It takes a strong stomach to be bearish on Geely Automobile Holdings Ltd.

Just ask Robin Zhu. The Hong Kong-based Sanford C. Bernstein & Co. analyst has advised investors to avoid Geely since August 2015, a span where the share price has soared more than 500 percent. The owner of Volvo cars is the world’s best-performing auto stock this year and one of the most highly valued, trading at 26 times profit. Among more than 30 analysts tracked by Bloomberg, Janet Lewis at Macquarie Group Ltd. has the only other “underperform” rating.

Bulls say that billionaire Li Shufu, who controls Geely, will succeed in grabbing market share in China for his new upscale brand Lynk & Co., while using its investment in Malaysia’s Proton Holdings Bhd. to expand in Southeast Asia. Still, Bernstein’s Zhu isn’t backing down: he reiterated a 12-month target price of HK$7.50 on Thursday, implying a 57 percent stock decline from Friday’s close. That’s the steepest downside for a forecast made by any other analysts within the past three months for a company on the Hang Seng Index. Geely didn’t immediately respond to requests for comment.

“In light of uninspiring retail trends year-to-date in the Geely brand, issues we foresee with Lynk and export economics, and the company’s ambitious valuation, we continue to rate Geely underperform," Zhu wrote in a report Thursday.

Geely’s current share price has already factored in success of the Lynk brand and hopes that it is a Chinese industry champion that could go global, just like technology giant Huawei Technologies Co., according to Zhu. Such expectations could be difficult to realize since it would be costly for Lynk to expand abroad and because car pricing in most global auto markets are lower than in China, he said.

A correction could be underway in the coming months or the first half of next year, when the auto maker’s sales growth starts to look “less impressive,” Zhu told Bloomberg by email on Thursday. That’s a view shared by Macquarie’s Lewis, whose target price of HK$8.30 reiterated on July 20 suggests a 53 percent decline from Friday’s close.

Geely’s reliance on parent Zhejiang Geely Holding Group Co. and government subsidies are other causes of concern, Lewis said. State grants and subsidies have accounted for an average 38 percent of annual net income in the past five years, Bloomberg calculations show.

The auto maker currently doesn’t pay any research and development expenses for the platform that the parent company and Volvo built to produce cars, Zhu said, adding that the management hasn’t revealed how the costs will be shared. Geely intends to rely on the platform over the coming years for new vehicles, including the first sport utility vehicle model under the Lynk brand, according to its latest annual report.

Shares of the auto maker more than doubled this year and reached a 23-year high to become the best performer on the benchmark Hang Seng Index, before paring the advance. Geely is among the most expensive auto stocks globally, second only to Ferrari NV’s 35 times reported earnings. Yet bulls are betting more upside can be expected because of the company’s product pipeline, including the Lynk & Co. 01, an SUV.

Angus Chan, a Hong Kong-based analyst with Bocom International Holdings Co., boosted his target price for Geely by 34 percent to HK$22.15 last month after an earlier target was reached. The stock closed 4.6 percent lower at HK$17.58 on Friday.

“I’m not worried about a share decline,” said Chan. “There’s nothing negative at the moment to drag on the stock, and further gains won’t be a problem as the Lynk brand will be a success.”

Macquarie’s Lewis advises investors to take into account the promotion costs and compensation Geely must give dealerships in the early days before they can make money, rather than just focusing on top line sales.

“Historically any auto maker launching a new brand faces very heavy costs,” said Lewis. “Our view is that you have to consider the profits as we are looking ahead for the launch of Lynk & Co.”

Source:
courtesy of BLOOMBERG

by Bloomberg News

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