Earnings Transcript for 0175.HK - Q4 Fiscal Year 2020

Operator: Geely investors, good afternoon. Thank you very much for attending the Geely Automobile Holdings Limited 2020 Annual Results Announcement. My name is Charlie . First of all, I’d like to introduce you to the executives attending today's conference. They are Mr. Daniel Donghui Li, CEO of Geely Holding Group, Vice Chairman and Executive Director of Geely Automobile Holdings Limited; and Mr. An Cong Hui, President of Geely Holding Group, Chairman of Geely Auto Group, Executive Director of Geely Automobile Holdings Limited CEO of Zeekr; and Mr. Gui Sheng Yue, CEO and Executive Director of Geely Automobile Holdings Limited; and Mr. , Senior Vice President and CFO of Geely Auto Group.

Daniel Donghui Li: Today's presentation is divided into four parts. I will cover the first two parts, results, abstracts and operation. And my colleague, will take up the next part, which is of our financial and ESG. First of all, let's talk about take a look at the results at abstracts. We have made an attribute profit of about RMB5.53 billion. The wholesale volume was down by 3% RMB1.32 million. But if you'll calculate the Lynk&Co, the average selling price including Lynk&Co will be up by one percentage point, which is up to about RMB80,451. Gross margin is about 16% and our operating margin is 5.4%. Considering our total cash standing at about RMB19 billion, so the management board decided the dividend payout ratio is 30%. The 2020 key highlights include the whole market for wholesale share was about 6.45% with the successful launch of machinery that has head roads new era of version 4.0 for GD. The JV net profit is up by 32%. It is largely because of our financial company and Lynk&Co boost. In order to maintain our competitiveness, our R&D expense was up by 22% laying a solid foundation for the future and we have also placed 600 million new shares to strengthen our capital base. Operation; first of all, let's take a look at the sales performance. For the domestic sales that's remained unchanged, while export is up by 35% largely because of our overseas market performance, which is quite good for the distribution of the segment is largely dominated by SUV accounting for about 32% -- 62% for new energies is sold at about over 68,000 sets. And also we have a complete lineup for an EVs including the MHEVs, PHEVs, and BEVs. In addition, we have also seen rapid increase and improvement in terms of our product quality and the max range per charge. So, there's a huge room for future improvements in the days to come. So, these are the -- some of the introductions of our financial company. For Genius AFC, our loan assets rose to about RMB41.6 billion with low default rates against the pandemic. Our partner BNPP PF has exercised to call option to acquire additional equity interest in Genius AFC.

Unidentified Company Representative: So dear guests, good afternoon. Now, I will take the floor to brief you on the financial part of Geely. First of all, about the sales volume for the whole year. In 2020, we have fulfilled about 1.32 million, down by 3% against the year 6% downward pressure in the world. And for Geely, those figures somewhere between 1.145 million, down by 7% for Lynk&Co, that’s 175,000, up by 37%. For revenue, it's down by 5%, for Lynk&Co, 2.38 million. So in total, the figure is about RMB115.5 billion. The gross profit margin is 16%, down by 1.4 percentage point compared with the figure in year 2019. For EBITDA ratio, in 2020, the figure is 12.8%, down by 0.8 percentage point compared with 2019 figure, 13.6%, which is slightly -- which is much smaller than that of the ratio in the past. This is a clear testimony to the healthy and sound economic growth of a company.

Unidentified Company Representative: Thank you, , Well, now just invited to Mr. Mr. Gui Sheng Yue to deliver his speech.

Gui Sheng Yue: All right. So first of all, I would like to express my appreciation to those online participants, the investors and financial analysts. Most of you are our old friends. You've just seen the result announcement. Well, probably it's not the result that is up to your expectation. Probably the investors as well as the analysis are not satisfied with our results. I need to give you a brief summary of the annual results. And my colleagues will give you detailed information on that later on. Last October, when we announced the biannual result, we told you that 2020 was going to be a toughest year for Geely Auto. Well, especially the first half of 2020, we face tremendous amount of difficulties. Well, we can't attribute all these difficulties to pandemic or the cost increase in raw materials. The difficulty is largely determined by the life cycle that we currently experience as part of the car industry. If you take a look at the past history, I remember in 2015, when we are doing the roadshow, I told you that we are going to embrace a new era, transforming from version 2 to version 3. Indeed, since year 2016, we have seen the launch of new products based upon this platform version above three. So that's why you can see really rapid growth of the economic performance of our company. So today, we cannot deny that the products, since year 2016, coming to the end stage of its life cycle, and also, because of the strong momentum of growth of the last generation of products back in year 2016 and 2017. Some latest products were successfully developed and that really ushered in a new era, which I call version number four. So last year, you can see the year, the competitiveness of the last generation products are getting weaker. So in order to tackle through the new challenges and a huge competition in the market niche and to maintain our market share, if not enhancing our market share, apparently you can see the dropping of our profitability.

