Hong Kong, June 12, 2020 -- Moody's Investors Service has confirmed the Baa3 issuer and senior
unsecured ratings of Geely Automobile Holdings Limited.
The outlook on all ratings has been changed to stable from ratings under
review.
This rating action concludes the review for downgrade initiated on 26
March 2020.
RATINGS RATIONALE
"The ratings confirmation continues to factor in Geely's solid
business profile and growing market share, as a result of its improving
product breadth and strength," says Gerwin Ho, a Moody's
Vice President and Senior Credit Officer.
"Importantly, the ratings also reflect Geely's track record of prudent
financial policy, allowing it to sustain a strong credit profile
that safeguards it against industry cyclicality and supports its Baa3
ratings," adds Ho.
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines are creating a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects
of these developments are unprecedented. More specifically,
Geely's exposure to retail, discretionary consumption and
manufacturing has left it vulnerable to shifts in market sentiment,
especially given its sensitivity to consumer demand.
In the Chinese market, where Geely generates most of its unit sales,
Moody's expects auto sales to steadily improve from the low levels seen
in the first quarter of 2020 as a result of the coronavirus outbreak.
In a positive sign, Geely's unit sales grew 20% in
May compared to last year, outpacing the 14.5% growth
that the China Association of Automobile Manufacturers indicated for the
overall market in May.
Moody's expects auto unit sales in China to contract 10%
this year, before growing by 2.5% in 2021 amid signs
that demand is beginning to return to normal following a sharp decline
in the first quarter of 2020. Chinese auto sales rebounded in April
and May, growing by 4% and 14.5% respectively
compared to the same period last year, signaling a healthy rebound
in demand.
Despite the slowdown in China's auto market since 2018, Geely
has maintained its market share, positioning it as the third largest
passenger vehicle brand and the seventh largest automaker by unit sales
in China (A1 stable) in 2019.
Moody's expects Lynk & Co -- which commenced sales in
December 2017 and is a joint venture between Geely, its parent Zhejiang
Geely Holding Group Company Limited and Volvo Car Corporation (VCC),
a subsidiary of Volvo Car AB (Ba1 negative) -- will help
further increase vehicle sales and improve Geely's product breadth
and strength in terms of price points and geographic coverage.
Geely owns 50% of the registered capital of the joint venture,
while VCC and Zhejiang Geely own 30% and 20% respectively.
Moody's analysis of Geely's key credit metrics accounts for the 50%-owned
Lynk & Co joint venture on a consolidated basis.
Moody's expects Geely's unit sales to contract about 4%
in 2020 compared to last year. Despite this, it should gain
market share in 2020 as its sales decline will be less than the 10%
broader market decline that Moody's projects for China's auto
market in 2020.
The ratings also reflect Geely's track record of prudent financial management
and strong liquidity position.
Geely's debt leverage remained low in 2019, as reflected by a low
debt/EBITDA ratio of 1.1x.
While Moody's expects Geely's debt will rise as it funds investments
in production facilities and product development, its revenue and
EBITDA should be flat in the next 12-18 months compared to 2019
levels.
Geely has invested in research and development to develop new energy and
electrified vehicles (NEEVs), including electric, battery
electric, hybrid electric, mild hybrid electric and plug-in
hybrid electric vehicles, which will help the company manage its
environmental risk. The company's NEEV unit sales reached
8% of its total unit sales in 2019.
Moody's expects Geely's debt leverage to remain low at around 1.2x
in the next 12-18 months, which is strong for its rating
category despite the weak sales outlook for this year, providing
it with a good buffer against potential market volatility and investment
needs.
Geely completed a new share issuance that raised net proceeds of HKD6.4
billion in June. The transaction has improved Geely's robust liquidity
and helps to maintain its low leverage by reducing its need to finance
investments with additional debt funding.
Moody's forecasts Geely's profitability, in terms of its EBITA margin,
will increase to about 5.9% in the next 12-18 months
from 5.7% in 2019, as the company's continued
investments in research and development will be offset by greater operating
leverage as its revenue scale expands.
Geely's liquidity position is solid. At 31 December 2019,
its reported net cash holdings, excluding pledged cash and including
lease liabilities, totaled RMB15 billion. The company has
maintained a net cash position since the end of 2012.
Geely's rating also factors in strong competition in China's auto market
and the execution risks associated with its product and geographic diversification.
The stable rating outlook reflects Moody's expectation that Geely will
continue to grow its scale and product breadth while remaining disciplined
in its financial management, as seen by low debt levels and a strong
liquidity position.
The rating also takes into account the following environmental,
social and governance (ESG) considerations.
As an automaker, Geely is exposed to environmental, social
and governance risk. Meeting regional emission requirements,
particularly those relating to CO2, is one of the most pressing
challenges facing the auto industry over the medium to long term.
This risk is partially offset by the company's financial capacity
to accommodate increasing requirements to invest in R&D and alternative
fuel vehicle production systems.
Moody's regards the coronavirus outbreak as a social risk under its ESG
framework, given the substantial implications for public health
and safety. Today's action reflects the impact on Geely's
credit profile of the breadth and severity of the shock, which has
been offset by its solid financial and liquidity buffer.
Geely's ownership is concentrated in a small number of shareholders,
including its chairman and his family. Its parent company,
Zhejiang Geely, has also historically reported higher leverage than
Geely. This situation is partially mitigated by (1) Geely's status
as a listed and regulated entity, and (2) its track record of maintaining
sound corporate governance.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Upward pressure on the ratings could emerge if Geely: (1) further
improves its overall market share through successful sales of new models;
(2) further expands its product breadth and enhances its geographic diversity
to a level more comparable to that of its global peers; or (3) maintains
a prudent financial policy that includes low debt leverage and a solid
liquidity profile on a sustained basis, against the backdrop of
its parent company's corporate activities.
Downward pressure could emerge if: (1) Geely does not grow its scale
and gain market share; (2) its profitability declines, such
that its EBITA margin drops below 5.0%-6.0%
on a sustained basis; (3) its debt leverage -- as measured by
debt/EBITDA -- rises above 1.5x-2.0x on a sustained
basis; or (4) its liquidity profile deteriorates.
The principal methodology used in these ratings was Automobile Manufacturer
Industry published in June 2017 and available at https://www.moodys.com/research/Automobile-Manufacturer-Industry--PBC_1062773.
Alternatively, please see the Rating Methodologies page on www.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. Its chairman
and founder, Mr. Li Shufu, and his family held a 44.1
% stake in the company at the end of 2019. The company is
incorporated in the Cayman Islands and listed in Hong Kong.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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At least one ESG consideration was material to the credit rating action(s)
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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.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
