 65.3
Apr 18, 218 Strong momentum continued in March, strong pick-up in 1Q18 sales The company sold 12,964 autos during March, up 39.1% YoY/9.7% MoM, continuing its strong sales momentum. The company sold 8,57 Lynk & Co 1 units, indicating a healthy ramp-up for the new brand, in our view. Geely s 1Q18 sales rose 38.7% YoY to 386,296 units, representing 24.4%/23.3% of its 218 annual sales target/our estimate. The company also saw growth in overseas market, with exports surging 194% to 1,586 units. Figure 1: Geely Auto monthly sales vol and YoY growth 18, 16, 14, 12, 1, 8, 6, 4, 2, Total monthly sales vol. (LHS) Monthly YoY growth (RHS) 18% 16% 14% 12% 1% 8% 6% 4% 2% % Lynk & Co 1 March sales volume reached a new high as capacity continued to be ramped up Geely sold 8,57 Lynk & Co 1 models during March, up 112% MoM from 4,12 models in Feb. After the CNY holiday-induced slowdown in sales in Feb, consumers now appear to be more positive on Lynk & Co thanks to the competitive 1 model and its marketing campaigns. The model has seen a positive sales ramp-up so far and we expect sales to pick up further on the back of the strong pipeline and improving product mix (2 crossover model/3 sedan due to be launched in 2Q18/2H18 respectively). Lynk & Co s capacity bottleneck should be partly resolved soon as its second factory in Zhangjiakou begins operation after its pilot production period. With the ramp-up of production capacity and the development of its dealer network, we expect Lynk & Co to contribute 16, unit sales in 218. Sedans: Emgrand GL sees decent sales volume, New Vision sales grew moderately Geely s March sedan sales volume came in at 48,36 units (excluding the King Kong model), with sales performance diverging across different models. The company sold 21,372 New Emgrand sedans, down 4.3% YoY. We attribute this weak growth to its comparably low product strength given that the 217-version of the New Emgrand has been on sale for nearly a year since its launch last summer. Sales were also affected by the expiry of the purchase tax subsidy for small-engine vehicles (displacement below 1.6L). The model s March sales came in largely in line with our estimates. We expect New Emgrand sales growth to accelerate again following the launch of the 218 version in late April. The Vision sedan recorded sales volume of 11,628 units during March, up 4.9% YoY. Sales volume for the company s flagship A+ class sedan, the Emgrand GL, surged 51.6% YoY to 12,352, demonstrating a healthy uptrend with monthly YoY growth for the model s volume remaining above 25% for the past six months. The Emgrand GL inherits the cost-effective characteristics of 2
Apr 18, 218 the Emgrand series: its product strength outpaces other A+ sedans while remaining competitive in terms of pricing. We believe the Emgrand GL will gradually become a sales pillar for the company s sedan segment. The company sold 3,3 of its B-class sedan, the Borui, during March, down 9.9% YoY. The company has launched the PHEV version of the Borui, and we expect the Borui GE to enhance its appeal to consumers from cities with restrictive license plate policies, boosting sales. Figure 2: New Emgrand monthly sales volume 35, 3, 25, 2, 15, 1, 5, Figure 3: Emgrand GL monthly sales volume 16, 14, 12, 1, 8, 6, 4, 2, SUV segment recorded solid YoY growth Boyue sales climbed 7.1% YoY to 21,919 units. Equipped with the GKUI interface, the upgraded 218 