In it for the long haul

A traditional Chinese proverb advises rich men “let not your wealth be exposed”. Perhaps that is why privacy has become such a concern for Geely’s Li Shufu, who saw his net worth swell almost 10 times the past two years.

Speaking at a financial forum on the first day of 2018, the chairman of the private sector Chinese carmaker told the audience that China’s information security, or the lack of it, could turn out to be a weak spot hampering Geely’s ambition to compete globally.

“Many of our commercial secrets are being exposed easily,” the auto tycoon said. “I am thinking Pony Ma [the chairman of Tencent] must be reading our WeChat messages everyday. He can see whatever he wants all the time. This is a big problem.”

Li might only have been joking when he suggested Ma was peeking at his WeChat – the ubiquitous social media platform controlled by Ma’s Tencent – nevertheless his remarks immediately stoked an online firestorm, which even led to Tencent putting out an official statement on its privacy policy.

“WeChat does not store any user’s chat logs, which is only stored in users’ mobile phones, computers and other terminals,” the statement reads. “Please rest assured that privacy has always been one of Wechat’s most important principles.”

Perhaps Li is still learning to handle the weight of his words. As a little boy, Li used to build cars out of sand on the beach near his home in Zhejiang province. The idea that he would one day build arguably China’s first global car company must have seemed as fanciful as a castle made out of one.

But Geely’s rocketing share price has turned Li into one of the top 10 richest men in China. According to Forbes, his current net worth stands at $18.4 billion (other leading auto tycoons such as BYD’s Wang Chuanfu seem like also-rans on just $5.8 billion).

Since its low point of HK$2.88 ($0.37) in February 2016, Geely’s Hong Kong-listed share price has risen almost tenfold. In fact, the carmaker is the best-performing blue chip in Hong Kong, since its inclusion in the benchmark Hang Seng Index in February. As of Wednesday’s close, Geely was trading at HK$28.35. That gives Geely a market value of HK$250 billion ($32 billion).

As a result, Li now ranks third among global automobile tycoons just behind Tesla’s Elon Musk on $19.5 billion (although this also includes his rocket company Space X) and siblings Susanne Klatten and Stefan Quandt, who are worth a combined $45.8 billion after inheriting an almost 50% stake in BMW.

In terms of wealth, Li has some way to go before he catches up with the Germans. But his ambition to create an equal to their car company continues to progress at great speed.

Rarely a month goes by without a new overseas acquisition being announced. Other highly acquisitive Chinese conglomerates have come under the microscope for taking on too much debt and buying too many unrelated companies. Geely, by contrast, has received nothing but praise for a strategy which has seen it plug every gap in its product line from Polestar (high performance electric cars) at one end, to Malaysia’s Proton (entry level passenger cars) at the other.

During 2017 Geely’s unlisted parent has not only scooped up a 49.9% stake in Proton (giving it access to ASEAN markets) but also 51% of Britain’s Lotus (sports cars) and all of Boston-based Terrafugia (flying cars). It then topped off the busy year by becoming the largest individual shareholder (with the second largest voting rights) in Swedish trucking company, Volvo AB.

According to Swedish newspapers, Geely purchased an 8.2% stake (and 15.6% voting rights) for $3.86 billion from hedge fund Cevian Capital. In turn, the London-based firm said it had made $2.4 billion from the stake it purchased 11 years ago.

The Financial Times ponders whether Geely has overpaid, arguing that the Volvo AB deal goes against the grain since other auto giants are currently separating their commercial and passenger vehicle divisions.

However, Geely cannot separate something before it owns it. Most other commentators agree that its ownership of both Volvo brands – trucking and passenger cars (purchased for $1.5 billion from Ford in 2010) – makes a lot of sense (not least because it mops up any confusion about who owns them).

Media commentary about the deal also shows how far the company has progressed since 2010. Back then the talk was all about technology transfers from Volvo to Geely.

This has, in fact, occurred and while Volvo and Geely remain separate brands, they increasingly share technology and procurement. This has helped both companies to massively increase their Chinese sales. Volvo, for example, has gone from selling 22,000 cars in China during 2010 to just over 100,000 in 2017.

But where Volvo AB is concerned, a number of commentators highlight that it is now Geely, which will be providing the expertise, particularly in electric technology such as improving battery power for the long journeys truck drivers typically make.

The world’s three largest international truck manufacturers, Volvo AB, Daimler and Paccar, currently hold a tiny and combined 0.6% market share in China. Foton and Dongfeng Truck, which is 45% owned by Volvo AB, reign supreme.

Geely’s shareholding is now likely to change this, as internet users appear to attest. “Chinese brands are becoming amazing,” says one. “Geely just gets better and better,” says another. “Come on Geely.”

And analysts believe Geely’s share price will continue to perform even though it is at an all-time high on a current year valuation basis.

At 16.73 times forward earnings, it is also above the sector’s 12.9 times average. But it is still way below rival BYD on 24 times.

---

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.