Taking on BYD: Does Geely Stand a Chance This Year?

Geely Auto (0175.HK) released its first quarter report on June 28, 2024, after the Hong Kong stock market closed. The key points are as follows:

1. Decline in Gross Margin Quarter-on-Quarter: The overall gross margin for the first quarter was 13.7%, a decrease of 2.3% compared to the second half of 23, expected to be due to the decline in gross margin of new energy brands.

In the first quarter, new energy vehicles were generally in a sales downturn, with economies of scale not yet realized. At the same time, intensified competition in new energy vehicles is expected to put pressure on both ASP and gross margins of new energy vehicles.

2. Increase in Sales Volume and Price Driving Overall Revenue Growth Year-on-Year: The company achieved a total sales revenue of 52.3 billion in the first quarter, a 56% year-on-year increase. On the sales side, due to Geely's new energy transformation period in the same quarter last year, the base number of new energy vehicles was low, and the hot sales of China Star in the first quarter led to a 48% year-on-year increase.

The estimated ASP per vehicle is basically flat compared to the second half of 23, with an increase in Geely's main brand ASP. This is expected to be due to the hot sales of China Star's relatively high-priced fuel vehicles under Geely, as well as the increase in overseas market share, offsetting the price reduction impact of Geely's new energy vehicles.

3. Slow Progress in New Energy Vehicle Sales Compared to Annual Targets: From January to May 2024, Geely's new energy brand sales only reached 254,000 vehicles, achieving only 31% of the annual target of 810,000 vehicles. Key models such as the Galaxy L7 and Lynk 08, which achieved monthly sales of over ten thousand last year, have only dropped to around 6,000 vehicles, indicating that the speed of the new energy transformation is still below expectations.

4. Passive Approach to Hybrid Vehicles in the Second Half, Emphasizing Pure Electric Vehicles: Compared to BYD's new product cycle under DMI 5.0 technology, Geely's new generation of hybrid vehicles will not be mass-produced until 2025. The strategy for hybrid vehicles is passive, with a focus on launching models with pure electric power in the second half of the year.

5. Controlled R&D Expenses, Decline in Operating Expense Ratio: Sales expenses in this quarter are relatively fixed, with marketing expenses mainly used for the launch of new vehicles under Geely's new energy brands ZEEKR, Lynk, and Galaxy. Research and development as well as management expenses are relatively restrained, mainly due to a significant reduction in ZEEKR's research and development expenses in the first quarter. The operating expense ratio decreased from 13.4% in the second half of 23 to 12.3% in the first quarter of 24.

6. Decline in Net Profit per Vehicle, but Profit Increment from Joint Ventures: The decline in net profit is lower than the core operating profit, mainly due to the reduced losses of the joint venture company Lynk and the profit increment from the divestment of the affiliated company Blue Geely.

Overall View:

From Geely's first quarter performance, the revenue side basically meets expectations, but the gross margin side is lower than expected.

The gross margin for the first quarter was only 13.7%, a decrease of about 2.3% compared to the second half of 23. It is speculated that this may be due to the decline in gross margin of Geely's new energy brands. In the first quarter, ZEEKR's gross margin was only 12%, a 3% decrease from 15.2% in the second half of 23, and Galaxy is also expected to show a downward trend in gross margin due to the price reduction of the Dragon Soaring Edition However, the overall revenue performance is good, with both sales volume and price increases driving a year-on-year increase in overall revenue. Dolphin Jun predicts that this is mainly due to the strong sales of Geely's fuel vehicles relative to the high prices of Chinese brands, as well as the increase in overseas market share, offsetting the adverse impact of price reductions on its new energy brands.

However, looking at the sales volume, Geely's new energy brand sales in the first five months of 2024 only reached 254,000 vehicles, achieving only 31% of the annual target of 810,000 vehicles. The main models, the Geometry L7 and Lynk & Co 08, which achieved monthly sales of over ten thousand units last year, have dropped to around 6,000 units each, indicating that the pace of transformation to new energy vehicles is still below expectations.

Looking at the whole year, compared to BYD's new product cycle under the DMI 5.0 technology, Geely's new generation of hybrids will not be mass-produced until 2025, meaning that the start of Geely's new product cycle will have to wait until at least 2025. This year, the hybrid strategy is still in a passive state.

Geely's new models in the second half of the year will still focus on pure electric vehicles, but the competition in the pure electric segment is fierce, and there have been no popular models after the ZEEKR 001. It is expected that Geely's new energy brand sales will still find it difficult to have a major breakthrough this year.

Currently, Geely's PE ratio for 2024 is at 14-15 times, which is at a relatively reasonable level. However, with the difficulty of achieving a significant increase in sales volume for new energy brands this year, the upside potential may be limited.

Here is a detailed analysis:

I. Gross margin decreased by 2.3% compared to the previous quarter, expected to be due to the decline in gross margin of new energy brands

In the first quarter of 2024, the company's overall gross margin was 13.7%, a decrease of 2.3% compared to the second half of 23, expected to be due to the decline in gross margin of new energy brands.

