- Messages
- 35,991
Crazy that Daimler don't have these loop holes closed.
Crazy that Daimler don't have these loop holes closed.
- Messages
- 11,474
- Name
- Matt
German law, I believe.
Half have to represent the shareholders, and half have to represent the workforce. I might have misinterpreted that, but I got it from Daimler IR.
CrunchSlaughtered
RPM Ruler
- Messages
- 7,390
No comparison between the Volvo acquisition, which at the time was on the edge of bankruptcy and the leading provider of premium automobiles. The most concerning fact is that Mr Shufu first tried the get full control of FCA and when he was rejected he turned to Daimler. His aim is hardly to invest his free cashflow in a profit generating shares, but to gain control. I am sure that there is a red alarm at Daimler at the moment.
- Messages
- 35,991
Volvo stating this week that they will stop developing combustion engine, shows Shufu's hand. He wants engines.
Despite the bright future of electric drive trains, combustion engines aren't going anywhere and will still reign in many countries over the next 10 years. Mazda's next petrol engines will push boundaries and Toyota recently introduced new ones.
There is no way Volvo's current engines will be good enough in 5 years time. Furthermore, Lotus need exciting engines to remain relevant as a sports car brand.
tristatez28lt1
Tire Trailblazer
- Messages
- 6,580
I know this is slightly off topic but it's an interesting read on Geely:
Geely Automobile Holdings: China's Rising Star - Geely Automobile Holdings Ltd. (OTCMKTS:GELYF) | Seeking Alpha
Summary
Business is booming for Geely, a car manufacturer based in Hangzhou, China.
Cars are selling at an impressive pace, and revenues and profits are growing.
Despite the rapid rise and doubling of its share price during the past year, Geely continues to be an attractive investment worthy of consideration.
Editor's note: Seeking Alpha is proud to welcome John McHarris as a new contributor. It's easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to the SA PRO archive. Click here to find out more »
Investment Thesis:
China is by far the world's largest car market; its importance will continue to grow.
The Chinese government is strongly supporting Electric Vehicles (EVs) and hybrids, which, together as a category, are referred to as New Energy Vehicles (NEVs). Factors underlying support include: [A] the PRC's desire to position China as a future leader in the transportation industry, addressing public health concerns, and [C] reducing the nation's dependence on oil.
NEVs will undoubtedly come to represent a much bigger share of the Chinese car market. Automobile manufacturers must adapt to these new realities, and companies like Geely (OTCPK:GELYF) are well positioned to do so.
Geely is one of the largest and fastest growing car companies in the domestic market.
Geely's partnership with Volvo (OTCPK:VOLAF) is a major plus. Volvo's positive influence on the improved design of Geely's cars is already showing. These better-designed cars are selling well.
Recently, Geely has invested $9.2 billion in Daimler (OTCPK
DAIF) and is currently Daimler's largest shareholder. Geely has expressed an interest in partnering with Daimler, on battery technology and EVs.
For the short term, Geely will continue to prioritize its efforts on the Chinese market. Longer term, Geely's success globally is a real possibility.
Looking for growth in the automobile market? Look towards China
In 2009, China surpassed the USA as the world's largest automobile market, as highlighted in this Forbes article here. The sheer size of China's middle class and its growing purchasing power all but ensures the country will remain the largest market well into the future. EVs will play an increasingly important role in China's future. China's NEV sub-sector grew at a rate of 53% during 2017. In contrast, the broader industry (light vehicles + trucks + buses) grew at a much lower 3 percent.
Support for New Energy Vehicles (NEVs) is strong, and the government is putting its money where its mouth is. Subsidies have been estimated at $15.4 billion, according to UBS. Using both "carrots" and "sticks"; China is creating incentives for industry to transition towards a greener and cleaner future. The article here, China, in EV push, plans ban on fossil-fuel vehicle sales, provides a good example of the government's firm resolve to promote widespread adoption of EVs.
Geely's Corporate Strategy includes emphasis on New Energy Vehicles
Geely's corporate strategy includes a clear emphasis on EVs and hybrids. Although the overwhelming number of cars that Geely sells are traditional cars; the company has long been an early supporter of EVs. In March of 2013, Geely created a joint venture (JV) with Kandi (NASDAQ:KNDI), a producer of electric vehicles. The assets of the Geely-Kandi JV include a number of large, modern, and operational factories. Geely is well positioned, through this JV to ramp up EV production and sales.
In addition to the Kandi JV, Geely has invested significant capital into the NEV sector. This includes businesses that are already operational, as well as those that will become operational in the coming years. These include:
Geely's $5 billion investment in a future NEV facility/factory in Eastern China.
Geely's investment in the EV ride-sharing company CaoCao. As explained here, CaoCao recently raised "US$156 million … from various investors, at a valuation of over RMB10 billion (US$1.6 billion). … Caocao uses only electric vehicles made by Geely, which is a strategic investor in the company. It operates in 17 cities with over 12,000 drivers, and fills roughly 150,000 orders daily ...".
Volvo and Geely Holdings, together, have invested 758 million USD into an emerging EV company known as Polestar. Polestar is a new company within the "Geely group" that will initially target China's luxury NEV market.
Geely's financial backing of Zhidou, a company which makes small affordable EVs. Zhidou's model D2 has been particularly successful with over 43,000 sold during 2017.
Geely and all automobile manufacturers have strong incentives to ramp up production and sales of NEVs. During recent years, government's main mechanism for supporting NEVs has been subsidies which make EVs and hybrids much more affordable. Subsidies are scheduled to end in 2020, and in 2019, automobile manufacturers will have to comply with new carbon emission reduction regulations that utilize a carbon credit score system. That system is designed to ensure strong continued support for NEVs well into the future.
