/// With a cash reserve of only 2.84 billion yuan, Nezha urgently needs capital market support.

Edited by: Xiao Ying

Nezha Automobile, invested by Zhou Hongyi, is going to list in Hong Kong.

On June 26th, Hezhong New Energy Automotive Co., Ltd., the main company of Nezha Automobile, a new force in car manufacturing, officially submitted its prospectus to the Hong Kong Stock Exchange. China International Capital Corporation, Morgan Stanley, CITIC Securities, ABC International, and CMB International acted as joint sponsors.

This means that after NIO, XPeng, Lixiang, and Zero Run, four new forces in car manufacturing successfully listed in Hong Kong, Nezha Automobile is expected to become the fifth new force in the automotive industry to IPO in Hong Kong.

In the past three years, Nezha Automobile has experienced roller coaster-like development. It has gone through a peak period, once becoming the sales champion among new forces in car manufacturing, creating a myth of annual sales exceeding 100,000+, but only one year later, Nezha Automobile's sales fell to a trough and showed a continuous downward trend.

Public information shows that Nezha's sales continued to decline in 2023, with annual sales of only 127,500 vehicles, a year-on-year decline of 16.2%.

The prospectus also disclosed that in the first five months of this year, its car sales declined, delivering about 43,600 vehicles, which did not reach 20% of its annual target sales.

Once "rolling" in the low-end market with considerable gains, after failing to penetrate the high-end market, Nezha Automobile shifted its focus to overseas markets and fully bet on Southeast Asia. Will this be a "cure" to save Nezha Automobile?

01

Cumulative losses of 18.3 billion yuan, cash flow of only 2.84 billion yuan

According to the prospectus, Nezha Automobile's revenue in 2021 was 5.087 billion yuan, increasing to 13.05 billion yuan in 2022, a year-on-year increase of 156.5%. In 2023, the revenue was 13.55 billion yuan, basically flat compared to the previous year. The net losses were 4.84 billion yuan, 6.666 billion yuan, and 6.867 billion yuan, respectively, totaling over 18.3 billion yuan in losses over three years.

In terms of gross profit margin, Nezha Automobile's gross profit margin was -34.4% in 2021, -22.5% in 2022, and -14.9% in 2023. Although the overall gross profit margin has improved, it is still negative.

In terms of R&D investment, the R&D expenditures for the three years from 2021 to 2023 were 541 million yuan, 906 million yuan, and 1.598 billion yuan, respectively. In terms of R&D personnel, as of December 31, 2023, Nezha Automobile had 2,132 R&D personnel, accounting for 26.9% of the total number of employees.

In comparison, NIO's R&D expenditure in 2023 was 13.431 billion yuan, accounting for 24.15% of total revenue; Lixiang's R&D expenditure in 2023 was 10.586 billion yuan, accounting for 8.55% of total revenue; ZEEKR's R&D expenditure in 2023 was 8.369 billion yuan, accounting for 16.20% of total revenue; XPeng's R&D expenditure in 2023 was 5.277 billion yuan, accounting for 17.20% of total revenue.

It can be seen that although Nezha Automobile's R&D investment has been increasing year by year, it lags behind other new forces in car manufacturing in terms of R&D investment.

In addition, in terms of cash flow reserves, Nezha Automobile's cash flow is no longer sufficient to support a year's worth of losses. According to the prospectus, Nezha Automobile's negative operating cash flows were 2.99 billion yuan, 5.41 billion yuan, and 4.35 billion yuan in 2021, 2022, and 2023, respectively.

As of the end of 2023, the cash and cash equivalents on Nezha Automobile's books were only 2.84 billion yuan. Due to losses in the past few years, Nezha's cash on hand is relatively tight, which is one of the main reasons for its urgency to go public.

It is worth noting that Nezha Automobile has attracted a significant amount of capital since 2017, with a total financing of approximately 22.844 billion yuan.

