Geely Auto Financial Report Analysis

Geely simple machine Financial Report abbreviation 1. 0 Executive Summary This get across discusses the details of the Geely move Company and an depth psychology of its financial avowals in the past 5 yrs. The purpose of the report is an application of the knowledge learnt from the Financial Statement Analysis course, and tries to give recommendations. Rather than giving simple suggestions want deal, mete out or hold the stocks, it is hoped that by analyzing the financial statements, the data fag end provide support for the recommendations much(prenominal) as the future scratch and loss of Geely.As wholeness of the four largest independent private automobile manufacturers in mainland China, Geely Auto has been expanding rapidly. The sale of Geely has add-ond from cc units in 1998 to 329. carbon units in 2009. In addition, in 2010, the grease ones palms of Volvo prominently increases the reputation of Geely. Although the acquisition just happened few months ago, it is believed that it will beneficial to increase the jibeet p execrable. Further SWOT compendium show ups that, the well-established gross revenue meshworkwork and the wildness on R&D capabilities will have a irresponsible effect on the future increment of Geely.Moreover, the external environment such(prenominal) as the continuous growth in Chinese market and government policy support shows a promising future for Geely. However, at that place ar also threats populate outside the market and weaknesses inside Geely. It is re in ally troublesome to give any suggestions by simply analyzing the application and outside environment. Therefore, the report mainly focuses on the analysis of the financial statements. Analysis includes the gravid structure and solvency, liquidity, operating performance and profitability, and interchange take to the woods statements.By using common-size analysis, proportionality analysis and trend analysis, taking the rapid expansion in recent 5 y rs into consideproportionn. Though some forces turn out to be either not satisfactory or below industry average, the overall performance of Geely is quite good. Geely was using its money effectively and investing the money in the right place in the past 5 geezerhood. It is recommended to vitiate Geely Stocks, with the potential growth in their production and profitability. It is quite pessimistic that the earnings of Geely is going to increase and therefore the stock price in future. . 0 invention Geely Automobile Holdings is a Chinese automaker and is with BYD, Chery, and Great Wall, one of the four largest independent private automobile manufacturers in China. Geely is now headquartered in Hangzhou, Zhejiang, and operates six auto assembly and power-train manufacturing plants in China that are located in Lanzhou (Gansu province), Linhai (Zhejiang province), Luqiao (Zhejiang province), Ningbo (Zhejiang province), Shanghai and Xiangtan (Hunan province). These facilities enable a production capacity of approximately 300,000 cars per year. 2. Brief History Geely (Jili, pith auspicious, lucky) was founded in 1986 as a manufacturer of refrigerators, and then moved to manufacturing decoration materials in 1989, and by 1992, motorcycle parts. In 1994, Geely began manufacturing motorcycles. By 1996, Geely had produced over 200,000 motorcycles and scooters. Automobile production started in 1998. Geely began exporting its premier cars in 2003. Geely had its IPO on the Hong Kong Stock Exchange in 2004. Purchase of Volvo Geely was reported to have approached Ford in mid-2008 about a possible takeover of Volvo Cars.On October 28, 2009, Geely was named as the preferred buyer of Volvo Cars by Ford. On December 23, 2009, Ford confirmed that all substantive technical call for the sale to Geely had been settled. A definitive agreement was signed on March 28, 2010 worth $1. 8 billion, and the deal was completed on August 2, 2010. focussing * Executive directors Mr. L i Shu Fu, Mr. Gui Sheng Yue, Mr. Yang Jian, Mr. Ang, Siu Lun, Mr. Yin Da Qing, Mr. Liu Jin Liang, Mr. Zhao Jie, Dr. Zhao Fuquan * Non-Executive DirectorsMr. Xu Gang * Independent Non-executive Directors Mr.Song Lin, Mr. Lee Cheuk Yin, Mr. Yeung Sau Hung * Senior Management Mr. Zhang Peng, Mr. Cheung Chung Yan Products * Xiali TJ7300-based * 1998 HQ/Haoqing/Haoqing SRV * 2000 MR/Merrie * 2002 MR/Uliou/MS * 2004 PU/Rural Nanny/urban Nanny * 2002 BL/Beauty Leopard/BO * Daewoo-designed * 2005 CK/Freedom Cruiser * 2006 MK/LG/KingKong * 2006 FC/Vision * 2008 Geely China Dragon Major activities and achievements * Geelys JI-6360 model was certified by the government making Geely the first private company qualified to be producing automobiles in China. First Chinese automaker present at the Frankfurt Motor Show in phratry 2005. * First Chinese car maker to display at the US Detroit auto show. Winning the Special Contribution Grand Prize for Invention and man for its Blow-out Monitoring and Brake System (BMBS), a unique safety system independently developed by Geely. * In Peru, Uruguay and Venezuela, Geely has already started to sell its products. Geely has also entered the Bangladeshi, Cuba, new-sprung(prenominal) Zealand, Pakistani, Romanian, Turkish and South African car markets. Figure 1 cultivation in sales, source Geely annual report 1998-2009 3. Financial Analysis In the chase sections Geelys capital structure, solvency and liquidity, profitability and cash scarper will be discussed. 