[Table of Annual Sales was updated on 3/4/2014]
Geely Automobile Holdings Ltd (Geely) earns a profit in China and other foreign markets by converting raw materials to finished passenger vehicles. Geely sells 3% of all new automobiles sold in China and exports a small number of automobiles to foreign markets. The Company’s competitive advantages are (1) ownership of the Volvo brand name and (2) ownership of its supply-chain of parts. Geely’s ‘penny stock’ is a speculative investment that pays a small annual dividend and potential capital gains; but, be prepared for a loss from investing in the risky Chinese auto market.
Geely is a holding company in Hong Kong that operates 2 business segments –automobiles and gearboxes– among 5 Chinese companies and 1 European company (Volvo Car). Four brands of Geely automobiles (GLEagle, Englon, Emgrand, & Volvo) have independent distribution and service networks. Geely owned 1,822 technology patents in 2010 (Volvo excluded). Geely’s customers are the middle class Chinese society where households with monthly incomes limited to $1,000 USD are twice as likely to purchase a Chinese brand car as households with higher incomes.
Geely’s R&D, production, sales, and service are performed by subsidiary companies. During 2010, Geely owned 8 manufacturing plants in China and employed 17,102 workers (Volvo excluded). The plants were fully integrated to build auto bodies, make power trains, assemble cars, and paint cars. Five percent of the Chinese built cars were exported to markets in the Middle East, Eastern Europe, and Central/South America. The 2010 annual production capacity was 560,000 units per shift, with plans to expand to 2 million units by 2015. The Company complies with government regulations for emission standards, fuel efficiency, and other issues. Geely owns DSI’s gearbox manufacturing plant in Australia, which builds and supplies automatic transmissions to original equipment manufacturers. DSI will expand its production to factories in China with a 2011 goal of 300,000 gearboxes per year. Geely has a majority stake in the LTI taxi manufacturing plant in Shanghai. The 2011 goal is a sales volume of 3,000 units. The LTI enterprise operates at a net deficit.
Volvo China’s operations are headquartered in Shanghai and executed in 1 manufacturing plant through a joint venture with Ford Motor Co. Future operations will be incorporated into Geely’s plans to build 2 new manufacturing plants in China. Volvo Europe’s operations will continue under the distant oversight of Geely.
The corporate vision is to become a leading supplier of the safest, most energy-efficient vehicles in the World by implementing the following strategy:
- Use R&D to narrow the technology gap between Geely and major international companies
- Strengthen Geely’s brand image and competitiveness
- Expand Geely’s manufacturing capacity and sales networks
- During 2011, introduce SUVs and install automatic transmission in all new models
The Chinese automobile manufacturing industry is fragmented and experiencing a price war among manufacturers. The industry is challenged by these competing forces:
- Government subsidies for new cars and fuel efficiency
- Government taxes and licensing fees to control traffic congestion, etc.
- Low-income demand for small cars and high-income demand for luxury cars
- Customer preference for foreign brands (VW, BMW, GM, etc)
- Rising cost of ownership (e.g., high gasoline prices)
- Emerging sales of used cars
- Uncertainty of the global economy
- Rising prices of steel/raw materials, which will lower the profit margin
- Inflation and tightening monetary policies in China
New car sales are sensitive to government subsidies, which are declining, and various fees, which are rising. For example, city traffic congestion may cause imposition of countermeasures (licensing quotas, etc.) in at least 24 cities where combined sales accounted for 34% of total car sales in 2009. The emerging sales of used cars now comprise nearly 20% of total car sales in China. Since Chinese consumers prefer western brands, the used car sales market threatens the new car sales of Chinese brands.
Annual Sales of Passenger Vehicles (PVs)
|Year||Geely PVs||All Chinese PVs
||% of All Chinese||Volvo Cars|
According to the 2011 JD Power Customer Satisfaction Survey, Geely ranked no better than average for its Chinese brands and top ranking for the Volvo brand.
- GLEagle ranked average
- Englon ranked below average
- Emgrand ranked below average
- Volvo was top ranked among Western brands in the German market
Geely’s competitive advantages are (1) ownership of the Volvo brand name and (2) ownership of the supply chain of parts.
