20171117-Maybank_KERPL-吉利汽车-00175.HK-More_wings_to_this_story__TP_raised_33__13页_601kb

Geely Automobile Summary

Core Content

Geely Automobile (175 HK) is one of the largest privately owned automakers in China and has a strategic technical collaboration with Volvo Cars, both under the same parent company, Zhejiang Geely Holding Group. The company has been experiencing strong growth, with its share price surging 270% year-to-date (YTD), and the firm has reiterated a BUY recommendation with an updated price target of HKD36, implying a 31% upside from the current share price of HKD27.40.

Key Highlights

• Lynk & Co 01 Launch: The first model under the Lynk & Co brand, featuring Volvo's E-Drive engine and built on the CAM platform, is now available for pre-order. The pre-order session started at 8:01pm on 17 November 2017, and the first delivery is expected in late December 2017 or January 2018. The brand is adopting a no-discount policy, and dealers are already receiving over 3,000 tentative orders.

• Sales Growth: Geely's FY18 unit sales are projected to grow 47.5% YoY to 1.79 million units, excluding Lynk & Co. The company plans to launch five new models under the Geely brand and two models under Lynk & Co in 2018. This growth is supported by a stronger product pipeline, increased ASP (average selling price), and margin improvements.

• Financial Outlook: The company raised its FY18-19F EPS estimates by 8-14%, which are 17-23% above street estimates. Geely's gross margin is expected to increase to 21% from 20.8% due to better scale and ASP. The dividend payout ratio is forecasted to rise from 18.6% to 30% in 2018, driven by the redemption of USD300m in senior notes in October 2017.

• Valuation Metrics: The new price target of HKD36 is based on a 19x FY18 PER (vs. prior historical average of 15x), reflecting strong EPS growth and margin expectations. The EV/EBITDA is at 14x, aligning with BYD's valuation to highlight Geely's potential in the new energy vehicle (NEV) market.

• New Product Pipeline:

  • New MPV: Expected to sell 3,000 units/month in 2018, much lower than the GL 9's 13,000 units/month.
  • A-segment SUV: Expected to sell 5,000 units/month in 2018, with a higher price range than the Boyue.
  • A0-segment SUV: Projected to sell 15,000 units/month, with a lower price point than the Boyue.
  • A-segment Sedan: Replacing the old Emgrand, expected to sell 10,000 units/month in 2018 (vs. 20,000 units/month for the old model).
  • B-segment Sedan: Replacing the GC9, expected to sell 2,500 units/month in 2018.
  • Lynk & Co 03: A sedan set to debut in 2018.
  • Lynk & Co 02: Likely to be a SUV or crossover, though details are not yet disclosed.

Price Drivers

• Strong product launches and sales performance.
• Improved gross and operating margins due to better product mix and scale.
• Increased dividend payout ratio and potential for higher returns.
• Strong revenue growth, with FY18E expected to reach CNY122,816m, up 64.5% YoY from FY17E.
• A robust free cash flow (FCF) and healthy net cash balance sheet.

Swing Factors

Upside

• Product upgrades and the introduction of more SUVs.
• Technology upgrades with the CMA platform, expected to improve production efficiency and model performance.
• Strong NEV sales with a target of 90% of sales coming from NEVs by 2020.
• Potential M&A activities, especially in the NEV and autonomous driving sectors.

Downside

• FX losses due to the depreciation of the Russian rouble, which impacted 3% of unit sales in 2016.
• Delays in the CMA platform rollout could negatively affect the product pipeline.
• Short-term margin pressures due to the introduction of new models and platform ramp-up.

Financial Metrics

Market Performance

• Share price has surged 280% YTD, outperforming the Hang Seng Index by 193%.
• Unit sales are expected to grow significantly, with a target of 2.0 million units by 2020 (excluding Lynk & Co).
• Lynk & Co is projected to grow from 15,000 units in 2017 to 192,000 units in 2018, contributing positively to overall sales.

Strategic Initiatives

• Geely Blue Initiative: Aims to achieve 90% of sales from NEVs by 2020.
• Partnerships: Geely is collaborating with Volvo on the CMA platform, and Volvo and Uber on autonomous ride-hailing projects. The company has also acquired a US flying car company, Terrafugia, to explore next-generation mobility solutions.
• Capex: Expected to remain around CNY7 billion in 2017-2018, mainly due to rising capitalised R&D expenses.

Summary

Geely Automobile is well-positioned for continued growth with a strong product pipeline, technological advancements, and a strategic focus on NEVs. The company's financials are robust, with a healthy cash position and increasing profitability. The Lynk & Co 01 launch marks a significant milestone, and the firm is optimistic about its sales potential. While there are some risks, including FX exposure and potential delays in the CMA platform rollout, the overall outlook remains positive, supporting the BUY recommendation with a 31% upside to the new price target of HKD36.