As China’s car market grows for the first time in years, its top homegrown brand stands to benefit.
By guest author Jacky Wong from Wall Street Journal
With the world’s largest car market revving again, Chinese auto maker Geely GELYY 0.29% is poised to shift into a higher gear.
After nearly two years in reverse, China’s auto sales have begun moving in the right direction. Wholesale passenger-car sales were up 8.5 % from a year earlier in July, the third consecutive positive month. After a terrible start to the year due to the coronavirus, generous discounts and financing are now drawing in buyers, especially in the biggest cities and among those shopping in the premium segment.
The recovery will likely continue as the Chinese economy grows out of the pandemic, and Geely, as the leading domestic brand, is in a position to benefit. The stock took a beating this month after the company revised down its full-year sales target by 6% to 1.32 million. But the revision shouldn’t have been a surprise, given the dismal sales in the first few months this year. And the new guidance still implies sales for the last five months of 2020 will be up 11% from a year earlier, faster than the expected growth for the whole market.
That means Geely will continue to pick up market share from domestic rivals. Its gross profit margin dropped slightly in the first six months but is likely to improve in the second half as sales volume picks up. Sharing research and development with Volvo Cars, controlled by Geely’s parent, gives it an edge over local competitors. That is one reason Geely shares have traded at a premium to those of other Chinese car makers; they are currently at 15 times expected earnings, according to S&P Global Market Intelligence.
Geely will also likely be in the spotlight in the coming months. It plans to sell up to 15% of its shares in a new listing in Shanghai’s Nasdaq-like STAR market, where stocks trade at much higher valuations than in Hong Kong, where Geely is already listed. The two stocks won’t be fungible, but the higher valuation may still drive investors into the cheaper Hong Kong shares. Citi expects the listing could be done as soon as the end of September.
Geely is also planning a merger with Volvo Cars, which could turn the company into a bigger and more diversified global maker. The Shanghai listing has slowed the progress of the merger, but it will likely pick up steam again after the share sale.
Investors sick of hitching their fortunes to pricey U.S. tech and electric-vehicle stocks should consider hopping on Geely instead.