Geely: worst of times is the best of times to build a global auto network

The first-half profits of Geely Auto are terrible. This might therefore seem a bad time for the business to turbocharge a global buying spree. Instead, the strategy, mirroring that of unlisted parent Zhejiang Geely should benefit the most international of China’s carmaking groups.

Zhejiang Geely owns big stakes in Volvo Cars of Sweden, the UK’s Lotus Cars and Proton of Malaysia. It also has investments in Germany’s Mercedes-Benz. The Geely group is building a web of relationships with plenty of potential as the car industry electrifies.

Geely Auto’s first-half net profit fell 35 per cent to Rmb1.6bn ($236mn), despite a 29 per cent increase in revenue. Chinese lockdowns and a global chip shortage disrupted production. Vehicle sales fell 9 per cent, missing the company’s target.

Shares have dropped more than a third in the past year. Operating margins have more than halved to just 1.8 per cent last year. Yet the shares trade at a steep 20 times forward earnings, more than four times global peer Volkswagen

That is partly because of rapidly growing sales of new energy vehicles, which include battery electric and plug-in hybrid cars. These quadrupled, accounting for about a fifth of the total. Growing exports are another reason. A fifth of all cars sold went abroad.

Geely Auto has an edge over local rivals: Zhejiang Geely’s foreign stakes help with distribution.

Geely Auto is following in its parent’s footsteps. It has bought a 34 per cent stake in a South Korean joint venture between France’s Renault and Korea’s Samsung. Such deals are sometimes the only realistic option to enter saturated markets such as South Korea.

Investors will remember past Chinese buying sprees. Many of these ended disastrously. Conglomerate HNA, whose offshore acquisitions included Hilton Worldwide, went bankrupt last year.

The auto industry is different. The race for new technologies related to electric cars and batteries is gaining pace. Geely Auto and its parent can acquire and disseminate ideas via stakes in peers and joint ventures. Extra income should result. Skilfully done, the M&A drive should pay off handsomely.