20161007-中国银河国际证券-吉利汽车-00175.HK-Initiate_with_BUY__Growth_story_warranted_by_strong_model_cycle_18页_1mb

Geely Automobile Holdings [175.HK] Summary

Core Content

Geely Automobile Holdings (175.HK) is a leading Chinese automaker, recognized as the country's first privately owned automaker. The report initiates coverage with a BUY rating and a target price of HK$8.6, based on a 12x 2017E PER and a 0.25x 2017E PEG. This valuation is justified by Geely's strong growth prospects, including a robust product-renewal cycle, sales mix upgrade, and efficient cost management, which are expected to drive a 47% CAGR in recurring net profit and a 38.2% CAGR in revenue from 2016 to 2018.

The company is well-positioned to capitalize on the growing domestic SUV market, with its SUV sales proportion rising from 11.8% in 2015 to 45.5% in 2018E. This shift is expected to contribute to ASP progression and margin expansion, supported by the introduction of new models and the use of advanced platforms like the CMA platform.

Geely has also been investing in capacity expansion and platform strategy to enhance production efficiency and support future growth. The opening of new plants, such as the Shaanxi Baoji and Shanxi Jinzhong plants, is expected to increase production capacity significantly, helping to meet the demand for new models and maintain a competitive edge.

Main Points

• Growth Strategy: Geely is leveraging a strong product-renewal cycle and brand consolidation to drive growth.
• Sales Mix Upgrade: The company is increasing its focus on SUVs, which are expected to account for a larger share of total sales.
• Capacity Expansion: New plants are being opened to boost production capacity and support the demand for new models.
• Platform Strategy: Geely is utilizing shared modular platforms to reduce costs and improve production efficiency.
• Valuation: The target price of HK$8.6 is based on a 12x 2017E PER, which is higher than the average 9.6x PER of its HK-listed peers, justified by its superior EPS growth.

Key Financials (2014–2018E)

Key Financial Highlights

• Revenue Growth: Expected to grow at a 38.2% CAGR from 2016 to 2018.
• Net Profit Growth: Projected to grow at a 47% CAGR for recurring net profit.
• EPS Growth: Basic EPS is expected to increase by ~31% in 2018E compared to 2017E.
• Gross Margin: Expected to rise from 18.2% in 2015 to 20.2% in 2018E.
• Operating Leverage: Enhanced through cost absorption and improved efficiency.
• Dividend Yield: Projected to increase from 0.3% in 2014 to 2.0% in 2018E.

Capacity Expansion and Production Strategy

• Shaanxi Baoji Plant: Opened in late September, with initial capacity of 16,000–18,000 units/month, and expected to reach ~30,000 units/month by end-2016.
• Taizhou Linhai Plant: Currently produces 14,000 units/month, with plans to increase to ~18,000 units/month by early 2017.
• Shanxi Jinzhong Plant: Started operations in October, supporting the production of Emgrand GS and expected to increase capacity to ~25,000–30,000 units/month by end-2016.

Product Launches and Market Response

• New Models: Includes the Emgrand GL, Emgrand hybrid, and models from the CMA platform.
• Sales Performance:
  • August 2016 sales reached 53,638 units, representing +69% YoY.
  • 8M16 sales totaled 382,497 units, +22% YoY, achieving 58% of the revised full-year target.
• Order Backlog: Strong order backlog for models like the Boyue, Emgrand GS, and Vision SUV.
• Market Acceptance: New models have received a warm market reception, with high ASP growth projected from RMB56.6k in 2015 to RMB76.2k in 2018E.

Strategic Advantages

• Brand Consolidation: Geely has consolidated its brands under one umbrella, enhancing brand recognition.
• R&D Investment: Continuous R&D efforts have led to the development of competitive models and technology.
• Synergy with Volvo: The acquisition of Volvo has brought advanced safety systems and brand prestige to Geely.
• Cost Efficiency: Declining auto-component purchase costs help absorb the impact of price competition.

Valuation and Peer Comparison

• Current PER: 10x (2017E), below the target of 12x.
• Peer Comparison:
  • Recurring Net Profit CAGR: Geely's ~47% is significantly higher than the average 21% of its HK-listed peers.
  • PER: Geely's 10x is lower than the target 12x, but higher than the average 9.6x of its peers.
  • EV/EBITDA: Expected to decline from 15.0x in 2014 to 3.9x in 2018E.
  • PBR: Expected to fall from 3.1x in 2014 to 1.6x in 2018E.
  • ROE: Expected to rise from 8.4% in 2014 to 22.4% in 2018E.

Catalysts

• High YoY Sales Growth: Expected to continue with strong performance in the coming months.
• Market Response to New Models: Positive reception and strong order backlog.
• CMA Platform Updates: More product launches from the CMA platform in 2017.
• Potential Rush Orders: Expected before the expiry of the purchase tax cut policy for cars with engine size ≤1.6L.

Investment Thesis

• Strong Model Cycle: Supports volume growth and improves ASP and margins.
• Sales Mix Upgrade: Focus on SUVs and higher-end models helps drive profitability.
• Capacity Expansion: New plants will increase production efficiency and support future demand.
• Platform Strategy: Shared modular platforms reduce costs and improve production flexibility.
• Competitive Edge: Superior product pricing, settings, and cost-effectiveness over peers.

Conclusion

Geely is positioned for strong growth through its product renewal cycle, sales mix upgrade, and capacity expansion. The company's strong cash position, solid financials, and strategic acquisitions provide a solid foundation for future success. With a BUY rating and target price of HK$8.6, the report highlights the potential for recurring net profit growth, revenue growth, and ASP progression. The CMA platform and synergy with Volvo are expected to further enhance its competitive position and support long-term growth.