Boyue was launched on March 15 and we maintain our positive view on the Boyue s full-year sales given its overseas expansion progress (Boyue was officially launched in Belarus on Feb 28) and improving product strength. The Emgrand GS (another sales pillar for the company s SUV segment) recorded sales of 12,243 units in March, up 47.6% YoY. The company sold 1,46/1,366/7,489 Vision SUV/X3/S1 models during the month. The Vision X3 (a mid-range small SUV) debuted last Aug. After a three-month ramp-up period, monthly sales volume for the Vision X3 has remained above 1k units for five consecutive months, showing that Geely s strategy to offer SUVs designed on hatchback models and with affordable pricing has been well received by consumers. Figure 4: Geely Boyue monthly sales volume Figure 5: Emgrand GS monthly sales volume 35, 3, 25, 2, 15, 1, 5, 25, 2, 15, 1, 5, 3
Apr 18, 218 Figure 6: Geely annual sales volume and domestic market share in 21-1Q18 (1, units) Figure 7: Sales volume breakdown of sedans vs SUVs Sales volume (LHS) Market share (RHS) 1% % of sedan % of SUV 14 12 1 8 6 3.% 2.9% 3.1% 3.1% 2.1% 2.4% 3.2% 5.% 6.3% 7% 6% 5% 4% 3% 8% 6% 4% 49% 53% 52% 4 2 2% 1% 2% 31% 21 211 212 213 214 215 216 217 1Q18 % % 12% 15% 12% 213A 214A 215A 216A 217A 218E 219E Figure 8: Key automakers March/1Q18 sales volume & YoY growth Company Ticker Vol (March) YoY Vol (1Q18) YoY Geely Auto 175 HK 12,964 38.7% 386,296 39.1% Brilliance China 1114 HK 35,273 9.3% 13,632 13.8% Great Wall Motor 2333 HK 88,247 3.3% 256,623 1.% GAC Motor 2238 HK 183,377 4.9% 58,432 11.2% SAIC Motor 614 CH 649,511 7.4% 1,822,42 1.1% Note: Brilliance China s sales volume only includes contribution from the BMW JV Geely s 217 results: Revenue up 72.7% YoY to Rmb92.8bn and net profit up 18% YoY to Rmb1.6bn. We held two post-results meetings (in Hong Kong and Guangzhou). Key takeaways below: Strong product pipeline, nine new models to be launched in 218 This will include two SUVs (a sports version of the Boyue and an A-class SUV), two sedans (one under the same platform as the Borui but higher end, and the other one being similar to the New Emgrand but with better product positioning), two NEV models (one crossover and one sedan) and the company s first-ever MPV (aimed at families). The Lynk & Co 2 crossover is expected be launched in 2Q18, and the Lynk & Co 3 sedan will be launched in 2H18. Further, the company will roll-out PHEV versions for all key products in 2H18. 4
Apr 18, 218 Figure 9: Geely Auto s new models to be launched in 218 Brand Class Description Sedan New generation of B segment sedan New A segment sedan (with good fuel efficiency) New mid-size SUV under the Boyue family SUV New A segment SUV Geely MPV The Group s first MPV model Upgrade Upgraded versions of all major existing models NEV Two pure EVs from the Group s new EV platform PHEV and HEV versions for all major existing models Sedan Lynk 3: The brand s first sedan Lynk & Co Crossover Lynk 2: The brand s first crossover model NEV PHEV versions for all Lynk & Co models Lynk & Co keeps ramping up capacity, targeting five factories with production capacity of 1.5m units We believe Geely s capacity bottleneck issue will be alleviated in the medium term. Its second factory located in Zhangjiakou is now undergoing a pilot production phase and will commence operation soon, according to management. The third and fourth factories in Zhejiang province are both under