GELYF - Geely Is Responding Well To Electric Vehicle Demand

Summary

• Over 1/4th of Geely’s units sold were BEVs in December 2022.
• Geely sold approximately 200 thousand more BEVs in 2022 than in 2021.
• Geely has a goal of selling over 600 thousand new energy vehicles in 2023.

Introduction

Consumers are quickly switching to battery electric vehicles (“BEVs”) in China and some companies are adapting to this shift better than others. My thesis is that Geely ( GELYY ) ( GELYF ) is responding well to these changes such that their sales of BEVs are increasing rapidly.

At the time of this writing, RMB 100 is about $14.80.

The Numbers

Electric sales for Geely were practically non-existent in January 2021 but over 1/4th of their units sold were BEVs by December 2022:

Geely has come a long way in a short time with respect to BEVs. Geely only sold about 60 thousand BEVs in 2021 and we see from EV-volumes that this wasn’t very impressive relative to other carmakers:

Geely sold approximately 200 thousand more BEVs in 2022 than in 2021 such that the 2022 total was around 260 thousand. EV-volumes shows that this new total is very respectable on a global level:

The numbers above for Geely are even more impressive when we consider that not all the units are apples to apples. For example, many of the “GM” ( GM ) units above are joint venture vehicles that some describe as “golf carts” due to their small size and low price.

On January 28th, Geely said they have a goal of selling over 600 thousand new energy vehicles (“NEVs”) in 2023 and a substantial majority of these should be BEVs seeing as Geely’s December 2022 press release shows that over 80% of the NEVs for the month were BEVs. This is because they sold 45,790 NEVs in the month composed of 37,902 BEVs, 6,648 plug-in hybrid electric vehicles (“PHEVs”) and 1,240 hybrid electric vehicles (“HEVs”).

Valuation

Geely’s minority interests can be confusing and it helps to clear things up by starting with a company like Disney that presents them in a more typical fashion. Minority interests are otherwise known as non-controlling interests and they typically take away from earnings to shareholders. For example, Disney ( DIS ) only owns 80% of ESPN so 20% of ESPN’s earnings go out to minority interests. Looking at Disney’s 10-K income statement through the fall of 2022, we see that overall net income is $3,505 million. Below this, we see the line for net income attributable to non-controlling interests is $(360) million. Accordingly, the next line down shows that net income for Disney shareholders is only $3,145 million. The earnings per share calculations are based on the line in this group that is closest to the bottom of the income statement - the $3,145 million line in the case of Disney. Geely’s income statements can be confusing in this regard as some of the lines appear to be in the reverse order and the minority interests figures appear to use the reverse signs. Looking at the income statement in Geely’s 2021 annual report , profit attributable to equity holders of the Company is shown as RMB 4,847,448 thousand. The next line down is non-controlling interests which is shown as RMB (494,440) thousand. Directly below this, we have the profit for the year line which is shown as RMB 4,353,008 thousand. The profit per share line is based on the top line in this group - the RMB 4,847,448 thousand line. There is a caveat here in that the distribution paid on perpetual capital securities of RMB 127,388 thousand is deducted before dividing by the number of shares. My read is that in 2021, the Geely segments partially owned by minority interests had negative profits. This is my read for the 2022 interim income statement as well. In some ways the minority interests for Geely can be nebulous and I wish they would do more to provide clarity to shareholders.

Geely’s trailing twelve month (“TTM”) profit attributable to shareholders through June 2022 is RMB 3,888,199 thousand which is about $575 million. This is from RMB 1,485,578 thousand 1H22 + RMB 4,720,060 thousand FY21 - RMB 2,317,439 thousand 1H21. For many companies, free cash flow (“FCF”) is more important to me than profit, but questions surround Geely’s cash flow statement. The trade and other payables line swung from RMB (4,650,266) thousand in 2020 to RMB 9,374,135 thousand in 2021 and the annual report said the following:

Total capital expenditures on property, plant and equipment, intangible assets (i.e. capitalized product development costs) and land lease prepayments for the Group amounted to RMB 6.1 billion in 2021, which was within the budgeted amount of RMB 6.5 billion fixed at the beginning of the year. Working capital (inventories + trade and other receivables – trade and other payables) decreased by about RMB 11,093 million to deficit RMB 20,483 million at the end of 2021. If excluding the changes in working capital related to the acquisition and disposal of subsidiaries, the working capital increased by RMB 5.2 billion in 2021. Starting from 2021, the Group tightened its credit policies given to its dealers and suppliers back to normal levels as the negative impact of COVID-19 subsided, resulting in significant increase in net cash inflows from operating activities.

Given all the moving parts with Geely’s FCF, I feel more comfortable focusing on their profit attributable to shareholders at this time. It’s hard to say how much Geely is worth in this environment of higher interest rates but a range of 25 to 30x the TTM profit of $575 million isn’t out of the question. This comes out to a range of about $14 to $17 billion.

The share capital note in the 2022 interim report shows 10,020,846,540 shares through June 2022. Multiplying this by the January 30th GELYF share price of $1.63 gives us a market cap of $16.3 billion (note that GELYY is 20x the value of GELYF per comments in a 2018 Seeking Alpha article ).

One of the reasons it is hard to compare the enterprise value to the market cap is because the economic value of minority interests may be substantially different from the accounting value. From an accounting standpoint, it looks like the enterprise value is less than the market cap seeing as the June 2022 balance sheet has RMB 37,562,245 thousand in bank balances and cash which equates to about $5.6 billion. This figure more than offsets the following considerations:

-Long-term lease liabilities, bank borrowings and loans from related companies come to RMB 7,775,699 thousand which is approximately $1,151 million.

-Short-term lease liabilities, bank borrowings, loans from related companies and bonds payable come to RMB 6,234,616 thousand which is about $923 million.

-Minority interests are RMB 1,467,360 thousand which equate to about $217 million.

Forward-looking investors should keep an eye out for the 2022 annual report to see how the economics are changing as a higher percentage of vehicles sold are BEVs. If Geely can figure out how to sell BEVs profitably like Tesla or BYD then the future is bright.

Disclaimer: Any material in this article should not be relied on as a formal investment recommendation. Never buy a stock without doing your own thorough research.

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