Geely’s 1H Earnings Missed; but Lifting FVE to HKD 20 on Positive Signs of New Energy Initiatives

We raise our fair value estimate for Geely to HKD 20.00 from HKD 13.60 as the company’s new energy initiatives start to gain positive traction. We reduce our 2022-23 net profit forecasts by 17%-33% to reflect weaker-than-expected first-half margins but lift 2024 earnings by 5% and longer-term assumptions to factor in long-term earnings potential from higher new energy vehicle, or NEV, contribution. Excluding the estimated Zeekr valuation on peers’ average 2 times forward price/sales ratio, our fair value implies a 2023 price/earnings ratio of 13.7 times for the remaining group, which is at a 9% discount to its historical average of 15 times. With first-half 2022 earnings below market expectation, a consensus earnings revision down is likely, but we see value at the current share price. We project 2022 to be the profit trough. With a strong NEV model portfolio, we anticipate Geely to deliver a 28% net profit CAGR in 2021-24 with long-term value creation potential through the launch of Zeekr.