Geely's future success, in terms of selling both New Energy Vehicles (NEVs), as well as traditional cars, will be influenced by the effectiveness of its partnerships. Geely's most valuable and widely publicized partnership is with Volvo Cars, which is owned by the Geely Holdings Group.
The Geely-Volvo Partnership; Strong and Thriving
It's hard to overstate the strategic importance of the Geely-Volvo partnership. Volvo Cars is a subsidiary of the Geely Holding Group, a company led by Mr. Li Shufu. Li is undoubtedly the single most important individual regarding all things Geely. Li is the Chairman of the Board of Directors of three related businesses; the Geely Holding Group, Geely Automobile Holdings, and Volvo Cars. The Geely-Volvo partnership includes areas of collaboration such as R&D, technology sharing, car design, manufacturing, and distribution. Like Geely, Volvo too is a promoter of EVs. In 2017, Volvo set its own ambitious goals towards a greener future with a bold announcement that "All Volvo cars to be electric or hybrid from 2019".
Geely's formal relationship with Volvo dates back to 2010. During the American automobile industry crisis of 2008-2010, Ford (NYSE:F), GM (NYSE:GM), and others struggled to remain solvent and were forced to sell off assets. Capitalizing on a golden opportunity; Geely purchased Volvo from Ford for the bargain basement price of $1.5 billion. For historical perspective, Ford paid more than four times that amount ($6.45 billion) when acquiring Volvo in 1999.
For a great read on the transformation of Geely, see Michael Dunne's article Geely: The astonishing rise of a small Chinese car company. Dunne highlights two critical factors contributing to Geely's rise; - improved quality and improved design. In 2011, Li hired Peter Horbury, Volvo's respected Chief of Design. Although numerous factors determine competitiveness in the market, design is critical; especially as companies seek to compete on quality. In the past, Geely was associated with "lower-end affordable cars". That image and reputation have largely been left behind; and Geely is now preferred by many of China's mostly middle class buyers.
The Geely-Volvo partnership has been mutually beneficial. Geely has invested heavily in Volvo, with much of that investment dedicated to R&D, which in turn, has benefits for design. Companies wishing to compete successfully in China's rapidly changing market must find ways to shorten the time span required for design, manufacturing, and sales. Bertel Schmitt, an auto-industry expert based in Tokyo, highlights the importance of this aspect of the business in his excellent blog "If Any Chinese Car Company Will Take On The World, It's This One". Schmitt notes:
Design and development play a leading role in Geely's ultimate advantage: Its speedy time to market. Developing a new car from the ground up usually takes around 5 years, at Geely, it can be done in 3 years, or less, without cutting corners with details, quality, or testing.
In the excerpt below, Schmitt goes on to highlight other advantages related to engineering, innovation, and Geely's competitive edge:
Innovation is only learned by actively innovating, by being a part of the innovation process. Geely owns world-class automaker Volvo, allowing its engineers to be five years ahead of their colleagues at the mostly state-owned joint ventures.
Geely, Volvo, and the birth of a new brand: Lynk & Co.
Lynk & Co., a new company and brand jointly owned by Geely and Volvo, has recently launched its first model (the "01"), into the Chinese market.
Sales are planned for Europe (2019) and later in the USA (2020). Marketing efforts are primarily designed to appeal to young urban professionals. Features include an "01 App store", "always-on" Internet, and a personal cloud. Convenience is also a selling point, in terms of online purchasing and an after-sales service experience that maximizes convenience transactions online, such as booking maintenance appointments, scheduling pick-ups, drop-offs etc. The price of the 01 ranges between $24,000 and $31,000, depending on options.
Geely's core brand and business is booming
Geely is enjoying remarkable success in China's mass (mid-tier) market. Sales have been very strong during the last few years. In 2015, the company sold just over one half million cars. In the short time span of just two years, sales have more than doubled to over 1.2 million cars sold.
Geely has established a track record of under-promising and over-delivering. In January 2016, Geely set its annual sales target at 600,000 cars, representing an 18% increase over 2015. As a successful 2016 began to unfold, the target was revised upward to 700,000. By the end of 2016, Geely exceeded its initial sales target by 28% and its revised target by 9%. A similar pattern of under-promising and over-delivering unfolded during 2017. Geely initially set an ambitious goal of selling 1 million cars in 2017. Following a very good start to the first half of the year, in July of 2017, the target was revised upwards by 10% to 1.1 million. Recently, Geely released a Press Releasereporting over 1.2 million cars sold in 2017, making for an increase of +63% from 2016 sales. Within that same release, the company announced its sales target of 1.58 million for 2018.
The investment thesis herein is simple: Geely will continue to sell more cars, leading to higher revenues, higher profits, and by extension; a higher share price. The starting point for this causal chain is "more cars sold", which is a basic indicator of business success for any car manufacturer.
Higher revenues and profits should continue to support an upward share price.
Both Geely's revenues and profits have risen dramatically in recent years. Between 2015 and 2016, revenues rose 78%, while net profits more than doubled. Geely's financial results for 2017 will be reported in late March 2018. The company is expecting a net profit increase of about 100%, as communicated in its "Positive Profit Alert" (Jan. 2018) found here. If Geely's expectation comes to fruition, net profit for 2017 would be approximately USD$1.61 billion. The consistency in which the company's previous alerts have in fact panned out should engender high confidence and trust in Geely's management. A summary table comparing alerts with subsequent results can be viewed here.
Investors considering taking a long position in Geely should ask a number of important questions as part of their due diligence. These include but are not limited to:
Will Geely continue to sell more cars, and how is the company performing against its main competitors?
