This article is excerpted from the autocarweekly official account
Author: Finance Street Old Li
Volvo IPO, close to fundamentals, far from imagination.
Recently, there has been news in the market that Volvo is expected to be listed in Stockholm, Sweden at the end of this month, with an estimated valuation of about $20 billion. If the listing is successful, it will become Europe’s largest IPO this year. At the same time, there were rumors a few days ago that Volvo will also be listed on the Hong Kong Stock Exchange, becoming a luxury car brand listed in Hong Kong.
As the news was expected, the news of Volvo’s IPO did not cause any market fluctuations. Since the merger plan of Geely Automobile and Volvo stopped at the beginning of this year, many researchers have speculated that Geely Automobile and Volvo will be listed separately. From the news point of view, it is neutral for both Geely and Volvo.
Everyone knows very well about the brand and technology of Volvo. Today, Old Li will talk to you about Volvo from a capital perspective. As a company that has been around for nearly a century, why has Volvo’s listing been so tumultuous? Why is its listing a cry to the capital market? After a big move, who will be the ultimate winner?
There is no best solution in the capital market
In Volvo’s history of going public, Geely and Volvo have been seeking to maximize their interests in going public. This may be a fallacy. Old Li believes that there are two reasons: First, from the capital perspective, Volvo is a traditional car company, and in the traditional track, time is not a friend of valuation, but an abyss; secondly, the external environment of the capital market changes very quickly, and all opportunities are fleeting, and the last one may not be the watermelon.
In the past five years, Volvo has had two opportunities to go public. One was in 2018, when Volvo planned to go public independently during its golden development period; the other was in 2020, when Volvo planned to go public on the Hong Kong Stock Exchange through a merger with Geely. Both plans were eventually aborted, mainly because Geely and Volvo did not believe that it was the best time or plan to go public at that time, or that the valuations of the two IPOs were not satisfactory.
In the past three years, Volvo has changed, and the capital market has changed too. Generally speaking, the more turbulent the internal and external environment, the less favorable it is for IPO companies.
In 2018, Volvo’s business was in its golden period, but the external environment was not favorable, and it failed to achieve the desired valuation. At that time, institutions including Goldman Sachs and Morgan Stanley gave Volvo valuations of between $12 billion and $18 billion, and some institutions gave valuations of over $20 billion, but in the eyes of shareholders, they were not satisfactory numbers, and Volvo’s listing ended.Three years later, looking back, 2018 was indeed the best time for Volvo’s IPO. At that time, Volvo was in a golden period of development, with the SPA platform 90 series and 60 series products successively launched, sales continued to rise, and the CMA platform 40 series products also received widespread attention from the market. From the fundamental point of view, there was no problem with Volvo’s performance.
In 2019, the capital market emerged from the shadow of 2018, but Volvo lost the favor of capital. From that year onwards, the focus of capital shifted to new energy, from Tesla to “We Xiaoli”, which rose wave after wave. From then to now, the international market has not given any chance to traditional car companies.
At the same time, Volvo’s business also lost its “highlight” from that year. After the launch of the Volvo S60 in 2019, all the main models of the SPA platform have been launched, the CMA platform 40 series is lukewarm, and new energy vehicles are basically blank. Volvo has played all its cards, but due to lack of financing support, the development of new platforms is relatively slow, which has resulted in Volvo being ignored in the capital market.
Subsequently, everyone knows what happened: in February 2020, Volvo Cars and Geely Automobile announced that they were planning to reorganize their business, and the reorganized Volvo Cars would be included in Geely Automobile’s Hong Kong-listed company (HK.0175) and consider listing in Sweden in the future. In February 2021, the two parties launched a new merger plan, which abandoned the plan to merge and go public as a whole, and instead merged powertrain businesses and carried out technology cooperation in areas such as electrification, intelligent interconnection, and autonomous driving.
In February of this year, after Geely and Volvo announced the abandonment of the merger and listing, many researchers judged that Geely and Volvo would go public separately. Subsequently, a series of events basically confirmed the researchers’ judgment: in April, Polestar was officially released; in June, Geely stopped its listing on the Science and Technology Innovation Board; in July, Volvo Cars completed the acquisition of Daqing Volvo (manufacturing base) and Shanghai Volvo (research and development center).