construction, with the third almost completed. The company is currently selecting sites for its fifth factory. Management expects to launch 3-4 Lynk & Co models per year and has already established a sales network with almost 1 dealers across China (its plan for this to reach 25-3 by end-218). Geely brand to share the CMA platform with Volvo and Lynk & Co According to Geely s management, as well as Lynk & Co, the Geely brand has also started to develop new models under Volvo s CMA platform, which will enhance Geely s branding and reduce costs by optimizing operations via joint procurement and R&D. Moreover, Lynk & Co is developing models based on Volvo s SPA platform, which is designed for full-sized vehicles such as Volvo s XC9. Geely attempted to develop a full-size model (under the Boyue) benchmarking Toyota s Land Cruiser in 216, but has not yet launched the model. We think the company will extend its line-up to full-sized vehicles with the Lynk & Co brand. GKUI interface to enhance driving experience Geely implemented the GKUI interface in its upgraded Boyue model. Cooperating with internet giants such as Tencent (7 HK), JD (JD US) and international player BOSCH, the interface is now at an accelerated stage of development and the company thinks it is on a good footing to become a global leader in the future mobility sector. 5
Apr 18, 218 Figure 1: Geely ASP and YoY growth in 21-17 (Rmb) Figure 11: Geely sales volume and YoY growth in 21-17 (1k units) ASP (LHS) YoY (%, RHS) Sales volume (LHS) Geely sales YoY (RHS) 8, 7, 6, 5, 4, 3, 25% 2% 15% 1% 14 12 1 8 6 Sector sales YoY (RHS) 7% 6% 5% 4% 3% 2% 1% 2, 1, 5% 4 2 % -1% -2% % -3% Geely continues to be our top pick in the auto sector given its high earnings visibility. We lay out our rationale below: 1) Strong product cycle continues, sales volume to rise on the back of model pipeline A) Geely will cover both the mass segment and the high-end segment through its Geely and Lynk & Co brands. B) Geely will upgrade its key existing products and launch seven new models in 218, including two sedans (a fuel-efficient A-class and a B-class sedan), two SUVs (sports version of the Boyue and an A-class SUV), the Lynk & Co 2 (crossover), Lynk & Co 3 (sedan) and Geely s first ever MPV. Geely has pledged to sell 1.58m models in 218, representing a 27% increase from 217 volume. We think the company will continue its strong product cycle which began in 216. 2) Blue Geely initiative underway as NEV segment grows Geely will launch two EV models in 218, along with its key models PHEV and HEV versions, in order to improve the sales contribution from its NEV segment. Geely s NEV sales volume rose 47% YoY in 217 and we believe the Blue Geely initiative is fully underway given more NEV model launches. 3) Top-line growth driven by rising volume and ASP, net profit increases on platform sharing strategy For its top line, we believe improving sales volume backed up by a strong pipeline should form a powerful driving force for Geely s revenue. Economies of scale should enhance the company s bargaining power both upstream and downstream, enabling the company to improve its ASP and margins simultaneously (Geely s operating profit margin rose to 13.2% in 217). Further, Geely s expenses have grown at a slower pace than revenue and gross profit in the past three years, with its selling expenses and management expenses as a percentage of revenue decreasing each year since 214. Geely s platform sharing strategy with Volvo and Lynk & Co should allow the three companies to reduce costs through shared R&D expenses and joint procurement. We think Geely and Lynk & Co will further optimize their expenses and boost net profit. 6
