20220324-招银国际-吉利汽车-00175.HK-Low_earnings_quality__Not_an_inflection_point_yet_6页

Geely Automobile (175 HK) Summary

Core Content

Geely Automobile Holdings reported a FY21 net profit of RMB 4.847 billion, a decline of 12.4% YoY, below expectations. The report suggests that the company's earnings quality is questionable due to significant contributions from connected transactions, such as R&D services and IP licensing, which account for about 34% of the net profit. The report maintains a HOLD rating and cuts the target price to HK$13.50 from HK$21.00, based on a sum-of-the-parts (SOTP) valuation.

Main Points

• Earnings Quality Concerns:

  • FY21 net profit fell by 12.4% YoY.
  • Earnings from connected transactions (R&D services, IP licensing, auto parts) are a major contributor to net profit.
  • The report indicates that earnings quality may be worse than reported due to these non-core activities.

• Zeekr's Role and Challenges:

  • Zeekr, a key driver for Geely's valuation, has not yet proven its capabilities in sales and technology.
  • FY21 gross margin for Zeekr was 3.7%, with only 6,007 units delivered.
  • Zeekr's revenue includes 40% from battery pack sales and R&D services, indicating limited profitability potential.
  • Projected net loss for Zeekr in FY22E is expected to widen to RMB 16 billion.

• FY22E Outlook:

  • Sales volumes for Geely and Geometry brands are expected to rise 12% YoY to 1.23 million units.
  • Gross margin for these brands is projected to remain flat at 15.4% in FY22E.
  • Net profit for FY22E is estimated at RMB 6.628 billion, up by RMB 0.6 billion from FY21.

• Lynk & Co Performance:

  • FY22E sales volume is projected at 240,000 units, below the sales target of 300,000 units.
  • Lynk & Co's net profit is expected to surge 45% YoY due to improved model mix.
  • The 09 model, produced at a higher-margin plant, may offset fixed cost pressures.

• Financial Overview:

  • Revenue is projected to grow by 36.9% to RMB 139.073 billion in FY22E.
  • Net profit is expected to increase by 36.7% to RMB 6.628 billion.
  • P/E ratio is projected to be 14.7 for FY22E and 11.8 for FY23E.
  • P/B ratio is expected to decrease to 1.3 in FY22E and 1.2 in FY23E.

• Key Risks:

  • Uncertainty around Zeekr's performance and the broader sector.
  • Potential sales volume and gross margin deviations from forecasts.
  • Sector re-rating or de-rating could impact the valuation.

Key Financial Highlights

Shareholding and Performance

• Shareholding Structure:

  • Li Shufu holds 43.2% of shares.
  • Others hold 56.8%.

• Share Performance:

  • 1-month return: -23.5%
  • 3-month return: -45.5%
  • 6-month return: -48.0%

• Market Cap:

  • HK$119,849 million
  • Average 3-month turnover: HK$914 million
  • 52-week high/low: HK$29.80 / HK$10.00

Valuation and SOTP

• SOTP Valuation:
  • Estimated core revenue for Zeekr: RMB 18,900 million.
  • Valued at HK$40 billion based on 3x FY22E core P/S.
  • Other businesses valued at HK$93 billion using 10x FY22E P/E.
  • Total SOTP valuation: HK$109.74 billion.
  • Target price: HK$13.50.

Key Ratios

Summary of Financial Projections

• Revenue Growth: Expected to grow by 36.9% in FY22E and 9.0% in FY23E.
• Net Profit Growth: Projected to rise by 36.7% in FY22E and 24.6% in FY23E.
• SG&A Expenses: Projected to increase by RMB 3.8 billion in FY22E due to Zeekr investments.
• Amortization and R&D Expenses: Expected to rise by RMB 1 billion and RMB 0.7 billion, respectively, in FY22E.

Conclusion

Geely's valuation is heavily influenced by Zeekr, which has yet to demonstrate consistent profitability. The report suggests that while FY22E could show some improvement, the inflection point may not have arrived yet. The HOLD rating is maintained, with a revised target price of HK$13.50, reflecting the adjusted net profit estimates and SOTP valuation. Investors are advised to wait for clearer signals before making decisions.