Geely Automobile
　　Another robust year ahead with high earnings visibility backed by promising Galaxy product cycle
　　Following a strong volume beat over target in 2024, we anticipate Geely to sustain a robust year in 2025, in terms of not only sales growth but also NEV profitability. We believe Geely is well positioned to confront with BYD’s head-on competition given its generation-leading product strength over rivals, optimised cost structure, as well as visible surging scales that allow Geely’s suppliers/dealers to share the burdens to cope with the potential price war. For exports, despite geopolitical threats looming larger in specific destination country, the mgmt. anticipates wider market access and broader product offerings to cover the potential downside risks. Over the short term, we reckon the overhang of subsidy renewal, as well as tepid 1Q25 industry outlook due to seasonality and front-loaded consumption may disrupt the street sentiment. Yet, we believe the market volatility may offer good entry-point for investors to accumulate Geely in 1Q25. Reiterate BUY with higher TP of HK$21.
　　Key Factors for Rating
　　Handsomely surpassed 2024 original annual sales target by 15%. The full-year sales volume of 2024 for Geely reached 2.176m vehicles, with an increase of over 32.0% YoY, nicely exceeding the original annual sales target of 1.9m units by 15% and ending the six-year streaks that fails to exceed annual sales target after prior-round strong product cycle (over 2015-2017). By brands, the sales volume of Geely brand rose by 27.4% YoY to 1.67m units, well above the original guidance and our anticipation on stronger demand for exports and gasoline lineups (China Star series) domestically, as well as brighter market feedback for Galaxy GEA-platform new models in 2H24 (i.e. E5, Xingyuan, Starship 7). The Lynk&Co brand delivered 285k units in 2024 with a rise of 29.6% YoY, outstripping the initial estimate. Yet, the ZEEKR brand sold 222k units in 2024 with a leap of 87.2% YoY, slightly below the sales target of 230k for two consecutive years primarily on unfavourable competition dynamics.
　　2025 sales target represents another robust year for Geely with upside potential. For 2025, the company aims to sell 2.71m vehicles, an increase of 25% over the 2024 shipments, which is set to continue outperformance against industry and peers. By brand, management expects to deliver 2m Geely brand vehicles (+20% YoY), 320k ZEEKR brand vehicles (+44% YoY), 390k Lynk & Co cars (+37% YoY). By powertrain engine types, the company targets to ship 1.5m NEV models in 2025 (+69% YoY), with the NEV penetration further hike to over 55% vs. 40.8% in 2024. By region, the company set a sales target of 467k units for exports (+16% YoY), with remaining 2.243m units for domestic sales.
　　Geely brand to deepen NEV transformation through promising Galaxy product line-up with decent profitability. The company targets to sell 2m vehicles under main brand Geely for 2025, essentially driven by the volume surge of Galaxy new model cycle that is set to more than double from 2024 at 494k units. During the 2025 sales target investor conference, the mgmt. pledged to launch 4-5 all-new Galaxy models in 2025 (two sedan and three SUV models). Given the enhanced cost competitiveness and wider audience acceptance for Galaxy GEA-platform models in 2H24, we expect the coming Galaxy new models to extend the initial success in respective mainstream segments and become the major volume driver for Geely brand. Beyond the promising volume surge for Geely Galaxy, the bright spots to watch are mainly i) the profitable outlook for Galaxy NEV business and ii) continuing sales outperformance and market share gains in gasoline sales with refreshed five major product Series (incl. Xingrui, Xingyue, Bin, Emgrand, Bo series).
　　New ZEEKR to expect post-consolidation synergies for profit release. The brand consolidation of ZEEKR and Lynk&Co will officially kick off after the shareholder meeting on 10 January. The mgmt. aims to sell 710k cars under new ZEEKR (ZEEKR+Lynk&Co), with roughly 100k volume increase for each sub-brand independently. For ZEEKR, the company targets to sell 320k units for 2025, primarily helped by three all new launches (incl. two hybrids and ZEEKR 007-based shooting brake model) and full-year contribution of key model 7X launched in 2H24. In our view, compared with the Galaxy's market position and product strengths in the addressable markets, we deem that for the mid- to-high end market, Zeekr and Lynk&Co may face stronger rivals including Huawei-backed brands, Xiaomi (1810 HK/TP: HK$36.00, BUY), Li Auto (LI US/TP: US$36.00, BUY), etc. Having said that, we reckon the key focus on new ZEEKR is the potential synergies post consolidation that is set to bring considerable cost/OPEX savings and faster profit release in the coming two years.