(' units) YoY % Company report Apr 18, 218 Maintain Buy and TP of HK$33.29 218 will be a key product year for Geely Auto, with seven new models (including two NEV models) from the Geely brand and three from Lynk & Co to be launched after April. We expect these new models, as well as upgraded versions and NEV versions of its existing line-up, to drive sales growth of 33% in 218 to 1.66m units (1.5m/.16m from Geely brand/lynk & Co). The stock is currently trading at 9.7x our 218 EPS estimate, undemanding in our view. We maintain our Buy rating and target price of HK$33.29, based on 15x 218E P/E, 1SD above its three-year historical average of 12x. Risks Monthly sales miss expectations; market downside risk affects the company s stock; aggressive discounts aimed at driving sales volume and hence lowering profitability; marketing expenses for Lynk & Co are higher than estimated. Figure 12: Geely ASP and YoY growth in 21-17 (Rmb) Figure 13: Geely sales volume and YoY growth in 21-17 (1k units) 1, Revenue (LHS) YoY growth (RHS) 1% 12 Net profit (LHS) YoY growth (RHS) 14% 9 8 7 6 5 4 3 2 1 Revenue CAGR 21-17: 29% 8% 6% 4% 2% % -2% 1 8 6 4 2 Net profit CAGR 21-17: 4.7% 12% 1% 8% 6% 4% 2% % -2% -4% -4% -6% Figure 14: Revised sales volume estimates Figure 15: Revised GPM, OPM and NPM estimates 25 2 15 1 5 213 214 215 216 217E218E219E Sales volume Sales volume growth 2-Y CAGR sales volume 7 6 5 4 3 2 1 (1) (2) (3) 25 2 15 1 5 2.1 21.5 22. 19.4 18.2 18.2 18.3 13.2 13.9 14.4 11.7 1.9 11.5 12.3 13.5 9.3 8.9 9.1 9.5 6.6 7.5 213 214 215 216 217 218E 219E GPM% OPM% NPM% 7
Apr 18, 218 Figure 16: Geely Auto annual sales volume by model/market As of year-end 217 Total 217 Sales vol. (units) 216 Sales vol. (units) YoY (%) 1,247,116 765,97 62.8 Domestic 1,235,361 744,191 66. Exports 11,755 21,799 (46.1) Key models Boyue 271,485 14,911 158.8 SUV Emgrand GS 161,385 6,532 166.6 Vision SUV 127,42 69,59 84. Emgrand GL 113,311 3,64 276.9 King Kong 52,126 63,412 (17.8) Sedan Borui 38,26 47,78 (18.7) Vision 165,996 153,75 8.4 New Emgrand 214,75 213,222.4 Figure 17: Financial statements Income Statement Balance Sheet Year-end Dec 31 (Rmb m) 216 217 218E 219E 22E Year-end Dec 31 (Rmb m) 216 217 218E 219E 22E Revenue 53,721.6 92,76.7 136,48.6 188,496.5 235,154.3 Non-current assets COGS (43,879.9) (74,779.3) (17,8.7) (147,27.3) (182,244.5) AFS financial assets 21.8 21.7 23.8 26.2 28.8 Gross profit 9,841.7 17,981.4 29,327.8 41,469.2 52,99.7 Interest in associates/jv 1,2. 4,84.9 5,285.4 5,813.9 6,395.3 Other income 1,131.4 1,229.1 1,629.2 1,955.1 2,346.1 Property, plant and equipment 1,65.3 14,52.9 17,9.3 2,431.4 24,16.7 Selling and distribution costs (2,52.7) (4,55.7) (6,2.) (8,15.3) (1,111.6) Intangible assets 6,461.8 1,551.8 13,717.3 17,832.5 23,182.2 Administrative expenses (2,559.9) (2,922.8) (5,865.6) (8,15.3) (1,111.6) Goodwill 6.9 16.1 16.1 16.1 16.1 Other operating expenses: SBC (42.2) (27.7) (68.2) (94.2) (117.6) Prepaid land lease payments 2,2.9 2,123.9 2,336.3 2,569.9 2,826.9 Operating expenses_as stated (3,973.4) (5,777.1) (1,36.5) (14,349.9) (17,994.8) Deferred tax assets 188.1 41.3 441.5 485.6 534.2 Operating profits_as stated 5,868.3 12,24.3 19,21.3 27,119.3 34,914.9 Total non-current assets 2,333.8 31,972.6 38,91.7 47,175.7 57,9.2 Finance income 85.4 127.1 125.1 15.1 18.1 Current assets Finance costs (115.5) (162.3) (146.2) (168.1) (193.3) Inventories 3,65.8 6,27.3 7,835.5 1,186.2 13,242. Share of (loss)/profit of associates/jv (8.7) 42.4 1,182.5 3,562. 