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Geely Automobile Holdings Limited (SEHK: 0175) is one of the major automobile manufacturers in China. It sells most of its vehicles in China but has started to export to developing countries over the past few years.
After reaching a historical peak at HK $29.8 in Nov 2017, Geely’s stock price has declined almost 50% at today’s price.
This dramatic drop has attracted bargain hunters (like myself) who are eager to see whether the company might be a good investment opportunity.
In this article, we will share with our readers a few factors to consider when evaluating this investment opportunity.
Did it perform well?
The first thing to consider is the company’s fundamentals. We have to take a look at both its past track record and recent performance.
Let’s start with the former. In the last decade, Geely grew its sales volume by a compound annual growth rate (CAGR) of 22.1% to 1.5 million vehicles in 2018. This resulted in net profit growing at an even faster rate of 30.5% CAGR to RMB 12.6 billion in 2018. That’s nothing short of remarkable.
As for its recent performance, both revenue and net profit for the first half of 2019 fell by 11% and 40%, respectively. The weaker performance was driven by lower sales volume in China throughout 2019 (down 15% year-on-year to 1.18 million). Clearly, 2019 has not been a great year for Geely’s investors. Still, investors can find some comfort knowing that the decline in car sales was an industry-wide problem.
From the above, we can see that, though Geely has performed well over the long term, its business will still be impacted by t the cyclical nature of the automobile industry.
Is it cheap?
As we pointed out above, Geely has lost more than 40% of its market capitalization from the peak reached in 2017.
Naturally, the next question is whether the company’s stock is cheap now?
To gain some insight, let’s look at how the company’s current valuation compares to its historical valuation. To better understand this, we will use two simple metrics: price-to-book (PB) ratio and price-to-earnings (PE) ratio.
In the last five years, Geely’s PB ratio traded below two times for several years, and also touched a high of eight times in 2017. Its PE traded at ranges from less than 10 times to above 20 times in the same period.
Presently, the company’s PB and PE ratios are 2.7 and 9.4 times respectively, which are on the lower end of the ranges in the last five years.
In all, we can see that Geely has grown well over the last decade, mainly driven by the growth of the automobile industry in China. This trend should remain intact over the long term.
In the short term, however, the company’s performance is likely to be impacted by the industry-wide reduction in sales volume.
But for bargain hunters, its current valuation seems quite attractive when compared to its historical valuation.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hongkong contributor Lawrence Nga doesn’t own shares in any companies mentioned.