Geely Automobile Holdings - NEV products boosting business outlook
- 1H23 revenue grew 26% y-o-y as Geely accelerates production of its new EV models. GP margin eased marginally to 14.4% despite intense market competition
- Seven new products planned for launch in 2H23 to support sales volume of 1.65m units for FY23F
- Revised down FY23/24F net earnings by 16%/15% to factor in losses from Lynk & Co and near-term margin pressure
- Maintain BUY with new TP HK$13.20, based on 18x 12-month rolling P/E
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To support product innovation and transformation, 1H23 R&D expenses remained high at Rmb844m (1H22: Rmb926m). Selling and distribution costs rose 44.3% y-o-y to Rmb4.77bn because of sales channel expansion and sales promotions. These brought only 1.2% growth in net earnings to Rmb1.57bn.
Healthy financial position with high liquidity. Geely had net operating cash flow of Rmb10.7bn in 1H23 (1H22: Rmb9.8bn), the highest level the company has ever achieved in the past interim period. The net cash balance as of Jun’23 was c.Rmb30bn, a huge improvement from Rmb23bn in Dec’22. This provides a strong cash base to support the company’s technology transformation.
Entering product expansion phase. Geely will be launching a total of seven new products across its brands, six of which are NEV models, as the company starts ramping up its NEV business, which has become an important sales growth driver among automakers. The NEV models will lift Geely’s overseas market share as well, given the 40.5% y-o-y expansion in export sales volume to 142k units in 7M23. Geely is targeting to achieve 1.65m units in total vehicle sales in FY23 (7M23 run rate: 50.4%). FY23 capex is guided at Rmb14bn.
Under the Geely brand, the new Galaxy series was launched in 1H23, with delivery of the first L7 model starting in Jun’23. Since then, total monthly sales of the Geely brand have exceeded 10k units. Two more models, L6 and E8, will be launched in 2H23, which will potentially give a boost to total vehicle sales. Geely also revealed that L6 will be equipped with smart technology, e.g. AI services and cloud computing, which enhances the safety of autonomous driving.
As for Lynk & Co, although its business suffered from a loss of Rmb660m in 1H23 due to market expansion and product transformation, its sales volume in 1H23 rose 6.2% y-o-y to 82k units, including a 420% expansion in the volume of exports to the APAC market. Lynk & Co 08, a PHEV model to be launched in Sep’23, has recorded a pre-order level of over 10k units. As Lynk will be launching only NEV models in future, we believe the brand will be having a competitive edge in the foreign high-end vehicle market.
As for Zeekr, the premium market BEV brand, one new model will be launched in 2H23, thus helping the brand achieve total sales of 140k units in FY23F (7M23 total delivery was 54.7k units, 39% of target). We expect Zeekr’s profitability to improve in 2H23, given the change in its margin from single digit in FY22 to double digits in 1H23. Zeekr plans to roll out at least two new models every year. It will also start exporting to the European market in 4Q23, starting with Sweden and the Netherlands. It will enter six more countries in 2024 and eight more in 2025.
In addition, following the trend to adopt smart in-vehicle tech, Geely will focus on the development of autonomous driving, the smart cockpit, and AI, which is reflected in the recent debut of Ji Yue 01, a robotic car model developed by Geely and Baidu, which will start to be delivered in 4Q23. Geely is also maintaining two lines of autonomous driving development, one with MobileEye and one that is self-reliant so as to achieve better supply chain control and ensure efficient delivery of smart technology.
Revised down FY23/24F earnings. We cut the net earnings of FY23/24F by 16%/15% to factor in losses in Lynk & Co’s operations, as the brand is incurring high cost in European market expansion. In addition, market competition and sales promotions also negatively impact Geely’s margins. Our new TP of HK$13.20 is based on 18x 12-rolling PE (previous was HK$16.80 on FY23F earnings). Maintain BUY on Geely Auto (175 HK).
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