Volvos could become cool

There is a real and present danger Volvos could become cool. They were once decried as steel boxes that European dentists piloted from home to surgery to golf course. Sleek new models are attracting younger buyers. That is auspicious for banks hired to lead a mooted $15 billion to $30 billion flotation of the car company. But shares in Chinese sister company Geely Automobile, which jumped 4 per cent, remain overvalued, irrespective of any Volvo initial public offering. The two businesses share an unlisted parent in Zhejiang Geely, which acquired the Swedish group from Ford in 2010… The only evident cross-fertilisation is a jointly produced electric vehicle, which debuted in December last year. Premium cars do well in China. However, Volvo is seen as solid rather than top tier… Geely hopes the listing will value Volvo cars at 16 times more than the $1.5 billion it paid Ford in 2010. That would boost Zhejiang Geely, but not its listed subsidiary. Analysts have believed Geely Auto’s share price was running ahead of its earnings growth potential. At 12 times forward earnings, it trades at double that of domestic rivals such as Guangzhou Automobile. Geely’s stock gets a high valuation as a national champion for China’s electric car ambitions. It has significant weaknesses. In 2016, subsidies constituted 15 per cent of net income. Last year free cash flow halved, while net income doubled. Not so cool.