Some friends also asked why Volvo Cars did not IPO in China. From the perspective of maximizing interest, mainland China is not the best choice. A shares are inferior to European and American markets in terms of market size, liquidity, and company P/E ratio. The Stockholm Stock Exchange belongs to the Nasdaq Group and has sufficient influence in Europe, which is more conducive to absorbing Swedish and European funds. In comparison, the A-share market is more like a “closed small-cap” market, far inferior to the Hong Kong market. However, due to reasons related to its parent company, it is reasonable for Volvo Cars to choose to IPO in Hong Kong.## Valuation Power of Capital
Volvo’s IPO plan has encountered twists and turns, mainly because its valuation did not meet the ideal expectations. Subjectively, the ideal expectations were judged by Geely and Volvo’s shareholders, and the power of valuation lies in the hands of the capital market.
The basis for capital market pricing is fundamental analysis and imagination. From a fundamental perspective, Volvo, as a high-end luxury car company, has shown a year-on-year increase in revenue and net profit in the past five years, fully supporting its current valuation. In 2020, its revenue reached SEK 26.28 billion (approximately RMB 20.33 billion), and operating profit reached SEK 8.5 billion (approximately RMB 6.58 billion), which is equivalent to 1.3 BYD revenues and multiple “Weixiao Li”.
Facing such fundamentals, shareholders have high expectations. In the plan for Volvo’s independent listing, shareholders expect a valuation of at least over USD 20 billion, or even higher; in the plan for Volvo and Geely’s merger and listing, shareholders expect even higher valuations. However, the reality is that Volvo’s valuation is far less than that of BYD, Weixiao Li, and even domestic car makers Geely and Great Wall.
In February of this year, at an investor communication meeting between Geely and Volvo, Gui Shengyue, CEO of Geely Holding Group, also expressed similar concerns about how to give Volvo a relatively reasonable valuation in the merger of Geely and Volvo’s equity and assets.
Regardless of whether the valuation is too high or too low, it will cause great pressure on Geely’s listed company (HK.0175). An undervalued pricing will sacrifice the interests of Geely Holding Group, while an overvalued pricing will dilute the shares of existing investors too much. From the perspective of major shareholders, the latter is preferred, but in the long run, even if a high valuation is given, the merged entity will be relatively large and dispersed, which is not conducive to future capital evaluation.
Relatively speaking, independent listing seems to be a more reasonable plan. However, from 2018 to 2019, there has been a huge change in the development direction of the automotive industry. The capital market no longer takes the fundamentals as the main pricing basis, but takes imagination as the main pricing basis.This is Volvo’s weakness, as well as a problem that all traditional automakers need to solve. Judging from the distribution of market capitalization of listed companies in the global automotive industry, the market capitalization of traditional multinational automakers is generally not high, and new forces in car making are the focus of capital competition.
Why is the valuation of new car-making forces high? It needs to be viewed from both the surface and the essence. On the surface, all new forces are promoting the new four modernizations. However, the capital market believes that the core competitiveness of the new forces is not in the new four modernizations, but in creating a new business concept for automotive enterprises. A new user experience has been created through new technologies, products, and marketing, forming a new ecosystem, and the imagination space for making money is much higher than that of traditional automakers.
This is also easy to understand. At this stage, traditional automakers are transforming their new energy strategies, and the sales volume of new energy vehicles of some companies has surpassed new forces, but their market value has not improved. Mr. Li believes that there are two reasons for this: one is that the capital market believes that traditional automakers only grasp the surface, and have not grasped the essence, so they would not give high valuations; Two is that the new forces currently have a good profit-effect, and capital is not necessary to give up new forces for the transformation of traditional automakers. If the valuation of traditional automakers rises, the profit-effect of new forces will inevitably be affected.
