Geely Automobile: China’s Leading Car Stock

Geely Automobile Holdings Ltd (SEHK: 175) isn’t that well known outside of China. In fact, the company’s most famous brand outside of China, Volvo, isn’t Chinese at all. Geely bought Swedish carmaker Volvo in 2010 mainly to capture more growth in the Chinese market. Yet Geely is a large company and is also a component stock of Hong Kong’s Hang Seng Index.

Geely isn’t wrong to focus on the Chinese market. China’s car market is the largest in the world. Despite the slowdown in its economy, China’s largest auto industry association believes vehicle makers will ring up sales of over 26 million vehicles this year.

In comparison, analysts expect new vehicle sales in the US to be around 16.8 million for 2019. Due to China’s large population and rapidly rising incomes among the population, China’s appetite for vehicles will likely ensure the country remains the largest market for vehicles for the foreseeable future.

Given the market, the fact that China’s government wants to create “national champions” in the domestic market, and Geely’s fair forward price-to-earnings (PE) ratio of 12, the company has an opportunity to be a potentially interesting stock for investors. Let’s take a closer look at it.

Fast historical growth…But a recent slowdown

Due to the rapid growth in China’s auto market over the past decade, Geely’s financial performance has been strong from 2009 to 2018. From 2009 to 2018, Geely averaged a 10-year comppund annual growth rate (CAGR) of 22.1% in sales volume and a 30.5% 10-year CAGR in terms of net profit. The company’s dividend per share (DPS) also averaged a 10-year CAGR of 36.1%.

While Geely’s financial performance has been strong from 2009 to 2018, sales have weakened in 2019 due to the trade tensions between China and the United States and the softening Chinese economy. As a result, China’s total auto sales fell 12.4% year-on-year for the first half of 2019.

Geely Auto financials

Source: Geely Automobile Corporate Presentation

Given that Geely gets most of its sales domestically, Geely’s total sales fell 15% year-on-year to 651,680 vehicles for the first half of 2019, with domestic sales falling 19% year-on-year and attributable profit falling 40% year-on-year to RMB 4.01 billion (US$560 million). For full-year 2019, management expects sales to fall 10% to around 1.36 million units.

Although Geely’s exports to other countries soared 344% year-on-year to 38,619 vehicles, exports only made up around 5.9% of sales and its growth hasn’t offset the domestic weakness.

Adjusting to disruption

Although China’s vehicle market is slowing, it will eventually recover as government policy responses strengthen the Chinese economy.

Once China’s vehicle market recovers, Geely won’t be able to count on China’s domestic market to grow in terms of the total number of units sold as it did in the previous decade due to the market’s already-large size.

Instead, the company will need to adjust to the newest technology successfully to deliver shareholder returns. Disruptive technologies such as electric vehicles (EVs) and autonomous driving present both an opportunity and a threat to traditional automakers like Geely.

On the one hand, autonomous driving could allow Geely to sell higher-margin cars and EVs offer a new growth market for it. On the other hand, Geely’s sales might suffer if its technology is not up to par with its competitors.

From this standpoint, execution will be crucial. How Geely’s autonomous driving efforts go and how many EVs it sells will matter a lot more in the coming years. In terms of its self-driving efforts, Geely hopes to achieve full automation by 2022. Sales of Geely’s new energy and electrified vehicles rose 301% to 57,600 units for the first half of 2019. That’s a positive sign.

Foolish conclusion

Although China’s auto market has slowed sharply, I believe it will recover once government stimulus starts to take effect. Although the auto market in China has grown quickly in the past, Geely will need to execute and adjust successfully to the new technological disruptions such as self-driving cars in the future.



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