Geely Automobile Summary
Core Content
Geely Automobile, a Chinese automotive company, reported an earnings surprise on 11 July 2018, with a 50% earnings growth in the first half of 2018 (1H18). This growth was driven by a 35% increase in Geely brand volume and margin improvements, as well as faster-than-expected earnings contributions from Lynk & Co and other income from its car loan business.
The company maintains a BUY rating with a target price of HKD29, which represents a 47% upside from the current price of HKD19.80. The valuation is based on a PEG of 0.50x, down from 0.60x, reflecting a 3-year CAGR of 35% and a 18x 2018F P/E. The analyst also cites a HKD32.20 DCF valuation as support.
Geely's strong sales performance may enhance its bargaining power with suppliers and reduce fixed costs and SG&A expenses per car. The analyst estimates that the company's gross margin and net profit margin increased by 0.1ppt and 0.9ppts YoY, respectively, in 1H18.
Main Points
- Earnings Growth: Geely reported a 50% earnings growth in 1H18, primarily due to volume growth and margin improvements.
- Lynk & Co Contribution: Lynk & Co's early earnings contributions and lower depreciation costs have positively impacted net profit growth.
- Valuation: The target price of HKD29 is based on a PEG of 0.50x and a DCF valuation of HKD32.20.
- Market Position: Geely's strong sales and diverse product portfolio are expected to sustain growth over the next few years.
- Risk: Unsuccessful sales from the Lynk & Co brand could negatively affect the earnings forecast.
Key Information
- Target Price: HKD29
- Upside: 47%
- PEG: 0.50x
- 3-Year CAGR: 35%
- 2018F P/E: 18x
- Market Cap: USD22,692m
- Analyst: Zhuang Dan
- Contact: +852 2103 9414, zhuang.dan@rhbgroup.com
- Share Performance:
- YTD: -26.8%
- 1m: -18.4%
- 3m: -16.5%
- 6m: -24.6%
- 12m: +7.0%
- Valuation Metrics:
- Recurring P/E (Dec-18F): 10.9x
- P/B (Dec-18F): 3.26x
- EV/EBITDA (Dec-18F): 7.5x
- Net debt to equity: Net cash
- Financial Highlights:
- Sales in 1H18: CNY54,538m (38.3% YoY growth)
- Gross profit in 1H18: CNY10,526m (39.3% YoY growth)
- Operating profit in 1H18: CNY7,610m (44.0% YoY growth)
- Net profit in 1H18: CNY6,578m (50.0% YoY growth)
Upcoming Growth
The analyst has adjusted FY18-20 earnings forecasts upwards by 14%, 8%, and 13%, respectively, to reflect continued strong sales and new model launches. These include the Borui GE, a new MPV and sports sedan, and Lynk & Co's C01, C02, and C03 models. The company's current portfolio and upcoming models are seen as strong drivers of future growth.
Financial Exhibits
| Financial Summary |
Dec-16 |
Dec-17 |
Dec-18F |
Dec-19F |
Dec-20F |
| Recurring EPS (CNY) |
0.54 |
1.11 |
1.55 |
2.17 |
2.68 |
| EPS (CNY) |
0.57 |
1.16 |
1.55 |
2.17 |
2.68 |
| DPS (CNY) |
0.11 |
0.22 |
0.30 |
0.42 |
0.52 |
| BVPS (CNY) |
2.77 |
3.86 |
5.18 |
6.99 |
9.23 |
| Valuation Metrics |
Dec-16 |
Dec-17 |
Dec-18F |
Dec-19F |
Dec-20F |
| Recurring P/E (x) |
31.4 |
15.2 |
10.9 |
7.8 |
6.3 |
| P/E (x) |
29.4 |
