Geely Automobile Holdings Ltd. (HKSE:00175, Financial), the $12 billion Chinese carmaker, recently posted its biggest profit growth in eight years.
According to a March 22 press release,  Geely reported 78% sales growth to 53.7 billion Chinese renminbi ($7.784 billion) and an astounding 126% profit growth to 4.9 billion renminbi – a 9.5% profit margin for fiscal 2016 compared to 7.5% in 2015.
In review, Geely sold a total of 765,970 units of vehicles in 2016, up 50.2% from 2015. Domestic sales grew 53.6% to 744,191 units from 2015 while abroad sales fell by 15.4% to 21,779 units.
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“Taking into account the group’s strong new products pipeline for 2017 and the continued strong sales momentum of the group’s latest new models, the group’s board of directors set the 2017 sales volume target at 1,000,000 units, representing an increase of 31% over 2016.” – Geely Automobile
Geely over-the-counter shares (GELYF, Financial) climbed about 6.5% at market close post-earnings press release.
Outlook
Geely sees its sales volume target for 2017 at 1 million units, representing an increase of around 31% over 2016.
Valuations
Geely, unlike the European and American carmakers, traded at high premiums compared to its peers. According to GuruFocus data, Geely had trailing price-earnings (P/E) ratio of 32.8 times vs. industry median 17.8 times, a price-book (P/B) value of 4.3 times vs. industry median 1.7 times and a price-sales (P/S) ratio of 3 times vs. industry median 0.8 times.
The Chinese carmaker also had a trailing dividend yield of just 0.3% and 10% payout ratio.
Using current valuations over expected fiscal year earnings, Geely had a forward earnings multiple of 18 times –Â markedly lower than the current trailing earnings multiple but still higher than the 15.4 times on a three-year average.
Total returns
Geely OTC shares greatly outperformed the broader Standard & Poor's 500 index in the past half decade. The Chinese carmaker delivered an overly great 235.06% total return in the past year vs. S&P 500’s 17.5%. In the past five years, Geely returned still more than twice that of S&P 500’s with 32.4% and 13%.
(Annual report)
Geely Automobile Holdings
Geely (officially Zhejiang Geely Holding Group Co. Ltd.) was founded 31 years ago and is a Chinese multinational automotive manufacturing company headquartered in Hangzhou, Zhejiang.
In 2016, Geely generated 97.3% or 52.3 billion Chinese renminbi – having a whopping 84.8% growth from 2015.
Geely directors consider that the company operates in a single business segment and that no separate analysis of the reportable segment results by operating segment is necessary.
As observed, 2016 was the year where Geely saw an unprecedented level of sales growth and achieved new highs for its car sales. Geely explained this amazing occurrence having had strong domestic sales volume growth more than offset the weaker exports.
(Emgrand)
Geely also noted the successful launch of its midsized A-segment sedan model “New Emgrand” as the brand remained the car company’s most popular model accounting for 30.1% of Geely’s total sales volume in 2016.
Sales and profits
(Annual Report and Press Release)
Geely recorded three-year sales and profit growth and margin averages of 30.9%, 46% and 7.9%.
Cash, debt and book value
As of December, Geely had 15 billion renminbi in bank balances and cash and 2.24 billion renminbi in notes and bank borrowings having led to a debt-equity ratio of 0.09 times vs. 0.1 in 2015.
Less than 10% (9.6%) of Geely’s 67.6 billion renminbi assets were labeled as goodwill and intangibles. The car company had a book value of 24.7 billion renminbi compared to 19.7 billion renminbi in 2015.
Cash flow
(Press release)
Geely’s cash flow from operations grew by 12.5% to 8.3 billion renminbi in 2016. Other than the impressive profit growth recorded on a year-on-year basis, Geely recorded a cash inflow of 42.7 million renminbi related to disposal of property, plant and equipment including government grants received.
Geely also recorded a cash inflow of 172.4 million related to bad debts written off, this figure compared to none in 2015.
(Annual Report and Press Release)
In 2016, capital expenditures were 3.14 billion renminbi leaving Geely with 5.2 billion renminbi in free cash flow compared to 3.73 billion renminbi in 2015. The automaker provided 5.8% of its free cash flow in dividends to its shareholders and noncontrolling interests.
(Annual Report and Press Release)
Geely also brought in 331.6 billion renminbi in debt proceeds and share issuances net repayments.
Conclusion
Expecting another 31% volume sales growth in 2017 after experiencing an outstanding 50% just the previous year definitely does not sound bad at all.
Geely set the 31% growth expectation having included and cited several challenges that business could experience along the way –Â ranging from political and social instability in Russia, Ukraine and Egypt markets to lower tax subsidies in China which were from 50% to 25%.
No question that Geely has a solid and admirable state of balance sheet. The Chinese car company should also consider allotting more of its bounty to its shareholders as dividends or share repurchases if management plans on just hoarding it.
(Geely Automobile Holdings Hong Kong shares and iShares Core S&P 500 ETF, Financial Times)
Using average three-year price-sales figure and expecting that Geely could deliver same sales growth average would indicate a value of 84.4 billion RMB or 95.2 billion Hong Kong dollars ($12.252 billion)Â –Â which would indicate that Geely’s Hong Kong listed shares should fall at least 21% to meet this conservative figure.
In summary, Geely is an outstanding Chinese company, but its shares are a pass.
Disclosure: I do not have shares in the company mentioned.
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