Chinese carmaker Geely seen attractive as positive profit alert shows strong earnings

PUBLISHED : Wednesday, 11 January, 2017, 3:52pm
UPDATED : Wednesday, 11 January, 2017, 10:08pm

Chinese carmaker Geely Automobile is recommended as a “Buy” by investment banks as its recent positive profit alert suggests better-than-consensus earnings growth.

After the market closed last Friday, the company issued an alert saying it expects net profit for 2016 to increase more than 100 per cent year on year.

“This implies 2016 net profit would be at least 4.52 billion yuan, 6 per cent higher than consensus earnings,” HSBC car industry analyst Carson Ng wrote in a report.

Geely cited a significant increase in overall sales volume and the improvement in product mix as key reasons for the profit growth. “It reaffirmed our view that the 50 per cent year-on-year volume growth in 2016 and rising SUV contribution from 11.8 per cent in 2015 to 30.6 per cent in 2016, has driven the company’s revenue growth and ebit margin improvement,” Ng added.

Lo Ka-leong, an analyst from Kim Eng Securities, also raised estimated earnings and lifted its target price following Geely’s statement.

The strong results were driven by a significant increase in sales and expansion in profit margins due to product-mix improvement and scale benefits, he said.

Kim Eng Securities reiterated its “Buy” rating based on Geely’s strong product cycle and the fact that the market doesn’t “fully appreciate” its solid margin outlook.

This implies 2016 net profit would be at least 4.52 billion yuan, 6 per cent higher than consensus earnings
Carson Ng, HSBC car industry analyst

Lo said his recent channel checks indicate the waiting time for new Geely models with 1.6 L size engines is still 2-4 months. “It points to strong demand despite the adverse impact from the expiration of government tax incentives for auto purchases,” he added. “More importantly, it is still the sweet spot in its product cycle.”

For Geely’s outlook in 2017, HSBC expects the positive trend to continue. “We believe Geely’s model cycle continue to stand out among peers,” Ng said.

The four new models, the Emgrand GL sedan, Emgrand GS SUV, Vision SUV and Boyue, continue to be the key drivers for an estimated 26 per cent year on year volume growth in 2017, he said.

Ng expects the SUV contribution to increase from 30.6 per cent of the company’s sales volume last year to 41.4 per cent year on year in 2017.

“In our view, the company still stands out from a model cycle perspective in 2017,” Ng said. “The potential positive profit alert, monthly volume and more updates on [the new marque] Lynk & Co are the key catalysts.”

Geely’s 2016 sales rose 50 per cent year on year to 766,000 units. It has set a sales target of 1 million units for 2017, up 34 per cent year on year.

“A one million sales target for 2017 shows strong confidence,” said CICC analysts Zheng Weili and Wei Feng. “The great success of Geely’s new product strategy in 2016 has brought Geely strong confidence, which is echoed by its chairman Li Shufu continuously increasing his shareholding.”

Zheng said his pessimism over Geely has been mostly priced in and rising sales will potentially boost its share price.

The company slid 1.33 per cent to close at HK$8.16 on Wednesday after surging 7.54 per cent in the previous trading days.

Geely’s share price has dropped 7.6 per cent on December, but started to strengthen in early January 2017. The stock slid 0.36 per cent to HK$8.24 on Wednesday afternoon after surging 7.54 per cent in the previous trading days.