$ On Longbridge's midday stock market time of August 18, 2022 Beijing Time, Geely Automobile Holdings Limited (Geely) released its performance report for the first half of this year, which was basically as expected, according to Dolphin Analyst.

As monthly car sales are published, Dolphin Analyst focused on the unit price structure, gross profit margin, and profit performance.

1. Poor sales, high prices: The prices of old oil vehicles, which are selling poorly, are low, while those of new vehicles, such as Geometry and Zeekr, which are taking their place, are generally higher. As a result, in the first half of the year, despite a slight drop of less than 1% in car sales (excluding the high-end brand Lynk & Co, a joint venture with Volvo, and the electric vehicle Ruilin, a joint venture with Lifan), overall vehicle sales revenue increased by 25% to nearly CNY 50 billion.

2. Diversification of revenue: In addition to newly added battery pack sales and other businesses, the overall revenue was CNY 58.2 billion, a year-on-year increase of 29%, which was still satisfactory for Geely's revenue performance in the first half of the year. Non-vehicle manufacturing sales accounted for more than 15% of the revenue.

3. Significant increase in unit price: Despite the weak sales volume, the income can still be stabilized mainly because of the upswing of unit income. Dolphin Analyst estimated that Geely's (excluding Lynk & Co and Ruilin) unit price increased by 26% year-on-year.

4. Tragic large decrease in unit profit: The unit profit for the first half of the year was only slightly over CNY 2,500, compared to CNY 3,500 in the second half of last year.

5. Price increases cannot keep up with the cost increases, and the gross profit margin collapses: In the first half of this year, the gross profit margin was only 14.6%, a decrease of 2.7 percentage points. To give a more intuitive feeling, the company's management expense ratio was only about 2.5%, which is equivalent to directly losing the volume of a management expense.

The reason for the tragic unit profit performance is that, in addition to the lack of sales volume growth, from the cost side, the increase in car unit price did not cover the increase in unit cost, which is due to the development cost of the cars, the rise in battery material prices, and so on. Especially, the gross margin of new energy vehicles is lower than that of traditional fuel vehicles of Geely. The proportion of new energy vehicles has already increased from 12% at the beginning of the year to 30% in July.

The company's explanation for this is mostly that there was a short-term cost reversal for income, including its own models such as Jieji and Koi, as many of the deliveries in the first half of the year were orders from last year before the price increase, while the battery prices have increased twice this year. In addition, the decline in production capacity profit margins and the corresponding increase in depreciation pressure has caused a significant drop in gross profit margin.

6. The era of high rigid investment: The transformation of sales channels increases sales expenses, while the electrification and intelligence of automobiles increase research and development expenses. Moreover, from the trend point of view, for example:

(1) 66 direct-operated stores for Geely's Koi brand were opened in the first half of the year, and the overall channel integration and sorting resulted in a year-on-year increase of 29% in sales expenses.

(2) In terms of research and development expenses, due to the large-scale research and development investment in the past, about 95% of it was capitalized. At present, these capitalization research and development investments have entered the stage of large-scale amortization, resulting in a direct increase of more than 40% in overall research and development expenses.

Clearly, in the era of automotive electrification and intelligence transformation, combined with the channel forces sorting between Geely's fuel and electric cars, these expenses are too rigid, and it is impossible to expect them to contract in absolute terms or reduce these expenditures. The only solution is to dilute the investment through sales growth. 7. The decline in bicycle profits corresponds to the overall level of company profitability: In the first half of the year, while Geely's overall revenue growth approached 30%, net profit shrank by more than 50%, to less than RMB 1.3 billion. In addition to the previously mentioned loss of gross profit and rigid expenses, there has been a continuous surge in equity incentive over the past year and a half.

The end result was that in the first half of the year, with revenue of more than RMB 58 billion, Geely created only RMB 8.5 billion in gross profit and less than RMB 1.3 billion in net profit.

8. Is there hope for the second half of the year? The competition characteristics of the whole automobile industry in the past two years is typically "the faster the better," but Geely seems to have fallen behind: with extreme orders in hand, the delivery is difficult, or the technology is developed, and the product launch is slow, giving people the feeling of only hearing thunder but not seeing rain.

Of course, the Waterloo of profits this time was caused by the mismatch of short-term gross margin income and expenditure. Looking at the second half of the year, after passing the mismatch period of cost and gross profit, and with a small decrease in battery cost, there will be less pressure on the cost side, and the hope for improvement in gross profit in the second half of the year will be higher.

However, the loss on the expense side can only be solved fundamentally by increasing automobile sales. If you look at sales, Geely still has hope:

(1) The king of hybrids, the Binyue plug-in hybrid and the Star version hybrid, have both been launched, and basically all of Geely's popular oil vehicles should have hybrid models in the future;

(2) The high-end pure electric MPV Jingke 009 has also been launched, and the sales are gradually being released;

(3) The "Lynk E-Motive" version of the "Lynk" brand's God of Thunder intelligent hybrid system has been fully launched with Lynk's digital series.

The rest can only be expected that Geely will take action faster, and even faster.

Dolphin Analyst Geely Automobile (0175.HK) historical articles:

March 23, 2022 Financial Report Interpretation "Geely after the fracture, the darkness before dawn is the most difficult to endure"

March 23, 2022 Telephone Conference "Can Geely rise with two legs of pure electric and hybrid, and the empowerment of platformization?"

November 3, 2021 "God of Thunder" is here, will Geely be this year's BYD next year?

September 9, 2021 "Geely Automobile (Part 2): National brands in the automobile industry emerge, is it finally Geely's turn?"

September 6, 2021 "Geely Automobile (Part 1): Under heavy pressure, will the king come back?"