Geely's business is so wide, what if it is short of money?

Recently, a photo of Geely Auto employees voluntarily downgraded their salaries and application forms for year-end bonus has aroused a heated debate in the industry about whether Geely lacks money. In response to his personal social platform, Yang Xueliang, vice president of Geely Automobile Group responded on his personal social media: "In order to make senior and middle-level managements focus more on missions and be result-oriented, P8 or above employees voluntarily join the incentive mechanism of sharing management results, and the return on goal completion will be higher."

Yang Xueliang's response shows that the incident is true from another side. The downturn in the auto market and stock market, Geely's delay in supplier payments, new investment projects waiting to be financed, especially the biggest overseas investment project that Daimler's stock investment failure, all these make people worry about how much pressure Geely's capital chain can withstand.

Geely's businesses

After rapid development in recent years and a large number of overseas mergers and acquisitions, Geely has become the largest private automobile company in China. In 2010, Geely Group successfully acquired Volvo as its largest shareholder for US$3.9 billion, and subsequently acquired nearly half of the troubled Malaysian Proton, including 51% of its subsidiary Lotus. In addition, Terrafugia, a company developing roadable aircraft and a Danish Saxo Bank, which is deeply involved in the financial industry, were also included. However, the largest and most shocking one was the acquisition of Daimler's 9.69% stake for US$9 billion, making it the largest single shareholder.

According to incomplete statistics, Geely has launched more than 10 overseas mergers and acquisitions during this decade, involving funds of hundreds of billions of yuan. After the completion of the wholly-owned acquisition project, the follow-up needs constant capital investment to support its operation, which is also a large expense. However, it does not include the continuous projects in China, as well as Chinese smart and mobility services joint ventures with Daimler.

In China, Geely proposed the 20200 strategy at the end of 2015, which refers to achieve 2 million sales targets by 2020. Subsequently, Geely invested in complete vehicles, engines, gearboxes and other projects in various places, covering an area of over 666.7 hectare, becoming the largest automobile group with the largest number of production layouts. According to statistics, Geely's investment projects built in China in the past four years were close to 100 billion yuan.

Its first NEV production base for commercial vehicle brand in Nanchong, Sichuan has an investment of 7 billion yuan, the estimated investment of the phase-II of the project to be built will reach 6.8 billion yuan. Geely also invested 7.2 billion yuan in Yiwu, Zhejiang to build a NEV production base with an annual production capacity of 100,000 units and signed a 32.6 billion yuan investment with Huzhou City for a new factory. The planned new production capacity is over 1 million units.

According to the group management structure, Zhejiang Geely Holding Group currently has five business segments and 16 brands, not including the two joint ventures established with Daimler. Such a scale and volume basically exceeds the two major international automobile groups of Volkswagen (13 brands) and Toyota (6 brands).

Based on the sales data for the whole year of 2018, the cumulative sales volume of the brands of Geely exceeded 2.15 million units. The annual sales volume of Volkswagen and Toyota is basically five times that of Geely. In addition, in terms of profitability, there’s also a large gap between Geely and the other two major automobile groups. According to the financial report released by the world's top 500 list in 2018, Geely's revenue is less than one-sixth of that of Toyota and Volkswagen. Toyota's profit is 12 times that of Geely.

However, Geely's own scale and funds are difficult to support Geely's large-scale acquisitions and investments in recent years. We learnt that Geely's overseas sources of funds are wide, including different investors in the United States, Europe. In China, part of the funds is obtained through Geely's own guarantees and mortgages. And the other part comes from local government investment and subsidies.

Some industry insiders commented that using production to spur local funds and resources, and use capital to incite technology and the market may be an important reason for Geely’s frequent acquisitions in the future. While another senior expert believes that large-scale frequent acquisitions not only require sufficient funds, but also the corresponding reserves of talents, technology, and management experience, which is the so-called system capability, and the market environment needs to be friendly. However, with Geely's volume and charging capacity, coupled with the current global and domestic auto market downturn and the sluggish capital market, it is necessary to sustainably support such a large scale. The risk should not be underestimated.

To break clamps for survival?

Yang Xueliang responded: "We have good business indicators and Geely is developing steadily."

