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Geely Automobile (175 HK) Investor day highlights

  • “Smart Geely 2025 strategy” and new powertrain brand “Raytheon Power” with the Hi-X hybrid platform were unveiled.
  • Geely’s five-year roadmap targets ~3.65mn units in sales volume and at least 25 NEVs to be rolled out. Its first self-developed “smart cockpit chip” will soon be mass produced, firm expects to launch first 7nm high computing power autonomous driving chip in 2023.
  • Recovery path to continue in 2022, driven by improved auto demand, new product line-up and accelerating electrification, although competitive pressures and global chip supply constraints remain as near- term concerns.
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Investor day highlights: The “Smart Geely 2025” strategy and a new powertrain brand were unveiled in Geely’s recent investor update. In the next five years, the firm expects R&D investments of about CNY150bn which will enable it to launch more than 25 new smart NEV products (>10 Geely brand products with Thor power hybrid system, >5 pure EV products from Geometry brand, >5 products from Lynk & Co and a pure electric SUV product to be launched in Europe in 2023) and reach its target of 3.65mn in sales volume by 2025 (includes 1.3mn from Geely brand, 0.3mn from Geometry, 0.6mn Lynk & Co, 0.6mn export, 0.2mn mobility and about 650k units from Zeekr, NEV sales to reach 900k units i.e. about a third of its sales volume). For the overseas markets, the target is to achieve 600k in sales volume, with Proton targeting the Malaysian market, Lynk & Co positioned for APAC markets and other product pipelines could be marketed at one-belt-one-road countries.

With the above vision, Geely targets to achieve more than 8% EBIT margin by 2025 as a result of the higher economies of scale (200% volume increase expected), reduced supply chain and per unit R&D expenses with technology sharing to external players to share the costs. It also aims to reach nos. 1 market share amongst the domestic brands and increase its average selling price by 30% by 2025.

Announced its in-house system on chip (SOC) plan – Its first self-developed “smart cockpit chip” will be soon mass produced, expects to launch first 7 nanometre (nm) high computing power autonomous driving chip (SE 1999, from its SiEngine Technology joint venture) in 2023. To achieve centimetre level high precision positioning, it plans to complete a low earth orbit satellite network with 72 internet of things satellites and 168 navigation satellites.

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For batteries, GEELY Vinidi E-mobility Technology has the capability to design a battery cell and is expected to soon mass produce high voltage 800V electric motor with silicon carbide power semiconductor which should provide high energy efficiency and maximum 475km output (<3 seconds for acceleration of 1-100 km/hour).

Modular intelligent hybrid platform “Thor Smart Engine Hi-Z” was launched which supports various hybrid technologies such as PHEV (plug-in hybrid electric vehicles/EV), HEV (hybrid EVs) and REEV (range extend EVs) covering small and ultra large size vehicles. Management views the Hi-X as world-class standard and shared that it has the highest engine thermal efficiency record globally (43.32% for DHE15 – 1.5TD turbocharged direct injection engine) and 40% fuel consumption saving (level of 3.6L100KM). The Hi-X platform comes with a maximum torque of 225Nm and power of 110kW, which are improvements of 71% and 41% respectively relative to comparable Japanese products.

Geely also announced its first self-developed “smart cockpit chip” should soon be ready for mass production. The firm expects to launch its first 7nm high computing power autonomous driving chip in 2023, and targets the first 5nm high computing power autonomous driving chip in 2025, where it also expects to obtain L5 autonomous driving and achieve L4 autonomous driving commercialization.

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In other recent updates, the firm has announced its plan to acquire an added 10% stake (~220mn shares) in Zeekr (previously 48% owned with the balance by its parentco Zhejiang Geely Holding) through new share issuance and cash. Zeekr is strategically important to Geely in its smart electric vehicle journey in terms of contributing more advanced technology and adding to its competitive product offering.

Downside risks to 2021’s full year sales volume target – Year to date (October), Geely’s sales volume of ~1.033mn units represented a modest growth of 1.8% from a year ago, and points to downside risks to management’s full year sales volume target of 1.53mn, a risk we have flagged out previously. October’s wholesales volume (sold to dealers) fell 20% from a year ago/+7.4% month on month to ~111.6k units, which the company highlighted was due to the impact of pandemic in select regions in China and continued negative impact from global chip supply shortage. Most OEMs are expected to see limited impact from the power outages in China.