　　Overseas business to pursue wider market exposure and broader product offering in spite of headwinds in specific region. The management expects a slowdown in overall exports market for 2025, and pursues a goal of 15% YoY increase in exports volume (c. 467k units vs. 403k units in 2024). Despite geopolitical headwinds in specific Eastern European country with volume proportion of 45% in 2024, the mgmt. anticipates to cover the potential volume downside risks with (i) wider global market access (mainly Latin America, Asia Pacific, Africa) and (ii) broader NEV product offerings for overseas market (i.e. Geely Galaxy, new ZEEKR) vs. mostly gasoline car exports at present.
　　Valuation
　　For 2024E, given the potential FX loss resulted from sharp Ruble depreciation towards end of year, we leave our 2024E net profit forecasts (excl. one-off gains related to powertrain Horse JV) largely intact at RMB8.5bn in spite of raising revenue forecasts on higher-than-expected sales performance in 4Q24.
　　For 2025E, we revise up our sales volume forecast to 2.8m units, mostly to reflect higher volume projection for Geely Galaxy (incl. Geometry) that is likely to be more than double to 1.1m units driven by full-year delivery of prior three GEA-platform models released in 2H24 (incl. Galaxy E5, Xingyuan, Starship 7) and coming 4-5 all-new launches. For 2026E, we lifted sales volume forecast to 3.125m units. Accordingly, we nudge up net profit forecast by 13%-18% to RMB13.1bn/15.1bn. It should be noted that our 2025E-2026E forecasts have yet to factor in the consolidation of Lynk&Co under ZEEKR as the deal still needs approval in shareholder meeting on 10 Jan and is expected to close in 1Q25.
　　We notice recently the main concern among investors over Geely is the possible margin compression from the price war initiated by BYD (1211 HK/TP: HK$325, BUY), which may hurt profitable prospects of Galaxy. In our view, Geely is well positioned to confront with BYD’s head-on competition this year given its generation-leading product strength over rivals, optimised cost structure, as well as scalable benefits from visible surging volume growth, which allow Geely’s partners (suppliers/dealers) willing to share the burdens to cope with the potential price war. Thus, as long as Galaxy’s products could gain popularity among consumers, which has been evidenced from the hot-selling momentum of GEA-platform E5/Starwish/Flagship 7, we believe Geely is able to secure the decent profitability for Galaxy with potential upside in either volume or margin.
　　In terms of valuation methodology, we render our prior SOTP valuation method will not appropriately reflect i) business nature within the listco entity after the consolidation of Lynk&Co into Zeekr; ii) the promising Galaxy business has transformed Geely from a traditional automaker into a fast-growing NEV player which could support Geely’s valuation premium over traditional OEM peers; and iii) new ZEEKR set to turn around to profitability backed by huge financial synergies upon consolidation. Therefore, we switch our valuation methodology from SOTP to P/E multiple method. By adopting 15x 2025E P/E multiple, we raise our TP from HK$19 to HK$21. With reference to the valuation of other profitable NEV stocks trading at 15-20x P/E and Geely’s historical P/E during fast-growing earnings period (2016-17), we reckon our target P/E multiples of 15x is well justified.
　　Over the short term, we reckon the overhang of subsidy renewal for 2025, as well as 1Q25 sales pullback due to seasonality and front-loaded consumption may disrupt the street sentiment on auto stocks. But the market volatility, on the other hand, may offer good entry-point for longer-term investors to accumulate Geely in 1Q25. From one-year horizon, we favour Geely given its high earnings visibility backed by promising Galaxy product cycle and potential synergies post consolidation under the new ZEEKR. Reiterate BUY with TP of HK$21.