Is Geely's share price fairly valued, considering the company's recent business performance as well as its expected future performance?
Geely and its Competition
Geely's main competitors are Chinese companies that manufacture and sell their cars in China. For an excellent brand level analysis of China's car market, see the recent Carsalesbase.com blog titled: China car sales analysis 2017 - brands. The blog includes a table which ranks competing brands according to sales volume. Geely ranked 3rd overall, behind Volkswagen (OTCPK:VLKAF) and Honda (NYSE:HMC), but ahead of other major global and domestic brands such as Buick, Toyota (NYSE:TM), Nissan (OTCPK:NSANF), Changan, and Baojun. Considering the Chinese brands alone, of the 48 brands ranked, Geely ranks highest, with an estimated 1.25 million cars sold during 2017. Considering domestic manufacturers, its closest competitor was Changan Auto, which ranked 7th overall, with 1.05 million cars sold. In summary, based on both brand rankings and model based comparisons, Geely's cars are selling well against its competition.
Valuing Geely and its "Peers"
Valuation comparisons have greatest validity when the companies being compared have similar profiles and growth rates. Because of Geely's success, in terms of out-performing its peers, similar companies (i.e. true "peers") are not easy to find. With this caveat up front, the graphs below compare Geely with two other "high growth" Chinese automobile companies; BYD (OTCPK:BYDDF) and GAC (OTCPK:GNZUF) (Guangzhou Automobile Group). During the last few years, both sales and earnings per share (EPS) of all three companies have generally been rising rapidly. The exception to this trend is BYD in 2017. BYD's sales are known to have decreased in 2017 relative to 2016, and as a result, profits are also expected to decline. Although BYD lost momentum during 2017, sales have sequentially risen during the last four months of 2017. Analysts are predicting higher earnings in 2018, setting the stage for returned upward momentum.
Sales and earnings trends are shown for all three companies below:
The table below presents four indicators relevant to valuation, to give readers a better understanding of whether Geely is fairly valued relative to its peers (BYD and GAC).
While Geely's P/E is considerably higher than GAC's, it is significantly lower than BYD's. The Forward P/E indicator is the more useful indicator in this context because of the high growth nature of these companies, and because analysts are expecting higher earnings for Geely, BYD, and GAC in 2018. As seen in the last column in the table above, long-term earnings growth rates are positive for all three companies. However, the estimated rate is by far, highest for Geely. Lastly, the valuation indicator that really stands out is free cash flow, where again Geely's positive cash flow for 2017 of +9.25 billion Chinese Yuan (USD$ 1.46 billion) is in stark positive contrast to the large negative cash flows of BYD and GAC. Free cash flow/FCF as an indicator is favored by some analysts and investors as an alternative or complement to P/E indicators because, as noted here in this Investopedia article;
Earnings can often be adjusted by various accounting practices, but it's tougher to fake cash flow. For this reason, some investors believe that FCF gives a much clearer view of a company's ability to generate cash and profits.
In summary, for all of the reasons above, Geely's valuation, relative to its peers BYD and GAC, seems reasonable/fair, or perhaps even low.
Changes in share price during the past year
Changes in share price for Geely, GAC, and BYD are graphed below. This gives an indication of how the market has reacted to past business performance. To the extent that the market is actually forward looking, future expectations and prospects might also be reflected.
All three of these "high growth companies" depicted in the graph above have seen the value of their share prices appreciate greatly during the past year; Geely's share price has gained +103%, BYD shares are up +57%, and GAC is up +27% for the one-year period ending 2018/02/20.
Can Geely's rapid growth continue during 2018 and beyond?
Whether Geely can continue to grow at a rapid pace is a fair and open question. A number of important factors lead this author to believe that Geely's future is indeed bright; at least for the 2018-2020 period. These include:
Strong leadership, particularly from Geely's founder and Chairman, Mr. Li Shufu.
A proven track record of successfully designing, manufacturing, launching and selling new car models, and an ability to continue that trend.
Geography. Geely's home country China is the largest automobile market in the world. Being able to sell and expand into that market is a major advantage.
Geography - Geely's home is the largest automobile market in the world
China's market for cars is by far the largest in the world. The considerable differences in size between the number one market and the number two market (the USA) were highlighted in Michael Dunne's article, Geely: The astonishing rise of a small Chinese car company:
Chinese consumers and state agencies bought a stunning 27 million cars, trucks, and buses last year. For comparison, Americans bought 17.5 million.
Geely is quite literally "at home" operating in the Chinese market, as noted in a Bloomberg article, "Geely's Home Court Advantage", by Shelly Banjo. Foreign industry giants such as Volkswagen, GM, Honda, and others still dominate China's market. International brands represented about 56.1% of China's market share for passenger cars in 2017. Domestic/Chinese brands represented the remaining 43.9% according to a January 2018 article herefrom China's Association of Automobile Manufacturers.
In the article Chinese brands outstrip rivals in market share (Sept. 2017) - Geely's Vice President Yang Xueliang, predicts a growing market share for Chinese brands in the future:
If the momentum continues, Chinese brands are likely to have a 50 percent or even 60 percent market share in the long run.
Geely's CEO, An Conghui, has not been shy about his company's clear intention to compete head on with foreign rivals. The senior executive is quoted in a April 2017 Reuters article (SAIC, Geely turn up heat on global rivals) as saying:
The Lynk&Co brand's mission is to compete head-on with global [mass-market] brands.
Competing at home means that Geely will have an easier growth path forward as it seeks to become a player amongst industry giants. In contrast, companies like Toyota, Honda, and Hyundai had to fight their battles for global prominence largely in foreign markets (i.e. American and European markets). That strategy made sense at the time, simply because those were the biggest markets.
