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Ethical Investing, Lesson 8: Safety First

|Includes: Geely Automobile Holdings Ltd. (GELYF)

Everyone loves a safe, reliable product made by a respected company. In an age when product recalls flood the media and major corporations often prove themselves unworthy of consumers' trust, dependable companies that are still making safe products continue to be held in high esteem.  

Consumer products need not necessarily be "idiot proof" to be ethical, but they must be reasonably safe when used as directed. The ethical investor should know enough about a company's products to make a reasonable judgment about the company's commitment to consumer safety.

The word "safety" brings just one word to the minds of many consumers, myself included: Volvo. The company's dedication to safety goes back to its founding in 1927, when the first Volvos were created with Sweden's icy, dark winters in mind. Indeed, the company was championing safety long before government regulations required seat belts and safety glass. 

Volvo rolled out padded dashboards way back in 1956. Modern 3-point seat belts were invented by a Volvo engineer and became standard for Volvo cars in 1959, nine years before American cars were legally required to have basic lap belts. Volvo created the first rear-facing child seat in 1964, childproof locks on rear doors in 1972, and its own booster seat in 1978. Side airbags were standard in all Volvo models by 1996, head-protecting airbags joining them two years later. Volvo engineers kept improving the cars' safety with whiplash protection, blind-spot vehicle detection, an optional safety feature that can detect an intruder in the car, adaptive cruise control, collision warning and brake support, and pedestrian detection with an automatic brake. 

Many car manufacturers have added similar features to their vehicles. After Ford Motor Company bought Volvo, many of Volvo's safety features were added to Ford cars. Basically, Volvo sets the standards. Are you sold on their dedication to safety, or do I need to go on?

Volvo is currently owned by Zhejiang Geely Holding Group (0175.HK). The holding company has a $14 billion market cap, and trades at a P/E of 8.7. You can also purchase Geely Automobile in the US over the counter market (OTC: GELYF.PK). Geely intends to make Volvo-branded cars for the Chinese market, which Volvo has already agreed to. The Chinese government has not yet agreed to this proposed situation, but given the exploding demand for sedans and higher-end cars in China, it is probably only a matter of time before an arrangement is made. In spite of all the fraud and ethical issues surrounding a lot of Chinese companies, Geely is a real company making real cars for a rapidly expanding market. Therefore, I was quite surprised at the astounding valuation metrics on Geely.

Volvo-branded cars, of high enough quality to win Volvo's approval, would most likely be in high demand among China's growing middle and upper middle classes. And Geely has the means to begin production - they have just under $700 million in cash, plus ready access to inexpensive labor and materials. The stock is currently $1.90 in Hong Kong and a low $0.23 per share in the OTC version, so any investor with faith in China's emerging free markets can afford to purchase at least a few shares.

Geely does have the usual slug of debt associated with automobile manufacturing, but with their cash and current EBITDA, it could be paid off easily. Geely has a single-digit P/E and 10% profit margins, which are very healthy for this industry. With a modest valuation and the opportunity to use Volvo's long history of safety in the world's largest car market, Geely is enthusiastically endorsed by this ethical investor. 

Disclosure: I have been a Volvo driver since 1999.