The race to be China's Tesla hits the accelerator | Article – HSBC VisionGo

A spate of fundraisings sees investors and tech giants betting on which local electric car firm will emerge as China's version of Elon Musk's firm

Technology  ·    ·  8 mins read

Every December there are forests of forecasts on what might happen in the year ahead. How much do they get right? At the end of last year no one was predicting that oil prices would dip briefly into negative territory. There were no scenarios for a tech-heavy Nasdaq repeatedly hitting record highs, despite a deadly global pandemic.

It would have been a similarly bold call for an analyst to predict that Tesla would emerge as the world’s most valuable car firm. But a 250%-plus spike in its share price so far this year saw the electric vehicle (EV) pioneer surpass $300 billion in market value last week. Toyota (with a $200 billion market cap) is trailing some way back and General Motors ($37 billion) isn’t even in Tesla’s rearview mirror.

In early 2017 Tencent revealed it had scooped up a 5% stake in Tesla. The Chinese internet major might be tempted to cash this out were it merely an equity investment – the stake has soared to more than $15 billion in value from its $2 billion starting point. But there’s little indication that Tencent is looking to take profit. Instead, the internet giant has just doubled down on its other bet on the EV sector – in this case a Chinese start-up. The move has added more intrigue to what is not only the world’s largest car market but also the one that is moving fastest to an electric future.

What is Tencent’s latest move into the auto industry

“Has Tencent identified another Tesla?” an automotive market analyst asked on 36Kr.com, following the internet firm’s decision to pump fresh funds into NIO last month. The new investment take its stake in Nasdaq-listed NIO to more than 15%.

Most investors would have deemed the Tesla comparison outlandish a year ago when NIO was struggling to survive. News reports on missed sales targets and a cash crunch saw the company’s stock price plunge to nearly $1. It has since rebounded more than 1,000%. Earlier this month it approached $15 (versus its $6.28 IPO price in 2018) on news that it had received Rmb10.4 billion ($1.5 billion) in loans from six state banks. The news brought its market value briefly above the $17 billion mark.

“We have been transferred to the common ward from the intensive care unit after a year’s hard work,” NIO founder and CEO William Li told journalists.

In April NIO secured a Rmb7 billion investment led by the local government of Hefei. In return the Shanghai-based firm will move all its local operations, including R&D and supply chain management, to the capital city of Anhui province.

But the continued backing from Tencent has been another key factor in NIO’s revival. In September last year, NIO raised a much-needed $200 million by selling convertible notes to Tencent and Li himself (convertible at $2.98 to $3.12).

One interpretation is that Tencent is betting on Li as much as it is on NIO. The 46 year-old, an Anhui native, founded an internet platform 20 years ago specialising in delivering information on China’s car market. At the time about two million cars a year were being manufactured in China, or 3.5% of the world total. Li’s venture would grow into Bitauto (or Yiche.com in China), one of the largest car marketplaces in the world. Tencent was an investor in Bitauto when it went public (again on Nasdaq) in 2010 and last month the tech giant led a consortium that took Bitauto private in a $1.1 billion all-cash deal.

Are other tech firms interested in the car sector?

Tencent’s long-term acquaintance with Li may help to explain its confidence in NIO, which it picked out from a wide array of EV start-ups in China, Caijing magazine thinks. But it isn’t alone as a tech investor in the EV sector. Alibaba bought 10% of XPENG Motor (see WiC397) in 2017, while Baidu is a key investor in WM Motor.

Meituan-Dianping, the operator of China’s so-called ‘everything app’, has also joined the fray (see WiC498 for how Meituan has muscled out Baidu at tech’s top table). According to 36Kr.com. Meituan CEO Wang Xing personally put $300 million into Lixiang Automobile’s $530 million fundraising round last August. Late last month Meituan topped up the cash reserves at the five year-old Lixiang with another $500 million investment. The fundraising values the Beijing-based EV brand at $4 billion.

In a social media post published in January this year, the Meituan boss explained that China’s car market is being divided into a “3+3+3+3” format. In his view that constitutes the three largest state-owned carmakers in FAW, Dongfeng and Chang’an; three SOE car firms backed by local governments in Beijing (BAIC), Shanghai (SAIC) and Guangzhou (GAC); three private sector brands in Geely, BYD and Great Wall; and three EV start-ups in Lixiang, NIO and XPENG.

According to Wang, the future of the sector will be decided by battles between these 12 firms.

His prediction quickly stoked debate. Critics pointed out that his forecasts seemed to ignore the elephant in the room – Tesla, the only carmaker in China wholly-owned by a foreign firm (that is to say, not in a joint venture). Wang’s selection of the final subgroup – or the most promising EV start-ups – was also controversial. Commentators spotted that he had omitted WM Motor, which is backed by Baidu, and WM’s founder Freeman Shen was soon on social media offering a bet (not uncommon among Chinese entrepreneurs) that his firm would be one of the “top three new forces”.

XPENG’s founder He Xiaopeng was also busy on WeChat recently, posting a photo of himself with Lixiang’s boss Li Xiang and NIO’s William Li. “Three miserable hardworking guys thinking about changes while recalling their miseries,” he wrote, adding a photo of three of Marvel’s Avengers characters and another picture of a famous battle during the Three Kingdoms period when three generals took on a mighty warlord.

Chinese businesspeople often deliver thinly veiled messages in playful WeChat posts, so He’s photo was parsed widely in car industry circles. Many thought he was inferring that XPENG and Lixiang were going to join NIO in going public on an American bourse. Lixiang has already filed a listing application, Reuters reported this month. But the final image of the Three Kingdoms battle image was interpreted differently, as a suggestion of some form of alliance or cooperation between the Chinese start-ups to fend off a formidable rival, such as Tesla. There was even speculation that the trio might be heading for an audacious merger.