Companies like Geely and Guangzhou Auto (GAC) have ambition to become global players within the industry. However, they are competing mainly in their own domestic market. This represents both a critical difference and a critical advantage. Companies like Geely don't have to struggle to becomeestablished in China's market. Highlights from Geely's January 2018 corporate presentation and profile shown below illustrate just how well established the company is on its home turf.
Year Started: 1998
Total Workforce: 35,100
Manufacturing facilities: 9 plants in China
Products: 10 major models under 5 platforms
Distribution Network: More than 920 dealers in China
2017 Sales Volume: 1,247,116 (99% in China market)
2016 Revenue: US$7.9 billion
Market Capitalization: US$28.9 billion (as of January 19th, 2018)
Of all the various profile descriptors above; the "99% in the China market" matters most. In other words, at this stage of Geely's development, the export market doesn't matter much. If and when Geely brands like Lynk & Co. successfully penetrate Western markets, exports will matter more in future years. However, for the short term (i.e. 2018-2019), Geely's business is squarely focused on China.
Conclusion
In simplest terms, the basic and broader narrative of this report is that:
China is by far the most important automobile market globally, both in terms of size and growth potential. This will continue to be the case for the foreseeable future.
China's huge air-pollution problems and related public health concerns are key drivers in terms of the Chinese government's support and policy push towards cleaner and greener cars. Although the transition away from dependency on conventional cars (fossil fuel dependent) towards Electric Vehicles/EVs and hybrids will take decades; it is clear that China is headed in this direction. Manufacturers must adjust and adapt to these new realities, and companies like Geely are well positioned to do so.
Geely is selling more cars than ever before,
Higher sales have resulted in higher profits and earnings,
The company will be able to produce and release new car models at a competitive price that appeal to Chinese buyers,
These trends are expected to continue.
Closely related to this, strong fundamentals have been the basis for an upwardly moving share price. For investors or potential investors in Geely, we come to a critical question: "Will these trends continue"? This author and analyst conclude "highly likely"; for all of the numerous reasons stated already in this report. Obviously, the maxim of "do your own due diligence" applies in this and every investment context.
Geely Automobile Holdings: China's Rising Star - Geely Automobile Holdings Ltd. (OTCMKTS:GELYF) | Seeking Alpha
Summary
Business is booming for Geely, a car manufacturer based in Hangzhou, China.
Cars are selling at an impressive pace, and revenues and profits are growing.
Despite the rapid rise and doubling of its share price during the past year, Geely continues to be an attractive investment worthy of consideration.
Editor's note: Seeking Alpha is proud to welcome John McHarris as a new contributor. It's easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to the SA PRO archive. Click here to find out more »
Investment Thesis:
China is by far the world's largest car market; its importance will continue to grow.
The Chinese government is strongly supporting Electric Vehicles (EVs) and hybrids, which, together as a category, are referred to as New Energy Vehicles (NEVs). Factors underlying support include: [A] the PRC's desire to position China as a future leader in the transportation industry, addressing public health concerns, and [C] reducing the nation's dependence on oil.
NEVs will undoubtedly come to represent a much bigger share of the Chinese car market. Automobile manufacturers must adapt to these new realities, and companies like Geely (OTCPK:GELYF) are well positioned to do so.
Geely is one of the largest and fastest growing car companies in the domestic market.
Geely's partnership with Volvo (OTCPK:VOLAF) is a major plus. Volvo's positive influence on the improved design of Geely's cars is already showing. These better-designed cars are selling well.
Recently, Geely has invested $9.2 billion in Daimler (OTCPK
DAIF) and is currently Daimler's largest shareholder. Geely has expressed an interest in partnering with Daimler, on battery technology and EVs.For the short term, Geely will continue to prioritize its efforts on the Chinese market. Longer term, Geely's success globally is a real possibility.
Looking for growth in the automobile market? Look towards China
In 2009, China surpassed the USA as the world's largest automobile market, as highlighted in this Forbes article here. The sheer size of China's middle class and its growing purchasing power all but ensures the country will remain the largest market well into the future. EVs will play an increasingly important role in China's future. China's NEV sub-sector grew at a rate of 53% during 2017. In contrast, the broader industry (light vehicles + trucks + buses) grew at a much lower 3 percent.
Support for New Energy Vehicles (NEVs) is strong, and the government is putting its money where its mouth is. Subsidies have been estimated at $15.4 billion, according to UBS. Using both "carrots" and "sticks"; China is creating incentives for industry to transition towards a greener and cleaner future. The article here, China, in EV push, plans ban on fossil-fuel vehicle sales, provides a good example of the government's firm resolve to promote widespread adoption of EVs.
Geely's Corporate Strategy includes emphasis on New Energy Vehicles
Geely's corporate strategy includes a clear emphasis on EVs and hybrids. Although the overwhelming number of cars that Geely sells are traditional cars; the company has long been an early supporter of EVs. In March of 2013, Geely created a joint venture (JV) with Kandi (NASDAQ:KNDI), a producer of electric vehicles. The assets of the Geely-Kandi JV include a number of large, modern, and operational factories. Geely is well positioned, through this JV to ramp up EV production and sales.
In addition to the Kandi JV, Geely has invested significant capital into the NEV sector. This includes businesses that are already operational, as well as those that will become operational in the coming years. These include:
Geely's $5 billion investment in a future NEV facility/factory in Eastern China.
Geely's investment in the EV ride-sharing company CaoCao. As explained here, CaoCao recently raised "US$156 million … from various investors, at a valuation of over RMB10 billion (US$1.6 billion). … Caocao uses only electric vehicles made by Geely, which is a strategic investor in the company. It operates in 17 cities with over 12,000 drivers, and fills roughly 150,000 orders daily ...".