3. 1 Analysis of slap-up Structure Geely automobile Holdings Limited Analysis of Capital Structure HK$000 2005 2006 2007 2008 2009 L-Tdebt 87000 1318000 Deferred taxation 8018 37727 other L-T liabilities 682838 309274 0 1442153 Total L-T liabilities 682838 309274 95018 2797880 Current liabilities 54548 227198 5273470 76378 8907789 Total liabilities 54548 910036 5582744 171396 11705669 % 6% 46% 68% 3% 62% common shareholders comeliness 798080 1030157 2441440 41978 62 6375613 nonage vexs 9013 19769 211760 584619 720907 Total equity capital 798080 1049926 2653200 4782481 7096520 % 94% 54% 32% 97% 38% Total liabilities and equity 852628 1959962 8235944 4953877 18802189 100% 100% 100% 100% 100% These consolidated financial statements have been prepared in accordance with Hong Kong Financial Reporting Standards (HKFRSs) -From common-size analysis, we know leverage rate of Geely is stable for year 2006 and 2007, declines sharply for year 2008, and then rebounds strongly to 62% in year 2009. Then look at the absolute value, its not difficult to find out a great rise in both liability and equity capital. In 2009, the total liability is more than a trilion. Referring to its investment and operation in recent years, we find Geely is trading on the equity, which indicates it is using equity capital as a borrowing base in a desire to reap excess returns.This can be confirmed by its step-by-step acquisition of many assembly line and investment on new factories financed by bond and bank borrowing, which is conversely based on increase equity (stock price stimulated by expansion). Those investments are revalued and taken into asset as a new backup. 3. 2 Solvency Analysis Geely Automobile Holdings Limited Solvency Ratios HK$000 2005 2006 2007 2008 2009 D/E ratio 0. 07 0. 88 2. 29 0. 04 1. 84 Interest insurance coverage ratio 7. 66 10. 11 16. 06 15. 46 S-T D/E 0. 22 2. 16 0. 02 1. 0 The computation for Year 2009 is shown here D/E ratio= Total liabilities / Shareholders equity = 2,797,880 / 6,375,613 Interest coverage ratio= EBIT / Interest Expense = 1,657686 / 107,226 S-T D/E= Long-term liabilities / Shareholders Equity = 8,907,789 / 6,375,613 The computation for EBIT is shown below HK$000 2005 2006 2007 2008 2009 Net Profit 115377 214149 318100 866053 1319028 Interest expense 32390 35103 60952 107226 Taxation 1585 1673 51869 231432 EBIT 115377 248124 354876 978874 1657686Since the ratio of debt to eq uity capital is relatively high, we need to take a further look of its financial condition. Before assessing long-term solvency we want to be satisfied about the near-term fiancial excerption of Geely. Unfortunately, Geelys short term debt to equity ratio is 1. 40, quite high in the most recent year. Although it can raise capital from HK listed market, equity is apparently not enough to make up its shortage of capital in short term. According to NOTE, Geely has discounted notes receivable to banks in exchange for cash with recourse in the unremarkable course of business.Therefore, the risk resulting from its speeding expansion not only depends on its own performance, but its customers financial distress. Interest coverage ratio is satisfactory, which means defrayal of the interest liability Geely has incurred on its long-term borrowing is in a less(prenominal) pressure. 3. 2 Analysis of fluidity Geely Automobile Holdings Limited Analysis of Liquidity HK$000 2005 2006 2007 2008 2 009 Industry norm Accounts Receivable Turnover 1. 91 0. 95 1. 99 1. 51 2. 29 19. 47 Acid-test ratio 1. 13 0. 68 10. 44 0. 71 1. 19 Inventory overturn 15. 9 11. 10 8. 36 136. 70 393. 17 31. 