In the first quarter, new energy vehicles were generally in a sales slump, and Geely was no exception. In the first quarter, Geely's new energy brand sales were only 144,000 vehicles, with the proportion of new energy vehicles decreasing slightly from 33% in the second half of 23 to 30% in the first quarter of 24.

Due to the lack of economies of scale in new energy vehicles and intensified competition, Dolphin Jun predicts a decrease in Geely's new energy brand gross margin compared to the previous quarter.

Looking at individual brands, in the first quarter, ZEEKR's gross margin was only 12%, a decrease of 3% from 15.2% in the second half of 23. Due to the price promotion of the Longteng version in March (a price reduction of 10,000-20,000), it is expected that the gross margin of the Galaxy will also show a downward trend compared to the previous quarter.

Source: Company financial report, Dolphin Research

II. Revenue increased by 56% year-on-year, contributed by sales volume and ASP increases

In the first quarter of 2024, the company achieved a total sales revenue of 52.3 billion, a 56% year-on-year increase, mainly contributed by increases in sales volume and average selling price per vehicle From the perspective of sales volume, the total sales volume in the first quarter of 2024 was 480,000, a year-on-year increase of 48%. On the one hand, this is due to Geely's new energy transformation period in the first quarter of 2023, with a low base of new energy vehicles. On the other hand, in the first quarter of 2024, Geely's fuel vehicle sales performed well, with the China Star series in high demand, achieving a year-on-year growth.

In terms of ASP per vehicle (estimated by Dolphin based on the proportion of car sales revenue to total revenue remaining stable from the second half of 2023), the estimated single vehicle revenue for Geely in the first quarter is about 106,000 yuan, basically on par with the second half of 2023.

Looking at the brands, due to intensified competition, Geely's sub-brand ZEEKR saw a price drop of 31,000 to 57,000 yuan with the launch of the new ZEEKR 001 compared to the old model, and the proportion of high-priced car ZEEKR 009 decreased, leading to a decrease in ZEEKR's ASP per vehicle from 273,000 in the second half of 2023 to 247,000 this quarter.

However, Geely's main brand (including Polestar, Geometry, and Geely) saw an increase in ASP per vehicle compared to the second half of 2023, ranging from 3,400 to 94,000 (according to Dolphin's calculations). This exceeded Dolphin's expectations. Dolphin believes this may be mainly due to the strong sales of Geely's high-priced fuel vehicle China Star, as well as the increase in overseas sales proportion, offsetting the negative impact of the price reduction of the Galaxy brand (Geely's new energy brand Galaxy due to the price reduction of BYD's Honor Edition, reduced prices by 10,000 to 20,000 yuan in March for the Galaxy Dragon Edition).

III. Sales Progress of New Energy Vehicles Still Lagging Behind Full-Year Target

From January to May 2024, the company's cumulative sales reached 790,000 vehicles, a year-on-year increase of 42%. The full-year sales target for 2024 is 1.9 million vehicles, with 42% of the full-year sales target already achieved. Dolphin predicts that the current sales progress will not hinder the achievement of the full-year target.

However, looking at the new energy vehicle business, the company sold a total of 158,000 new energy vehicles from January to May 2024, a year-on-year increase of 44%. Compared to Geely's 810,000 new energy vehicle sales target for 2024, the completion progress is only 31%, making it difficult to achieve.

In terms of brands:

1. Geometry: The Geometry brand mainly positions itself in the 100,000 to 200,000 yuan new energy vehicle segment, currently focusing on plug-in hybrid models, with price ranges overlapping with BYD, becoming direct competitors.

Due to the impact of BYD's Honor Edition price reduction in February, Geometry also successively reduced prices for the Geometry L6 and Geometry L7 in March and April, with price reductions ranging from 20,000 to 25,000 yuan.

However, the starting price of 99,000 yuan for the Geometry L6 is still nearly 20,000 yuan more expensive than the direct competitor BYD Qin plus dmi, while the Geometry L7, although slightly advantageous in price compared to the BYD Song dmi Honor Edition, still shows a declining trend in sales, after achieving monthly sales of over 10,000 units in 2023, it has declined

Currently, the price reduction has limited effect on the sales boost of L7, with only 5,600 units sold in May, expected to be impacted by the launch of BYD Song DMI Honor Edition.

Lynk & Co: Lynk & Co brand also prioritizes the plug-in hybrid SUV strategy, successfully creating a hit product Lynk & Co 08 PHEV in 2023, achieving sales of over ten thousand units.

However, it also faces the challenge of unsustainable sales, with sales dropping to only 6,000 units in May 2024.

1. ZEEKR: ZEEKR brand mainly positions itself in pure electric vehicles priced above 200,000 RMB, with ZEEKR 001 currently being the best-selling model.

After the price reduction of the new ZEEKR 001 model (3.1-5.7 RMB lower than the old model), sales quickly rebounded, with sales in May 2024 reaching 13,500 units. The redesigned ZEEKR 001 still maintains strong competitiveness compared to its competitors, and sales momentum is expected to continue.