An Conghui: Dear investors, dear analysts, good afternoon. And I'm sorry that 2020 is not supposed to be a year of great success in your eyes. However, we are still filled with confidence for 2021 and beyond. Also, I think there has been a very solid foundation laid there for our performance this year. I took a look at some of the questions from the investors online. So, I'd like to address some of these questions I pick up from those investors. You have raised many questions, but for those issues of common interest, I will give you some collective answers. First of all, you might be interested in the target that we set for 2021 being 1.5 million or 3 million cars and how can we achieve that target? The questions also may involve why we are so confident about achieving this goal. The second aspect may be related to Zeekr as a newly founded company that has to be separate from the company now and why you set up this company on its own and what is the future plan for Zeekr some eyeing comments will be on these two aspects.

Unidentified Company Representative: And Mr. Liga , you have anything to add?

Unidentified Company Representative: Mr. Gui and Mr. An shared with you their observations, their insights, I got some additional remarks, Mike. So we're moving from development stage 3.0 to development stage 4.0 for Geely Auto and we’re capturing the four mega trends in the auto industry, leading intelligent technologies to connectivity technologies, electrification technologies, and the sharing trend. So this is a transitional period, or transitional time for Geely Auto. I would like to thank you very much for your long-term interest and support to Geely Auto. I’ve got two bullet points to share with you. So the product is moving from version 3.0 to version 4.0. Probably, our result last year -- financial result last year is not that satisfying. In August last year, when we announced our half year results, we told you that we would bottom out in the second half of 2020. And we faced great challenges in the first half of 2020. And we got through that most difficult time. Thanks to the launch of Lynk&Co 05, 06 and Xingyue in the second half of 2020, so we witnessed a 49% increase or close to 50% increase in the sales revenue in the second half of last year, compared to the first half of last year. Our profitability increased by 40% in the second half of 2020. In 2021, we're going to launch nearly identical models based on the SPA platform, which is co-developed by Geely and Volvo and we're going to launch a whole new series of products in 2021. I think we're going back to the fast track our profit increase. The second bullet point is about the Two Blue Geely Action Plans. These two Blue Geely Action Plans is related to Zeekr. Everything Zeekr is going to do will be highly focused and dedicated. One, Geely, Blue Geely Action Plan will heavily involve the participation of Zeekr and the second action planned over launched to consolidate our fundamentals. Zeekr will be the main player in the green – Blue Geely Action Plan 2. We have enriched our technology pipeline and product pipeline and intelligent technologies and smart technologies and electrification technologies. Well, in the past, all the project teams would have to focus on both combustion engine as well as electric motor powertrain. So, apparently, there is a tug of war for attentions from the executive management. And also there's a tug of war for the allocation of resources. The commercial or business model had to cover the two categories, which are quite different from each other. So we made an important decision, a key milestone is that Mr. An Cong Hui will serve as the CEO of Zeekr And the past more than nine years ever since Mr. An became the CEO of Geely Automobile Holdings. The sales volume of Geely increased from 410,000 in 2011 to 1.51 million in 2020. We're going to set up a new record high this year. There's our plan. Our profitability increased from RMB 1.7 billion in 2011 to RMB 12.6 billion in 2018. Well, of course, the CMA, SPA platform as well as the launch of Lynk&Co brand, they were impossible without the contribution from Mr. An Cong Hui. And Mr. An has a proven record and is a established figure in the automobile industry. Now Mr. An will service the CEO of Zeekr. So he is working hard on building a team of talents suited