79 The computations are as follows Accounts Receivable Turnover = Net sales / Average accounts receivable Acid-test ratio = Cash and equivalents + Marketable securities + Accounts receivable / Current liabilities Inventory turnover = Cost of goods sold / Average Inventory The selected accouts used in computation are here HK$000 2005 2006 2007 2008 2009 Sales revenue 101411 127006 137209 4289037 14069225 COGS 90649 110036 121251 3637752 11528489 Inventory 5703 9910 14498 26611 29322 urrent asset 67212 280681 884331 5110552 12219411 current liability 54548 227198 79559 5273470 8907789 Trade and other receivables 44840 59065 65443 2840255 6144929 Dividend receivable 8220 74840 3560 Accounts receivable 53060 133905 69003 2840255 6144929 cash cash equivalents 8 449 20972 761684 889408 4498155 Marketable security The accounts receivable turnover is much worse than industry average. However, an increase of accounts receivable may due to rise in sales or difficulty in collecting quite timely.Referring to NOTE, we know that receivables are guaranteed by established banks in the PRC and have maturities of six months or less. So the likeliness of timely collection is in less question. The inventory turnover is exaggeratedly higher than industry level, especially after its installment of P-SCM supply chain wariness system, which integrates ordering, producing, selling, and distributing. So we can conclude that Geely is doing excellence in inventory management and is enjoying a growth in market demand of its products 3. Analysis of Operating Activities To be able to make a comprehensive analysis of Geelys activities, both the income statement and the balance sheet have been restated in appendix A and B, such that it is possible to identi fy operating and non-operating income, assets and liabilities. Assumptions regarding classifications are also available in the appendixes. Figure 2 illustration of revenue and operating income, Source Geely annual report 2007 -2009 Figure 2 illustrates how dramatic the development in especially revenue has been the last three years.Net sales are up by almost 200 share from 2008 to 2009, while only a 60 percentage increase in volume is reported in the annual report. Mainly the large growth is a result of full consolidation of the Groups manufacturing Operations. Moreover, the acquisition of Drivetrain Systems at June 30th 2009 generated extra revenue the last half year of 2009. Further the notes reveal that 95 percent of sales are within China in 2010, in 2009 it was only 81 percent. A decline in export can in a future growth horizon be a concern.Geely have improved profit margin over the last three years (18 percent In 2009), while the operating margin have been rather volatile ( Appendix 1). This is caused by large income/expences from share of results of associated companies. It is expected that this account will be less important in the future as some associates now are fully consolidated. A large increase in distribution and selling expenses in 2009 (increase more than 200 percent) is worth to note. It raises questions as can Geely manage all the new acquisitions without getting less effective and the level of earnings quality.No extraordinary or unusual are identified in the financial statement. It is a good sign since these accounts often are subject to earnings management. Comprehensive income is nicely increasing and no unusual increase in unrealized get hold ofs/losses of currency is identified. 3. 4 Analysis of Return on Common Equity This analysis show that the drivers female genital organ the increasing return to common equity is mainly due to heavy increase in asset turnover and an equal percentage increase in leverage. The adjusted profit mar gin has unfortunately been declining heavily over the period.Geely is therefore relying on Non-operating activities to reach the growth in ROCE. From a shareholder perspective is an increase in ROCE due to leverage not sustainable. However it must be noticed that it was only last year the increase in leverage was heavy, while the increase in asset turnover has been for longish. From a financial point of view it can be argued that taking up debt while it is cheap, since the interest rate is presently low, is in the long run better for the shareholders, if the alternative was to finance expansion with more expensive equity.What is critical is if Geely is strong enough to reverse their adjusted profit margin to keep growing healthy. 3. 5 Cash Flow Analysis It is useful to construct a summary of cash inflows and outflows by study categories because we can evaluate a firms sources and uses of cash from operating, investing and funding activities directly. Geely Automobile Holdings L imitedSummary of cash inflows and outflowsYear ended 31 Dec 200X HK$000 2005 2006 2007 2008 2009 TotalOperating activities (7636) (31858) (17747) 550977 948805 1442541 invest activities 5064 (660806) 247079 (274542) (1305946) (1989151) Financing activities 9452 704988 542943 (148711) 3966382 5075054 Increase( decrease) in cash 6880 12324 772275 127724 3609241 4528444 Year 2009 cash reinvestment ratio = (operating cashflow-Dividends) / (Gross plant assets+investment+other assets+working capital) = (948,805- 59,500)/103+(293,697+97,788)+4,185,892+3,311,622) = 11. 