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Geely Automobile Holdings Limited — Moody’s affirms Geely’s Baa3 ratings, changes outlook to negative


Rating Action: Moody’s affirms Geely’s Baa3 ratings, changes outlook to negativeGlobal Credit Research – 23 Aug 2022Hong Kong, August 23, 2022 — Moody’s Investors Service has affirmed the Baa3 issuer rating and senior unsecured rating of Geely Automobile Holdings Limited.At the same time, Moody’s has revised the outlook to negative from stable.”The negative outlook reflects the pressure on Geely’s profitability resulting from higher investment in product development and operating expenses, including those relating to new energy vehicles (NEVs) and its startup premium electric vehicle business Zeekr, as well as the increased debt to support such investments and associated expenses, which will keep its leverage elevated,” says Gerwin Ho, a Moody’s Vice President and Senior Credit Officer.”Nonetheless, Geely’s market position in China’s automobile market remains competitive, and the company has a track record of maintaining low leverage, excellent liquidity and net cash, which enables it to deleverage; all of which underline the rating affirmation,” adds Ho.RATINGS RATIONALEGeely’s Baa3 issuer rating reflects Moody’s expectation that the company will achieve good unit sales growth, given its competitive market position and the fact that it principally operates in China’s (A1 stable) large and growing automobile market.Moreover, the company’s track record of maintaining low leverage, excellent liquidity and net cash acts as a buffer against industry cyclicality.Geely’s rating also factors in the strong competition in China’s auto market and the execution risks associated with its product and geographic diversification.In March 2021, Geely and its parent company Zhejiang Geely Holding Group Company Limited (Zhejiang Geely) announced the formation of the Zeekr Intelligent Technology Holding Ltd. (Zeekr) joint venture, with Geely and Zhejiang Geely initially holding stakes of 51% and 49%, respectively. The joint venture, which is consolidated by Geely, engages in the research and development and sale of premium intelligent electric vehicles under the Zeekr brand in China. Geely subsequently increased its stake in Zeekr to 59.7% as of 31 December 2021. Zeekr also announced it reached an agreement to raise USD500 million from third party investors during 2021. Moody’s believes Geely’s investment in Zeekr will help the company further broaden its product range to the premium NEV segment. The Chinese government’s definition of NEVs includes battery electric vehicles (BEVs), plug-in hybrid electric vehicles (PHEVs) and fuel-cell electric vehicles (FCEVs).Geely’s revenue rose 29% to RMB58 billion in the first half of 2022 as compared with the same period last year. The rise was driven by an increase in average vehicle selling prices, reflecting a change in product mix that included more higher priced models and growth in auto parts and other auto-related businesses.However, the company’s gross margin narrowed to 14.6% from 17.2% during the same period, reflecting a change in product mix that included more lower margin NEVs and higher raw material and component costs. NEV’s contribution to Geely’s overall unit sales rose to 17.9% during the first half of 2022 from 3.5% during the same period a year ago.Moody’s forecasts Geely’s revenue will rise about 31%-33% over the next 12-18 months as compared with that in 2021, supported by unit sales growth, higher average vehicle selling prices resulting from the product mix change and growth in auto parts and other auto-related businesses. Moody’s forecasts the company’s overall unit sales will grow about 9%-11% over the next 12-18 months as compared with the level in 2021, supported by growth in the China auto market and new model launches.Geely’s profitability, as measured by EBITA margin, fell to below 2% over the last 12 months ended 30 June 2022 from 4.3% in 2021. This decline reflects lower gross margins and higher operating expenses relating to sales and distribution as well as product development, including those related to Zeekr, which is in a startup phase. Moody’s projects the company’s EBITA margin will improve slightly to about 2% over the next 12-18 months, reflecting operating leverage benefits from a rise in unit sales and revenue, as well as upward price adjustments.Geely’s leverage, as measured by debt/EBITDA, rose to about 3.5x over the last 12 months ended 30 June 2022 from 1.0x-1.5x in 2021. The rise reflects a fall in EBITDA due to margin contraction and higher adjusted debt to RMB17.4 billion as of 30 June 2022 from RMB7.9 billion as of 31 December 2021. Most of the rise in debt is attributable to RMB7.5 billion of related party loans from Zhejiang Geely, including a RMB6.0 billion 10-year loan with a moderate interest rate of 4.5% per annum. Excluding the related party loans, leverage over the last 12 months ended 30 June 2022 would be significantly lower at about 2.0x.Moody’s projects Geely’s leverage will improve to about 2.9x-3.1x over the next 12-18 months, reflecting a rise in EBITDA as unit sales and revenue grow and profitability increases, while debt remains stable as the company supports its growth with positive free cash flow. As of 30 June 2022, the company’s cash balance of RMB37.6 billion well covers its reported debt of RMB12.4 billion.Moody’s expects Geely’s prudent financial management to mitigate the challenges relating to growing its startup Zeekr business, product development and competition. Such challenges are reflected in its negative outlook.Geely’s liquidity position is excellent. As of 30 June 2022, its reported net cash holdings, excluding pledged cash, totaled RMB25.1 billion. The company has maintained a net cash position since the end of 2012.ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONSESG considerations have a moderately negative impact on Geely’s ratings. The company’s exposure to highly negative environmental and social risks is in line with the wider automobile manufacturing sector. In terms of governance risk, the company’s conservative financial strategy counterbalances the high ownership of voting shares by its controlling shareholder and that a majority of its board members are non-independent.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe negative outlook could return to stable if the company (1) deleverages whilst improving its profitability; (2) maintains its market position in China’s auto markets; and (3) continues its prudent financial management, with stable and low leverage and strong liquidity.Credit metrics indicative of an outlook change to stable include EBITA margins rising to about 3.0%, adjusted debt/EBITDA improving to 2.5x-3.0x and maintenance of a net cash position on a sustained basis.On the other hand, Moody’s could downgrade the ratings if over the next 12 to 18 months (1) the company’s sales or market position weakens; (2) its EBITA margin fails to improve towards 3.0%; (3) its credit profile deteriorates, such that adjusted debt/EBITDA fails to trend towards 3.0x; or (4) its liquidity deteriorates with the loss of its net cash position.The principal methodology used in these ratings was Automobile Manufacturers published in May 2021 and available at https://ratings.moodys.com/api/rmc-documents/72240. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.Geely Automobile Holdings Limited is one of the largest privately owned, local brand automakers in China. It develops, makes and sells passenger vehicles that are sold in China and overseas. The company is incorporated in the Cayman Islands and listed on the Stock Exchange of Hong Kong.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating. Gerwin Ho VP – Senior Credit Officer Corporate Finance Group Moody’s Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong, China (Hong Kong S.A.R.) 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