Geely Shares Rally As Investors Welcome Volvo Joint Venture Plan

Chinese auto maker Geely Automobile (175.HK) accelerated more than 5.5% in Hong Kong trading Monday, taking the stock’s return to close to an incredible 300% over the last 12 months.

The Hong Kong-based firm, the best-performer of the benchmark Hang Seng Index today, has seen its shares rev up as its drives into new markets and acquires other industry players.

Monday’s performance came after Geely announced a new joint venture for its upmarket Lynk & Co brand alongside its subsidiary Volvo. Geely’s shares initially tanked following the news on Friday, before rebounding strongly Monday. Some in the market view the announcement as positive because it means Geely is likely to piggyback Volvo’s expertise to try and make Lynk & Co a more global brand.

Here’s more from Daiwa analyst Kelvin Lau:

The participation of Volvo will add more value to the new brand and enhance the capabilities for its global expansion in the future. (Lynk & Co will be sold in European market from 2019 and in the US market thereafter) .

The deal could also help clean up Geely’s balance sheet, which has a been a concern among investors:

In our view, as Lynk & Co would implement the leasing model in oversea markets, which means the JV would have a larger balance sheet for both assets and liabilities. This JV arrangement can alleviate concerns of some investors on Geely’s balance sheet, as the JV would not be consolidated by the company.

No doubt, Geely’s shares are starting to look pricey following their furious rally. The stock trades at 13 times next 12 months’ earnings, compared to just six times for Dongfeng Motor (489.HK) and 10 for SAIC Motor (600104.CN).

A recent article for the Wall Street Journal’s Heard on the Street opinion section doubts whether Geely’s rally has much more road left to run, pointing to flagging auto retail sales in China.


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