The recovery path should continue into 2022, driven by improved auto demand, new product line-up and accelerating electrification, although competitive pressures and near-term industry chip supply constraints remain as sector overhang factors (management thinks semiconductor issue could resolve only around mid of 2022), while base effects for volume sales growth comparison should get tougher. Our base case is for the chip supply situation to gradually improve into 1Q22, assuming no further supply shocks.

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For 2022, the firm expects sales volume should be in similar CAGR growth range of 2021-2025 or 20% CAGR. 2H21 margin should be supported by improved product mix and lower cash rebate to dealers, which should help to mitigate pressure

from higher raw material costs. New products expected include new generation Geely brand, Boyue SUV, new Geometry brand SUV and mid life cycle upgrade of Binyue SUV, Binrui sedan, Jiaji MPV and Haoyue SUV. Zeekr targets to breakeven at the gross margin level near term, with monthly production volume likely to be increased to 10k units by March 2022 (guided for ~7k delivery units in 4Q21).

Roadmap for growth

In its prior investor updates, management shared its autonomous driving roadmap over the next five years, which will move from partial autonomous driving in 2021, highway autonomous driving by 2023 to full autonomous driving on open roads by 2025. To optimize costs and efficiency, it will continue to work with solution providers (e.g. Mobileye, Weymo, Baidu Apollo). The company is expected to launch four new models in FY21E, including the first sedan from its EV-dedicated SEA (Sustainable Experience Architecture) platform with level 3 autonomous driving hardware set-up named Zero Concept – expected launch in 2H21 and targeted to be sold overseas in developed markets of U.S. and Europe. Other potential catalysts could come from further progress in its sales and development of electrified autonomous and smart vehicles.

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ESG updates

Geely’s ESG rating was lowered in the December 2020 review, following enhancements to the governance assessment framework. Key concerns cited include the firm’s weaker business ethics policies versus peers, with presence of founder chair on the board, related party transactions with the controlling shareholder firm and lack of an independent board majority. Positives observed include strong quality control systems already established (majority of facilities certified to ISO9001, fewer product recalls than domestic peers) and a supplier management system that includes training and audits. Geely has demonstrated a strong commitment to labour management and offers stock options and incentive pay schemes which can support staff retention and productivity levels. Our fair value incorporates a lower valuation multiple for its traditional auto business, in view of the sector median. While the competitive landscape will remain intense and base effects for sales volume growth comparison should get tougher, our view remains that Geely continues to look better positioned in the EV race in China compared to traditional OEM peers, driven by improved auto demand, new product line-up and accelerating electrification. With the industry’s contribution to China’s environmental objectives, we also believe there may be some technical support for share prices from investors who are concerned over higher regulatory risks in other sectors.

On environmental aspects, while Geely is making efforts to lift its sales of EV vehicles, ICE vehicles still make up the majority of its revenues which has resulted in its lower than global auto industry’s score of 5.3 (vs 6.3 for product carbon footprint). The industry-wide chip shortage issue is expected to remain as an overhang near term as a result of the move towards cleaner tech, given the implications of tougher chip supply management for auto companies amid the ongoing industry focus to increase EV penetration and models offering (a typical EV also requires more chips than the traditional ICE (internal combustion engine) vehicle).

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Blue Geely Action Plan

Geely sold about 68k new energy vehicles in 2020, around 5% of its total. Geely remains focused on executing its electric vehicle (EV) growth strategy, with a premium ZEEKR brand and new joint venture with its parent focusing on research and development of related technologies. Both Geely Auto and parent have previously announced they will have stakes of 51%/49% respectively in the JV and will contribute a total of CNY2bn. The JV shares to be subscribed by the company will be funded by internal resources of the group in cash. ZEEKR will establish its fully owned dealers network (vs using third party dealers). Geely plans to convert Lynk &Co’s “Zero Concept” sedan into ZEEKR’s first product with target selling price of CNY300-500k. To secure upstream supply, the holding company had announced investments in power battery. The Blue Geely Action Plan was announced as part of its transition towards electrification, which the company targets to grow NEV market expansion to more than 10% by 2025. The collaboration will continue with strategic partners (Baidu, Foxconn, Tencent, Volvo). HOLD. (Research Team)