Manufacturing News

China's Geely set to post earnings jump as Volvo tech boosts sales

Geely Automobile Holdings is set to post its biggest profit growth in eight years on Wednesday, as improved product design and engineering after 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 predicted 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 SUV, exceed initial estimates.

Long seen as a no-frills brand, Geely has transformed itself into an automaker with upmarket aspirations, using its Volvo r&d advantage to expand market share in China, where it now ranks seventh.

Next year, Geely plans to market its own brand -- 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 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 asked not to be named.

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 it could sell far more depending on market conditions, a Geely official told Reuters.

For 2016, net profit likely doubled to 4.6 billion yuan ($666 million), according to a Reuters poll of 31 analysts. Net profits are expected to rise 52 percent to 7 billion yuan this year, the poll showed.

Growth has come at a cost. Geely and parent Zhejiang Geely Holding Group Co. 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 rival BYD Co.'s expenditure of 2 billion yuan in 2015, according to Thomson Reuters data.

But Geely's sales this year could be hurt by China's decision to raise the sales tax on vehicles with small engines. That, in turn, could add urgency to Geely's overseas expansion.

"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 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.

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

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