Volvo and Geely Holdings, together, have invested 758 million USD into an emerging EV company known as Polestar. Polestar is a new company within the "Geely group" that will initially target China's luxury NEV market.
Geely's financial backing of Zhidou, a company which makes small affordable EVs. Zhidou's model D2 has been particularly successful with over 43,000 sold during 2017.
Geely and all automobile manufacturers have strong incentives to ramp up production and sales of NEVs. During recent years, government's main mechanism for supporting NEVs has been subsidies which make EVs and hybrids much more affordable. Subsidies are scheduled to end in 2020, and in 2019, automobile manufacturers will have to comply with new carbon emission reduction regulations that utilize a carbon credit score system. That system is designed to ensure strong continued support for NEVs well into the future.
Geely's future success, in terms of selling both New Energy Vehicles (NEVs), as well as traditional cars, will be influenced by the effectiveness of its partnerships. Geely's most valuable and widely publicized partnership is with Volvo Cars, which is owned by the Geely Holdings Group.
The Geely-Volvo Partnership; Strong and Thriving
It's hard to overstate the strategic importance of the Geely-Volvo partnership. Volvo Cars is a subsidiary of the Geely Holding Group, a company led by Mr. Li Shufu. Li is undoubtedly the single most important individual regarding all things Geely. Li is the Chairman of the Board of Directors of three related businesses; the Geely Holding Group, Geely Automobile Holdings, and Volvo Cars. The Geely-Volvo partnership includes areas of collaboration such as R&D, technology sharing, car design, manufacturing, and distribution. Like Geely, Volvo too is a promoter of EVs. In 2017, Volvo set its own ambitious goals towards a greener future with a bold announcement that "All Volvo cars to be electric or hybrid from 2019".
Geely's formal relationship with Volvo dates back to 2010. During the American automobile industry crisis of 2008-2010, Ford (NYSE:F), GM (NYSE:GM), and others struggled to remain solvent and were forced to sell off assets. Capitalizing on a golden opportunity; Geely purchased Volvo from Ford for the bargain basement price of $1.5 billion. For historical perspective, Ford paid more than four times that amount ($6.45 billion) when acquiring Volvo in 1999.
For a great read on the transformation of Geely, see Michael Dunne's article Geely: The astonishing rise of a small Chinese car company. Dunne highlights two critical factors contributing to Geely's rise; - improved quality and improved design. In 2011, Li hired Peter Horbury, Volvo's respected Chief of Design. Although numerous factors determine competitiveness in the market, design is critical; especially as companies seek to compete on quality. In the past, Geely was associated with "lower-end affordable cars". That image and reputation have largely been left behind; and Geely is now preferred by many of China's mostly middle class buyers.
The Geely-Volvo partnership has been mutually beneficial. Geely has invested heavily in Volvo, with much of that investment dedicated to R&D, which in turn, has benefits for design. Companies wishing to compete successfully in China's rapidly changing market must find ways to shorten the time span required for design, manufacturing, and sales. Bertel Schmitt, an auto-industry expert based in Tokyo, highlights the importance of this aspect of the business in his excellent blog "If Any Chinese Car Company Will Take On The World, It's This One". Schmitt notes:
Design and development play a leading role in Geely's ultimate advantage: Its speedy time to market. Developing a new car from the ground up usually takes around 5 years, at Geely, it can be done in 3 years, or less, without cutting corners with details, quality, or testing.
In the excerpt below, Schmitt goes on to highlight other advantages related to engineering, innovation, and Geely's competitive edge:
Innovation is only learned by actively innovating, by being a part of the innovation process. Geely owns world-class automaker Volvo, allowing its engineers to be five years ahead of their colleagues at the mostly state-owned joint ventures.
Geely, Volvo, and the birth of a new brand: Lynk & Co.
Lynk & Co., a new company and brand jointly owned by Geely and Volvo, has recently launched its first model (the "01"), into the Chinese market.
Sales are planned for Europe (2019) and later in the USA (2020). Marketing efforts are primarily designed to appeal to young urban professionals. Features include an "01 App store", "always-on" Internet, and a personal cloud. Convenience is also a selling point, in terms of online purchasing and an after-sales service experience that maximizes convenience transactions online, such as booking maintenance appointments, scheduling pick-ups, drop-offs etc. The price of the 01 ranges between $24,000 and $31,000, depending on options.
Geely's core brand and business is booming
Geely is enjoying remarkable success in China's mass (mid-tier) market. Sales have been very strong during the last few years. In 2015, the company sold just over one half million cars. In the short time span of just two years, sales have more than doubled to over 1.2 million cars sold.
Geely has established a track record of under-promising and over-delivering. In January 2016, Geely set its annual sales target at 600,000 cars, representing an 18% increase over 2015. As a successful 2016 began to unfold, the target was revised upward to 700,000. By the end of 2016, Geely exceeded its initial sales target by 28% and its revised target by 9%. A similar pattern of under-promising and over-delivering unfolded during 2017. Geely initially set an ambitious goal of selling 1 million cars in 2017. Following a very good start to the first half of the year, in July of 2017, the target was revised upwards by 10% to 1.1 million. Recently, Geely released a Press Releasereporting over 1.2 million cars sold in 2017, making for an increase of +63% from 2016 sales. Within that same release, the company announced its sales target of 1.58 million for 2018.
The investment thesis herein is simple: Geely will continue to sell more cars, leading to higher revenues, higher profits, and by extension; a higher share price. The starting point for this causal chain is "more cars sold", which is a basic indicator of business success for any car manufacturer.
Higher revenues and profits should continue to support an upward share price.
