Despite a first half where sales prices and units drove upwards, Geely 175, HK, halted its continued rise. It lost steam after far surpassing the Hang Seng year to date and on a 12-month basis.
Here are a few of the reasons for the rise.
First half gross revenue up 31% on sales volume increase of 11%.
First half sales volume increased by 41% in June over 2015; ytd. up 11.2% over 2015.
First half ex-factory average sales price up 17% year on year.
First half net profits up 34.8% on higher volume, better pricing mix, stable gross margins and lower operating costs as a percent of revenue.
So why the drop? One analyst at Gutai securities blamed it on the overall auto market in China falling faster than projected in the last half.
Geely’s warning – to investors and regulators:
Despite the improved performance by the indigenous brands in China recently, the implementation of more stringent regulatory requirements in fuel efficiency, product warranty, product recall and emissions standards in China could put tremendous cost pressure on motor vehicle manufacturers in China. The impact could be even bigger for China’s indigenous brands given their relatively weak pricing power, and thus their difficulties to pass on the additional costs to their customers.
Further, the planned expiration of sales and purchase tax reduction policy by the end of 2016 could potentially shift some demand forwards from early 2017 to 2016, thus affecting demand for small and mid-size vehicles in early part of 2017.
Exports remain challenging. As I reported back in May, hometown Geely and Great Wall have struggled with declining exports. This has continued into July of 2016 and with political and economic turmoil in its targets in the Mid-East, South America and Africa is expected to continue throughout 2016.
From HK filings
Fortunately for Geely, year to date unit exports were 12,871 or only 4.5% of the total sold. This is not great for Geely’s international plans but does show what a minimal effect it has on current and projected sales. (In 2015 Geely exported 24,342 units or about 9.6% of units sold).
Electric Vehicle Fraud and Subsidy Pains
After an initial surge toward electric vehicles, China has been coming to grips with subsidy fraud and lagging infrastructure support. Geely admitted to a change in subsidy stance as a reason for selling two electric car related jv’s: Kandi and Ninghai Zhidou, which had combined 1st quarter losses of 137.5 million rmb. A proposed agreement to a 3rd, independent party fell through with the company now proposing a sale of its interests to its parent, Geely Holding. The breakdown is as follows:
The circular for the proposal had been delayed so is still not resolved. Although losses are of concern, jv income has been a tiny proportion of net income.
SUV Reliance As Sedans Slip
As mentioned above, Geely has been helped by increased sale prices which has been due in part by SUV’S. Geely has continued to move toward greater emphasis on SUV’S, while its sedans sales continue to slide.
Geely appears to have had success with this move. It introduced 2 new vehicles in the first half, a new SUV crossover, the Emgrand GS and the Boyue SUV which replaced the NL3. The Boyue sold 10,128 in July, its first month while the Emgrand GS has sold 14,128 since its introduction – beating company expectations. For the second half, a new compact SUV, the Vision will be launched as well as a Emgrand GL sedan and an Emgrand sedan hybrid. All of these cars have at least one version that would be under the 1.6 liter engine maximum to qualify for the 50% tax reduction effective in China until the end of December.
Great Expectations for the Last Stretch
While June was good, July was even better in terms of unit sales. Geely reported that July sales were up over 64% from 2015 and up 16.75% year to date from 2015. With Geely raising its annual projections from 600,000 to 660,000 units, it appears to be expecting this run to continue. This will mean a shift of its sales at year end from 2015.
Geely’s sales definitely have been picking up steam. If they continue as the company projected, they will be on track for the projected unit increase of 29%. Momentum and the looming tax incentive deadline could push them there. Geely beat 1st half forecasts easily with eps up 36% vs. 18.9% and 30% vs. 23% projected on revenues.
Forecasts from the Financial Times
Currently, projections are for a bit over 46% increase in annual revenues and eps. If this is an achievable target, it would leave room for the stock to climb with its moderate p/e even after its dramatic climb over the last 12 months.
Forecast from the Financial Times