Sales & share price plummeted, Geely “20200 Strategy” to be screwed?

According to the latest data released by China Passenger Car Association (CPCA), Geely's retail sales in December was 86,298 units, down 43.7% year-on-year, and its annual retail sales reached 1,473,305 units. Geely Automobile Group's “20200 Strategy”, which refers to achieving annual production and sales volume of 2 million vehicles in 2020), is facing a huge test. January 8, shares in Geely Automobile Holdings dived 11.28 percent with its share price [HKG:0175] closed at HKD10.22 (USD1.3). It fell more than 65% in 14 months totally. In view of the massive expansion in the past few years, the rapid decline in stock prices is testing the capital chain of Geely.

Sales target in 2018 are substandard, and growth expectation in 2019 is only 0.61%

Geely's retail sales in last December was 86,298 units, down 43.7% year-on-year. In terms of specific models, the sales of whole series of products declined. The Emgrand series fell by 40.3%, of which the Emgrand GL fell 47% year-on-year. The Vision series fell more than 70%, and its star product Boyue sold 17.072 units in a single month, a decline of 45%.

Geely claimed that the wholesale volume in 2018 was 1,500,838 units, while the retail sales data released by the CPCA were 1,473,305 units. There are more than 27,500 units difference between the two figures. Calculating according to the wholesale volume, Geely's 2018 sales volume differed from the target of 1.58 million units by nearly 80,000 units, achieving 95% of its target. In fact, in the first half of 2018, Geely has maintained a double-digit growth. And in the second half of the year, the volume of retail sales increased between August and December are 30.2%, 14.3%, 2.6%, -1.1%, -43.7 %, respectively. There must be an in-depth reason behind the cliff-like decline in December.

Yang Xueliang, vice president of Geely Group, said in an interview with IIA: "The sales volume of December is the result of proactive regulation. The purpose is to ensure a sustainable development of the network channel and lay the foundation for the development in 2019 by optimizing short-term structural inventory and reducing the occupation of liquidity. "

However, some insiders pointed out: "Geely has a wholesale volume of 93,333 units in December and retail volume of 86,298 units. The wholesale volume is still larger than the retail one. It seems that the effort of the inventory reduction is still insufficient. If large enough, the wholesale volume will be reduced more, then the sales volume will be awful, which is also a dilemma."

Inventory pressure decreased the share price, dealers still in pressure

According to a report by Bloomberg on January 3, Morgan Stanley cut its target price for Geely Automobile from HKD 15 to HKD 8, and downgraded its stock to a reduction, as economic indicators indicate that it is expected to be weak. Subsequently, Geely's share price fell 8.17%, closing at HKD 11.92 per share, the lowest closing price since May 2017. “Our economics team for China sees domestic demand as the key drag,” Morgan Stanley analysts led by Jack Yeung wrote in the report.

On December 31, 2018, the Hang Seng Index (HSI) had closed at 25,845.7 points, a decline of 13.61%, while Geely's share price fell by 49.54%. In the auto industry, BYD, which is also listed in the Hong Kong market, fell 28.28% in one year.

Geely's share price hit a record high of HKD 29.15 per share in 2017. Calculated based on the closing price of HKD 11 on January 10, it has fallen by nearly 62.26% since then. January 8, it once fell to HKD 10.08, a record low in the past 22 months.

The inventory of Geely’s best-selling compact crossover SUV, Boyue, has risen to over three months, while that of its luxury brand Lynk & Co has reached more than a month, Morgan Stanley said in its report.

Earlier, IIA has published an article titled Negative growth & large inventory test Geely's annual target. It mentioned that, after sales and inventory data were released in November, Geely actually faced a dilemma. From the perspective of capital market, it is not good news for investors that the annual sales target cannot be reached. However, to complete the sales target means that the dealer must be further backlog inventory which will lead to a series of troubles. But now, it seems that Geely has chosen the inventory.

In this regard, Yang Xueliang said: "Based on the current complex and volatile market environment, we proposed a stable development strategy at the beginning of 2019. Long-term stability and steady development are more important. Geely will not regard sales as the only indicator. All the work is carried out around the improvement of market share. We will focus on improving the quality of operation, paying more attention to the healthy and stable development of the whole system and channels."

Regarding the dealer inventory, Yang said: "After the proactive adjustment and clearing in last December and the car-selling peak season in January, Geely dealers' inventory pressure will be further reduced, and the store-to-sale ratio will be even more reasonable."

However, a person in charge of sales of Geely Automobile authorized dealer told IIA: "The business policy of 2019 has not yet been published. At present, dealers slowed down their ordering. Some even refused to order the car from the manufacturers. However, manufacturers allow dealers to sell inventory, but no relevant subsidies. That’s why the existing unsold vehicles inventory time is more than half a year."

The dealer inventory index has significantly exceeded the warning line. With the premise of no incentive policy, the industry predicts that consumers will continue to be in the wait-and-see period. Geely achieved rapid growth in last Q1. However, market performance in this Q1 will continue to be sluggish. It will continue to fall into the dilemma.

The plummeted stock price to test the Geely capital chain

At the end of 2016, Geely published the “20200 Strategy”, that is, Geely plans to achieve annual production and sales of 2 million vehicles by 2020 (referring to the sales of Geely and LYNK&CO, excluding Volvo), and enter the top ten global auto companies. However, from the goal of 1.51 million vehicles set in 2019, it is extremely difficult to complete the goal of 2 million vehicles by 2020 for it has to increase 490,000 vehicles based on the 2019 target. However, compared to the goal of the strategy, Geely's bigger challenge lies in the capital chain.

A professional in an interview with IIA said: " One of the reasons of Geely's plummeted sales in December was the market factor. Many car companies were in the process of completing sales targets in December or were reducing price to avoid an awful annual sales volume. The competition was particularly cruel. Another possibility is that in order to stabilize the dealer relationship, Geely reduced the wholesale volume to ease dealers’ inventory pressure."

He believes: "In the dilemma of handling the relationship with dealers and completing sales targets, Geely is more sensible in choosing the former. However, due to the substandard sales target, Geely's share price plummeted 11.28% the second day after the issue of the 2018 sales. However, more serious question is whether the declined share price will affect Geely's capital chain. Due to the massive expansion of Geely in the last two years, including the acquisition of Proton, Lotus, Daimler shares, and expansion of production capacity. Both need huge financial support, which depends to a large extent on Geely's performance in the stock market. However, the stock price has plummeted, and the problems of defaulting on suppliers' fees have also been exposed. Whether Geely's capital chain can withstand it maybe a big challenge. Of course, Geely may have other stronger financing channels."