However, a Geely insider revealed that the salary adjustment of Geely staffs was not happened for the first time. It was mainly based on market share, which means that the better the sales, the higher the income. There is also a report that Geely is cutting inventory of the National-IV emission standard models. Geely requires P8 and above staffs with administrative duties to buy a LYNK&CO 01, the prepayment is 20,000 yuan, and the rest will be deducted from the salary. It is said that if the Chinese auto market continues to slump, the scope of internal sales may be extended to P7 and P6 staffs.

In addition, over the years of continuous expansion and acquisition, where the nearly 200 billion yuan of investment came from? According to the data from choice.eastmoney.com, Geely Holdings’ debt in the third quarter of 2018 was 220.52 billion yuan, an increase of 34.27 billion yuan from the beginning of the year, and the asset-liability ratio was 67.15%, higher than the industry average. It was also revealed that Geely used to issue bank tickets and bonds to repay bank loans.

According to the retail data released by China Passenger Car Association (CPCA), Geely's sales in the first four months of this year were 444,000 units, down 13% year-on-year. Particularly in April, the decline was expanded to 23.7%, and the monthly sales were less than 100,000 units. What does it mean for the company selling 30,000 less new cars a month? It will lead to larger dealer inventory pressure, and will also affect the factory scheduling plan, thus, will increase the operating costs of upstream suppliers.

According to the latest disclosures on the Hong Kong Stock Exchange, Geely's four senior executives reduced their holdings of Geely's stocks last month, and the total reduction of total stocks was 26.945 million shares. This is obviously not good news. In addition, as of the close of May 16, Geely's closing price was HK$13.44 per share, compared with a share price of HK$22.92 per share in the same period last year, down 41% year-on-year.

In addition, Geely Automobile has also been criticized for driving down prices and the delay of supplier payments. At the same time, it has been repeatedly exposed to the arrears of the partners, coupled with a series of problems that have been basically confirmed that some employees' salaries and year-end awards being reduced. All these led to a speculation that there are problems in the Geely capital chain.

Geely's biggest overseas investment that it bought $9 billion shares of Daimler has also changed

At that time, Geely make the acquisition of Daimler's equity as a long-term strategic investment. They used a low-risk, medium-yield option portfolio strategy, named “Collar Options”, which will set investor losses and returns in an interval to control risk. Li Donghui, director, executive vice president and CFO of Geely, said that the content of the agreement has locked the stock down to a very small range. In the past year, Daimler’s stock has suffered a serious loss, with the highest rate approaching 30%. The content of the agreement is hard to know, but it is clear that such a decline has crossed the range of the minimum decline.

As early as Jan. 11, Bloomberg reported that Geely sold half of Daimler's shares because of the collapse of Daimler's shares. Although Geely denied, it is clear that the incident is related to the option agreement "collar options".

According to notifications released by Daimler, Morgan Stanley and Bank of America have changed Daimler's shareholdings since last November. In a recent notification, Bank of America increased its shareholding in Daimler to 3.12%, including 16.06% of voting shares.

It is mentioned in other explanatory remarks: Geely owns a 9.69% stake in Daimler, which is related to a collar transaction and a back-to-back trading collar transaction. Under the transaction agreement, Bank of America can obtain a 9.69% voting rights of Daimler AG. In other words, this means that the 9.69% voting rights of Daimler held by Geely will be temporarily controlled by Bank of America. In this regard, IIA tried to confirm with Yang Xueliang, but he replied: "No comments."

The above mentioned senior expert believes that Yang Xueliang's response to the "reduction of salary" is hardly convincing. The falling stock prices, falling sales, and huge investment losses are clearly not "good business indicators." The so-called “employees will get a higher return after the goal is completed” is still unclear whether the goal can be completed. It now appears that Geely’s goal to sell 1.51 million vehicles in 2019 and 2 million in 2020 has gradually drifted away, and the possibility of “reduced returns” is even greater. It is necessary to turn a bad information into a positive one, which is obviously "excessive public relations." But no matter what, Geely's lack of money is true. On the other hand, Geely still needs a lot of money for projects. For example, Lotus needs a lot of investment in building factories in China. The smart joint venture project is just around the corner. Once the capital chain has serious problems, it is inevitable that the crab breaking clamps for survival.

A large investment in domestic and foreign projects has made Geely look good. But it has to bear greater risks as well. Geely's current mode of operation is more like a gamble. Will Geely keep good luck all the time?