FREE

CSCI-Auto-Geely (175 HK)：New Lynk 1.5T model to relieve supply constraints - 20180308

New Lynk 1.5T model to relieve supply constraints

• Geely’s total sales (exclude Lynk) jumped 38% YoY during Jan-Feb 2018, representing 17% of its annual sales target, with the strong sales cycle likely to be further strengthened with the launch of the new models equipped with the newly developed 1.5T powertrain system in FY18E, in our view.
• We expect the Lynk 01 1.5T model, with engines to be produced in its newly acquired powertrain facilities and launched in 2Q18, would alleviate the supply constraint (due to shared capacity with Volvo) that has restricted a substantial ramp-up in the shipment volume of the Lynk 01 2.0T.
• Despite Lynk will likely barely contribute any profits in FY18E, we anticipate this brand will turn profitable in FY19E, and thus, we have factored in Lynk’s valuation based on its FY18E 1.8x P/S (Geely currently trades at a valuation equivalent to FY18E 1.5x P/S), and raised PT to HKD30. Maintain BUY.

New 1.5T+7DCT powertrain system to be equipped on most of Geely new models in FY18E. With one-third less working days in Feb-18 as compared to Jan-18 due to the Chinese New Year holidays, Geely saw total shipments fell 26% MoM to 110,243 units in Feb-18. Nonetheless, with the shipment figure still representing a 24% YoY growth, Geely’s total sales jumped 38% YoY for the Jan-Feb 2018 period with 17% of its annual sales target achieved subsequently. We believe Geely 3.0 models have remained on a competitive upcycle and sales are likely to be fueled by new models like the Vision SUVs (both Vision X3 and S1 monthly sales remained above 10k units) and MPVs etc. Meanwhile, the brand new 1.5T+7DCT powertrain system jointly developed with Volvo, which will be equipped in most of the new Geely models in FY18E, should provide substantial improvement in power performance, in our view. In view of the continuous strong shipment momentum, we have revised up our sales forecast for FY18E to 1.66mn units from our previous estimate of 1.6mn units.

Lynk 01 production capacity constraints will be mitigated after the launch of the 1.5T model in 2Q18. During the past few months since the launch of the new 2.0T model, Lynk 01 monthly sales have been maintained at only around 4K-6k units, which were lower than expected earlier primarily due to the supply shortage of 2.0T engines given the limited production capacity in both the Zhangjiakou and Luqiao plants, as Lynk 01’s 2.0T engines were basically derived from Volvo Drive-E T4 engines, which meant that both plants will also supply engines to domestically produced Volvo models and thus constraining the supply of 2.0T engines for Lynk 01. However, we expect the new Lynk 01 1.5T models scheduled to be released in 2Q18 would largely alleviate the supply constraint issue given that production of the 1.5T engines will not share the same plants with the current Volvo 2.0T models but instead will be mainly assembled in the newly acquired powertrain facilities in Dec-17 located in Baoji (宝鸡), Yiwu (义乌) and Ningbo (宁波). In addition, the starting price of the Lynk 01 1.5T models will be lowered (Lynk 01 2.0T: RMB158k up) which should drive shipment growth, in our view.

PT raised after factoring in the Lynk contribution. On assumption of the Lynk brand may turn profitable from FY19E, we have included Lynk’s contribution in our valuation of Geely based on its FY18E 1.8x P/S (Geely currently trades at a valuation equivalent to FY18E 1.5x P/S), and raised our PT to HKD30. Maintain BUY.