Geely announced its FY19 results, significantly missed CMBI estimates. Revenue achieved RMB97.4bn (vs CMBI estimate of RMB99.0bn/ vs consensus estimate of RMB97.4bn), a decrease of 9% YoY. NP was RM8.2bn (vs CMBI estimate RMB10.7bn / vs consensus estimate of RMB8.7bn), a decrease of 35%. EPS has declined by 36% to RMB0.90 while DPS has decreased by 29% to RMB0.23.
- Geely sold 1.36mn units in 2019, lower than our estimate of 1.39mn units, leading to its top-line 2% lower than our expectation. Given factors such as the emission standard switch, the decline of NEV subsidy, and the rebate increased, GPM has dropped to 17.4% in 2019 (vs CMBI estimate of 19.0%/vs consensus estimate of 18.1%) from 20.2% in 2018. In addition, admin exp ratio increased to 5.3% in 2019 from 3.5% in 2018, of which 1.4ppt increase came from the increase in R&D expense.
- In 2020, Geely will launch 6 new models in different sub-segments, including 3 Geely brand, 2 Lynk&Co and 1 Geometry. Geely did not adjust its target of 1.41mn for now. However, we believe that the COVID-19 will have a negative impact on spending power of lower-middle-income residents, hurting the low-end vehicle market. Besides, the spread of COVID-19 in oversea countries may potentially disrupt the supply chain. Therefore, we estimated the sales volume will be 1.31mn units (1.17mn Geely brand/140K Lynk&Co) in 2020E, a decrease of 3%YoY.
- The acquisition of Volvo will help Geely to become a truly multinational corporation. If the deal were completed, the company would have balanced its domestic/foreign sales proportion at 50/50. Furthermore, Geely and Volvo could have carried out in-depth cooperation, including R&D sharing in the CASE field, production-base sharing, etc. Also, the problem of peer competition will be avoided if Volvo wants to access the capital market. At present, both Geely and Volvo have completed the recruitment of financial advisors. We are expecting the deal process will run smoothly.
- We adjust down the top-line in 2020E by 21% to RMB95.5bn to reflect the impact of COVID-19. Furthermore, we also adjust down our bottom-line forecast by 29% to RMB8.7bn in 2020E to further factor-in the lower GPM. However, given its visible potential with Volvo, we only adjust down our TP to HK$13.1 (based on new 12.0x 2020E P/E) with an upside of 16% from initial TP HK$16.4 (based on initial 10.5x 2020E P/E). Reiterate BUY.
