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Financial statement analysis report

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3 Capital Structure and Solvency Analysis

3.1 Analysis of Capital Structure

Geely automobile Holdings Limited

Analysis of Capital Structure

HK$'000 2005 2006 2007 2008 2009

L-Tdebt – – – 87000 1318000

Deferred taxation – – – 8018 37727

other L-T liabilities – 682838 309274 0 1442153

Total L-T liabilities – 682838 309274 95018 2797880

Current liabilities 54548 227198 5273470 76378 8907789 Total liabilities 54548 910036 5582744 171396 11705669

% 6% 46% 68% 3% 62%

common shareholder's

equity 798080 1030157 2441440 4197862 6375613

minority interests 9013 19769 211760 584619 720907 Total equity capital 798080 1049926 2653200 4782481 7096520

% 94% 54% 32% 97% 38%

Total liabilities and

equity 852628 1959962 8235944 4953877 18802189

100% 100% 100% 100% 100%

From common-size analysis, we know leverage rate of Geely is stable for year 2006

and 2007, declines sharply for year 2008, and then rebounds strongly to 62% in year

2009. Then look at the absolute value, it's not difficult to find out a great rise in both

liability and equity capital. In 2009, the total liability is more than a trilion. Referring

to its investment and operation in recent years, we think Geely is trading on equity, which indicates it is using equity capital as a borrowing base in a desire to reap

excess returns. This can be confirmed by its step-by-step acquisition of many

assembly line and investment on new factories financed by bond and bank borrowing,

which is conversely based on increasing equity( stock price stimulated by expansion).

Those investments are revalued and taken into asset as a new backup.

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3.2 Solvency Analysis

Geely Automobile Holdings Limited

Solvency Ratios

HK$'000 2005 2006 2007 2008 2009

D/E ratio 0.07 0.88 2.29 0.04 1.84

Interest coverage ratio – 7.66 10.11 16.06 15.46

S-T D/E – 0.22 2.16 0.02 1.40

The computation for Year 2009 is shown here: D/E ratio= Total liabilities / Shareholder's equity = 2,797,880 / 6,375,613

Interest coverage ratio= EBIT / Interest Expense = 1,657686 / 107,226

S-T D/E= Long-term liabilities / Shareholder's Equity = 8,907,789 / 6,375,613

The computation for EBIT is shown below:

HK$'000 2005 2006 2007 2008 2009 Net Profit 115377 214149 318100 866053 1319028

Interest expense – 32390 35103 60952 107226

Taxation – 1585 1673 51869 231432

EBIT 115377 248124 354876 978874 1657686

Since the ratio of debt to equity capital is relatively high, we need to take a further look of its financial condition.

Before assessing long-term solvency we want to be satisfied about the near-term

fianncial survival of Geely. Unfortunately, Geely's short term debt to equity ratio is

1.40, quite high in the most recent year. Although it can raise capital from HK listed

market, equity is apparently not enough to make up its shortage of capital in short

term. According to NOTE, Geely has discounted notes receivable to banks

exchange for cash with recourse in the ordinary course of business. Therefore,

risk resulting from its speeding expansion not only depends on its own performance,

but its customers' financial distress.

Interest coverage ratio is satisfactory, which means payment of the interest liability

Geely has incurred on its long-term borrowing is in a less pressure.

4 Analysis of Liquidity

Geely Automobile Holdings Limited

Analysis of Liquidity

HK$'000 2005 2006 2007 2008 2009 Industry

norm1

Accounts

Receivable

Turnover

1.91 0.95 1.99 1.51 2.29 19.47

Acid-test ratio 1.13 0.68 10.44 0.71 1.19

Acid-test ratio 1.13 0.68 10.44 0.71 1.19

Inventory turnover 15.89 11.10 8.36 136.70 393.17 31.79

The computations are as follows:

Accounts Receivable Turnover = Net sales / Average accounts receivable

Acid-test ratio = Cash and equivalents + Marketable securities + Accounts receivable /

