Introduction
Both battery electric vehicles (“BEVs”) and plug-in hybrid vehicles (“PHEVs”) are counted as new energy vehicles (“NEVs”) in China. Per my December 2023 article, Geely Auto (OTCPK:GELYF) was positioned for substantial NEV sales in 2024. Since that time, we’ve gotten the unit numbers for the first five months of 2024, and they are not disappointing due to growth from PHEVs and Zeekr (ZK) BEVs:
Geely Auto has popular PHEVs including the Galaxy L6, the Galaxy L7 and the Lynk 08. Zeekr is Geely’s premium BEV subsidiary, and they filed an F-1 in November, but Geely still owns most of the subsidiary. Zeekr has the fastest charging BEVs in China and I expect their growth to continue. Apart from Zeekr, we’ve seen a decline in Geely’s BEV sales, but some models are still strong, such as the Panda Mini EV.
My thesis is that 2024 will continue to be a good year for Geely Auto with respect to NEVs due to their PHEV growth and the increase of premium Zeekr BEV units.
At the time of this writing, RMB 1,000 is equivalent to about $137.62.
The Numbers
The CPCA May 2024 Retail Ranking Express Report shows impressive numbers for Geely as they are in second place for YTD NEV units. Their NEV units went up 126.9% from 107,021 for the first five months of 2023 to 242,779 for the first five months of 2024:
PHEVs
Bloomberg explains Geely Auto’s old and inefficient PHEV architecture called P2, or position 2 which:
… adds an electric motor to convert a conventional combustion drivetrain into a plug-in hybrid without changing the engine or transmission.
The range on the battery power with P2 is short and the fuel efficiency of the engine isn’t improved. The BYD (OTCPK:BYDDY) DM-i PHEV came out a few years ago, and it is much better than the P2 architecture as it uses two electric motors and saves on fuel. Geely Auto now has a new plug-in hybrid platform called Leishen Power, and they have stopped making PHEVs with P2 architecture. Bloomberg explains:
Geely has a new plug-in hybrid platform called Leishen Power, which took more than five years and tens of billions of yuan to develop. The latest version hit the market in 2023 and is found in Geely’s new Galaxy series of affordable EVs and plug-in hybrids, and the Lynk & Co brand. The Leishen platform has multiple transmissions added to improve the driving experience compared with that of BYD’s DM-i, which uses a single transmission. At speeds exceeding 100 km per hour, DM-i’s handling isn’t so good.
A Geely Auto press release talks about Leishen Power winning the 2023 Global New Energy Vehicle Innovation Technology “High-performance Inverter Hybrid Platform Technology” Award:
Our high-efficiency hybrid engine incorporates the cutting-edge “Controllable Airflow” combustion technology. Guided by our innovative “Airflow Priority” development approach, we optimize airflow direction by refining the cylinder head boundaries. This optimization results in a remarkable 44% increase in turbulence within the cylinder and a 20% acceleration in combustion speed. Ultimately, we achieve an outstandingly high thermal efficiency of 44.26% for the mass production of dedicated hybrid engines.
Customers have been stepping up purchases of new-tech PHEVs from Geely Auto. The Lynk 08 PHEV is doing well. Per the 2023 annual report, more than 83 thousand Galaxy L7 PHEVs were sold during the year:
Two PHEVs, Galaxy L7 and Galaxy L6, and one BEV, Galaxy E8, were launched during the year. Since the launch of its first product – Galaxy L7, the sales volume has exceeded more than 10,000 units for six consecutive months, with accumulated sales volume exceeding 83,000 units during the year.
Per Counterpoint, Geely jumped from 5% of global PHEVs in 1Q23 up to 9% in 1Q24:
One of the reasons I think Geely will continue doing well with PHEVs is because they are always working on improvements such as extended range. There are headlines about upcoming PHEV vehicles from BYD and Geely which could have a range close to 2,000 kilometers (over 1,240 miles). The recent Chery challenge featured a real world attempt of reaching 2,000 kilometers, and the vehicle fell short as it “only” went 1,935 kilometers. Of course this isn’t realistic for other drivers as its average speed was quite low.
In the 4Q23 Geely Auto call, GEO Sheng Yue Gui said PHEVs can be more profitable than BEVs (emphasis added):
In China’s carmaking world, there was a unique phenomenon. Chinese carmakers are making money. As long as you have your own powertrain or engine production, you’d be able to make money. But if you are a pure NEV maker, you’re not making money. BYD is excellent in pure EV, but they’re only making money for their hybrid models, whereas Toyota, they’re making money.
Zeekr
Geely’s May 10th announcement on the Zeekr spin-off says the following:
ZEEKR is owned as to approximately 52.1% (on a fully-diluted basis and assuming the Overallotment Option is not exercised) by the Company, and is owned as to approximately 11.4% (on a fully-diluted basis and assuming the Over-allotment Option is not exercised) by Geely Holding as at the date of this announcement.
Zeekr’s F-1 forecasts high sales volume for premium BEVs in the coming years:
I believe Zeekr will continue doing well throughout the year seeing as Zeekr’s F-1 says premium BEVs have numerous features welcomed by customers:
Premium BEVs are usually equipped with advanced intelligent functions and configurations such as ADAS, autonomous driving technologies, smart cockpit functionalities, OTA, air suspension, appealing design and superior space layout. These features increase the comfort and safety of car driving with better customer experience, and thus are more welcomed by customers. The slight decrease of the sales volume in the Chinese premium BEV market in 2023 is predominantly a result of the Tesla Model Y’s price reduction. In the longer term, the sales volume of premium BEV is expected to maintain rapid growth, driven by their advanced technology and better driving experience offered to customers.
Valuation
One of the concerns with respect to valuation is the stability of cash reserves. In the 2023 results presentation, Geely says they are well positioned in this regard:
Other considerations for valuation are the payout ratio and the dividend yield. The payout ratio has gone up a bit in the last few years, such that it is getting close to the 40% level per the 2023 results presentation:
Looking at the 2023 annual report, accrual profits have not been growing:
The 2023 profit to shareholders of RMB 5,308 million comes out to about $730 million.
It’s hard to get a read on average yearly free cash flow (“FCF”) because of large working capital changes like trade and other payables. Also, 2023 depreciation and amortization was only RMB 8,202,762,000 but purchase of property, plant and equipment was RMB 5,711,295,000 and additions of intangible assets was RMB 9,439,276,000. The enterprise value is also tough to digest because of confusion with financing in the auto business. If average FCF is reasonably close to accrual earnings and the enterprise value is somewhat close to the market cap then I wouldn’t quibble with investors who see the stock as a hold when the P/E ratio is between 15 and 20.
GELYF shares equate to ordinary shares and per Citigroup, 20 ordinary shares equate to one GELYY share:
Per the April 8 proposed increase in authorized share capital document, there are 10,063,382,383 shares outstanding. Multiplying by the June 25th GELYF price of $1.14 gives us a market cap of $11.5 billion. Dividing by the 2023 profit to shareholders of $730 million gives us a P/E ratio of about 16, and I think the stock is a hold at this level.
Disclaimer: Any material in this article should not be relied on as a formal investment recommendation. Never buy a stock without doing your own thorough research.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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