Geely Auto Shares Fall Most in Two Months on Smaller-Than-Expected Profit

Geely Automobile Holdings Ltd., the Chinese automaker whose parent is buying Volvo Cars, fell the most in more than two months in Hong Kong trading after boosting 2009 profit less than analysts expected.

The shares declined 5.3 percent, the biggest drop since Jan. 27, to close at HK$3.95. Net income for the year ended Dec. 31 rose to 1.18 billion yuan ($173 million) from 879 million yuan a year earlier, Geely said in a Hong Kong Stock Exchange statement today. That compares with the 1.6 billion yuan median of six analyst estimates compiled by Bloomberg.

Geely increased car sales 48 percent in 2009, lagging behind a 53 percent surge in China’s industrywide demand. The company suffered from a lack of production capacity and “sluggish demand” from overseas markets, it said in today’s statement. A drop in export sales and growth in purchases of lower-cost small cars also reduced gross margin, Executive Director Lawrence Ang told reporters in Hong Kong.

“The result is disappointing,” said Ricon Xia, an analyst at Daiwa Institute of Research in Hong Kong with an “outperform” rating on Geely’s stock. “The profit and gross margin are lower than market expectations.”

Geely plans to sell a “large number” of new models this year, cut costs for parts and raw materials and expand overseas to offset an expected slowdown in domestic demand growth, the company said in today’s statement. It expects average sales prices to improve with the release of higher-priced vehicles, Ang said after the results announcement.

Sales Target Increase

The company has targeted a 22 percent increase in sales to 400,000 units this year, a goal it would be “possible” to exceed, Ang said. Fewer than 40,000 of those sales are expected from overseas markets, he said.

Production capacity will be boosted to 680,000 units from 460,000 last year, Ang said.

The carmaker’s sales more than tripled to 14.1 billion yuan last year from 4.29 billion yuan in 2008. The company got government approval to take over five of its operating units in July 2008, and 2009 was the first full earnings year reflecting the expanded business.

Geely Auto’s parent Zhejiang Geely Holding Group Co. agreed to pay $1.8 billion for Ford Motor Co.’s Volvo Cars unit on March 29, marking the biggest overseas acquisition by a Chinese automaker, after Ford abandoned attempts to make a profit from selling European premium-brand vehicles.

Volvo Investment

The Geely group plans to invest $900 million in the unprofitable Swedish automaker as it works on a turnaround, the Chinese carmaker said last month. The company is seeking to boost profit by offering more expensive models at home and selling 50 percent of its cars overseas by 2015.

Chairman Li Shufu said March 30 that Geely has raised about $2.7 billion to fund the Volvo purchase and operations, half of it from abroad. Geely aims to complete the acquisition in the third quarter.

The newly acquired unit may take three years to become profitable, Geely Auto Chief Executive Officer Gui Sheng Yue told reporters in Hong Kong. Geely Auto will have “priority rights” to decide whether Volvo will be injected into the Hong Kong-listed unit, not the parent, he said.

Geely is also considering whether to take control of Manganese Bronze Holdings Plc, the maker of London black cabs, Hong Kong-based Ang said last month. It was possible Geely may help the British carmaker if it was “rational” to do so, Gui said.

Raise Stake

Geely may increase its stake in the cab-maker to 51 percent from 19.9 percent by buying new shares at 70 pence apiece, Mark Fryer, finance director of the Coventry, England-based Manganese Bronze, said on March 18.

Manganese, which makes taxis and parts in a Shanghai venture with Geely, will spearhead the Chinese automaker’s plans to sell its own saloon cars in the U.K. and Europe, Fryer said.

Volvo plans to produce 390,000 cars this year, compared with 330,000 in 2009, according to CEO Stephen Odell. The unit’s pretax loss narrowed to $934 million last year from $1.7 billion in 2008, Ford said on Jan. 28. Volvo’s last annual pretax profit was $377 million in 2005.

Ang said he doesn’t expect any gain in the Chinese currency to have a great impact on Geely as most of the company’s sales are domestic.

Going forward, the company plans to invest more into vehicles that run on alternative-energy sources and said the timing of any electric car would depend on China’s policies on the technology, Gui said.

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