20131025-中国银河国际证券-Betting_On_The_Future_Of_Local_Auto_Brands_16页_1mb

Geely Auto [0175.HK] Summary

Core Content

Geely Auto is a leading domestic automobile manufacturer in China, operating under three brand divisions: GLEagle, Emgrand, and Englon. It has been actively investing in technology upgrades and strategic partnerships, particularly through its acquisition of DSIH Australia in 2009 and Volvo Cars in 2010. The company is currently valued at a discount to the industry average and is recommended with a BUY rating and a target price of HK$5.10, implying a 11x PER for 2014E and a 0.7x PEG for 2012-2015E EPS CAGR.

Key Drivers

• Near-term Growth:

  • Sales volume from SUVs and high-end sedans are expected to drive growth.
  • SUV sales are projected to increase by 98.7% in 2013E and 20% in 2014E.
  • High-end sedans, particularly the Emgrand EC7, are expected to grow by 20.2% in 2013E and 14.5% in 2014E.

• Long-term Growth:

  • Technology development and collaboration with Volvo will be crucial for sustainable growth.
  • Geely Auto will share Volvo's scalable product architecture (SPA) in 2015E and compact model architecture (CMA) in 2016E.
  • These platforms are expected to enhance production efficiency and reduce costs through economies of scale.

Financial Highlights

Metric	2011	2012	2013E	2014E	2015E
Turnover (RMBm)	20,965	24,628	29,526	33,814	38,032
Net Profit (RMBm)	1,543	2,040	2,550	3,047	3,460
Net Margin (%)	7.4%	8.3%	8.6%	9.0%	9.1%
Basic EPS (RMB)	0.21	0.27	0.30	0.35	0.39
Diluted EPS (RMB)	0.19	0.26	0.29	0.35	0.39
PER (x)	15.3	11.4	10.1	8.7	7.7
PBR (x)	2.5	1.8	1.6	1.4	1.2

Margin Improvement

• Gross Margin: Expected to rise from 18.5% in 2012 to 20.1% in 2015E.
• Operating Margin: Projected to increase from 11.1% in 2012 to 12.4% in 2015E.
• Net Margin: Projected to increase from 7.4% in 2011 to 9.1% in 2015E.

Sales Volume Trends

• In 9M13, Geely Auto's sales volume grew by 16% YoY, outperforming the sector.
• However, export sales dropped by 27% in September 2013E due to RMB appreciation, leading to a likely miss of the annual sales target.
• Full-year sales volume is projected at 536,696 units, 4% below the target of 560,000 units.

Product Mix and Brand Strategy

• SUVs and high-end sedans are becoming a larger portion of the product mix, contributing 6% in 2012, 11% in 2013E, and 13% in 2014E.
• Brand consolidation is expected, with Geely Auto likely to focus on GLEagle (low-end) and Emgrand (high-end), reducing the role of Englon.
• Emgrand EC7 is a key model, expected to grow by 24.3% in 2013E, contributing 33% to total sales and improving profitability.

Strategic Collaborations

• Volvo Cooperation: Geely Auto will benefit from Volvo's SPA in 2015E and CMA in 2016E, sharing R&D and production costs.
• DSIH Australia: Acquired in 2009, provides access to automatic transmission technology.

Balance Sheet and Liquidity

• Cash and Cash Equivalents: Projected to increase from RMB3,030.4m in 2011 to RMB7,706.0m in 2015E.
• Net Cash: Expected to reach RMB4,880.5m by end of 2013E, sufficient to fund a 20% equity stake in Volvo without issuing new equity.
• Debt-to-Equity Ratio: Projected to decrease from 2.6x in 2012 to 2.1x in 2015E.

Valuation and Investment Outlook

• The current target price of HK$5.10 implies a 11x PER for 2014E, 0.7x PEG for 2012-2015E CAGR.
• Despite missed sales targets, earnings growth is expected to remain strong at 25% YoY in 2013E.
• Price weakness is attributed to dilution from CB conversion and slower sales growth, but the company is still undervalued relative to its future earnings potential.

Conclusion

Geely Auto is positioned for long-term growth through technology upgrades, brand consolidation, and strategic partnerships with Volvo. While sales volume may miss targets due to export challenges, the product mix and margin improvements are expected to drive strong earnings growth. The company's healthy balance sheet and improving financial ratios support its BUY rating and target price.