Geely Automobile Holdings Limited (0175.HK): Chinese Automotive Play Could Benefit From Volvo Knowledge Spillovers

Geely Automobile Holdings Limited (0175.HK) is strongly collaborating with subsidiary sister Volvo Car AB of parent company Zhejiang Geely Holding Group - ZGH. These strong relationships could prove profitable for the Geely Holding on the long run.

Through the Zhejiang Geely Holding Group the company has a direct link to the innovative plans within Volvo. Technologies developed and researched in Sweden could spillover to the Geely group which could further benefit the already successful Chinese companies. Last year the Volvo Group announced it would create a joint-venture with Swedish battery company Northvolt to develop and produce more sustainable batteries. Innovations developed within this collaborations could benefit the Geely holding directly, while not having to directly invest in the joint-venture. Even though the Geely holding does not enjoy any boost from the announced stock market entry of Volvo subsidiary Polestar, success technologies developed using this new funding are potentially at grabs for the Geely Holding.

Figure 1 – Overview of Geely Holding

Diversified Automotive Play

Despite announced profit cuts due to the chip shortage and announced lockdowns in Shanghai, the Geely Holding still benefits from revenue growth despite a profit shrinkage of 10% in 2021. The development of battery swapping company Livan is also an exciting development as the EV market enters a new stage of innovation. Battery swapping offers a key advantage over current recharging stations, namely quicker turnarounds, as well as allowing consumers to buy an EV without a battery at a lower cost and subsequently subscribe to a battery leasing programme. This creative business model could prove successful for Geely’s focus on middle income consumers. With developments in the field of autonomous driving, boosted income due to the profitable auto financing venture Genius AFC. Combined with growing market share in the high-end market with its European brand Lynk&Co and Chinese premium car brand Zeekr, the Geely Holding looks well-diversified within the automotive market.

High Exposure To Chinese Market Major Risk

Figure 2 – Sales and Market Share

However, the Chinese car manufacturer is mainly concentrated in China and as its market share within China does not grow tremendously, there is some market risk. While China sticks to its zero-covid policy, new supply chain issues could emerge due to the major challenge Omicron poses to this policy stance. As the chip shortage remains in-tact and other supply chains get affected by new stringent measure by the Chinese government it remains ambiguous whether Geely Automobile Holdings Limited (0175.HK) stock will find its reflection point after already dropping over 66% percent in the last few months. With a P/E ratio of 12.07 and expected sales growth of 24% the stock looks cheap, especially when compared to its sister company Volvo AB with a P/E of around 20. However, Volvo Group AB could enjoy large gains from the IPO of its daughter company Polestar that has its assembly line in Chengdu, China. Polestar will do this through a reverse merger with a special purpose acquisition company (SPAC) called Gores Guggenheim (NASDAQ: GGPI) and is valued at 20 billion dollars. Whether this step will be lucrative remains to be seen as rising interest rates pressure companies that focus mainly on future growth and need additional funding throughout the years.

The Chinese car manufacturer Geely seems to perform steadily despite supply chain issues and high competition within the Chinese market. However, large growth should not be expected on the short run but the Geely Holding proves that it performs consistently well with its profitable and growing business. It continuously develops and seems more dynamic towards changes which makes it more competitive than its European counterparts. Despite Chinese drawbacks due to (geo) political and pandemic related issues, the Geely Holding is certainly an interesting stock within well diversified portfolios.

Disclaimer: The writer of this article holds Geely Automobile Holdings Limited (0175.HK) stock, this article should not be interpreted as investment advice or anything like that.

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