ARGGY - Aston Martin: Impacted By Eric Li Shufu And Geely Holding

2023-05-26 05:10:32 ET

Summary

• Geely Holding did a nice job restoring the economics for Volvo Car, and they can do the same for Aston Martin.
• Geely Holding is doing well with electrification, and they can help Aston Martin in this area.
• The recent investment by Geely Holding is at a price point well above the current stock price.

Introduction

The book, My Other Car is an Aston , by Stuart Haining reveals that Aston Martins ( ARGGY ) make up about 30% of the cars owned by James Bond in his movies over the years. Along with other investors, entrepreneur Eric Li Shufu of Geely Holding has been trying to get involved with the iconic car brand over the years. My thesis is that Aston Martin has increased in value now that entrepreneur Li Shufu and Geely Holding have increased their ownership from a little under 8% to about 17%. Through Geely Holding, entrepreneur Li Shufu has interests in many OEMs. Geely Holding describes their ownership and management interests as follows:

Headquartered in Hangzhou, Geely Holding today owns and manages a number of brands: Geely Auto, Lynk & Co, ZEEKR, Geometry, Volvo Cars, Polestar, Lotus, London Electric Vehicle Company, Farizon Auto, RADAR AUTO, and Cao Mobility.

Geely Auto (GELYY) (GELYF) is the main company in the Geely Holding group and it includes Lynk & Co, Geometry, Livan, and Zeekr. In addition to interests in the above brands, Geely Holding has a relationship with Mercedes-Benz Group (MBGAF). Geely Holding acquired 7.6% of Aston Martin back in September 2022 and now they have upped this investment substantially.

At the time of this writing, £100 is equivalent to $123.48 and €100 is equivalent to $107.30.

Geely Holding Has Been Trying To Invest For Years

Aston Martin is said to have rejected proposals from Geely Holding over the years and a release from July 2022 talks about a specific rejection from Geely Holding's Atlas Consortium (emphasis added):

On 8 July 2022, the Company received a proposal (the "Proposal") from Investindustrial Group Holdings S.à r.l. ("InvestIndustrial") and Geely International (Hong Kong) Limited ("GIHK") (Investindustrial and GIHK together being referred to the "Atlas Consortium") for an equity investment of up to £1.3 billion in aggregate into the Company comprising of a £203 million firm placing and subsequent £1,105 million underwritten rights issue (pursuant to which the Atlas Consortium would take up its pro rata rights for approximately £300 million and underwrite, subject to relevant regulatory and shareholder approvals, any residual shares not taken up by existing shareholders.)

The July 2022 release goes on to show a placement of 23.3 million new ordinary shares at a price of £3.35 each for the Saudi Arabia Public Investment Fund ("PIF"). This raised about £78 million and it gave PIF about 16.7% of the post-placing share capital of Aston Martin. Combined with other considerations, the total capital raise was £653 million and many parties participated including the Yew Tree Consortium controlled by Executive Chairman Lawrence Stroll:

PIF, the Yew Tree Consortium and Mercedes-Benz AG to invest c. £335m in total. Proposed equity capital raise provides clear pathway for significant shareholder value creation with pro-forma cash of £500 - 600m post debt pay down, driving Aston Martin's growth ambitions and supporting positive free cash flow generation from 2024.

Despite the partial rejection of the Geely Holding proposal above, they were still able to work out a partial investment per a September 2022 article from @Petercampbell1 with the FT . Geely Holding acquired nearly an 8% interest at that time (emphasis added):

Geely's stake in Aston marks the culmination of years of interest in the brand by Li Shufu, the Chinese billionaire business magnate and founder and chair of Geely Holding. The Chinese group made several approaches for the company even before its initial public offering in 2018 . When Aston needed a bailout in late 2019, the Chinese group and Stroll pitched two rival offers. Geely's vision was to globalise the business's production plans and push quickly into electric cars, in an echo of its Lotus investment. But Stroll wanted to re-enter Formula One and focus on mid-engine supercars to rival Ferrari, in an effort to restore Aston's luxury credentials.