Both Geely's revenues and profits have risen dramatically in recent years. Between 2015 and 2016, revenues rose 78%, while net profits more than doubled. Geely's financial results for 2017 will be reported in late March 2018. The company is expecting a net profit increase of about 100%, as communicated in its "Positive Profit Alert" (Jan. 2018) found here. If Geely's expectation comes to fruition, net profit for 2017 would be approximately USD$1.61 billion. The consistency in which the company's previous alerts have in fact panned out should engender high confidence and trust in Geely's management. A summary table comparing alerts with subsequent results can be viewed here.
Investors considering taking a long position in Geely should ask a number of important questions as part of their due diligence. These include but are not limited to:
Will Geely continue to sell more cars, and how is the company performing against its main competitors?
Is Geely's share price fairly valued, considering the company's recent business performance as well as its expected future performance?
Geely and its Competition
Geely's main competitors are Chinese companies that manufacture and sell their cars in China. For an excellent brand level analysis of China's car market, see the recent Carsalesbase.com blog titled: China car sales analysis 2017 - brands. The blog includes a table which ranks competing brands according to sales volume. Geely ranked 3rd overall, behind Volkswagen (OTCPK:VLKAF) and Honda (NYSE:HMC), but ahead of other major global and domestic brands such as Buick, Toyota (NYSE:TM), Nissan (OTCPK:NSANF), Changan, and Baojun. Considering the Chinese brands alone, of the 48 brands ranked, Geely ranks highest, with an estimated 1.25 million cars sold during 2017. Considering domestic manufacturers, its closest competitor was Changan Auto, which ranked 7th overall, with 1.05 million cars sold. In summary, based on both brand rankings and model based comparisons, Geely's cars are selling well against its competition.
Valuing Geely and its "Peers"
Valuation comparisons have greatest validity when the companies being compared have similar profiles and growth rates. Because of Geely's success, in terms of out-performing its peers, similar companies (i.e. true "peers") are not easy to find. With this caveat up front, the graphs below compare Geely with two other "high growth" Chinese automobile companies; BYD (OTCPK:BYDDF) and GAC (OTCPK:GNZUF) (Guangzhou Automobile Group). During the last few years, both sales and earnings per share (EPS) of all three companies have generally been rising rapidly. The exception to this trend is BYD in 2017. BYD's sales are known to have decreased in 2017 relative to 2016, and as a result, profits are also expected to decline. Although BYD lost momentum during 2017, sales have sequentially risen during the last four months of 2017. Analysts are predicting higher earnings in 2018, setting the stage for returned upward momentum.
Sales and earnings trends are shown for all three companies below:
The table below presents four indicators relevant to valuation, to give readers a better understanding of whether Geely is fairly valued relative to its peers (BYD and GAC).
While Geely's P/E is considerably higher than GAC's, it is significantly lower than BYD's. The Forward P/E indicator is the more useful indicator in this context because of the high growth nature of these companies, and because analysts are expecting higher earnings for Geely, BYD, and GAC in 2018. As seen in the last column in the table above, long-term earnings growth rates are positive for all three companies. However, the estimated rate is by far, highest for Geely. Lastly, the valuation indicator that really stands out is free cash flow, where again Geely's positive cash flow for 2017 of +9.25 billion Chinese Yuan (USD$ 1.46 billion) is in stark positive contrast to the large negative cash flows of BYD and GAC. Free cash flow/FCF as an indicator is favored by some analysts and investors as an alternative or complement to P/E indicators because, as noted here in this Investopedia article;
Earnings can often be adjusted by various accounting practices, but it's tougher to fake cash flow. For this reason, some investors believe that FCF gives a much clearer view of a company's ability to generate cash and profits.
In summary, for all of the reasons above, Geely's valuation, relative to its peers BYD and GAC, seems reasonable/fair, or perhaps even low.
Changes in share price during the past year
Changes in share price for Geely, GAC, and BYD are graphed below. This gives an indication of how the market has reacted to past business performance. To the extent that the market is actually forward looking, future expectations and prospects might also be reflected.
All three of these "high growth companies" depicted in the graph above have seen the value of their share prices appreciate greatly during the past year; Geely's share price has gained +103%, BYD shares are up +57%, and GAC is up +27% for the one-year period ending 2018/02/20.
Can Geely's rapid growth continue during 2018 and beyond?
Whether Geely can continue to grow at a rapid pace is a fair and open question. A number of important factors lead this author to believe that Geely's future is indeed bright; at least for the 2018-2020 period. These include:
Strong leadership, particularly from Geely's founder and Chairman, Mr. Li Shufu.
A proven track record of successfully designing, manufacturing, launching and selling new car models, and an ability to continue that trend.
Geography. Geely's home country China is the largest automobile market in the world. Being able to sell and expand into that market is a major advantage.
Geography - Geely's home is the largest automobile market in the world
China's market for cars is by far the largest in the world. The considerable differences in size between the number one market and the number two market (the USA) were highlighted in Michael Dunne's article, Geely: The astonishing rise of a small Chinese car company:
Chinese consumers and state agencies bought a stunning 27 million cars, trucks, and buses last year. For comparison, Americans bought 17.5 million.
Geely is quite literally "at home" operating in the Chinese market, as noted in a Bloomberg article, "Geely's Home Court Advantage", by Shelly Banjo. Foreign industry giants such as Volkswagen, GM, Honda, and others still dominate China's market. International brands represented about 56.1% of China's market share for passenger cars in 2017. Domestic/Chinese brands represented the remaining 43.9% according to a January 2018 article herefrom China's Association of Automobile Manufacturers.