27%The summary of cash flow map shows that during fiscal year 20052007 Geely experienced negative operating cash flow. Besides that it has used cash to finance increase in inventory and receivables, the Share of results of associates black eye profits before tax from a positive position to a reverse one as it contributes more than 100% negatively before 2008 to Geelys profit after tax. This may be due to its stag e of growth since total capital expenditures by its operating associates amounts to approximately RMB1 billion, which are mainly funded by the in operation(p) cash flow generated by associates.The insufficient operating cashflow part is made up by financing activities through issuing debt and securities and borrowing from banks. From fiscal year 2008 Geely was able to begin generate positive operating cashflow . However, positive operating cashflow may due to the decrease in its working capital. The cash flow statement shows that payables decreased significantly after 2008, which raises doubt on a possibility that Geely delayed payments to suppliers until its operating cash flow before adjustment of working capital become healthier.The major cash outlay is investing activities, corresponding to its funding for the research and development of new vehicle models, new engines and gearboxes, the construction and expansion of plants. Concerning financing activities, one point should be mentioned here is that Geely borrows with its receivables as collateral, the inflow of cash is reported as a financing activity in the cash flow statement. The second doubt come up when comparing with income statement.Earnings are significantly transcendent operating cashflow, this may be an indication of aggressive accounting choices, such as recognizing revenues too soon or delaying the recognition of expenses. Take a look at the free cash flow statement. From free cash flow to equity (FCFE) we know the cash flow availabel for distribution to common shareholders is sufficient. Along with its satisfactory reinvestment ratio, Geely proves that it is taking finagle of investors. Geely automobile Holdings LimitedFree cash flow statementYear ended 31 Dec 200X HK$000 2006 2007 2008 2009Net income 214149 305767 866053 1319028 Depreciation 1403 2282 141053 364598 intereset expense 32390 35103 60952 107226 net capital expenditure 99304. 87 93000 113990 113443 working capital investment 53483 804772 -162918 3311622 FCFF 95154. 13 -554620 1116986 -1634213 Net borrowing 716000 330000 1061000 4300000 FCFE 584837 219253 1497987 5135362 net capital expenditure = approximate expenditure in RMB* rate of exchange prevailing at the balance sheet date 4. 0 SWOT analysis of Geely Automobile Strengths 1.Continuously Increasing Revenue Geelys gross profit margin has continued to grow over the past few years due to productive company expansion and increasing market shares. The total sales for various kinds of Geely vehicles has accumulated to over 800,000 since 2001, and the Geely trademark has been recognized as a well-known mark in China. It has established over 200 sales service bases overseas, and performed SKD/CKD assembly production and sales in Ukraine, Russia and Indonesia and other countries. 2. Emphasis on Research Development CapabilitiesBy the end of 2009, Geely owns a total of 1,600 technology patents. Geely has a professional research and development team, th e staff number of which exceeds 1,400, representing 12% of the total staff of the Group With its across-the-board investment in research and development, the groups RD team is capable of launching four to five new models every year, reflecting its atomic number 82 position in RD and technology innovation capabilities in Chinas automobile sector. 3. Acquisition of Volvo and Enhanced Green TechnologyNew energy-powered vehicle is the a la mode(p) trend and it will be the future of the instaurations auto industry. Ford and Volvo have already invested billions of dollars over the past decade in terms of new energy technology. Acquiring Volvo may enhance Geelys technology in new energy-powered vehicle area, help Geely take a step fore in competing with other homegrown brands, and pave the way for Geely to enter the global auto market. Weaknesses 1. Accounts Receivables Worse than Industry average Geelys average turnover ratio of accounts receivables from 2005 to 2009 is 1. 3, which i s substantially refuse than the industry average, 19. 