14.5 |
10.9 |
7.8 |
6.3 |
| P/B (x) |
6.09 |
4.37 |
3.26 |
2.41 |
1.83 |
| Dividend Yield (%) |
0.6 |
1.3 |
1.8 |
2.5 |
3.1 |
| EV/EBITDA (x) |
18.2 |
10.5 |
7.5 |
6.0 |
4.7 |
Income Statement (CNYm)
| Item |
Dec-16 |
Dec-17 |
Dec-18F |
Dec-19F |
Dec-20F |
| Total turnover |
53,722 |
92,761 |
118,122 |
137,603 |
159,717 |
| Gross profit |
9,842 |
17,981 |
23,016 |
26,536 |
30,801 |
| EBITDA |
7,523 |
13,139 |
17,683 |
20,164 |
23,082 |
| Operating profit |
5,868 |
12,204 |
16,547 |
18,848 |
21,756 |
Cash Flow (CNYm)
| Item |
Dec-16 |
Dec-17 |
Dec-18F |
Dec-19F |
Dec-20F |
| Cash flow from operations |
11,646 |
12,287 |
17,606 |
21,425 |
23,402 |
| Capex |
-3,141 |
-3,452 |
-10,345 |
-12,052 |
-13,988 |
| Net change in cash |
10,192 |
1,829 |
3,072 |
6,611 |
4,617 |
| Ending balance cash |
19,428 |
16,846 |
16,487 |
23,750 |
33,521 |
Balance Sheet (CNYm)
| Item |
Dec-16 |
Dec-17 |
Dec-18F |
Dec-19F |
Dec-20F |
| Total cash and equivalents |
15,045 |
13,415 |
17,139 |
28,904 |
41,431 |
| Tangible fixed assets |
17,119 |
24,621 |
33,178 |
38,760 |
43,513 |
| Total liabilities |
42,897 |
50,170 |
63,170 |
73,396 |
84,826 |
| Shareholders' equity |
24,437 |
34,467 |
45,983 |
62,094 |
82,032 |
| Net debt |
-12,803 |
-12,118 |
-15,804 |
-27,529 |
-40,014 |
Key Metrics
| Metric |
Dec-16 |
Dec-17 |
Dec-18F |
Dec-19F |
Dec-20F |
| Revenue growth (%) |
78.3 |
72.7 |
27.3 |
16.5 |
16.1 |
| Recurrent EPS growth (%) |
109.8 |
106.2 |
39.5 |
39.9 |
23.7 |
| Gross margin (%) |
18.3 |
19.4 |
19.5 |
19.3 |
19.3 |
| Net profit margin (%) |
9.5 |
11.5 |
12.0 |
14.4 |
15.4 |
| Dividend payout ratio (%) |
18.8 |
18.8 |
18.8 |
18.8 |
18.8 |
| Interest cover (x) |
50.8 |
75.2 |
99.0 |
109.5 |
122.7 |
Peer Comparison
| Company |
Ticker |
Price (HKD) |
Mkt Cap (US$m) |
PER Hist (x) |
PER FY1 (x) |
PER FY2 (x) |
EPS FY1 YoY% |
EPS FY2 YoY% |
EPS FY3-3-Yr CAGR (%) |
PEG (x) |
Div Yld Hist (%) |
Div Yld FY1 (%) |
P/B Hist (x) |
P/B FY1 (x) |
| Geely Automobile |
175 HK |
19.84 |
22,692 |
31.4 |
14.2 |
10.6 |
121.2 |
34.1 |
60.7 |
0.2 |
1.5 |
1.3 |
4.4 |
4.3 |
| HSI |
- |
- |
- |
11.5 |
11.4 |
10.3 |
29.91 |
19.09 |
16.95 |
4.54 |
3.49 |
3.54 |
1.29 |
1.10 |
DCF Valuation
| Item |
2018F |
2019F |
2020F |
TV |
| EBIT (CNYm) |
16,547 |
18,848 |
22,617 |
- |
| Tax rate (%) |
16% |
16% |
16% |
- |
| EBIT*(1-t) (CNYm) |
13,906 |
15,840 |
19,008 |
- |
| Dep (CNYm) |
1,136 |
1,316 |
1,579 |
- |
| Chg in working capital (CNYm) |
-2,129 |
-56 |
2,735 |
- |
| Capex (CNYm) |
-10,345 |
-12,052 |
-13,988 |
- |
| Dividends from investments (CNYm) |
652 |
5,154 |
6,184 |
- |
| FCFF (CNYm) |
3,220 |
10,202 |
15,518 |
248,245 |
Conclusion
Geely Automobile is expected to maintain strong growth in the coming years, driven by its diverse product portfolio and successful earnings contributions from Lynk & Co. Despite the risks associated with Lynk & Co's sales performance, the analyst believes the current valuation is justified, with a PEG of 0.50x and a DCF valuation of HKD32.20 supporting the BUY recommendation.