Geely’s 2006-2010 consolidated statements showed evidence of considerable growth momentum and maintenance of a low inventory. The 2006-2010 CAGR of total revenues was a remarkable 283%. By the end of 2010, Geely managed over $3.5 billion USD in total assets of which two-thirds were financed by debt (total debt/equity = 0.56) and other obligations. Most of every sales dollar was consumed by costs of production and operation. About half the retained earnings provided dividends on a regular basis. Aside from the one-time cost of acquiring Volvo with borrowed money, the growth strategy is to invest in capital goods with sales revenue. Deferred Chinese government grants of land, property, plant, and equipment amounted to ~$44 million USD in 2010.
The Company was formed in 2003 by restructuring of the Guorun Holdings Ltd. The Company’s current Board was formed on 6/9/2005 and includes the following leadership.
- Li Shu Fu, age 47, is the founder, Chairman, and leading shareholder. His compensation is almost exclusively limited to owned shares.
- Yang Jian, age 49, is the president of Geely Holding Company, Vice Chairman of the Company, and Chairman of the 5 subsidiary Chinese automakers.
- Gui Sheng Yue, age 47, is the CEO. Among Directors, the highest paid was Mr. Gui (CEO) who received ~$1.3 million USD in 2010.
At year’s end 2010, Management was an all-Chinese team of qualified businessmen, accountants, engineers, and scientists. The Company was 50.4% owned by insiders and 49.6% owned by public shareholders. Mr Li and “his associate” beneficially owned “Proper Glory Holding Inc.”, which owned 54.1% of the Company’s issued share capital. Goldman Sachs owned 17% of issued shares. The accounting firm named Jingdu Tianhua, a subsidiary of Grant Thornton International, was paid $352,000 USD to audit the Company. Geely’s corporate structure appears to be changing on an annual basis in efforts to improve the quality of governance, manufacturing productivity, and the company’s market share. Yet a major shortcoming today is the undisclosed role of Volvo Car in Geely’s operations and governance.
“GELYF” is a ‘penny stock’. I estimate that the potential total return is 8%, of which 4% is derived from dividends. The Company paid an annual dividend of ~$0.0033 USD per share to shareholders registered as of May 18, 2011.
In my opinion, the major risks of investment are:
- Geely is a Chinese company whose operations are influenced by economic, social, and political events in China.
- The Chinese automobile market is new and highly regulated
- Geely’s stock price is pegged to the Hong Kong Stock Exchange. Hong Kong’s Exchange is well established, but subject to events affecting the broader equities market in Asia.
- The Chinese and Hong Kong currencies’ exchange rates can affect Geely’s stock price.
- The ‘penny stock’ is high risk, high return.
My trip to China
In October, 2011, I toured several big cities in China where I asked 6 tour guides and 1 hotel concierge if “Geely” is a famous car in China. All 7 knew about Geely and placed its popularity below that of the Chinese passion for Western cars. The Chinese prefer foreign brands over the domestic brands of BYD and Geely. At the top of their list were Western cars made in China that are either fuel efficient (e.g., Japanese hybrid) or a status symbol (e.g., BMW and Audi). Chinese cars have the reputation of poor construction, but the quality is improving. One man said that Geely makes “cheap” cars; “you get what you pay for”. Several respondents proudly informed me that Geely bought Volvo last year. One guide said that her husband considered buying a Volvo until he realized that he couldn’t afford it. In Beijing, I saw one Volvo every day floating in an ‘ocean’ of Western brands and Volkswagen taxis. Aside from the reputation of owning Volvo, the most complimentary comment about Geely was that it is a young company that’s still developing its product. Geely makes a “good middle car”; the “Panda” is a popular small car in small cities.
I observed that today’s cars in China are gasoline powered, the air is heavily polluted by coal fumes, and most of the scooters and bikes are electric-battery powered. Two well known deterrents to new car sales in China are: 1) Gasoline prices are ~$5 USD per gallon; and 2) the government subsidy for new cars expires in 2011 as a countermeasure to rapid inflation and traffic congestion. The subsidy is being replaced by newly required buying permits in the big cities. Electrical current in the Chinese hotels was 220 V. Will the grid be configured for electric vehicle charging stations?
Copyright © 2011 Douglas R Knight