In the article Chinese brands outstrip rivals in market share (Sept. 2017) - Geely's Vice President Yang Xueliang, predicts a growing market share for Chinese brands in the future:
If the momentum continues, Chinese brands are likely to have a 50 percent or even 60 percent market share in the long run.
Geely's CEO, An Conghui, has not been shy about his company's clear intention to compete head on with foreign rivals. The senior executive is quoted in a April 2017 Reuters article (SAIC, Geely turn up heat on global rivals) as saying:
The Lynk&Co brand's mission is to compete head-on with global [mass-market] brands.
Competing at home means that Geely will have an easier growth path forward as it seeks to become a player amongst industry giants. In contrast, companies like Toyota, Honda, and Hyundai had to fight their battles for global prominence largely in foreign markets (i.e. American and European markets). That strategy made sense at the time, simply because those were the biggest markets.
Companies like Geely and Guangzhou Auto (GAC) have ambition to become global players within the industry. However, they are competing mainly in their own domestic market. This represents both a critical difference and a critical advantage. Companies like Geely don't have to struggle to becomeestablished in China's market. Highlights from Geely's January 2018 corporate presentation and profile shown below illustrate just how well established the company is on its home turf.
Year Started: 1998
Total Workforce: 35,100
Manufacturing facilities: 9 plants in China
Products: 10 major models under 5 platforms
Distribution Network: More than 920 dealers in China
2017 Sales Volume: 1,247,116 (99% in China market)
2016 Revenue: US$7.9 billion
Market Capitalization: US$28.9 billion (as of January 19th, 2018)
Of all the various profile descriptors above; the "99% in the China market" matters most. In other words, at this stage of Geely's development, the export market doesn't matter much. If and when Geely brands like Lynk & Co. successfully penetrate Western markets, exports will matter more in future years. However, for the short term (i.e. 2018-2019), Geely's business is squarely focused on China.
Conclusion
In simplest terms, the basic and broader narrative of this report is that:
China is by far the most important automobile market globally, both in terms of size and growth potential. This will continue to be the case for the foreseeable future.
China's huge air-pollution problems and related public health concerns are key drivers in terms of the Chinese government's support and policy push towards cleaner and greener cars. Although the transition away from dependency on conventional cars (fossil fuel dependent) towards Electric Vehicles/EVs and hybrids will take decades; it is clear that China is headed in this direction. Manufacturers must adjust and adapt to these new realities, and companies like Geely are well positioned to do so.
Geely is selling more cars than ever before,
Higher sales have resulted in higher profits and earnings,
The company will be able to produce and release new car models at a competitive price that appeal to Chinese buyers,
These trends are expected to continue.
Closely related to this, strong fundamentals have been the basis for an upwardly moving share price. For investors or potential investors in Geely, we come to a critical question: "Will these trends continue"? This author and analyst conclude "highly likely"; for all of the numerous reasons stated already in this report. Obviously, the maxim of "do your own due diligence" applies in this and every investment context.
Wolfgang
Kraftwagen König
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Daimler Interested in Closer Ties With China’s Geely Automotive Group
Dieter Zetsche says of billionaire investor Li Shufu, ‘everything he touches seems to succeed’
Dieter Zetsche shows off the new Mercedes-AMG GT 4-door at its world premiere during a news-media day ahead of the Geneva International Motor Show on Tuesday. PHOTO: HAROLD CUNNINGHAM/AGENCE FRANCE-PRESSE/GETTY IMAGES
By William Boston -- WSJ
GENEVA— Daimler AG DMLRY 0.29% Chief Executive Dieter Zetsche on Tuesday said the German car maker was interested in developing a closer relationship with China’s Geely automotive group, its largest shareholder, but said any cooperation needed the backing of Daimler’s current Chinese partner BAIC Motor Corp.
Speaking on the sidelines of the Geneva International Motor Show, Mr. Zetsche praised Geely’s founder, billionaire Li Shufu, as a gifted entrepreneur, saying “everything he touches seems to succeed.”
“It doesn’t take too much imagination to see the potential upside for Daimler,” he said, adding that cooperation with Mr. Li’s Zhejiang Geely Holding “potentially gives us more options.”
Mr. Zetsche’s comments are the clearest indication yet that the maker of Mercedes-Benz automobiles could be open for closer cooperation with Geely, a fast-growing Chinese auto group that has become a global juggernaut since its 2010 acquisition of Swedish auto maker Volvo Cars.
Mr. Li disclosed last month that he had amassed a 9.7% stake in Daimler, becoming its largest single shareholder. The news rattled the German auto sector and the country’s political leaders, who worried that the Chinese could scoop up a cornerstone of German industry.
Mr. Zetsche dismissed speculation in the German media that the company was shocked by Mr. Li’s acquisition of a sizeable stake in the company. At a meeting early last year, Mr. Li told Mr. Zetsche he wanted to become a Daimler shareholder and that he saw many potential areas of cooperation.
“I said we are definitely open for anything in China. He then went out and did what he said he would do,” Mr. Zetsche said, adding about Mr. Li’s acquisition of Daimler shares: “We didn’t necessarily expect it to be in that range but it wasn’t a total surprise to us.”
After disclosing his stake in Daimler, Mr. Li went to Stuttgart and met Mr. Zetsche again, exploring the possibility of cooperation between Daimler and Volvo Cars.
“It was a good conversation with a very successful entrepreneur,” Mr. Zetsche said.
BAIC and Mercedes are building their fifth car together in China and will jointly build an electric crossover vehicle under Daimler’s EQ badge, which is planned to launch in 2020.
Daimler and BAIC announced last month that they would invest $1.9 billion to build a new factory in China that will make electric cars and other vehicles.
