Geely’s H2 Margin, Core Profit Miss

No-moat Geely 00175 posted 59% year-over-year net profit growth in the second half, which was helped by revaluation gain. Excluding the one-off item, core profit declined 16% compared with the same period last year. While revenue was largely in line, second-half gross margin also missed, with a 3-percentage-point decline from a year ago. We reduce our 2023-24 net profit forecasts by 12%-13% to reflect weaker margin and cut our fair value estimate to HKD 16.40 per share from HKD 20. However, we maintain our positive view on Geely as its new energy initiatives showed positive progress. Excluding estimated Zeekr valuation on 2 times forward price/sales ratio, our fair value implies a 2023 price/earnings ratio of 12.8 times for the remaining group, which is at 15% discount to the historical average of 15 times.

Geely’s automobile revenue for the second half increased 52% year over year to CNY 73.6 billion, with a 31% gain in average vehicle price and 16% increase in sales volume (excluding Lynk & Co and Livan). Gross margin, however, contracted 3.2 percentage points year over year to 13.8% due to higher new energy vehicle, or NEV, mix amid rising battery cost. Lynk & Co contributed about CNY 193 million in equity loss, compared with CNY 238 million equity income in the prior-year period, on 9% volume drop and margin contraction. Excluding CNY 1.7 billion revaluation gain on associate investment, second-half core net profit dropped 16% year over year to CNY 2.0 billion.

With core earnings below market expectation, consensus earnings revision is likely, but we see value at the current share price as investors underestimate longer-term earnings potential from higher NEV contribution. The brand already made around 5% gross margin last year on relatively small volume, according to management. With a strong NEV portfolio, we anticipate Geely to deliver a 29% net profit CAGR in 2022-25 with long-term value creation potential through Zeekr and launch of the Galaxy NEV brand.