However, ZEEKR 007's performance is relatively average, with sales in the first 6 months of its launch hovering around 4,000 units. ZEEKR urgently needs to create the next hit model to continue its success.

IV. Geely's hybrid strategy in the second half of the year is relatively passive, focusing on promoting pure electric vehicles

Looking at Geely's new car models this year, hybrid models only include Lynk & Co 07 and Galaxy L5. Compared to BYD's new product cycle initiated by DMI 5.0, Geely's hybrid strategy is relatively passive.

In May 2024, BYD released the DMI 5.0 technology, which can achieve a fuel consumption of 2.9 liters per 100 kilometers (NEDC), with a full tank and full electric range of 2,000 kilometers. This is expected to have a significant impact on fuel vehicles and direct competitors. BYD is currently in a major new product cycle in 2024.

Geely's hybrid strategy has always been following BYD's strategy. Geely is also about to launch the Thunder God hybrid system, with a maximum range of over 2,000 kilometers on a full tank and full electric charge, and is expected to enter the era of 2 liters per 100 kilometers fuel consumption. However, Geely's Thunder God hybrid will not start mass production until 2025, making its hybrid strategy relatively passive this year.

Geely's focus on new car models this year is still on pure electric vehicles, with Lynk & Co and Galaxy introducing their first pure electric sedans, Lynk Z10 and Galaxy E8. However, the price range of pure electric models overlaps with ZEEKR to some extent, potentially leading to some sales erosion. At the same time, the competition in the pure electric vehicle market is more intense. After the success of ZEEKR 001, Geely has not introduced any other hit models, making it difficult for pure electric vehicles to achieve significant sales growth.

V. Research and development expenses are under control, but net profit per vehicle is declining Geely Auto achieved a net profit attributable to the parent company of 1.57 billion yuan in the first half of 2023, a year-on-year increase of about 1%, slightly exceeding the market's expected 15.1 billion yuan. However, the net profit margin declined from 2.7% in the first half of 2022 to 2.2% in the first half of 2023, and the net profit per vehicle also decreased from 2529 yuan to 2317 yuan.

In the first quarter of 2024, Geely's net profit was 1.42 billion yuan, which basically met the expectations of Dolphin Jun. Sales expenses were relatively fixed, with marketing expenses mainly used for the launch of Geely's new energy brands ZEEKR, Lynk & Co, and Geometry. Research and development and management expenses were relatively restrained, with a significant reduction in ZEEKR's research and development expenses in the first quarter. The operating expense ratio decreased by 1% from 13.4% in the second half of 2023 to 12.3% in the first quarter of 2024.

Due to a significant decline in gross profit margin, the core operating profit margin decreased from 2.5% in the second half of 2023 to 1.3% in the first quarter of 2024, but the net profit margin only decreased by 0.8% to 2.7%. The net profit per vehicle decreased from 0.38 million yuan in the second half of 2023 to 0.33 million yuan in the first quarter of 2024, mainly due to the reduced losses of the joint venture company Lynk & Co and the profit increase brought by the divestment of the affiliated company LYNK & CO.

Source: Company financial report, Dolphin Research

End of translation

Dolphin Jun's historical articles on Geely Auto (0175.HK):

ZEEKR:

Financial Report Analysis:

June 11, 2024, Financial Report Analysis "Will the 'Second Generation of Cars' ZEEKR be a Dark Horse in Pure Electric Vehicles?" Link

In-depth Analysis:

June 14, 2024, "ZEEKR: Is Being Spoiled by Daddy Toxic or Beneficial?" Link June 19, 2024 "ZEEKR: Second Generation of "Negative" or Dark Horse to Explode?"

Geely

March 20, 2024 Financial Report Analysis "Geely Auto: Will the Upside Come from the Speed of New Energy Transformation Exceeding Expectations?"

August 22, 2023 Financial Report Analysis "Geely Auto: Is There Finally Hope to "Get Ahead"?"

August 18, 2022 Financial Report Analysis "Geely: Constant Expectations, Constant Disappointments, Is There Still Hope for the Rising Story?"

March 23, 2022 Financial Report Analysis "Geely, Fractured Again After Fracture, the Darkest Before Dawn is the Hardest to Endure"

March 23, 2022 Conference Call "With Two Legs of Pure Electric and Hybrid, Can Geely Rise with Platformization?"

November 3, 2021 "The God of Thunder Emerges, Will Next Year's Geely Be This Year's BYD?"

September 6, 2021 "Geely Auto (Part 1): Under Heavy Pressure, the Return of the King?" September 9, 2021 "[Geely Automobile (Part 2): The Rise of Chinese Brands in the Automotive Industry, Is it Finally Geely's Turn for Good Luck?"(https://longbridgeapp.com/news/45196978)"

Risk Disclosure and Disclaimer for this Article: Dolphin Investment Research Disclaimer and General Disclosure