Equity Research Auto 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 Positive profit alert amid solid sales momentum and improving product mix Geely s profit alert guided 1H18 profit growth of 5% YoY, largely in line with our estimate Geely s strong profit upturn is underpinned by solid sales momentum (up by 45% YoY in 1H18) and product mix improvement, according to management. We think the profit alert indicates solid fundamentals from Geely, despite near-term external headwinds including rising materials cost, intensifying competition and sluggish sectorwide retail sales in May/June. 1H18 revisit: Rising market share amid steadily increasing sales volume Geely announced its June sales data on 9 July: sales volume went up 45% YoY/4% MoM to 128k units, while 1H18 volume rose 44% to 767k units, representing continuous strong momentum and 48.5% completion of Geely s 218 sales target of 1.58m units. As a result, Geely s 1H18 domestic market share rose to 6.5% on the back of steadily increasing sales, and the company ranked fourth among Chinese PV automakers in terms of monthly sales volume since April this year. We observe increasing concentration in the domestic own-brand segment, and believe Geely will continue to benefit from PV sector s further consolidation and realize more market share gains given its leading stance in the segment. Lynk & Co 1 SUV continues to ramp up to new high, 2 crossover on sale Lynk & Co 1 s June sales came in at 9,247 units, up.1% MoM. 2Q18 sales rose 47% QoQ to 28k units while 1H18 sales volume came in at 46k units, indicating a healthy ramp-up in our view. Our recent channel check suggests strong demand for the brand in Tier-1 cities: currently the waiting periods for the delivery of the 1/2 models are typically 2/3 months respectively, with the waiting period for the (2.T+6AT) version of the 2 reaching 4 months due to some constraints in the 6AT gearbox. Daily average unit sales per 4S outlet range between 6-8 cars, which can reach as high as 18 cars sold on some weekends. Stock performance 吉利汽车 Geely 43% 22% 1% Source: Bloomberg Key data Source: Bloomberg 恒生指数 HSI -2% 217-7 217-11 218-3 218-7 July 16 (HK$) 2.4 Shares in issue (m) 8,976 Major shareholder Li Shufu (46.2%) Market cap (HK$ bn) 183.118 3M avg. vol. (m) 47.94 52W high/low (HK$) 29.8/17.1 Our Top pick for PV automakers, maintain Buy and TP of HK$33.29 We expect Geely to deliver strong full-year sales growth, underpinned by its solid product cycle (Binrui sedan, Boyue Coupe in 3Q18; Xingyue compact SUV, Lynk & Co 3 sedan and the company s first MPV in 4Q18), while its GPM and NPM should improve on greater operating leverage and economies of scale. We expect these new models, as well as upgrade versions and NEV versions of existing products, to drive 34% YoY sales growth in 218. Over the long run, we maintain our positive stance on the company s Blue Geely initiative and shared modular strategy with Volvo and Lynk & Co, which should give it an edge over local peers in terms of brand premium, reducing costs through joint procurement and the sharing of R&D expenses. The stock is currently trading at 8.9x our 218 EPS estimate, undervalued in our view. We think the recent share price drop does not justify the company s solid growth outlook, and we expect a share price rebound once the external headwinds have been lifted. 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 missing expectations; market downside risk. Stock valuation Turnover (Rmb m) Net profit EPS (Rmb) EPS YoY (%) P/E Yield BPS (Rmb) P/B ROE (%) 216 5,27 5,114.58 126 32.1.4 2.8 5.9 2.4 217 92,761 1,634 1.19 15 13.9 1.5 3.9 4.3 35.7 218E 136,49 16,75 1.867 57 8.9 3.3 4.4 3.8 45.2 219E 188,496 25,448 2.836 52 5.8 5. 5.2 3.2 59. 22E 235,154 34,131 3.83 34 3.2 6.8 6.4 2.6 65.3 Sources: Company data, GF Securities (Hong Kong) This is a summary of a report originally written in Chinese. Please contact us for more information of the original report. The Chinese version shall prevail in the event of any discrepancy between the two versions.
