Geely suddenly hits the brakes: December sales plummet 39% and market value evaporates HK$32 billion in 5 days

Has the turning point arrived?

What happened to Geely?

On January 7, Geely Auto announced its sales data for 2018: the total sales volume for the whole year was 1.5 million vehicles, an increase of about 20% over the same period last year, but it did not achieve the annual sales target of 1.58 million vehicles. Among them, the sales volume in December was 93,300 vehicles, a year-on-year decrease of 39% and a month-on-month decrease of 34%, setting a new low in 16 months.

What is even more surprising to the industry is that Geely Automobile said that in view of the current uncertainty in the Chinese passenger car market, the board of directors initially set the group's sales target for 2019 at a conservative level of 1.51 million vehicles, which is equivalent to the sales volume in 2018 and lower than the general expectations of brokerages. Previously, some investors expected that this year's eight new models, higher than last year's five, should lead to a double-digit increase in sales targets.

This triggered a shock in Geely Auto's stock price. As of the close of January 8, Geely Auto's stock price plummeted by 11.28%, with a share price of HK$10.22 per share. The lowest price dropped to HK$10.08 per share, and the highest price reached HK$10.8 per share. The total market value fell below HK$100 billion to HK$91.792 billion. In the five trading days since 2019, Geely's stock price has fallen by 26%, and its market value has evaporated by HK$32 billion.

Geely is the sales champion of China's own brands and the best-developed own brand since 2015. In terms of sales, Geely Auto sold 1.247 million vehicles in 2017, a year-on-year increase of 63%; total revenue was RMB 92.76 billion, a year-on-year increase of 73%; profit reached RMB 10.63 billion, a year-on-year increase of 108%. In the first half of 2018, Geely Auto's sales volume increased by 44% year-on-year, sales revenue increased by 36% year-on-year, and net profit increased by 54% year-on-year, with a net profit of RMB 6.67 billion.

If we take into account the acquisitions of Volvo, Lotus, Proton, American Flying Cars, Denmark's Saxo Bank, and 9.69% of Daimler's shares, Geely is even more successful.

Why did the sales of Geely, which has always been strong, plummet in December last year? Time Finance contacted Geely Auto, but no response was received as of press time. However, Geely stated in its announcement that although the wholesale sales level was relatively low, the corresponding retail sales level was still healthy, reflecting the management's determination to actively manage the dealers' total inventory to a healthy level.

Tianfeng Securities believes that Geely has been actively reducing channel inventory since November. The company's wholesale sales have shown signs of weakening month-on-month since November, which may be a signal that Geely has begun to loosen its dealer car delivery policy. In December, the wholesale sales index fell further month-on-month, so the company continued to clear inventory.

Has the turning point come?

In fact, the turning point of Geely Auto's performance has already appeared. From the analysis of monthly sales, Geely Auto has maintained an increase of more than 30% before August. But from September to November, the situation took a sharp turn for the worse, and the growth rate continued to narrow, reaching 14.3%, 2.6%, -1.1%, and -39% in December.

This is not accidental. In 2018, China's auto market has been declining since July. In November, passenger car sales were 2.173 million, down 16.1% year-on-year, the largest drop in nearly seven years. Although December sales have not yet been announced, it is a foregone conclusion that China's auto market sales will show negative growth in 2018. Many parties predict that full-year sales will decrease by about 3% year-on-year.

The China Association of Automobile Manufacturers said that multiple negative factors have affected the further growth of the automobile market, including the early consumption caused by the adjustment of the 1.6-liter purchase tax preferential policy from the fourth quarter of 2015 to 2017, and the impact of the slowdown in macroeconomic growth. In addition, the superposition of multiple factors such as the slowdown in domestic investment, rising housing prices, low consumer confidence, and the gradual impact of Sino-US trade frictions have also increased the downward pressure on the operation of the automobile industry.

The sharp drop in Geely Auto's sales growth has also triggered doubts and concerns from investment banks. In the past four months, Morgan Stanley has released two reports, changing Geely's rating from "neutral" to "reduce" and lowering its target share price from HK$15 to HK$8.

