<News Alert> Geely (175 HK) – Acquisition of Korean auto company to launch new business venture
- Geely will subscribe 34.02% stake (on enlarged basis) in a target company in Korea for Rmb1,376m, under the collaboration agreement with Renault
- Initial plans include launching gasoline and hybrid vehicles
- Transaction will strengthen Geely’s internationalization strategy to cover more Asian markets
- Geely has a strong net cash of Rmb24bn as of end Dec-21 to support its business expansion
What’s new
Target company was incorporated in Korea in 2000 and is engaged in the sale, production and research of automobile. Besides, the target company also operates a sales network to supplement its operations. Renault, Samsung Card and ESOP Pool currently hold 80.05%, 19.9% and 0.05% stake in the company.
Geely will subscribe for 45.375m new shares in the target company for Rmb1,376m, translating to Rmb30.3 per share. Based on the K-GAAP, the target company achieved approximately Rmb20bn of revenue (+13% yoy) and profit after tax of Rmb83m in FY21 (vs loss of Rmb380m in FY20). The purchase consideration translates to FY21 PE of 16.6x and PBR of 0.2x. The purchase price looks reasonable in that the company’s after-tax profit could further expand following the launch of all-new vehicles for the Korea market, including ICE and hybrid vehicles.
The transaction will seal Renault and Geely earlier agreement to enter into the Korea automobile market. It will also strengthen Geely’s internationalization strategy through this collaboration.
Based on Korea Automobile Manufacturers Association statistics, total vehicle sales reached 1.73m units in 2021, down 9%, due to pandemic outbreak and supply chain disruption.
As of end Dec-21, Geely has net cash of Rmb24bn on hand, hence funding the transaction is not an issue. However, we believe the near-term earnings impact on the company is limited, as the joint venture partners will have to rollout new models catering to the domestic consumer market and ramp up the production scale.
We currently rate Geely with BUY and TP of HK$20. While the transaction is positive on Geely’s long-term development, near-term share price performance is being affected by the volatile stock market.