Morgan Stanley says this is the stock to play China's EV industry consolidation

Morgan Stanley has resumed coverage of Hong Kong-listed Geely with an overweight rating on expectations the Chinese automaker can weather macro and industry uncertainties. Fierce competition in China's new energy vehicle market, which includes battery- and hybrid-powered cars, has increasingly forced automakers to cut prices and add features if they are to survive. Many of the companies have launched overseas expansion strategies to tap new revenue sources, but rising trade tensions with the U.S., and, more recently the European Union, have added challenges. "We see Geely as a beneficiary of market consolidation," Morgan Stanley Asia equity analyst Tim Hsiao and a team said in a June 25 report that resumed coverage of the stock. "Geely has said it has limited exposure to the EU, except for PHEV exports under Lynk & Co (which are not affected by the tariff hike currently) and potential overseas expansion for Zeekr (which will start at a minimum level)," the report said. PHEV is the acronym for plug-in hybrid electric vehicle. Hangzhou-based Geely entered China's auto industry in 1997 and is known for acquiring Volvo in 2010. Geely has a wide number of other subsidiaries, which include Polestar, Lynk & Co. and the electric car brand Zeekr that listed in New York earlier this year . Morgan Stanley's analysis showed that Geely climbed from its yearslong fourth place ranking into third place last year by China market share, behind one of Volkswagen's joint ventures in the country. BYD held first place, a position it's held since 2022, up from 13th place in 2021, the analysis showed. In 2020, BYD launched the Blade battery , which many argued helped spark the company's growth in EVs. Geely on Thursday announced it had developed its own competitor, the lithium iron phosphate "Aegis Short Blade Battery," which it claims passed above-industry standard tests without exploding. The company also claimed the new battery can be used for 50 years, which can support secondhand sales. The company plans to initially use the battery in its own vehicles this year. The majority of Geely's cars are still traditional internal combustion engine vehicles. But the company raised the share of its new energy vehicles to 32% so far this year, higher than peers such as Great Wall Motor, for which the share is 23%, the Morgan Stanley analysts pointed out on Tuesday. Geely's "presence in the [new energy vehicles] market should bode well for its mid-/long-term domestic market presence amid the trend toward NEV transition, and contribute to the longer term sustainability of profits," the report said. The analysts expect Geely to grow sales by 22% overall this year, despite a moderation in growth in the second half of this year. Zeekr and other electric car brands typically release monthly delivery figures around the end of each month. Geely on Friday broke out first-quarter results for the first time — Hong Kong rules don't require such frequent disclosures. Quarterly revenue rose 56% to 52.32 billion yuan ($7.2 billion) year over year, the filing showed. Profit attributable to shareholders more than doubled to 1.56 billion yuan from the year-ago period. Geely shares closed 1.2% lower at HK$8.79 ($1.13) on Friday ahead of the earnings release. The Morgan Stanley analysts on Tuesday set a price target of HK$11.20 ($1.43), about 27% above where shares closed Friday. "Although profitability has been volatile in the past 2-3 years due to investment in [new energy vehicles] and one-off non-cash expenses, we see good visibility on profit growth aided by increasing sales volume and potentially reduced losses at its NEV businesses," the Morgan Stanley report said. "We think the company's profitability will allow it to navigate the current macro economic uncertainties," the analysts said.