Aston Martin is a binge too far for China’s Geely

Timing is everything in investing, a refrain the ambitious Li Shufumight want toheed.

TheGeely Grouphas held preliminary talks abouta possible investment in Aston Martin Lagonda Global Holdings Plc, the high-endbut encumberedBritish carmaker of James Bond fame. Billionaire Lawrence Stroll,owner of the Racing Point Formula One team, is also amongthe investors looking to pump infresh capital.

At first blush, this isn’t surprising. Struggling to dent the world market with Geely Automobile Holdings Ltd.’s(1)ownvehicles, the Chinese auto executive hasdeveloped amodus operandiof appearing to ascendthe value chain by picking up marquee brands, financially precarious thoughthey may be. Through his holding company Zhejiang Geely Holding Group,Li splashed out $9 billion to build a 9.7% stake in Mercedes Benz-maker Daimler AGin 2018. Zhejiang Geely owns or has stakes in Volvo AB, Lotus Cars, Malaysia’s Proton Holdings Bhd and even a flying car company, Terrafugia Inc., either directly or through its subsidiaries.

Li is trying to stayahead of the expensive technology curve. Earlier this month, Geelyset up a joint venture with Daimler to make the electric version of Smart cars in China. The company hasan electric vehicle battery joint venture with South Korea’s LG Chem Ltd. Geely has also used Volvo Car Group in a joint ventureto subsidize Lynk& Co., a more upmarket version of Geely’s homegrown brands that’sso far sold primarily in China.So, Aston Martinseems to fits in. But this time, Li has more to consider: business at home. Geely Autosold 1.36 million cars last year, posting$2.8 billion inprofit for the 12 monthsto June 30, but the Chinese market is struggling to find afooting. Retail car sales tumbled more than 7% in 2019, with production down 9.5%.All told, sales in the world’s largest car market are shrinking and the competition to surviveis gettingstiffer.The outlook is grim. While newcar buyers accounted for two-thirds ofsales over the last five years, the next fivewill likely be driven by replacement demand, Goldman Sachs Group Inc. forecasts. To keep up with upgrading consumers, most automakers, including Geely, are rolling out new models of multi-purpose vehicles (thecategory that liesbetween SUVs and family vans).Sure, Geely is investing in a future ofelectric cars,but the costs for mass adoption remain high.

Geely has done better through the downturnby maintaining a fine balance between production, sales and inventory.But it has had to slash sales targets, moving further away from its goal of selling 2 million vehicles by 2020. WhileLynk sales volumes rose,net profit fell. Research and development costs continue to climb. Geelyremains exposed to lower-tier cities, where demand has cratered.

Vanity buying is best saved for more upbeat times. Investing inAston Martinwill be a cash sink, premium brand or not. Low as the price may be, astake won’t add value to Li’s auto portfolio any time soon given its debt burden and a struggling core business. The Geely group should have other priorities, especially its finances.

Debt atZhejiang Geely totaled136 billion yuan ($19 billion)at the end of September 2019, up from 92 billion yuan a year earlier. Previous stake purchases have come with leverage. To buy Daimler, for instance, Geely took to using complex derivatives. Its ratio of net debt to earnings before interest, tax, depreciation and amortization rose to 1.4 times in 2018 from 0.6 times in 2017, according to S&P Global Intelligence, because it took on a fair amount of debt to fund the acquisition of its 8% stake in Volvo AB. The credit rater estimated that theleverage ratio could rise further on lower sales and shrinking margins.Meanwhile, the parent actively supports various operations atsubsidiaries.

Geely may find the slow lane is best for now.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.