At the meeting in Stuttgart last month, Mr. Li proposed various ways Daimler and Geely could bundle activities to share technology and development costs.
“We will examine everything if it is in keeping with the wishes of our partner,” Mr. Zetsche said.
Write to William Boston at william.boston@wsj.com
Li Shufu, chairman of Zhejiang Geely Holdings, left, and Hakan Samuelsson, chief executive of Geely’s Volvo Cars. PHOTO: ASSOCIATED PRESS
Dieter Zetsche says of billionaire investor Li Shufu, ‘everything he touches seems to succeed’
Dieter Zetsche shows off the new Mercedes-AMG GT 4-door at its world premiere during a news-media day ahead of the Geneva International Motor Show on Tuesday. PHOTO: HAROLD CUNNINGHAM/AGENCE FRANCE-PRESSE/GETTY IMAGES
By William Boston -- WSJ
GENEVA— Daimler AG DMLRY 0.29% Chief Executive Dieter Zetsche on Tuesday said the German car maker was interested in developing a closer relationship with China’s Geely automotive group, its largest shareholder, but said any cooperation needed the backing of Daimler’s current Chinese partner BAIC Motor Corp.
Speaking on the sidelines of the Geneva International Motor Show, Mr. Zetsche praised Geely’s founder, billionaire Li Shufu, as a gifted entrepreneur, saying “everything he touches seems to succeed.”
“It doesn’t take too much imagination to see the potential upside for Daimler,” he said, adding that cooperation with Mr. Li’s Zhejiang Geely Holding “potentially gives us more options.”
Mr. Zetsche’s comments are the clearest indication yet that the maker of Mercedes-Benz automobiles could be open for closer cooperation with Geely, a fast-growing Chinese auto group that has become a global juggernaut since its 2010 acquisition of Swedish auto maker Volvo Cars.
Mr. Li disclosed last month that he had amassed a 9.7% stake in Daimler, becoming its largest single shareholder. The news rattled the German auto sector and the country’s political leaders, who worried that the Chinese could scoop up a cornerstone of German industry.
Mr. Zetsche dismissed speculation in the German media that the company was shocked by Mr. Li’s acquisition of a sizeable stake in the company. At a meeting early last year, Mr. Li told Mr. Zetsche he wanted to become a Daimler shareholder and that he saw many potential areas of cooperation.
“I said we are definitely open for anything in China. He then went out and did what he said he would do,” Mr. Zetsche said, adding about Mr. Li’s acquisition of Daimler shares: “We didn’t necessarily expect it to be in that range but it wasn’t a total surprise to us.”
After disclosing his stake in Daimler, Mr. Li went to Stuttgart and met Mr. Zetsche again, exploring the possibility of cooperation between Daimler and Volvo Cars.
“It was a good conversation with a very successful entrepreneur,” Mr. Zetsche said.
BAIC and Mercedes are building their fifth car together in China and will jointly build an electric crossover vehicle under Daimler’s EQ badge, which is planned to launch in 2020.
Daimler and BAIC announced last month that they would invest $1.9 billion to build a new factory in China that will make electric cars and other vehicles.
At the meeting in Stuttgart last month, Mr. Li proposed various ways Daimler and Geely could bundle activities to share technology and development costs.
“We will examine everything if it is in keeping with the wishes of our partner,” Mr. Zetsche said.
Write to William Boston at william.boston@wsj.com
Li Shufu, chairman of Zhejiang Geely Holdings, left, and Hakan Samuelsson, chief executive of Geely’s Volvo Cars. PHOTO: ASSOCIATED PRESS
SDNR
Kraftwagen König
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That is absolutely fascinating.
Imagine if Geely one day actually owned a controlling majority of Daimler - my, that would be earth-shattering. I have little doubt Mr. Li has thought about it.
mini_cooper4
Autotechnik Ace
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Would love to see Daimler under Geely. I have faith in Li Shufu... he can do it!
Robbie
Schwarzwald Sprinter
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I'm glad that my earlier posts saying this have been shown to be correct - that Mercedes and Volvo would work together... and that Daimler would have to cooperate with their new biggest shareholder. Now it has practically been officially confirmed by Zetsche.
CrunchSlaughtered
RPM Ruler
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I think that Zetsche is just stalling, in order not to cause panic. Volvo is a serious competitor and sharing one of their competitive advantages like engines is not very wishful for them
D
Deleted member 25
Guest
It's funny though to see a single individual make a titan such as Daimler sweat by buying some shares.
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Volvo aim to exclusively offer electrified cars from 2020. Mercedes will not sell them mild hybrid four and 6 cylinder engines.
Aston Martin and Pagani are supplied because they are low volume manufacturers that don't compete with Mercedes' bread and butter cars.
chonkoa
Aerodynamic Artisan
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It has nothing to with an individual- it is all about China.
D
Deleted member 25
Guest
Why ? You think their industry captains are all the continuation of the state ? Some sort of puppets ? Or oligarchs taking orders from the communist party top brass ?
CrunchSlaughtered
RPM Ruler
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There is a rumor that Li Shufu is married to the sister of Xi Jinping's wife
Robbie
Schwarzwald Sprinter
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I don't think you have interpreted their statement about launching electrified cars correctly. They are saying that their new model cars will have all electric and hybrid options. There is no way they can ONLY have electric cars from 2020.
Volvo Cars to go all electric
Also, I am not exactly sure why there is such concern about supplying a competitor. If that were really an issue, Audi wouldn't supply VW and Porsche with engines... Volvo and Mercedes is not that different from VW and Audi. I know they are all part of the same VAG group, but if Geely/Li owns 10% of Daimler, there is an economic interest at play, so it's not like a completely unconnected competitor.
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