Geely announced FY20 results, slightly below market expectations. In 2020, its top-line recorded RMB92bn, down 5% YoY. Net profit was RMB5.6bn (vs CMBI estimate of RMB7.2bn), down 32%YoY. The Company declared a dividend of RMB0.17, representing 29% of the payout ratio, higher than the historical average. We revised our TP to HK$28.3 and reiterate the BUY rating.
- Operating deleverage erodes the bottom-line. The sales volume in 2020 was 1.32 mn, down 3%YoY. Among them, the Geely brand reached 1.14mn(-7% YoY) while Lynk&Co sold 175K units(+37% YoY). GPM decreased by 1.4ppt to 16% given due to D&A growth and higher precious metal costs. The expenses ratio increased significantly due to 1) advertising expenses from the launch of new models and 2) the amortization of R&D. Together with the decline in sales, the Company's operating leverage was worsened in 2020. At the same time, Geely’s products are at the end of the product cycle, having margin pressure in order to ensure market share.
- Several highlights are worth paying attention to. Geely helps suppliers and dealers to reduce the financial burden in the context of COVID-19. In 2020, the accounts payable to the third party decreased by RMB3.2bn while the third party's advancement decreased by RMB2.4bn. Meanwhile, the Company's inventory decreased by RMB1.1bn. Supporting the upstream and downstream stakeholders would lay out the foundation for growth in 2021E. The Company also has various financing channels to access the capital market. In 2020, Geely raised about RMB6bn from share placement. By the end of 2020, the Company has RMB19bn cash on hand with a net cash position. The upcoming list of STAR boards will further enhance the capital strength of the company. In the revenue mix, the R&D support revenue and IP license revenue illustrate the Company's technology strength.
- Even though FY2020's performance was lower than expected, the new product cycle in 2021E is still worth looking forward to. We lower our 2021E earnings forecast to RMB6.9 billion to reflect the revised expense ratio forecast. Events such as 1) more close cooperation with Volvo,2) the spin-off of Zeeker, and 3) export of Lynk&Co to the Western Europe market will continue to support the market sentiment. Therefore, we adjust our TP to HK$28.3 (based on the new 35.0x 2021E P/E) with an upside of 42.1% from the initial TP of HK$35.0 (based on the initial 30.5x 2021E P/E). Reiterate BUY.
- New product cycle will support profit growth. In 2020, several new models will roll out to the market. Under the Geely brand, Xingyue L and the new generation of Emgrand will launch within the year. The first Lynk&Co model based on the SPA platform will roll out to the market. Geely and the parent company jointly build Zeeker, a smart BEV brand, which helps to integrate the resources under the holding company into the new brand. The first model is priced in the range of RMB300K to RMB500k and will debut in Apr. The Company set its sales target in 2021E at 1.53 mn units(+16%YoY), reflecting the confidence in the overall market and its new product cycle.