not only for the external environment, but also for its internal environment. No matter who is – who it is being CMO, CEO, CTO or CHRO. So this dedicated team will be of great value and worth to the future growth of intelligent and electric vehicle models launch. So from our perspective, from the perspective of the investors, I think the covenants can be assure, dedication. For the Blue Geely actions, we continue to maintain the 90% as high target. In other words, the electric vehicles will accounted for about 90% of the order product launched in the future, and ICE products will account for less than 10% of the total mix. The action plan number one will be there to ensure we maintain our leading position in China's auto industry. At the same time, we need to enhance our market visibilities in the world to really work to improve our international reputation in the future. We hope and we believe that in an extra 10 to 15 years, when the electric vehicles will be the future, our market perspective and our market share will be as high as to sustain our future growth. And our market share will be up to about 50% and beyond. Many of our investors hope that, while working on the year migration and the transposition of EVs, we need to maintain stability and continuous growth for investment. So, in addition to action plan number one of Geely Auto, we have also map how Geely action plan number two, which can help us to achieve the target properly and comfortably. Thank you. So I forgot to mention about the new car models plans this year. This year, for Geely, just now we mentioned about CMA as a new model, called Xingyue L. It will be launched to the market since mid of this year, it will be delivered. For Emgrand, all new generation of Emgrand will be also launched to the market for the second half of this year. The latest models of this year will also account for the biggest market share for Lynk&Co. The SPA platform based first model of Lynk&Co will also be launched to the markets pretty soon. The Lynk&Co products coming from this SPA configuration will also help us to improve our market performance and market reputation. And also our competitiveness and a sales performance can also be enhanced further. Secondly, for Geometry, this year we are going to launch a brand new product, since the second half of this year. Thirdly, for Zeekr, as previously mentioned, some of the latest models can be on the order book since April of this year, and will be delivered December -- sorry since September. For the two action plans of Geely Auto, the Blue Geely action plan number one is the intelligent and energy saving vehicles. Why we will see better representation in this regard because the future energy saving vehicle technologies would come from PHEV and range extended technologies. So this surely will be the order of the day. And Geely will also work on the intelligence-based future through this hybrid system, through intelligence-based operation, we hope to enhance our market share to improve our sales performance and sales volume. And also we hope to really make money and also to make a lot of profit from the market, because the future 10 to 15 years, this represents a really huge market. But the technologies has already been moving towards in this direction, we call it intelligent hybrid system using high pressure and a dual motors. For the action plan number two, intelligent pure electric cars, that's better -- that's easier to understand which is a cars represented by Zeekr. The cost of the car of Zeekr is already known to you and we started this market debuts since last October. And the real car is no different from that of the concept car. So, this is additional remark on the car models. And I see also a lot of investors will care a lot about our chip supplies indeed. Actually, the chip supply is delivering a huge impact not only on Geely, but also on the entire world. The sales of Geely was under some impacts of this supply of chip product. But so far, I think the impact is quite limited. Here, I cannot say for sure whether it will last too long or short. But anyway, I think that chip supply issue will be resolved sooner or later. Our purchasing plan and our relationship between the OEMs and also the suppliers will also be optimized to ensure that we minimize the impacts from the chips for supply.