Current liabilities

Inventory turnover = Cost of goods sold / Average Inventory

The selected accouts used in computation are here: HK$'000 2005 2006 2007 2008 2009

Sales revenue 101411 127006 137209 4289037 14069225 COGS 90649 110036 121251 3637752 11528489 Inventory 5703 9910 14498 26611 29322 current asset 67212 280681 884331 5110552 12219411 current liability 54548 227198 79559 5273470 8907789

Trade and other

receivables

44840 59065 65443 2840255 6144929

Dividend receivable 8220 74840 3560 – –

Accounts receivable 53060 133905 69003 2840255 6144929 cash & cash equivalents 8449 20972 761684 889408 4498155 Marketable security

The accounts receivable turnover is much worse than industry average. However, an increase of accounts receivable may due to rise in sales or difficulty in collecting quite

timely. Referring to NOTE, we know that receivables are guaranteed by established

banks in the PRC and have maturities of six months or less. So the likelihood

timely collection is in less question.

The inventory turnover is exaggeratedly higher than industry level, especially after its installment of P-SCM supply chain management system, which integrates ordering,

producing, selling, and distributing. So we can conclude that Geely is doing

excellence in inventory management and is enjoying a growth in market demand of its

products.

1 Industry average figure reference: http:// www.stats.gov.cn

5 Operating Performance and Profitability

5.1 Return on Investment Geely automobile Holdings Limited

Return on Invested Capital Ratios

HK$'000 2005 2006 2007 2008 2009

RNOA 8.95% 14.01% 8.29% 5.71% 7.58%

ROCE 15.90% 23.43% 18.33% 26.09% 24.95%

The detailed computation are as follows: Payables 34817 23653 38725 37176 4229631

Long-term Debt – 34817 23653 38725

NFO 34817 58470 62378 75901 4229631

SE 798080 1030157 2441440 4197862 6375613

NOA 832897 1088627 2503818 4273763 10605244

HK$'000 2005 2006 2007 2008 2009

Sales 101411 127006 137209 4289037 14069225

COGS (90649) (110036) (121251) (3637752) (11528489)

Distribution and

selling expense (379) (3016) (3055) (219807) (764563)

Administrative

expenses (18378) (22542) (45394) (282536) (524130)

Share of results

of associates 122691 243230 351832 226335 (15145)

NOPAT 74552.4 152517.3 207571.6

5 243930.05 803983.7

Assuming all other income and equity earnings of affiliates( share of results of associates) are operating, and interest income and minority interest are nonoperating.

Also, using the statutory income tax rate of 35%.

HK$'000 2004 2005 2006 2007 2008 2009

Net income 115377 214149 318100 866053 1319028

Common equity 653447 798080 1030157 2441440 4197862 6375613

Average common equity

725763.5 914118.5

1735798.5

3319651 5286737.5

ROCE = Net income - Preferred dividends / Average common equity

No evidence of preferred dividend payment revealed in statements

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5.2 Operating performance

Geely automobile Holdings Limited

Analysis of Profit Margin Ratios

HK$'000 2005 2006 2007 2008 2009

Working capital 12664 53483 804772 (162918) 3311622

Gross profit margin 11% 13% 12% 15% 18% Operating profit

margin 61% 122% 605% 87% 76%

Net profit margin 114% 169% 223% 20% 9%

The Computation are here:

Gross profit margin = (Net sales - COGS) / Net sales Operating profit margin = EBIT/ Net sales

Net profit margin = Net income / Net sales

The selected accouts used in computation are as following:

EBIT 61509 154877 830687 3729663 10643084

Net income 115377 214149 305767 866053 1319028 Share of results of

associates 122691 243230 351832 226335 (15145)

We see that Geely's gross profit margin is increasing stably. Yet its Operating profit

margin is abnormally high and moves in a quite volatile way, along with its net profit

margin. Link these profitability measures with evidence in earlier analyse, it is

difficult to find that sales grows gradually based on a health cost and expenses

increase. The variable that strongly influences net income is the account "share

results of associates", which demonstrates its success in expansion with rotative

financing.

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