Maintain BUY. Despite an unexciting net profit, its SG&A cost control and NEV profitability were impressive in 3Q24. We expect the current strong NEV sales momentum to extend into 2025, leading to substantial core profit growth.
3Q24 operating profit beat. Geely's 3Q24 revenue was 2% lower than our prior forecast. GPM in 3Q24 was 0.3ppts lower than our estimates, largely due to the accounting standard changes to book warranty costs under COGS which dragged down its GPM by about 0.4ppts. Excluding such impact, SG&A ratio in 3Q24 was still about 1.6ppts lower than our prior forecast. Operating profit of RMB3.0bn in 3Q24 was 13% higher than our estimates. Net profit excluding Lynk & Co's impairment of RMB2.76bn in 3Q24 was largely in line with our prior forecast of RMB2.75bn.
FY25 outlook. We raise our FY25E sales volume by 18% to 2.38mn units, as the recently launched NEV models, including the Galaxy E5 and Starwish, have been well received. We project NEV sales volume at Geely to surge 51% YoY to 1.32mn units in FY25E, or 55% of its total sales volume. According to management, net profit of Geely's NEV business (including Zeekr under the HKFRS accounting standards) turned to positive territory in 3Q24, driven by the new models based on the GEA platform and greater economies of scale. We expect these factors to continue supporting GPM in FY25E and therefore, we project a GPM of 15.6% in FY25E (vs. 15.5% in FY24E), despite higher sales contribution from NEVs. Accordingly, we revise up our FY25E net profit forecast by 43% to RMB12.4bn.
We view Lynk & Co's move as necessary. Zeekr is to own 51% equity interest of Lynk & Co after acquiring 20% from Geely's parent, 30% from Volvo Car (VOLCARB SS, NR) and a capital injection. Such business combination could at least reduce product cannibalization and cut costs, in our view. That, along with the sales network combination between Geometry and Galaxy, reminds us of the brand combination of Emgrand, Gleagle and Englon in 2014. Geely's sales volume rose 22%, 50% and 62% YoY in FY15-17, respectively.
Valuation/Key risks. We value Zeekr at 0.7x (unchanged) our revised FY25 core revenue, which implies US$8.3bn for Zeekr's valuation. We value Geely's all other businesses excluding Zeekr at 12x (unchanged) FY25E P/E. We maintain our BUY rating and raise our target price from HK$14.00 to HK$19.00. Our net target price corresponds to 14x our FY25E P/E. Key risks to our rating and target price include lower sales volume and GPM, especially for NEVs, than we expect and a sector de-rating.