The 2022 annual report shows the major shareholders and their percentages through December were Yellow Tree Consortium with a 28.4% interest, PIF with an 18.7% interest, Invesco with a 10.2% interest, Mercedes with a 9.8% interest and Geely Holding with a 7.6% interest:

Geely Holding Is Now A Larger Shareholder With Board Representation

Reinforcing the price point of £3.35 per share from the July 2022 release, a May 2023 release talks about Aston Martin's growth ambitions and their vision to be the world's most desirable ultra-luxury British performance brand. Following additional investments from Geely Holding, Aston Martin's share capital will increase to 727,057,075 ordinary shares and the ownership stake of Geely Holding will rise to 17% . 28,300,000 new shares are part of the investment and they will be 4% of Aston Martin's enlarged share capital. Seeing as the new shares are 335 pence each, Aston Martin will get £94.8 million in cash from this investment. 41,575,708 existing shares are also part of the investment such that Geely Holding is committing about £234 million in aggregate. Here are some details (emphasis added):

Aston Martin, Geely and the consortium of investors led by Yew Tree Overseas Limited ("Yew Tree Consortium") announce the entry by Geely into (a) a sale and purchase agreement (the "SPA") with certain members of the Yew Tree Consortium, to acquire 41,575,708 existing ordinary shares of the Company ("Ordinary Shares") and (b) a subscription agreement (the "Subscription Agreement") with the Company, to subscribe for 28,300,000 new Ordinary Shares (the "New Shares"), in each case at a price of 335 pence per Ordinary Share (representing a 45% premium to the closing price per Ordinary Share on 17 May 2023) (the "Transaction").

As @benjaminmarlow notes , Geely Holding did a nice job bringing Volvo Car back to prominence. He also points out that in addition to Geely Holding acquiring newly issued shares, they are also buying shares from Executive Chairman Stroll's Yew Tree investment vehicle such that Executive Chairman Stroll's ownership percentage is dropping both directly and indirectly. My read from the May 2023 release is that this investment is the first one that secured board membership for Geely Holding (emphasis added):

Under the terms of the Relationship Agreement Geely will have the right, subject to holding more than 7% of the Company's voting rights, to appoint a Non-Executive Director to the Aston Martin Board of Directors as a shareholder representative, as well as to appoint a second person as an observer.

Executive Chairman Stroll said the following about the strategic partnership with Geely Holding in the May 2023 release (emphasis added):

They offer us a deep understanding of the key strategic growth market that China represents, as well as the opportunity to access their range of technologies and components. Geely share our vision for Aston Martin and want to be a more significant shareholder. This transaction enables the creation of a long-term partnership with Geely - a relationship that I believe will bring very significant value for all of our shareholders over time. "It is a further example of how we are successfully building Aston Martin into the most desirable ultra-luxury British performance brand through a combination of our own product development, technology and design and also drawing on the skills and capabilities of major international companies that are both strategic partners and shareholders .

Valuation

I like some of the things Road & Track says about the new DB12 and I'm optimistic that they'll sell well which will be good for Aston Martin's valuation.

The exposure from the racing side of the business is an important consideration in our valuation framework. A May 2023 NY Times article by @ianparkesf1 details the way in which Executive Chairman Stroll found success on the racing side of the business by bringing driver Fernando Alonso to the team. This shrewd move has increased Aston Martin's valuation (emphasis added):

Alonso returned to Formula 1 in 2021 with Alpine with moderate success, but midway through last year, his star rose after Sebastian Vettel of Aston Martin, a four-time champion, announced he was retiring. Alonso, an old friend of Lawrence Stroll, the team owner, quickly agreed to a deal.