A - Unidentified Company Representative: Okay. Now, we have some limited time for Q&A, because just now, the three managements have already answered a lot of the questions. So, I will open -- choose a few other questions for the three leaders to answer. Some investors will ask, what's your outlook for the auto market this year, in general? In general, this year as I already covered this part, we have confidence to cover this 1.5 million to 3 million cars. The macro-economy is quite good, because the market demand is getting back. So, the growth will be for sure. Thank you. I think this is an online investors meeting, which is totally different from what it was in the past, raising some limitations to the leader -- for the attendees. So, would you please select some of the most representative questions for us to answer? For those details or detailed issues, we will have a series of roadshows and three levers will cover different parts of the one-on-one Q&A sessions. So I hope that analysts and investors can be having some face-to-face interactions from tomorrow onwards. And also we can send those questions back to us later. Okay, please choose some common questions to us. Okay? And would you please still be more understanding to us, because of the restrictions of the external conditions. So because we don't have much time to cover all those questions, I will say that -- those are common issues. And what is the reason behind the performance of 2020? Just now I've already covered this part because of the markets because of the product competitiveness is going down. That's why our profit surely is going down. So that's main reason. But as to the details probably Mr. Kai can answer some of the reasons.

Unidentified Company Representative: So I've covered the reasons and also the future of the performance. First of all, yes, indeed, because of the pandemic, we have seen the drop of our sales performance by about 7% of our sales volumes. And this has actually also increased some of the cost for some precious stones like copper and others indeed to me are appreciating. That’s why we have seen the rising price of those and materials. But these are the external conditions. But more importantly, as some of the questions have already covered, we are facing a new era where we are shifting from a new -- from an old era to new era to embrace some new technologies. So the last generation of products is at the lowest end of entire life cycle with a weakening profitability. So they are not sufficient enough to dilute or dissolve the negative impacts of the rising price of the raw materials and also for the launch of the new generation of products. Apparently, there is a high cost involvement of for promotional purposes like a Geometry C and Xingyue and others. So these products launched to the market since the end of last year, but the market profitability’s will be occurring on a later stage. So based upon the above mentioned status that's why our gross margin was down by 1.4 percentage point. Also, the investors have been taking note of the marketing expenditure that is going up a little bit. Just as I mentioned about a launch of new cars, especially the second half of this year, it went up by one percentage point. The entire volume is about RMB 2.8 billion, up by RMB 700,000. But the sales profit was down also compared with 6% of the previous year. Without considering the expenditure on R&D, the other main expense remains flat. Apart from the gross margin, our EBITDA continues to maintain its growth rate of about 12.5%, down by 0.8 percentage point, the 12.8% as its percentage of working revenue, it is still a good figure. Looking ahead into the future, just now Mr. An has mentioned about a sales target of about RMB 1.53 million, we have the confidence to say that this is within our reach. And some of the negative factors that I've just mentioned will be compensated and offset, as a result of the launch of new products in this new era based upon this new technology. So we have the confidence to come back from the original end to recover our past momentum. That's the recent analysis and the future prospects. Also, some investors raised questions around capital expenditure. We're not spending a lot of on capital expenditure. So are we going to have greater capital expenditure in the future? Well, I'm going to tell you that in 2020, our capital expenditure was RMB 7 billion, in 2021 in fact, capital expenditure will drop to RMB 6.5 billion. So the capital expenditure will maintain flat or slightly downward in the future. So we've already had our manufacturing facilities in place according to the version 4.0. So in the future, our capital expenditures will be invested in smart technology, energy conservation technologies and electric vehicle development. So this is about a capital expenditure. And also there's a financial question related to the liquidity or cash flow. During the first half of 2020, we give some cash support to all suppliers, so that they can resume production as quickly as possible. And in the second half of 2020, we withdraw that cash support to the suppliers and the payment terms came back to the normal condition. So that means in the first half of 2020, we incurred a negative cash flow that is minus RMB3.2 billion. And in the second half of 2020, we saw a positive RMB4.8 billion cash flow. So the net effect is RMB1.6 billion cash flow, that's positive. So we're back to positive cash flow.

Unidentified Company Representative: Our next question. One investor wants to know about the profit per unit of vehicle in the future?

Unidentified Company Representative: Well, has covered the question and also partly covered that question during my presentation. In version 4.0, the scale of economy will have a dominant role to play. Xingyue was launched toward the end of last year. So far, well, enjoys the highest per vehicle profitability. As we apply the CMA platform widely to our new models, we’re going to enjoy the great benefit from the scale of economy. So that's my short answer.

Unidentified Company Representative: There are questions around Geometry and its difference -- the difference between Geometry and Zeekr.

Unidentified Company Representative: Zeekr is smart technology or intelligent technology cooperation. Its equity structure is split by 31% to 49%, meaning that we've taken into consideration the interest of the Geely investors in the Geely Holdings. Well, Zeekr brand represents a high end fashionable brand. And as to Geometry, it will not be incorporated into the Zeekr Company so far. We are still developing Geometry models on a SEA platform. Once we have that product in place, we're going -- we will incorporate that product into the nameplate of Zeekr. Well, that's our plan for Geometry and Zeekr. We’ll release more information in the subsequent roadshows and conference held in April.

Unidentified Company Representative: Our next question is, will Zeekr raise funds independently in future?

