China’s latest EV stocks face uncertain reception in New York | Mint

China’s latest EV stocks face uncertain reception in New York

Chinese EV startup Zeekr will launch to consumers in Europe before it tackles the US. (Photo: Reuters)
Chinese EV startup Zeekr will launch to consumers in Europe before it tackles the US. (Photo: Reuters)

Summary

Fast-growing startups Zeekr and Lotus will need to persuade investors they can handle brutal competition at home and geopolitical tensions abroad.

Electric vehicles have really taken off in China, but so has competition. That is the conundrum investors face as they size up the latest EV brands pitching their growth prospects in New York.

Lotus Technology is in the final stages of a merger with a Nasdaq-listed special-purpose acquisition company that values it at $5.5 billion. This week it said investors had committed $870 million to the deal, a step toward closure. Zeekr Intelligent Technology Holding, which raised money in February at a $13 billion valuation, filed its registration statement earlier this month for a U.S. initial public offering.

Both companies are products of Li Shufu’s automotive empire Geely, which is most famous in the West for reviving Swedish brand Volvo Car. Zeekr started as an upscale EV subsidiary of Li’s Chinese automaker Geely Auto before being spun out into its own company in 2021. Lotus is an even younger luxury EV offshoot of the namesake British racing-car brand, in which the Geely holding company bought a majority stake in 2017.

They will be the first Chinese EV startups to tap the U.S. market for some years, bucking a trend toward fundraising in Hong Kong. Zeekr rival NIO blazed a trail with its initial public offering of American depositary receipts in 2018, followed by XPeng and Li Auto in 2020. But as geopolitical tensions between China and the U.S. worsened, all three companies sought backup listings in Hong Kong. When another startup called Leapmotor went public last year, it headed straight for the Asian financial center. Chinese market leader BYD has been listed in Hong Kong since 2002, though back then it was a battery business.

Li, who has long had a global mindset, seems prepared to bet that China and the U.S. can keep working together. Unlike most Chinese EV startups, Zeekr and Lotus have open ambitions to build American businesses that might benefit from the brand halo of a local listing. Lotus’s SPAC pitch involves it selling 9,000 vehicles in the U.S. next year and 20,000 the year after. Zeekr will launch to consumers in Europe before it tackles the U.S., but meanwhile it has a deal to supply purpose-built autonomous taxis to Alphabet’s Waymo business.

This internationalism seems in part a hedge against a brutal market environment in China, where Tesla started a price war late last year. Consumer appetite for EVs is strong in the world’s largest car market, helped by prices that are now broadly comparable to gasoline cars at key price brackets. But so many companies have leapt at the opportunity that there is intense competition fueled by excess production capacity.

As is often the case when one technology supersedes another, it is “easier to figure out losers" than winners in the Chinese EV market, says Bernstein equity analyst Eunice Lee. In China the losers are the foreign brands that still dominate the shrinking market for traditional cars, most notably longtime leader Volkswagen but also Toyota and Nissan.

The only clear winner is BYD, which had a 34% share of Chinese EV sales in October, according to Bernstein’s analysis of insurance data. Scale, particularly in the battery business, has made it solidly profitable, with $4.2 billion in expected net earnings this year, according to consensus analyst estimates on FactSet. But even its growth prospects have been clouded by competition this year, with its stock down sharply in recent days following reports of discounting.

There is a long tail of companies fighting to achieve sustainable scale. Despite rapid growth since its first vehicle launch in 2021, Zeekr was only China’s 16th largest EV brand in October. It made a solid gross margin of about 18% on vehicle sales in the third quarter, helped by a “capital-light" model that uses Geely’s manufacturing assets. But the company still lost money as it doesn’t yet have enough sales to cover overheads.

The landscape in some ways resembles the American automobile industry in the early decades of the 20th century, which featured Ford as a successful pioneer of scale manufacturing followed by lots of struggling startups. It was only after a couple of industry shakeouts in the 1920s that General Motors and Chrysler joined Ford to make up the “Big Three."

A similar shakeout in China still seems a way off. One EV brand facing financial difficulties, WM Motor, filed for a kind of prebankruptcy restructuring process last month, but others recently raised fresh money, including XPeng from Volkswagen and Leapmotor from Stellantis. Not only are Western automakers desperate to keep horses in the industry’s biggest race, but China’s regional governments often don’t want to let important local employers fail either.

For all their growth potential, Zeekr and Lotus are caught between a crowded home market and geopolitical tensions abroad. Investors that hail a ride need to reckon with a lot of risks.

Write to Stephen Wilmot at stephen.wilmot@wsj.com

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