47. Although the previous analysis has shown less possibilities of payment collection problem, a low accounts receivable turnover ratio still indicates that there is an opportunity cost of holding receivables for a longer period of time. 2. Image of Lower-end Brand Although Geely has a well-established sales network and growing competence in center field technology, it is hard for Geely to alter its lower-end brand image, since its original target market is low cost vehicle.But branding is about value and perceived quality, so price wholly can never facilitate a victory. Enhancing quality and ensuring that its cars are on par with the global leading brands are still a major scrap for Geely. 3. Less Advanced Technology Despite the vast amount of investment in research and development, capital and talents for automobile core technology are limited, and it is hard for Geely to compete with the advanced technology of foreign auto mobile manufacturers. 4. Unsatisfactory Sales in Export Markets Motor vehicles sales in most parts of the world market remains fragile.As a result, Geely exports business could continue to face major challenges given the fierce competition and the short history of operation in its major export markets. Opportunities 1. Continuous Growth of China Sedan Market Chinas passenger vehicle market ended last year with a 59 percent year-on-year sales increase to surpass the United States as the worlds largest auto market for the first year. According to estimate of Goldman Sachs world(a) ECS research report, growth in China car market will be remained for the next 10 years and the industry GDP growth will be 11. % in 2010 and 10% in 2011. Goldman Sachs Global ECS research teams forecasts that China will further boost its No. 1 position in the car market with sales reaching 30 million units per year by 2020. 2. Government Policy Support In the past few years, the focus of Chinese government policies for automobile industry is to boost sustainable growth in the economy with auto industry as one of its pillars and to support domestic participants and industry consolidation. Threats 1.Fierce Competition from both Domestic and abroad Brand The huge profit potential of China car market brings about fierce competition among both local and foreign automobile manufacturers. In the luxury automobile market, foreign manufacturers are in leader position due to their sophisticated technology and high brand recognition. While in lower end automobile market, local brands are strong competitors. 2. Possibility of Overcapacity in China Auto Market Some industrial experts concern that Chinas market may one day face vercapacity problems. A report from the official news portal of Chinas eastern Zhejiang province showed that, based on the production plan of Chinas 12 major auto manufacturers for the next five years, Chinas auto production would reach 32. 5 million units in 2015, far exce eding the forecast of 22 million units in the blue book of Chinas automobile industry. If Overcapacity problems occur, serious overproduction capacity will lead to negative market competitiveness a loss in enterprise efficiency, factory stoppages and other problems. . 0 Analyses of management discussion and analysts idea Appendix C summarizes some psychoanalysts view of Geely. However, not all Analysts agree upon whether you should sell, hold or buy the stock. Several reasons are discussed in the respective reports though all analysts agree that Geely is a healthy company with a stable revenue base, increasing volume and satisfactory margins. What analysts do not agree upon is whether Geely can maintain their growth potential and gain market share in both the domestic and export market.The penetration in the Chinese passenger car market is extremely low compared to USA and Europe (JP Morgan, 2010) and as the Chinese people are getting wealthier the market potential will increase th e upcoming years. Loads of Automobile manufacturer will compete to gain market share and earn extraordinary profit. Credit Suisse and CIMB are representing the negative analysts who believe that domestic market competition will increase as the warm competitors have invested heavily in the industry and developing of new brands (CIMB, 2010).Geely Management has not explanationed upon this in their report, but instead they emphasize they have sufficient notes to cover investments and R&D expenses to facilitate their own growth. Additionally, Credit Suisse (2010) emphasize that every auto manufacturer in the Chinese market are currently investing in production facilities. Credit Suisse is therefore worried it will result in an oversupply and consequently make inventories to rice. To bring inventories down a price war on vehicles can arise. This will affect margins negatively.JP Morgan represents a positive analyst that strongly believe that the current acquisition of Volvo will resul t in synergy effects and a technology platform that no one else can imitate in the near future. Further JP Morgan is confident that the low penetration of vehicles in the domestic market will ensure future