In April this year, Nezha Automobile also announced that it had obtained a total investment of no less than 5 billion yuan from Tongxiang Municipal State-owned Capital Investment and Operation Co., Ltd., Yichun Jinhe Equity Investment Co., Ltd., and Nanning Minsheng New Energy Industry Investment Partnership (Limited Partnership), and coordinated relevant resources to IPO as soon as possible.

Although Zhou Hongyi and 360 are also shareholders of Nezha Automobile, they are not major shareholders, holding only 9.12% of the shares, and have not increased their holdings in Nezha in recent years. Before the IPO, Fang Yunzhou, the founder and chairman of Hezhong Automobile (Nezha's parent company), held 11.82% of the shares and, through consistent action arrangements, owned a total of 32.1% of the company's voting rights.

According to information disclosed in the prospectus, Nezha's current estimated value is approximately 42.4 billion yuan. Going public is undoubtedly an effective channel to obtain more funds, but continuous declining sales and lack of competitive market performance have also become key factors affecting investors' decisions.

02

Relying on the low-end market to break through, but struggling to penetrate the high-end market

In 2023, Nezha Automobile's revenue growth slowed down significantly, which is related to its poor sales performance.

In terms of sales, from 2020 to 2022, Nezha Automobile sold 15,100, 69,700, and 152,100 vehicles, respectively. In 2022, Nezha Automobile even surpassed NIO, XPeng, and Lixiang, becoming the sales champion in the new car manufacturing market.

However, since 2023, Nezha's sales have continued to decline, with annual sales of only 127,500 vehicles, a year-on-year decline of 16.16%. In 2023, revenue was 13.555 billion yuan, and the net loss was 6.867 billion yuan, equivalent to a loss of more than 50,000 yuan for every car sold.

In 2024, Nezha Automobile still failed to reverse the downward trend. In May, Nezha delivered 10,100 vehicles, a year-on-year decline of 22.38%, lower than competitors such as NIO, XPeng, and Lixiang.

The reason for this is that Nezha Automobile started in the low-end market and relied on the dislocated competition strategy of "big cars beating small cars" in the early stage to break out in the new energy market. However, its subsequent attempt to penetrate the high-end market did not achieve a breakthrough, leading Nezha Automobile to continue to "compete internally" in the low-end market.

According to public information, Nezha Automobile's founder, Fang Yunzhou, comes from the traditional automaker Chery and founded Hezhong New Energy Automobile, Nezha Automobile's parent company, in 2014.

CEO Zhang Yong joined in 2018, having worked for Chery and BAIC. He created the "coyote warfare" strategy, excelled at seizing opportunities, and was a top sales executive in the domestic low-tier market.

In 2018, the Nezha N01 was released, but only sold 1,000 units by the end of the year. Struggling to survive, Zhang Yong came up with the dislocated competition strategy of "big cars beating small cars." In April 2022, the Nezha V was released, with the lowest-end model priced at only 74,900 yuan.

At that time, domestic new energy vehicles priced around 80,000 yuan had a shape similar to an upgraded version of an elderly scooter. The Nezha V was a dimensional reduction strike, capturing the hearts of ride-hailing and taxi groups, selling nearly 100,000 units that year and creating a sales champion myth.

However, competition in the low-end new energy market has become increasingly fierce, with BYD, Wuling, and others successively launching low-priced, high-value-for-money new energy products, continuously diluting Nezha Automobile's competitive advantage.

Subsequently, Nezha Automobile's attempt to penetrate the mid-to-high-end market was also unsuccessful. The Nezha S, which starts at 199,800 yuan, can barely sell over 1,000 units per month after a price reduction of nearly 50,000 yuan. The Nezha GT, a sports car priced around 200,000 yuan, also fell silent after a brief boom.

Unable to break into the mid-to-high-end market and besieged in the low-end market, Nezha Automobile's development has gradually declined in the past two years. Earlier this year, Zhang Yong reflected on Weibo that the reason for Nezha Automobile's failure to meet sales expectations in 2023 was marketing issues.

