China’s Geely Auto Stuck in Neutral (F, TM, HMC)


Hong Kong-listed Geely Automobile Holdings Ltd. reported net profit rose 35% in 2009 to $173 million on sales of about $2.07 billion. The largest privately-owned Chinese car maker sold 325,413 cars in 2009, 59% above its 250,000-unit target.

While that sounds like good news, analysts were expecting better. Net profit was expected to be around $235 million, and the company failed to equal the Chinese auto industry’s sales growth of 53%, registering a disappointing 48% increase from 2008.

The company is targeting sales at 400,000 units for 2010, and has announced that first quarter sales reached 102,838, up 68% from a year ago and 26% of Geely’s 2010 target.

Geely’s problems were lack of capacity, a greater proportion of sales of lower-margin vehicles, and lack of demand from foreign markets. The company plans to boost its profits in 2010 by introducing a number of higher-priced models, cutting costs for parts and raw materials, and increasing is foreign sales.

That strategy has a few holes. First, it’s virtually certain that steel prices will rise as a result of the higher prices for iron ore. China has resisted the iron ore price hikes so far, but it’s ability to make steel without importing iron ore will last only as long as its current stockpile, which is estimated to be about two months worth. Second, even if Geely doubles its foreign sales that amounts to fewer than 40,000 units of the 400,000 total the company plans to sell for the year.

The government has also made some adjustments to its stimulus package that led China auto buyers to purchase more than 13 million cars in 2009, displacing the US as the world’s largest automobilie market. The stimulus deal has been extended thru December 2010, but it cuts the tax break on small cars and raised the subsidy for trade-ins. That means that if Geely can’t get its act together for its planned higher priced cars, it is likely to see even softer profits this year.

The elephant in the room, of course, is competition from foreign automakers like General Motors, Ford Motor (F), Toyota Motors (TM), Honda Motors (HMC), and Audi/Volkswagen. GM’s sales in China for the month of March totaled 230,048. VW sold 19,543 vehicles in China in March, up nearly 65% from a year ago. For the first three months of 2010, VW sales are up more than 77% in China, to 51,449 units. Toyota sold 61,200 cars in China in March, and Honda sold nearly 62,000 in the same month.

Even amid the Toyota recall, sales at TM are strong. Honda stock is unaffected despite a similar but much smaller brake recall. And despite news of a Toyota dividend cut, shares have stayed firm lately.

GM sold more cars in China in March than Geely did worldwide in the entire first quarter. Ford, which is selling its Volvo Car Corp. to Geely’s parent company for about $1.8 billion, sold 153,368 vehicles in China in the first quarter of 2010, up 84% from a year ago. Note that Ford’s sales are higher than Geely’s for the 2010 first quarter — and most people don’t think of Ford as being a big player in the China auto stock market.

The Chinese market is critical both to GM and Geely. However, it’s GM’s life support system. Without sales in China, GM is history.

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