On 7 Oct, Geely announces that it is exploring the possibility of merging its engine business with Volvo to form a world-leading powertrain business unit. Last week, we visited the Geely powertrain plant in Yiwu, Zhengjiang and attended the Geely investor day to get more details related to its powertrain development. We believe that Geely maintains its strategic focus on R&D during the market slowdown, which will give the Company a great advantage when overall market recovers. We maintain our Buy rating on Geely.
- Betting on the hybrid vehicle market development is in line with the future direction of the auto market. Geely believes the hybrid vehicle with the concept of ‘combustion engine + electrify’ technology will become the market trend in the short and medium-term. Therefore, Geely proposes its GHS1.0 strategy to match its market vision. We observe that the recent NEV policy has clarified that the hybrid vehicle with low fuel-consumption will be qualified for NEV credit in CAFC&NEV Credit Regulation, which reflects the government attitude on NEV development. Therefore, we believe that Geely has great advantages over other OEMs in terms of the technology roadmap.
- Given its strategy focus on hybrid vehicle development, Geely and Volvo have jointly developed different types of three-cylinder engines given that the three-cylinder engine has great economical fuel performance and the layout convenience for battery and battery motor. Although Geely has solved the problem of vibration of the three-cylinder engine to a certain extent, the perception of the three-cylinder engine was not popular among Chinese customers. The ultimate product popularity still needs to be confirmed by the retail sales volume in the future even though the Company is trying to educate the market through dealer training.
- The management team re-emphasized the view that the heavy investment in platform technology was nearly completed. As the capacity was build-up, the Company will reap the fruit of leading technology and the economies of scale. However, the brand image of Geely remained as a mass local product among Chinese customers even though the overall product quality was significantly improved. The management team states Geely will put more resources on brand building in the next two years.
- The management team expressed its confidence in sales performance in 4Q19 as the overall market improved marginally. The company sold 113,382 units in Sep, down by 9% YoY. However, the magnitude of decline continued to narrow from 19% in Aug. We believe that Geely will likely turn its YoY growth rate into positive territory within 2019 taking into account the seasonal factor and low base factor. Due to the market decline in 2019, the Company postponed the launch of several models to 2020. After considering the potential policy stimulus and product pipeline, we remain confident in the performance of the Company in 2020.
- Valuation/Key risks. The Company is currently trading at 10.05x 2019E P/E. Taking into the growth rate, we use fair 2020 PE ratio of 10.50x. Our Target Price maintains at HK$16.35 per share with 19.87s% upside potential. Maintain with Buy.