Which players are out of the race?

NIO, Lixiang and XPENG all experienced miserable times last year but the worst appears to be over after their latest fundraising rounds.

ThePaper.cn reported this week that XPENG has secured $500 million in new funds from investors that include private equity firms Sequoia China and Hillhouse Capital. The deal valued the Guangzhou-based company at $4 billion.

Other start-ups have been struggling to survive in business conditions in which China’s car market has slowed dramatically. Sales of new energy vehicles fell for a 12th straight month in June amid the Covid-19 outbreak. Yet Tesla, which started selling locally-made Model 3 sedans earlier this year, is grabbing a bigger slice of the shrinking market. According to Bloomberg, the American firm’s market share is close to 25% of EV sales in China.

That’s making life difficult for a slew of local wannabes. Byton was the latest to throw in the towel, despite having state giant FAW as one of its investors. Prior to that, Bordrin and Saleen also wound down their China operations (see WiC503). Saleen was only launched last July, hiring Hollywood action star Jason Statham for the debut of its new model at the stadium once used for the Beijing Olympics. However, it emerged last month that Saleen executives have been mired in investigations into alleged crimes including embezzlement of state-owned assets.

Another new car brand that has flattered to deceive is Faraday Future. The California-based company’s parent firm LeEco has been struggling financially for a while. Earlier this month a $2 billion bankruptcy case relating to LeEco and its boss Jia Yueting was finalised. He has promised a comeback with the carmaker, but after a falling out with Evergrande, one of its earlier disgruntled investors, the ‘nine-lived’ entrepreneur is going to find fresh fundraising tricky.

Which is the most valuable Chinese car firm now?

SAIC has long been China’s leading carmaker in terms of market value. As of Thursday, the Shanghai-listed firm was worth Rmb223 billion, although its share price has dropped more than a fifth in 2020 on concerns that the Covid-19 pandemic is slowing the car market further.

According to Jiemian, a news portal, SAIC’s crown as the most valuable car firm was taken last week by BYD. The battery and EV maker’s market capitalisation surged to Rmb225 billion this week after an 80% rally in its Shenzhen-listed shares.

That is still a tenth of Tesla’s valuation yet enough to generate talk on whether BYD’s shares are approaching “bubble territory”. The company’s net profit dropped 41% last year and the recent spike in the share price means that it is trading at more than 100 times its past earnings, a historical high.

“Some observers are drawing comparison with how Tesla has overtaken Toyota’s valuation,” Jiemian said of the BYD stock price.

In terms of total revenues, BYD has a lot of catching up to do. It racked up Rmb128 billion in sales last year, which was only 15% of SAIC’s Rmb843 billion; net profit stood at Rmb1.6 billion, or 6.3% of that of SAIC, which is one of the key JV partners of Volkswagen.

Shareholders are clearly pricing in BYD’s prospects of future profits. Akin to the growing gap between Tesla and Toyota, investors have been encouraged by the potential of BYD’s EV business. It topped China’s EV sales chart last year with 230,000 vehicles. Moreover, its battery unit produces up to 17% of China’s EV batteries. It has emerged as the key local rival to CATL, another of the leading battery makers (see WiC499), which is also a business partner of SAIC.

CATL was worth Rmb450 billion as of this week, Jiemian noted. Given that BYD’s EV battery division has almost a third of the capacity of CATL’s, the news portal thinks that this unit alone should be valued at Rmb150 billion. Adding the potential value of BYD’s other units, including a semiconductor business that’s been earmarked for an IPO on the Shanghai STAR Market, Jiemian reckons BYD ought to be worth at least Rmb240 billion (i.e. it’s fairly valued). “BYD is obviously overvalued as a car brand. Yet investors are willing to give a richer premium to its different business units,” it concluded.

Is there a regional rivalry too?

Meituan’s Wang believes only six firms from the “3+3+3+3” matrix will outlast the next round of competition. To survive the winnowing out contenders needs to be financially strong, Caijing magazine noted. That means the major car brands have an edge. Newcomers or weaker players might only survive with the financial firepower of more powerful internet firms behind them.

The race between SAIC and BYD also underlines the longstanding rivalry between their home cities. BYD is listed in Shenzhen (and Hong Kong) where the tech-heavy ChiNext board has been outperforming the Shanghai bourse (see WiC502), which is home to SAIC.

Geely, a member of Hong Kong’s Hang Seng Index, will soon be coming to Shanghai as well, after the Zhejiang-based brand announced its plans for a secondary listing on Shanghai’s STAR Market last month. The focus will be on whether Geely includes its own EV business in the upcoming IPO.

The three EV start-ups Lixiang, NIO and XPENG are based in Beijing, Shanghai and Guangzhou respectively. But the relocation of NIO from Shanghai – home to Tesla’s Gigafactory – to Hefei has made the Anhui provincial capital into a more interesting proposition. In May Volkswagen said it would be investing €2.1 billion in the EV market, of which €1 billion would go towards increasing its stake in Hefei’s JAC Motors from 50% to 75%.

Volkswagen has also invested €1.1 billion into Gotion High Tech, a Hefei-based battery maker for electric cars (see WiC504).

All told, when you add the foreign firms into the mix (such as VW, BMW and Mercedes) it’s clear that a brutally competitive landscape hasn’t got any easier for the rival combatants.

Yet the recent fundraisings across the sector show that investors are starting to believe that the various disruptive forces that EVs are bringing to China’s massive car market will create some highly valuable winners.

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