Geely Choking on Volvo Debt, Weak Sales 吉利债台高筑

What a difference a year makes, at least if your name is Geely, the company that was China’s pride last year when it purchased struggling Swedish automaker Volvo. The blogosphere has been buzzing the last 2 days after Chinese magazine Securities Weekly reported the company, whose Hong Kong-listed unit Geely Automobile (HKEx: 175) shares are down by half this year, is struggling under a mountain of debt now totaling 71 billion yuan, equal to about 73 percent of its assets. (Chinese article) The report prompted Geely to say it is capable of paying back the debt, and blasted the magazine for harming its image. Geely said earlier this year that Volvo’s sales in the first half of the year rose 20 percent and that it reported a $190 million operating profit. (previous post) But Volvo is in all likelihood still losing lots of money on a net basis, meaning it can’t really help to pay down the big debts that Geely is now carrying. Furthermore, Geely’s own profitable operations in its home China market are also starting to show signs of trouble, as the broader domestic auto market slows following nearly 2 years of blockbuster growth fueled by economic incentives from Beijing to boost consumption during the global economic crisis. As the industry slows, domestic names like Geely, Chery and BYD (HKEx: 1211; Shenzhen: 002594) are taking the biggest hit, as all have far fewer resources to weather such a downturn compared with rivals that operate joint ventures with big international names like Ford (NYSE: F), Volkswagen (Frankfurt: VOWG) and General Motors (NYSE: GM). Geely reported last week its October sales fell 10 percent from a year earlier, even as the broader market grew slightly (English article), and I suspect we’ll see more declines in the months ahead. All this could further strain Geely’s ability to repay its debt, which could force the company into a painful restructuring if things at Volvo and its domestic operations don’t improve quickly.