March 22, 2017 / 4:37 AM / 4 months ago

China's Geely doubles earnings as Volvo tech boosts sales

4 Min Read

FILE PHOTO: Employees work along a Geely Automobile Corporation assembly line in Cixi, Zhejiang province June 21, 2012.Carlos Barria/File Photo

BEIJING (Reuters) - China's Geely Automobile Holdings Ltd (0175.HK) posted its biggest profit growth in eight years on Wednesday, as improved product design and engineering following its 2010 purchase of Sweden's Volvo helped propel it to record sales.

Geely, which also owns the maker of London's black cabs, has already forecast a 31 percent jump in sales for the current year as affordable models introduced after the Volvo acquisition, such as its GC9 sedan and Boyue sport-utility vehicle, exceed initial estimates.

Long seen as a no-frills brand, Geely has transformed itself into an automaker with up-market aspirations, using its Volvo research-and-development advantage to climb the sales table in the world's largest auto market where it ranks around seventh.

Come next year, Geely plans its next phase of expansion as it aims to become China's first automaker to market its own brand - new Volvo collaboration Lynk & Co - in developed markets, beginning with Europe and the United States.

Entering major markets with an unknown Chinese brand is an expensive risk, analysts say, but investors are unperturbed: Geely's share price has trebled over the past 12 months.

"It's a total turnaround story," said a fund manager at a Taiwan-based investment firm that bought a significant amount of Geely stock last year.

"Before it was just a normal domestic brand, but after several new product launches it successfully elevated its brand image," said the person who was not authorized to speak publicly on the firm's investments and so declined to be identified.

Geely's China sales grew 50 percent last year to 766,000 vehicles, powered by the GC9 and Boyue, as well as small cars featuring Volvo technology. It aims to top 1 million this year, though could sell far more depending on market conditions, a Geely official with direct knowledge of the matter told Reuters.

For 2016, net profit more than doubled to 5.1 billion yuan ($741 million), its strongest growth since 2008. The figure is set to rise 37 percent to 7 billion yuan in 2017, showed a Reuters poll of analyst estimates prior to Geely's Wednesday filing.

Geely shares were down 1.2 percent in early afternoon trading after the earnings release.

Overseas Gamble

To be sure, growth has come at a cost. Geely and parent Zhejiang Geely Holding Group Co Ltd [GEELY.UL] have spent 10 billion yuan on R&D in each of the past three to four years, or about 15 percent of current revenue, said spokesman Victor Yang.

That compared with 2 billion yuan in 2015 at domestic rival BYD Co Ltd 002594.SZ, showed Thomson Reuters data.

But Geely's domestic growth spurts could lessen as expansion in China's overall passenger car market slows following the reduction of subsidies for small-engine vehicles, adding impetus to any international push.

"The current focus of our work is firstly the pace of development in China and increasing our share of the Chinese auto market, then next we can focus our work abroad," Geely Chairman Li Shufu told reporters in Beijing earlier this month.

But entering markets where the brand is unknown is a gamble, and it could take years to gain traction, said James Chao, Asia-Pacific chief of consultancy IHS Markit Automotive.

As there is plenty of room for growth in China, however, there is no need to be concerned about the move abroad, said fund managers at two investment firms that hold Geely stock.

"If they do well abroad it's a bonus, and if they don't then it's not a big reason to worry," one of the managers said.

Reporting by Jake Spring and Norihiko Shirouzu; Editing by Adam Jourdan and Christopher Cushing

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