The racing turnaround is more than just the addition of driver Alonso. A recent @PHortonF1 article in Autoweek talks about the ways in which Aston Martin is being taken seriously due to many improvements from Executive Chairman Stroll. A May 2023 Business Insider article by @RyanAHogg talks about the increased sales Aston Martin is seeing because of the investments Executive Chairman Stroll has made on the racing side. Noting that 300 or 400 Vantage F1 edition cars have been sold at about $200,000 each, the article suggests this has brought in up to $80 million of revenue:

Stroll highlighted the impact of Aston Martin supplying F1's safety car, a vehicle deployed to lead the racing pack at a slower pace when there is an accident. The CEO says the carmaker has sold between 300 and 400 of its Vantage F1 edition cars as a result of the vehicle featuring in those races.

My Ferrari ( RACE ) article shows 2022 gross profit of €2,446 million based on revenue of €5,095 million for a gross margin of 48%; this came from 13,221 cars shipped during the year. Per the 2022 20-F, Ferrari had 181,953,498 shares outstanding at the end of the year. Multiplying by the May 25th share price of $286.60 gives us a market cap of about $52 billion for Ferrari. Meanwhile, Aston Martin had 2022 gross profit of £450.7 million on revenue of £1,381.5 for a gross margin of 32.6%; this was based on 6,412 wholesale vehicles, half of which were SUVs:

No one compares well to Ferrari. Not only does Ferrari have a higher gross profit margin of 48% vs 32.6%, Ferrari is also advantaged with operating expenses. Ferrari has 2022 operating expenses of €1,231 million which are only 24% of their revenue whereas Aston Martin had 2022 operating expenses of £592.5 million, amounting to 43% of their revenue. These are some of the reasons why Ferrari trades at a much higher price to sales ratio than Aston Martin. In addition to these differences, the capitalization components of the two companies vary as well. Net debt is small relative to equity at Ferrari such that the market cap and the enterprise value aren't drastically different. This isn't the case at Aston Martin where net debt is a major consideration. Per Aston Martin's FY22 call, net debt at the end of 2022 was £766 million.

The 1Q23 presentation shows 2023 guidance with the important target of becoming sustainably FCF positive starting in 2024:

As the world shifts to battery electric vehicles ("BEVs"), I think about the way this impacts the valuation of OEMs. Geely Holding has an interest in Mercedes where 10% of car sales in 1Q23 were BEVs. They also have a large interest in Volvo Car where this percentage was 18%. Geely Holding will help Aston Martin directly with BEVs and they'll also help indirectly through Mercedes. Per comments from CEO Amedeo Felisa in the 2Q22 call , Aston Martin has many options with respect to BEV proposals from Mercedes:

And I think we have already defined some solution, having their proposal in the future architecture of our BEV. But I think we are continuing to understood better and better their proposal and of course, creating every time more understanding by our people.

Again, Geely Holding Entrepreneur Shufu is buying shares at 335 pence which comes to nearly $4.18. Entrepreneur Shufu is a savvy investor who does not have a tendency to overpay so I believe Aston Martin's equity value is close to his number which is about $3 billion in aggregate based on the 727,057,075 shares. Of course he could be over or under by 10% so this is the center of my optimistic valuation range. The enterprise value is more than the market cap due to the £766 million in net debt mentioned earlier.

Deutsche Bank Group shows a ratio of 1:1 for the ARGGY ADR. It can be a little bit confusing comparing ticker symbols like AML.L and ARGGY on a site like Yahoo Finance at a glance. It's key to remember that the former is in GBP while the latter is in $. Also, the "Currency in GBp (0.01 GBP)" distinction for the former is a reminder that the decimal is offset by two places.

The market cap is $2,341 million based on the May 25 ARGGY price of $3.22 and the new count of 727,057,075 shares. The market cap is below my optimistic valuation range and I think the stock is a buy for shareholders with a long-term mindset.

It was revealed in the FY22 call that the Capital Markets Day event will provide many details about the future product portfolio. Forward-looking investors should keep an eye out for it this summer.

For further details see: