On August 21, Geely Automobile Holdings Limited (0175.HK, hereinafter referred to as "Geely Automobile") and ZEEKR Intelligent Technology Holding Limited (NYSE: ZK, hereinafter referred to as "ZEEKR") released their semi-annual report for 2024.
Geely Automobile's semi-annual revenue exceeded 100 billion yuan, a year-on-year increase of 47%, and its net profit surged nearly six times, reaching the highest level in its semi-annual report history; ZEEKR's gross margin reached 15%, the highest level since the official delivery of its products. The impressive performance of Geely Automobile and ZEEKR is attributed to the significant increase in sales volume. In the first half of 2024, the total sales volume of Geely's automotive brands, including ZEEKR, Lynk & Co, Geely, and Geometry, increased by 41% year-on-year, with ZEEKR's sales volume growing by 106%. At the same time, the system capabilities of Geely Group also played a key role. The actual controller of both Geely Automobile and ZEEKR is Li Shufu. Over the course of about 20 years of development, Li Shufu has built a complex system through Geely Holding Group (hereinafter referred to as "Geely Holding"), with operating entities including Volvo Cars, Geely Automobile, Geely Technology, Lynk & Co, ZEEKR, LEVC, Lotus, Radar Automobile, Geely Xinwangda, etc., covering businesses such as automobiles, power batteries, satellite communication, finance, education, mining, and general aviation. Geely Holding supports the financial performance of Geely Automobile and ZEEKR through business and financial synergies between them.
Financial Skills
ZEEKR is an innovative new energy vehicle company. Such companies have a large initial investment scale, and their products are in the market development phase, generally incurring losses. Net profit is not a key indicator, and what is more concerned is the gross margin and its trend of change, cash reserves, etc. The gross margin reflects the production and sales efficiency of the vehicle company, and the latter reflects its financial health. The financial report cards of Geely Automobile and ZEEKR both rely on the support of Geely Holding. For example, the significant increase in Geely Automobile's net profit in the first half of 2024 is crucially due to several equity operations by Geely Holding. In November 2022, Geely Holding and Geely Automobile signed a framework agreement with Renault to establish a joint venture, integrating their powertrain technologies and capacities, including internal combustion engines, hybrid power, plug-in hybrid power, methanol internal combustion engines, etc., and using this company as a platform to provide products and services for the global vehicle plants of the three car companies. According to the arrangement of Geely Holding, Geely Automobile, and Renault, on May 31, 2024, the three parties will inject their respective assets into the newly established joint venture, completing the capital contribution and company establishment. The joint venture is named Horse Powertrain, registered in the UK. Geely Automobile will inject its wholly-owned subsidiary AUROBAY into Horse Powertrain, holding 33% of the equity of Horse Powertrain after the completion. After the transaction, Geely Automobile's equity in AUROBAY was diluted from 100% to 33%. According to the financial rules of the Hong Kong stock market, this transaction is regarded as Geely Automobile selling 67% of AUROBAY's equity, and the consideration for this equity was recorded in Geely Automobile's profit and loss statement, accounting for 7.66 billion yuan of income. This income accounts for most of Geely Automobile's net profit of 10.6 billion yuan in the first half of 2024. In addition, in February 2024, Geely Automobile sold its previously held 45% equity in Chongqing Rui Lan to other entities within the Geely Holding system, adding 160 million yuan of investment income to Geely Automobile's semi-annual profit and loss statement in 2024. On the ZEEKR side, it also benefits from the business arrangements of Geely Holding. First, ZEEKR 100% owns Zhejiang ZEEKR Automobile Research and Development Co., Ltd., and its personnel scale increased from 2,582 people in 2021 to 5,677 people in 2022. ZEEKR's R&D department provides R&D services to other entities within Geely Holding, earning 630 million yuan in gross profit for ZEEKR in the first half of 2024, contributing 12% of the total gross profit, with a gross margin as high as 40%, raising ZEEKR's overall gross margin. Second, ZEEKR's main business scope includes R&D, procurement, sales of electric vehicles and other related products, and related services, but ZEEKR itself does not engage in manufacturing. In terms of manufacturing, ZEEKR entrusts it to the Ningbo ZEEKR factory, Chengdu factory, and Meishan factory under Geely Holding, such as producing ZEEKR 001 and 009 models in the ZEEKR factory, and producing ZEEKR X models in Chengdu, with ZEEKR paying Geely Holding for raw material costs and processing fees. For start-ups, building their own factories requires investment and depreciation, but has stronger control. However, ZEEKR places the factory outside the financial statements, which can shed the burden and start light, while the factories belonging to Geely Holding are still highly controllable. This can not only improve the gross margin but also mobilize the world's most advanced factory production lines at any time, which is the state many start-up car companies yearn for. ZEEKR entrusts Geely Holding to produce cars, and the payment for the purchase of cars has a payment period, which will not immediately consume ZEEKR's cash. ZEEKR and Geely Holding can adjust ZEEKR's cash flow by adjusting the payment period at any time. As of June 30, 2024, ZEEKR's accounts payable and bills were 15 billion yuan, and the amount payable to related parties was 13.7 billion yuan, close to the total amount of accounts payable and bills. The two payables together accounted for 76% of the total liabilities. Because there are no heavy assets such as factories, ZEEKR's liabilities are mainly reflected in various payables. At the same time, ZEEKR's cash and cash equivalents were 5.496 billion yuan, and the restricted cash exceeded 80 billion yuan, reaching a historical high. In addition to special business arrangements, Geely Holding Group also provides financial support to ZEEKR. In 2022, ZEEKR obtained loans of 9.7 billion yuan and 1.6 billion yuan from within the Geely system, with a loan term of 10 years each; on May 10, 2024, when ZEEKR went public in the US stock market, it issued a total of 24.15 million American Depositary Shares (ADS), raising funds of 3.1 billion yuan, of which Geely Holding subscribed to 12.9 million shares, valued at 1.956 billion yuan. Through such collaboration, Geely Automobile and ZEEKR each take what they need, optimize financial indicators to the greatest extent, ZEEKR optimizes cash flow, and does not bear the risks brought by heavy assets of factories, focusing resources on R&D and sales business, achieving more breakthroughs in technology and sales. Geely Automobile has obtained a higher net profit growth rate, showing stronger confidence in dealing with price wars. However, Geely Holding needs to pay a price. Geely Holding's revenue and profit mainly come from Volvo Cars and Geely Automobile. As of the end of 2023, Geely Holding's shareholding ratios in the two were 79% and 40%, respectively, and both were consolidated statements. From 2022 to 2023, Geely Holding's revenue increased significantly. Especially in 2023, as the overseas automobile market improved, Volvo Cars' revenue increased by 27%, and Geely Automobile also increased by 21%, driving Geely Holding's operating income to increase by 23%. However, from 2022 to 2023, Geely Holding's net profit attributable to the parent company continued to decline, which was the key period for Geely Holding's electrification transformation and the creation of the ZEEKR brand. In addition, in November 2023, Geely Holding reduced its holdings in Volvo Cars, obtaining about 2.5 billion yuan in cash, and its shareholding ratio decreased from 82% to 79%, and the net profit attributable to the parent company distributed by Volvo also slightly decreased. Geely Holding has not yet released its semi-annual report for 2024, but as of the first quarter of 2024, its finances have returned to an upward trend, and the net profit attributable to the parent company has returned to growth.Geely Automobile has been the top-selling Chinese brand for many years, but was successively overtaken by BYD and Chery in 2022 and 2023. According to the Passenger Car Association, Geely's wholesale sales volume increased by 41% in the first half of 2024, second only to Chery's 52.3%, and surpassing BYD's 28.8%. In particular, Geely's new energy vehicle (NEV) business has grown rapidly, with retail sales volume in the first half of 2024 increasing by 118.2% year-on-year, breaking through 300,000 units, and ranking second in sales, only behind BYD and surpassing Tesla. In terms of scale, Geely also narrowed the gap with BYD and Chery in the first half of 2024. Among them, Zeekr's growth rate is only behind Seres and Zero Run. If we only look at pure electric vehicles, Zeekr is the brand with the best comprehensive performance in sales and growth rate in the first half of 2024. The brands included in Geely's sales statistics are Geely, Galaxy, Zeekr, Lynk & Co, and Proton. Among them, the main sales force of the Geely brand was previously the Boyue L, Xingyue L, and Bin Yue, all of which were sales stars in the SUV market of the fuel car era. In the first half of 2024, the sales of Boyue L and Bin Yue slightly decreased, while Xingyue L's sales increased by 54% through promotions. Geely's fuel cars achieved a 20% growth in the shrinking fuel car market, maintaining the basic sales volume. The Galaxy brand launched new models L6, E8, and E5 in 2024, and sales increased significantly; Zeekr updated its main models 001 and 009, and sales doubled; Lynk & Co relied on new models such as 08 and 07 to drive sales growth and outperform the market. However, good sales growth and financial performance have not reduced Geely's competitive pressure. First, fuel cars are still the basic business of Geely, accounting for more than 60% of sales. Under the overall shrinkage of fuel cars, Geely's fuel car business is under downward pressure. In July's Chinese passenger car market, the retail penetration rate of new energy vehicles exceeded 50%, and from August 1st to 18th, the wholesale and retail penetration rates of new energy passenger cars both exceeded 50%. The market is accelerating the switch to new energy, and Geely's main models Boyue L, Xingyue L, and Bin Yue, three fuel cars, account for about 30% of Geely's total sales. The 100,000-unit increase in fuel car sales in the first half of 2024 was basically contributed by export growth, but the export market has uncertainties, and the fuel car business, which accounts for 66% of sales, is under greater pressure. The Lynk & Co brand was still in a loss in the first half of 2024, and its main models are in the 100,000-200,000 yuan price range, with more and more competing models at the same level. Zeekr is also in the investment stage that needs the parent company's support. These businesses all need continuous support from Geely, and Geely's profits still depend on fuel cars. Under the overall downward trend of the fuel car market, Geely has a lot of pressure to maintain its cash cow business. Although Geely's growth rate is obvious, it has not yet established a safe advantage in all segments. The Geely, Galaxy, and Lynk & Co brands cover the segment below 200,000 yuan, and the growth rate in the first half of 2024 is obvious, which has already impacted BYD's dominant position. For example, the latest SUV model E5 launched by the Galaxy brand, according to store-end statistics, has received at least 30,000 orders since its launch on August 3rd, and it takes at least 1 month to order a car now. This sales performance has already aroused BYD's vigilance. Zeekr's main models are concentrated in the 200,000-300,000 yuan price range and have initially taken root, but the competition in this segment is extremely fierce, with both NIO, Li Auto, XPeng, Xiaomi, and BMW, Mercedes-Benz, and Audi, and most importantly, BYD, which has less layout in this segment before, has also started to exert force. The equation leopard's price reduction of 50,000 yuan directly enters this price range, and the Tengshi released the Z9GT on August 20th, with a starting price of about 330,000 yuan, and also showcased the Z9 sedan version, which is expected to further lower the price, all of which bring significant pressure to Zeekr. As the proportion of fuel car business becomes smaller and smaller, the support strength that can be provided will gradually decrease, and as the new energy vehicle business grows in scale, the resources needed for investment will increase. At the same time, the price war in the Chinese car market and the cooling of the overseas new energy vehicle market are all affecting the profitability of the new energy vehicle business, and the difficulty of crossing the break-even line is gradually increasing. Therefore, although the 2024 semi-annual report performance is pleasing, Geely is still far from a truly happy life.
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