Unidentified Company Representative: I'll take up the question. We focus on Zeekr technology. Well, to make sure that the Chinese pure electric vehicle manufacturers are on the same raising track with our international counterparts, in terms of equity structure, management structure, and attraction are appealing to customers. So, in the share structure of Zeekr, we want to make sure that Geely Auto takes off with 15% of the shares and at the same time as Geely Holdings will take up another 49% of the shares. That includes the future equity incentives to the management and the shares to be held by customers. And of course, we're going to open our shares and equities to other funding channels. We, of course, maintain the possibility of an independent listing of Zeekr in stock exchange around the world. I just pass through the questions raised by investors and analysts. In the short-term, you might confuse as to what kind of strategies we're adopting in the future? What are the differences between different employees? We want to tell you that, we firmly believe in the Electric Vehicles, which is the future for automobile industry. And at the same time, we believe that in the next 10 to 15 years, energy saving vehicles or new energy vehicles with the energy saving technologies will also enjoy a fairly substantial share of the market. So, strategically, we need to focus on these two areas and the target is pretty clear. Although introducing intelligent technologies to all the energy saving electric vehicles or new energy vehicles. So, I think if you wanted to understand the commonalities between action plan one and action plan two that is intelligent technology. I believe in the next 10 or 15 years, the energy saving, new energy vehicles will still take up a very large share of the automobile market. We want to maintain our leadership position, a leading position in this segment. If we want to increase our market share, that's a total failure for the version 1.0 strategy. We claim that we're ahead of others. We claim that we're in the leading position. So, there must be evidence to buy the increased market share. As Daiching has said that, we should be back to the fast-track of profit increase, so I hope that it will give you better and better financial results in the future. In terms of electric vehicles, we have to remain in the same racing track with so-called new auto making forces. We got a couple of advantages compared to these new forces, we have scale of economy, we have the whole group, we deliver sport products, smart futures, we had a strong CEO, which is the -- who is a professional in the auto industry. This professional has profound understanding of the auto industry and it has the right to fully mobilize all the resources available within Geely Group. So that really sets us apart from our competitors. This is a two-pronged strategy. The Board members of Geely also believe that this federation's represents totally two different seminar category. We believe that these two categories will attract different customers and will offer different products. We want professional companies to do professional jobs. You might ask why our competitors don't set up individual or independent companies focused on electric vehicles. Well, we don't comment on the practice of our competitors. But we believe that the energy saving, new energy vehicles are different from electric vehicles. So that's why we need to set up an independent new company to focus on a specific area. Given the limited time span or be quite impossible for us to cover all the details, we'll start the road show tomorrow. And we’ll try to give you as detailed information as possible during all these road shows. We really appreciate your long-term interest and support to Geely auto. It doesn't matter whether you have positive or negative comment on us. We really thank you from the bottom of our heart. If you bought our stuffs and you say that Geely Auto is a good company, that's our encouragement. If you are not satisfied with the Geely Auto’s Performance Series also to kind of encouragement our stimulus. Many analysts discovered some negative side of Geely Auto. I believe that they have an insight into the company and we can learn quite a lot from the analysis made by professional analysts. As a member of the management of a public company, I think I should give you a very special thank you to all of you for your support during this difficult time. Two more final questions. The first question is related to the price range of Zeekr products from RMB300,000 to RMB500,000. This is the price range for the first product. As to the specific model, while you can seek information from the internet and/or going to a launch a product release event in April. Geely established collaborative relationship with Tencent as well as the Volvo. So what kind of benefits that this collaboration will bring to Geely?

Daniel Donghui Li: I’ll take up the question first and I will hand the microphone to Mr. An Cong Hui later. Last month we announced a plan for an in-depth collaboration between Geely and Volvo. Our powertrain R&D teams will collaborate with each other. So, Geely Holding also worked with Foxconn, Tencent and Baidu to announce their strategic collaboration. We set up a joint venture for JV – for an EV for Foxconn, the company is on a new business model. And for the Tencent, our collaboration is on the intelligent cabins. The interactive systems, the car mounted app development. So if you put our collaboration into one mind, these are through the holdings. These are done through the holdings, but Geely Auto will be the beneficiaries. Through our technologies and products we share those products and technologies with our partners. This will do a lot to ensure we benefit a lot from the reduction of cost and the co-sharing of the benefits and to further improve the scale of purchasing by reducing down the cost of purchasing, so that we can further reinforce our position and competitiveness in this industry. So this will do us a lot of good to be sure. Of course, our collaboration is also a multi win for our partners. So, they will also shorten the lead time for the product development and to reduce the cost even further. So, the entire collaboration will be on the circle of vehicles. And we will surely command a leadership position in this regard.

Daniel Donghui Li: So that concludes today's meeting. Before we conclude anything you want to add? So, nothing else. So, again, thank you very much for your support. Okay. Okay. That's it. That's the end of today's conference.