Therefore, Nezha Automobile has been exploring new marketing methods this year.

Previously, the battle between Zhang Yong and Zhou Hongyi even attracted a wave of attention and traffic to Nezha Automobile. It is reported that Nezha L achieved an order volume of over 30,000 units in 35 days after its launch, with 95% of consumers choosing the top-of-the-line model - the 310 fast-charging red version.

Zhou Hongyi, relying on his popularity in the automotive industry, brought a wave of attention and sales to Nezha Automobile, but this cannot save Nezha from its predicament. Nezha's own future development strategy is to bet on overseas markets.

03

Betting on overseas markets, continuously expanding in Southeast Asia

In mythology, Nezha's ability to rebirth from the ashes is inseparable from Taiyi Zhenren's great assistance. But in the real automotive industry, who will become Nezha Automobile's Taiyi? Nezha Automobile has placed its hopes on overseas markets.

Since 2022, Nezha Automobile has begun overseas expansion, choosing Thailand as the starting point for entering the Southeast Asian market. It is reported that Nezha Automobile has successfully entered Indonesia, Malaysia, and other Southeast Asian countries, where it has been deeply cultivating and expanding its market share.

As of December 31, 2023, Nezha Automobile has established cooperative relations with about 80 overseas dealers and has sold over 20,000 vehicles in 28 countries and regions overseas.

According to the prospectus, in 2023, Nezha exported 17,019 new energy electric vehicles, accounting for 13.7% of Nezha's total sales of new energy electric vehicles in the same year, contributing 12% of its revenue.

Entering 2024, Nezha Automobile continues to maintain a good export momentum. From January to May 2024, Nezha Automobile exported 16,458 new energy vehicles, ranking fifth among automakers in terms of new energy vehicle exports and first among new forces in the automotive industry. As of the end of May, Nezha Automobile's cumulative exports reached 35,000 vehicles.

According to a report by CIC Consulting, in terms of insurance volume, Nezha is one of the top three brands of new energy passenger cars in Southeast Asia in 2023. The report pointed out that in the future, Nezha will continue to vigorously explore Latin America, the Middle East, and Africa, and identify and seize opportunities to expand into Europe.

The prospectus shows that Nezha will continue to invest in overseas markets, further invest in the Southeast Asian market in the future, and rapidly expand into potential markets such as Latin America, the Middle East, and Africa. It also plans to enhance its global operational capabilities, including establishing more subsidiaries or branches in key overseas markets and recruiting more international professionals; further localize overseas supply chains to support rapid sales growth in overseas markets.

From the prospectus, it can be seen that Nezha has shifted a lot of its focus to overseas markets. To reduce production costs, Nezha Automobile has established a factory in Thailand, the largest automobile manufacturing country in Southeast Asia, becoming the first new force in car manufacturing to build a factory in Thailand, consistent with BYD in terms of timing.

On November 30 last year, Nezha Automobile's first overseas factory in Thailand officially started production and rolled off new vehicles, with a production capacity of 20,000 vehicles. At the same time, Nezha Automobile's factory in Indonesia will also go into production in the second quarter of this year. According to the plan, Nezha Automobile will accelerate its overseas expansion this year, covering markets in over 60 countries and exceeding 500 overseas channels.

In 2024, Nezha Automobile's target sales volume is 300,000 vehicles, including 100,000 in overseas markets. Looking further ahead, Nezha Automobile hopes to achieve sales of 1 million vehicles by 2026: 65% from domestic sales and 35% from overseas sales.

Zhang Yong once said in an interview that according to the plan, all future products of Nezha will be equipped with overseas versions, specifically designed according to local languages and driving habits on the left or right side of the road.

Compared to the fierce competition in China, overseas markets are still a blue ocean. Betting on overseas markets may become an opportunity for Nezha to make a breakthrough again. This IPO, Nezha Automobile undoubtedly hopes to obtain the much-needed funds to supplement its overseas market expansion.