growth, and therefore recommends buying the stock. DBS, Deutche Bank and Yuanta are recommending holding the stock, since they believe there are too many uncertainties connected to Geely and the future. Especially they all emphasize the lack of a clear growth catalyst to outperform the market.Further, the acquisition of Volvo seems to have longer prospects before profiting than expected at first hand (CIMP, 2010). As expected Geelys management discussion is very positive towards the future and leaves the shareholders with the impression of a highly growing company with a healthy economy and a clear defined strategy, although it is noticed that very little space is used to comment upon the current competition in the market. Instead Geely Management has chosen to focus at their new strategic platform and how they can develop brands and product lines into a competitive advantage (Geely, 2010).It can be interpreted as an indirectly method to cope with the market competition without discussing the situation in detail. Shareholders, however, must be aware of this matter when evaluating the business. Even though current revenue is increasing heavily one must consider how sustainable this growth rate is in the future. It can be concluded that Geely Management are slightly taking a too positive approach towards the current market conditions, since these are not discussed in depth and analysts report emphasize different issues than Geely.This analysis facilitate that there are no universal answer to trading with stocks. We all wants to buy the stocks that are undervalued and sell the ones that are overvalued, and the answer you get depends on the method, forecast and strategic mindset of the analyst. Geely is without doubt a healthy company so the buy, held, sell deci sion lies within how you value the growth opportunities, how Geely can facilitate R&D and implement acquisitions and thereby benefit from synergies. 6. 0 RecommendationGeely have the recent years had an expansion strategy, and as a consequence a high level of investment. This has resulted in a higher leverage and that earnings significantly are exceeding cash flows. However this is also a natural picture of a company in an expansion phase. It is found that Geely has satisfactory interest rate coverage even though leverage is increasing. Furthermore, accounts receivables is found worse than industry average, but good bank agreements make it easy for Geely to meet liquidity issues. Inventory turnover is also good, as the focus on SCM systems have proven its worth.This is moreover expressed in the increased asset turnover which partly is the driver behind the increasing ROCE. However it is important to note that the adjusted profit margin is declining. The overall performance shows inc reased revenue/earnings, but it is very difficult to delineate the earnings quality since most of the rise is due to consolidation and acquisitions. The positive free cash flow and satisfactory reinvestment ratio shows that Geely are taking care of investors. SWOT analysis identifies possible business catalyst as R&D and the new acquisition of Volvo that could create synergy effect.It is our opinion that these business drivers are rather uncertain but is very likely to succeed and combined with Geelys current healthy financial situation we are taking a positive approach towards Geely and recommends to buy the stock. 7. 0 Bibliography Geely Automile Holdings Annual report 2005-2009 Investment Reports DBS (8. June2010) Hong Kong/ China Company Focus Geely Automobiles Holding DBS Vickers Securities Analyst Miu, Rachel Credit Suisse (12. July 2010) Asian Daily Geely Auto Credit Suisse Analysis Analyst HungBin Toh CIMB (28. Sep. 010) Geely Automiles Holding LTD CIMB Reasearch Analyst C heam, The Shen JP Morgan (26. Sep. 2010 ) Geely Automiles Holding LTD Initiating Coverage, JP Morgan Asia Pacific Equity Research Analyst by Li, Frank Deutche Bank (26. Aug. 2010) Geely Automiles Holding LTD Deutche Securities Asia LTD Analyst Ha, Vincent Yuanta (26. Aug. 2010) Geely Automiles Holding LTD Yuata Research Analyst Wong, Johnny Websites Reuters (http//www. reuters. com/finance/stocks/analyst? symbol=0175. HK) Appendix A Restated income statement Appendix B Restated Balance SheetAppendix C Overview of Analysts opinion Source Reuters (http//www. reuters. com/finance/stocks/analyst? symbol=0175. HK) 2 . Industry average figure reference http// www. stats. gov. cn 3 . Property, plant and equipment are depreciated on a straight-line tooshie at the following rates per 4 . Goldman Sachs, China Automobiles, May 19, 2010 5 . Business Monitor International, BMI China Autos Report 2010, November 2009 6 . Global Times, Chinas Expanding Auto Production Triggers Overcapacity Concerns, July 19 2010