Traditional automakers are also very smart. Since the old brand is not working, they will increase their market-to-earnings ratio by establishing a new independent brand for listing. For example, Geely Holdings’ Lynk & Co is expected to be valued between 7 to 40 billion US dollars. Regardless of the final market pricing, it is at least in the same order of magnitude as Volvo, it is unimaginable, but it really exists. Therefore, new brands such as Guangzhou Automotive Aeolus, Changan Ovter, and Zeekr will also achieve independent listings through similar methods, but the market will provide what kind of valuation, still unknown.
Who is the winner behind the scenes?
In my personal opinion, in the twists and turns of Volvo’s IPO, no one is a winner, and everyone is a winner. The biggest beneficiary is Geely Holding Group.
As Volvo did not achieve beyond expectations valuation, no one is a winner, but on the other hand, Geely Auto, Zeekr Auto, Volvo, and Lynk & Co can all achieve independent listings. This is an acceptable outcome for all parties. For Geely Holding Group, this is the “best solution”.
Many people have mentioned that Geely Holding is becoming more and more like Volkswagen Group. On the surface, Geely Holding has already laid out multiple brands from low-end to ultra-luxury, such as Geely, Proton, Geometry, Lynk & Co, Volvo, Polestar, Lotus, etc. However, in essence, Geely Holding still has a long way to go compared with Volkswagen Group.According to the current development trend, maximizing the benefits of automotive industry group includes several parts, such as maximizing the value of whole vehicle brand, maximizing the value of industrial chain and maximizing the value of users. Volkswagen is focusing on maximizing the value of whole vehicle brand, while Tesla and BYD are focusing on maximizing the value of industrial chain. In the future, everyone will focus on maximizing the value of users.
Volvo has changed hands several times in the past, and each acquisition was accompanied by the transfer of R&D, manufacturing, and marketing systems. Generally speaking, the ultimate goal of mergers and acquisitions is to fully absorb and digest the other party, and then tightly bind the other party. Geely’s acquisition of Volvo followed this convention.
After Geely acquired Volvo, it controlled the capital flow of Volvo, but for a long time, the major brands under the Geely Holdings system were fighting on their own. In the past decade, from CEVT to Lynk&Co, from Polestar to Geometry, Geely Holdings has been balancing the R&D and profitability of each brand, learning from each other’s strengths and making up for each other’s weaknesses.
After the new restructuring plan was announced in February this year, many researchers sighed that Geely Holdings had finally gained complete control of Volvo Cars. In the past many years, Volvo Cars mainly relied on its parent company for capital injection. Through the restructuring, Geely Holdings successfully “stripped off” Volvo Cars’ R&D system. The engine, transmission, powertrain and other businesses in Volvo’s traditional fuel-powered vehicles will be owned by an independent joint venture established by Geely and Volvo Cars, rather than directly owned by Volvo Cars. Coupled with the already controlled purchasing system, Geely Holdings controls the throat of a car company.
When Volvo Cars acquired Daqing Volvo (manufacturing) and Shanghai Volvo (R&D) in July, Volvo Cars announced to the public that it had fully integrated its manufacturing, R&D and sales business in China through this acquisition. This is a PR rhetoric for capital, in fact, Volvo Shanghai R&D is more like a joint venture’s R&D system in China, and its parent company Geely Holdings is the “headquarters”.
Under the current R&D system of Geely Holdings, any sub-brand can be publicly sold, because no matter which one the buyer chooses, its future development will require Geely’s R&D support. Geely Holdings has achieved the maximization of resource value through the restructuring of subsidiaries’ equity and business.From “Merger and Listing” to “Volvo’s Independent Listing”, from Geely Automobile’s withdrawal from the Science and Technology Innovation Board to GEEK+ external financing, from CATL IPO preparation to CAOCAO Travel’s external financing, Geely Holding has started from the single track of capital globalization development to the dual-track development of capital and industrial globalization.
In the past few years, Geely’s actions in the capital market have been mostly strategic layouts, and cash returns have not been outstanding. At present, Geely Holding has slowed down its pace of mergers and acquisitions, focusing on capital and business integration. Regardless of the result, it is worth looking forward to both by capital and industry, because this is a new path for the globalization development of Chinese enterprises.
This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.