Figure 1: Geely Auto monthly sales volume and YoY growth 18, Monthly sales volume (LHS) YoY (RHS) 18% 16, 16% 1 14% 1 12% 1, 8, 8% 6, 6% 4% 2% % Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Figure 2: Geely Auto semi-annual net profit attributable to shareholders and YoY growth (Rmb 1m) 7 6 5 4 3 2 1 1H15 2H15 1H16 2H16 1H17 2H17 1H18 3% 25% 2% 15% 5% % Net profit (LHS) YoY (RHS) 2
Figure 3: Lynk & co 1 monthly retail and wholesale volume 6,652 6,12 6,173 8,57 6,212 9,79 9,234 9,247 7,492 7,88 4,12 3,491 1,424 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Wholesale volume Retail sales volume Sources: Company data, CAAM, GF Securities Development & Research Center Figure 4: Geely Auto sedan monthly sales volume and YoY growth 9, 8, 7, 6, 5, 3, 1, 12% 8% 6% 4% 2% % -2% -4% Sedan monthly sales volume (LHS) YoY growth (RHS) Sources: Company data, CAAM, GF Securities Development & Research Center 3
Figure 5: Geely Auto SUV monthly sales volume and YoY growth 1, 9, 8, 7, 6, 5, 3, 1, 1% 9% 8% 7% 6% 5% 4% 3% 2% % SUV monthly sales volume (LHS) YoY growth (RHS) Sources: Company data, CAAM, GF Securities Development & Research Center Figure 6: Geely Auto monthly retail and wholesale volume (units) 2, 18, 16, 1 1 1, 8, 6, Wholesale volume Retail volume Sources: Company data, CAAM, GF Securities Development & Research Center 4
(' units) YoY % Figure 7: Geely Auto sales volume and market share (1k units) Figure 8: Geely Auto sales volume structure 14 Annual sales volume (LHS) Market share (RHS) 6.5% 7% % of sedan % of SUV 12 1 8 6 3.% 2.9% 3.1% 3.1% 2.1% 2.4% 3.2% 5.% 6% 5% 4% 3% 8% 6% 4% 49% 53% 52% 4 2 21 211 212 213 214 215 216 217 1H18 2% 1% % 2% % 31% 12% 15% 12% 213A 214A 215A 216A 217A 218E 219E Figure 9: Geely Auto sales volume forecasts Figure 1: Geely Auto key ratios forecasts 2,5 2, 1,5 1, 5 213 214 215 216 217 218E 219E Sales volume 2-Y CAGR sales volume 7 6 5 4 3 2 1 (1) (2) (3) Sales volume growth 25 2 15 1 5 2.1 11.7 9.3 18.2 18.2 18.3 8.9 9.1 7.5 6.6 1.9 9.5 19.4 13.2 11.5 21.5 22. 13.9 14.4 13.5 12.3 213 214 215 216 217 218E 219E GP margin (%) PBT margin (%) NP margin (%) 5
Figure 11: Geely Auto 215-219E estimated revenue Figure 12: Geely Auto 215-219E estimated net profit attributable to shareholders Revenue (Rmb m) YoY (%) Net profit attributable to shareholders (Rmb m) YoY (%) 25, 9 14 2, 15, 1, 5, 8 7 6 5 4 3 2 1 35, 3, 25, 15, 1, 5, 12 1 8 6 4 2 215 216 217 218E 219E 22E 215 216 217 218E 219E 22E Figure 13: Geely Auto key model sales and YoY growth (%) Model June sales YoY 1H18 sales YoY Boyue 22,233 4.5% 139,88 11.8% SUV Emgrand GS 14,44 13.% 82,584 41.8% Vision SUV 1,426-1.8% 61,995 6.4% Vision X3 1,225 N/A 63,16 N/A New Vision 11,734 9.8% 82,291 18.% Sedan Emgrand 19,645 21.% 128,8 5.3% Emgrand GL 13,819 68.2% 77,1 51.3% Lynk & co Lynk & co 1 9,247 N/A 46,252 N/A Total sales 128,449 44.7% 766,63 44.6% 6
Figure 14: 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/j (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 15,788.8 23,65. 34,513.5 Non-controlling interests 57.8 11.7 23.4 39.1 414.5 Total current assets 47,249. 53,8.2 6,179.8 73,42.3 92,37.3 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) (4,926.7) (7,485.) (1,39) Net assets 24,686.2 34,81.8 39,378.1 46,893.8 57,636.8 Other non-operating 31.4 (724.5) 5. 5. 51 Equity Net cash from financing activities 29.5 (1,684.6) (4,426.7) (6,985.) (9,537) Equity attributable to holders Change in net cash 5,89.7 (1,62.2) 2,424.2 7,326.2 11,497 Issued capital 162.7 164.3 164.3 164.3 164.3 Reserves 24,274.5 34,32.8 46,126.2 64,89.3 88,181.5 Opening cash and cash equivalents 9,166.9 15,45.5 13,414.6 15,788.8 23,65 Shareholders' funds 24,437.2 34,467. 46,29.5 64,253.6 88,346 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 15,788.8 23,65. 34,513 Total equity 24,686.2 34,81.8 39,378.1 46,893.8 57,637 7
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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