6,224.1 Accounts receviables 1,237.4 7.7 1,51.1 1,576.6 2,364.9 Profit before tax 6,25.2 12,774. 2,182.7 3,663.3 41,125.9 Prepayments and other receivables 2,939.2 3,986.7 5,182.7 6,737.5 8,758.7 Taxation (1,33.8) (2,38.6) (3,229.2) (4,96.1) (6,58.1) Notes receivable 24,864.1 28,79.9 3,23.5 31,742. 33,329.1 Profit for the year 5,171.5 1,735.4 16,953.5 25,757.2 34,545.7 Financial assets at fair value..... Profit attributable to: Tax recoverable 14.9 4.1 3.3 2.6 2.1 Equity holders of the Company 5,113.7 1,633.7 16,75.1 25,448.1 34,131.2 Cash and cash equivalents 15,45.5 13,414.6 15,79.7 23,69.8 34,522.2 Non-controlling interests 57.8 11.7 23.4 39.1 414.5 Total current assets 47,249. 53,8.2 6,181.7 73,47.1 92,316. Current liabilities Cash Flow Statement Accounts payable 23,41.3 3,593.8 39,771.9 51,73.5 67,214.6 Year-end Dec 31 (Rmb m) 216 217 218E 219E 22E Notes payable 99.5 1,45. 1,567.6 2,351.3 3,527. Income before taxation 6,23.9 12,774. 2,182.7 3,663.3 41,126 Advances from customers 7,91.4 7,984.5 8,144.2 8,37. 8,473.2 Depreciation & amortisation 1,654.3 1,938. 2,422.5 2,97. 3,488 Dividends and other payables 8,727.8 7,99.2 8,7.1 9,57.1 1,527.2 Associate adjustment 8.7 3.9 (1,182.5) (3,562.) (6,224) Non-current borrowings due < 1 Yr 174.4 1,296.5... Tax paid (753.7) (1,758.9) (3,229.2) (4,96.1) (6,58) Tax payable 676.8 1,73. 1,18.3 1,298.3 1,428.1 Change in working capital 1,538.1 (51.3) (561.4) (617.5) (679) Total current liabilities 4,63.2 49,91.9 59,364.1 73,23.3 91,17.1 Net cash from operating activities 8,188.7 9,793.9 11,433.6 11,434.6 11,435 Non-current liabilities Capex 562.2 (3,451.6) (3,796.7) (4,176.4) (4,594) Borrowings/Senior notes 2,68.3.... Investment (2,655.2) (3,95.) (1,975.) (987.5) (494) Deferred tax liabilities 198.1 268. 348.4 452.9 588.7 Net cash from investment activities (2,557.5) (11,911.1) (1,281.3) (9,673.5) (9,597) Total non-current liabilities 2,266.4 268. 348.4 453.9 59.7 Dividend paid (281.) (96.1) (4,924.8) (7,482.1) (1,35) Net assets 24,686.2 34,81.8 39,38. 46,898.5 57,645.4 Other non-operating 31.4 (724.5) 5. 5. 51 Equity Net cash from financing activities 29.5 (1,684.6) (4,424.8) (6,982.1) (9,533) Equity attributable to holders Change in net cash 5,89.7 (1,62.2) 2,426.1 7,329.1 11,51 Issued capital 162.7 164.3 164.3 164.3 164.3 Reserves 24,274.5 34,32.8 46,128.1 64,94.1 88,19.2 Opening cash and cash equivalents 9,166.9 15,45.5 13,414.6 15,79.7 23,7 Shareholders' funds 24,437.2 34,467. 46,292.4 64,258.4 88,354 Effect of FX, net 68.8 (28.6) (5.) (5.) (49) Non-controlling interests 249. 343.8 (6,912.4) (17,359.8) (3,79) Closing cash and cash equivalents 15,45.5 13,414.6 15,79.7 23,69.8 34,522 Total equity 24,686.2 34,81.8 39,38. 46,898.5 57,645 Sources: Company data, GF Securities Development & Research Center 8
Apr 18, 218 Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 1% Neutral Expected sector relative performance ranges between -1% and 1% Cautious Sector expected to underperform benchmark by more than 1% Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. 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