Morgan Stanley learned through industry channels that the inventory of Geely Auto's "Boyue" model has risen to a three-month high, and the inventory of its "Lynk & Co" brand has also risen for more than a month. Although Geely's stock price has fallen by 16% since December last year (the Hang Seng Index fell by 5% during the same period), Geely's current valuation is still the highest among similar companies, and its 2019 price-to-earnings ratio is also the highest among its peers.

However, Morgan Stanley also believes that the car tax reduction may not be implemented until after March, and believes that Geely will be the main beneficiary of the potential stimulus measures brought about by the VAT reduction.

Credit Suisse also recently cut Geely's target price from HK$29 to HK$11 per share, and downgraded its investment rating from "outperform" to neutral; Citigroup lowered Geely's target price to HK$12.7, maintaining neutral.

From the perspective of the secondary market, Geely's highest share price was HK$29.44 per share at the end of November 2017. But now, Geely's share price is only HK$10.16 per share, and its market value has evaporated by more than 150 billion yuan.

Trouble

There are many hidden concerns behind Geely's previous high growth. According to the semi-annual report in August 2018, Geely Auto made a net profit of 6.67 billion yuan, a year-on-year increase of 54%. However, this not only brought applause to Geely Auto, but also triggered collective complaints from netizens, who complained that Geely was squeezing suppliers.

21st Century Business Herald previously stated that Geely used its own "size" as a bargaining chip to lower suppliers' quotes and delay payments to suppliers as one of Geely's means of maintaining stable cash flow. Geely would delay payments for months or even a year, during which time it would ask suppliers to lower prices, and if they did not, it would continue to delay payments.

According to the 2018 semi-annual report, Geely Auto's accounts payable was 29.7 billion yuan, accounting for 55% of its operating income (53.7 billion yuan). This is the highest among mainstream independent brands and twice that of SAIC Group. This largely reflects the severity of Geely's arrears with suppliers.

The president of the China region of internationally renowned supplier C said that Geely’s requirement for them was “I hope you have Volvo’s technology, Volvo’s quality, and Geely’s price”, which is obviously against the law of nature. He believes that if we look at the time span, low prices do not necessarily mean low costs in the end. If product quality problems occur due to cost reduction, it will not be worth the loss in the end.

It is worth noting that the inventory pressure of Geely dealers is also increasing day by day. According to the survey results of "Auto Dealer Inventory" in November 2018 released by the China Automobile Dealers Association, the comprehensive inventory coefficient of auto dealers in November was 1.92, up 50% year-on-year and 2% month-on-month, and the inventory level was above the warning line.

Some senior industry insiders have previously said that Geely Auto is now in a dilemma: if it fails to achieve its annual sales target, the capital market will not buy it; if it wants to achieve its annual target, it means that it must further reduce inventory, which will lead to further deterioration of dealers' operating conditions. No matter which one it chooses, it is a difficult choice for Geely Auto. Judging from the sales data in December, Geely chose to help dealers reduce inventory.

Recently, Geely Automobile held a high-level organizational structure adjustment meeting. After a new round of adjustments to its brand structure, Geely New Energy has risen to become one of the three major brands alongside Geely and Lynk & Co. At the same time, some senior positions have also undergone certain changes. Will this allow Geely to return to high-speed growth?

As a winner of Toutiao's Qingyun Plan and Baijiahao's Bai+ Plan, the 2019 Baidu Digital Author of the Year, the Baijiahao's Most Popular Author in the Technology Field, the 2019 Sogou Technology and Culture Author, and the 2021 Baijiahao Quarterly Influential Creator, he has won many awards, including the 2013 Sohu Best Industry Media Person, the 2015 China New Media Entrepreneurship Competition Beijing Third Place, the 2015 Guangmang Experience Award, the 2015 China New Media Entrepreneurship Competition Finals Third Place, and the 2018 Baidu Dynamic Annual Powerful Celebrity.