Geely Earnings: Despite Profit Miss, Sequential Margin Improvement Signals Recovery Is in Sight

No-moat Geely 00175 posted 1% year-over-year net profit growth for the first half to CNY 1.6 billion, mainly dragged by surging selling and marketing expenses and equity loss from the Lynk & Co segment. Revenue was largely in line. Due to price competition, first-half gross margin contracted 0.2 percentage points from a year ago. We reduce our fair value estimate to HKD 14.50 from HKD 16.40 as we lower our 2023-25 net profit forecasts to reflect weaker margin and higher operating costs. However, we keep our positive view on Geely as its new energy initiatives continue to show positive progress. Excluding an estimated Zeekr valuation on 1.5 times forward price/sales ratio, our fair value implies a 2024 P/E ratio of 9.4 times for the remaining group—over 30% discount to the historical average of 15 times.

Our 2023-25 sales volume forecasts are largely unchanged. We forecast the company selling about 1.62 million vehicles this year, slightly below its target of 1.65 million units. While we increase the sales mix assumption, with higher NEV contribution, our 2023-25 revenue estimates also remain largely the same as we factor in concerns of stiff price competition this year. However, we reduce our 2023-25 net profit forecasts by 6%-19% due to slightly lower margin assumptions, a higher selling and marketing expense ratio, and reduced Lynk & Co profitability estimates.

Despite earnings being short of our expectations, the first half’s sequential recovery in gross margin amid fierce price competition is encouraging. We see value at the current share price as investors underestimate longer-term earnings potential from higher new energy vehicle, or NEV, contribution. Zeekr already recorded a double-digit gross margin in the first half, compared with about 5% in 2022, according to management. With a strong NEV model lineup, we anticipate Geely delivering a 27% net profit CAGR in 2022-25 with long-term value creation potential through Zeekr and the new Galaxy NEV brand.