We recently obtained news that the struggling HiPhi Automobile will finally welcome its white knight - Lifan Technology (601777). This comes four months after HiPhi's suspension of production. During this time, there were rumors that companies such as FAW, Changan, and Huawei were interested in acquiring or investing in HiPhi, but these were all辟谣辟谣(debunked). This time, HiPhi is expected to welcome its true savior. Since June 14, Lifan Technology (601777) has risen for five consecutive working days, and on June 26, it even achieved a strong limit up, seemingly confirming this news in the capital market.

In the public's impression, Lifan Technology (601777), which started as a motorcycle manufacturer, has no competitiveness in the automotive industry. After completing bankruptcy reorganization, it also lacks a significant presence in the end market. Meanwhile, HiPhi, with its high-end positioning, is a niche brand. Both parties belong to the vulnerable groups in the automotive industry. Why would these two weak parties come together? What does Lifan see in HiPhi?

01 Lifan Faces Challenges After a Narrow Escape

Lifan Technology (601777)'s predecessor was Lifan Motors, which started as a motorcycle manufacturer in 1992. It has been selected as one of China's Top 500 Enterprises for several consecutive years and is the first privately-owned passenger vehicle manufacturer to be listed on the A-share market, enjoying unparalleled popularity at that time.

However, when Lifan began to enter the automotive industry, due to insufficient technical experience and poor company decisions, its situation worsened, with sales plunging from around 130,000 units in 2017 to just over 20,000 units in 2019. There were serious financial irregularities, and in 2020, it had to apply for bankruptcy reorganization. It was only on April 26, 2021, that Lifan Motors "removed the star and removed the hat" and renamed itself Lifan Technology (601777), averting the crisis of bankruptcy and delisting.

In 2022, Lifan achieved impressive results: car sales of 56,800 units, an increase of 13.7 times year-on-year, and net profit also increased by 178% to 155 million yuan. However, this good performance did not last long. In 2023, Lifan's car sales declined by 25.6%, and net profit plummeted by 84%. Although sales in the first quarter of 2024 increased significantly by 148%, net profit decreased by 62%.

Why has Lifan Technology's (601777) performance continued to decline? The problem actually lies in its current main business - automobiles.

In 2023, Lifan Technology's (601777) revenue came mainly from three major areas: passenger cars and their parts, motorcycles and their parts, and internal combustion engines and their parts, realizing revenues of 3.734 billion yuan, 2.033 billion yuan, and 400 million yuan, respectively. That is to say, passenger cars and related businesses accounted for 55% of revenue. Specifically, in terms of its passenger car business, it sold a total of 42,280 cars in 2023, a year-on-year decline of 25.6%, of which 24,576 were new energy vehicles, a decrease of 40%. It is evident that the main problem lies in new energy vehicles.

Although Lifan Technology (601777) is backed by Geely (Chongqing Jianghehui Enterprise Management Co., Ltd., a subsidiary of Geely Technology Group, holds 19.72% of Lifan Technology's (601777) shares and is its second-largest shareholder), it has not obtained much core technology from Geely. With a clear understanding of its situation, Lifan Technology (601777) knows that its products are not competitive in the C-end market, so it has focused its post-reorganization business on the B-end market.

At the end of 2023, when responding to media inquiries about how to boost car sales, Lifan Technology (601777) clearly stated that "the company's current automotive products are mainly B-end products" and proposed the company's future direction: "actively deploying C-end products and forming a product series through rapid product launches and layouts in domestic and overseas markets to fully participate in market competition."

To grow and strengthen its new energy automotive products and establish a firm foothold in the C-end market, Lifan may find it difficult to rely solely on itself. Given the urgency of time, directly acquiring an existing new-energy automotive enterprise and obtaining its existing technology and resources may be the most efficient and effective path.

02 Complementing Each Other's Advantages to Create a Second Seres?

With the rapid development of the new energy automotive industry, more and more new players are entering the electric vehicle market, making competition increasingly fierce. Consumers are also demanding more from electric vehicles. Many new carmakers have been eliminated from the market due to insufficient financial reserves or outdated product technology. HiPhi is one of those that has stalled due to a lack of funds.

Before BYD's仰望brand was launched, HiPhi was the most expensive new energy automotive brand in China, with the most expensive model, the HiPhi X, priced at 800,000 yuan, and the cheapest model, the HiPhi Y, starting at 339,000 yuan. Despite the high prices, HiPhi sold over 4,000 units in the terminal market in both 2021 and 2022, thanks to its technological advantages in areas such as motor systems, clean energy vehicle powertrains, smart cabins, and intelligent driving assistance.

For example, the HiPhi Z, with its large battery pack and advanced drive technology, can accelerate from zero to 100 km/h in just 3.8 seconds. The HiPhi Bot can freely change angles to provide personalized services, coupled with a futuristic and technological design, making it favored by many wealthy individuals who enjoy trying new things. Even overseas media has given the HiPhi Z high praise, calling it a very mature work.

Manufacturing cars is an extremely expensive business, with large R&D investments and long return cycles. Before achieving self-sufficiency, many new carmakers have fallen. HiPhi has also fallen into a financial crisis due to insufficient follow-up funds and announced the suspension of production for six months on February 19 of this year.

Subsequently, there were continuous rumors of companies acquiring or investing in HiPhi, including FAW, Huawei, Changan, and the automotive investment consulting platform iAuto. Although these rumors were denied or did not receive positive responses, it is undeniable that HiPhi, with its rich technological reserves and international patents, has a certain charm. Especially for Lifan, HiPhi's brand awareness and recognition in the C-end market are another important factor attracting Lifan.

In terms of new energy vehicle sales and influence, both Lifan and HiPhi belong to third- and fourth-tier brands and are relatively weak. However, this combination of weak parties may spark unexpected synergies.

As mentioned above, HiPhi's advantages lie in its technology, patents, and brand awareness and recognition in the C-end market. Lifan's advantage lies in its state-owned background. Its largest shareholder is Chongqing Manjianghong Equity Investment Fund Partnership (hereinafter referred to as "Chongqing Manjianghong"), which is a state-owned enterprise. Through the relationships with Chongqing State-owned Assets and Changan Automobile, some industry insiders have analyzed that Lifan is expected to collaborate with Huawei, incorporating Huawei's advanced intelligent driving system and HarmonyOS Huawei Hongmeng vehicle system. Combining HiPhi's advantages in quality control, technology, and brand recognition, it is expected to form a resource sharing and complementary advantage, creating the next Seres.

It is worth mentioning that from January to May of this year, Chongqing produced 997,100 vehicles, surpassing Guangzhou to become the "First Automobile City in China." This achievement is inseparable from the efforts of the Chongqing Municipal Government and the State-owned Assets Supervision and Administration Commission. To sustain the development of the automotive industry and maintain its championship position, it is believed that the Chongqing Municipal Government and the State-owned Assets Supervision and Administration Commission will spare no effort to utilize all resources, and Lifan is one of those chess pieces.

Of course, 1+1>2 is the ideal state that Lifan and HiPhi can achieve after combining, but whether it will succeed remains to be verified by the market. However, for both parties, which are currently in a difficult situation and have no better options, why not give it a try?