Image source: Dugou

Taken at the Shanghai Auto Show in April 2023

At this critical moment of declining sales and falling rankings, Nezha Auto has finally begun to make big moves.

On June 26th, Hezhong New Energy Automobile Co., Ltd., the parent company of Nezha Auto (hereinafter referred to as "Hezhong New Energy"), submitted a listing application to the Hong Kong Stock Exchange, with CICC, Morgan Stanley, CITIC Securities, ABC International, and CMB International as joint sponsors.

If Nezha Auto can successfully go public this time, it will become the fifth stock of China's new carmaking forces in Hong Kong stocks after "Nio, Xpeng, and Li Auto" and Leapmotor. However, judging from the disclosed data, the current situation of Nezha Auto is not optimistic, and even if it successfully goes public, it may still face a "windy and rainy road" in Hong Kong stocks.

Moreover, the Hong Kong IPO market has not been optimistic this year, and even some companies with relatively good quality may see their share prices fall below their issue prices. How will Nezha Auto perform?

1

Losses exceeding 18.3 billion yuan in three years ●

Judging from the disclosed data, Nezha Auto may hardly have a "survival path" if it does not go public soon. There is not much financial reserve and time left for it to maneuver.

First, let's look at sales. Although Nezha Auto listed a series of excellent data in its prospectus to prove its continuous upward strength, such as the delivery volume rapidly increasing from 64,200 vehicles in 2021 to 124,200 vehicles in 2023, with a compound annual growth rate of 39%.

For example, the Nezha AYA series delivered over 50,000 vehicles last year, ranking first in sales of small pure electric vehicles in Southeast Asia with a market share of 52% based on insurance premiums.

Also, the Nezha X series delivered a total of 46,700 vehicles in 2023, ranking fourth among all compact pure electric SUVs in China; the Nezha S delivered a cumulative of 20,300 vehicles last year, ranking fourth in sales of medium and large new energy sedans in China; the Nezha GT delivered 7,092 vehicles in its first full year after its launch in May last year, ranking first among new energy sports cars in 2023...

However, these still cannot cover up the embarrassment of Nezha Auto falling from the "sales champion" of the new forces in 2022. According to official data, Nezha Auto delivered a total of 127,500 new vehicles last year, down 16% year-on-year, not only completing only half of its annual sales target but also lagging behind older rivals such as GAC Aion, "Nio, Xpeng, and Li Auto," and Leapmotor, and has even been overtaken by up-and-coming brands like Shenlan and Denza.

At the beginning of the year, Zhang Yong, CEO of Nezha Auto, publicly reflected on the reasons for the poor performance in 2023 and proposed solutions, cutting two executives after a painful realization. According to Zhang Yong's "prescription," he will personally lead the team to adjust the existing product line, upgrade channels, and improve the marketing system, aiming to stabilize the situation in 2024.

However, half of 2024 has passed, and Nezha Auto has still failed to stop the decline. From January to May this year, Nezha Auto sold a total of 43,600 new vehicles, continuing to decline by 13.4% year-on-year, leading the decline among major new forces, with an average monthly sales volume of less than 10,000 vehicles, only achieving about 14.5% of the annual sales target of 300,000 vehicles.

In the prospectus, Nezha Auto explained that this was mainly due to the company's efforts to rationalize and simplify domestic production capacity and global supply structure to promote international initiatives, which temporarily affected car production. This reason is hardly convincing.

Looking at the financial data, the situation is even more worrying. According to the prospectus, the operating income of Hezhong New Energy has been increasing in the past three years, but it has always been difficult to solve the loss problem, with losses of 4.84 billion yuan, 6.666 billion yuan, and 6.867 billion yuan in 2021-2023, respectively, accumulating losses of over 18.3 billion yuan in three years.

At the same time, Hezhong New Energy's operating cash flow has remained negative. The net cash flow generated from operating activities was -2.991 billion yuan in 2021, -5.408 billion yuan in 2022, and -4.354 billion yuan in 2023. As of the end of last year, cash and equivalents were 2.836 billion yuan, but there were many short-term borrowings, including 4.31 billion yuan that needed to be repaid within this year.

It can be seen that Nezha Auto, which has been continuously "burning money," has reached a point where it urgently needs to expand financing channels for "self-rescue."

2

The path to going public is a bit difficult ●

If Nezha Auto's current situation can raise funds through listing, it will be much easier. However, looking back at its listing journey, it has been quite bumpy. As early as the second half of 2020, the company announced plans to list on the STAR Market in 2021, but ultimately missed out due to issues such as core technology.

In September of that year, Zhang Yong said in an interview, "Enterprises need a lot of money for development, and it's fake to say that we don't lack money. Even those that have already raised money through listing still need to raise more." He believes that the more money an enterprise has, the better, and hopes that Nezha can also raise more funds.

Then from 2021 to 2023, there were rumors every year that Nezha Auto would go public in Hong Kong, but there was no follow-up each time. For example, in June last year, there were rumors that Hezhong New Energy was considering submitting a $1 billion Hong Kong IPO application within the month. Later, Nezha Auto responded that the news was inaccurate.

Fortunately, in August last year, Nezha Auto obtained external financing and announced the completion of a crossover round of financing totaling 7 billion yuan. Industry insiders said that crossover rounds are usually equity investments made to enable companies to IPO faster.

On April 15th of this year, Hezhong New Energy announced that it had signed a cooperation investment agreement with three state-owned and local investment companies, including Tongxiang Municipal State-owned Capital Investment and Operation Co., Ltd. According to the agreement, the signing parties will jointly provide a total investment of no less than 5 billion yuan to Hezhong New Energy and coordinate relevant resources to support Hezhong Auto in achieving an IPO as soon as possible.

After three years, Nezha Auto's IPO finally made substantial progress. However, it is worth noting that after such a long wait, Nezha Auto's valuation has fluctuated significantly.

After completing a nearly 10 billion yuan D-round financing in July 2022, its valuation reached 25 billion yuan. According to an announcement issued by 360 Security Technology Co., Ltd., as of the end of 2022, the company held a 10.72% stake in Nezha Auto, corresponding to a book value of 1.153 billion yuan. Based on this calculation, Nezha's valuation was approximately 10.76 billion yuan.

Nowadays, according to the cross-round investment disclosed in the prospectus, four investors acquired an 8.08% stake in Nezha Auto at a cost of 3.426 billion yuan. Based on this calculation, Nezha Auto's valuation has returned to a level of over 40 billion yuan.

However, it is still unclear how Nezha Auto's share price will perform after a successful listing in Hong Kong stocks. Last year should have been a year of "pains" and "fluctuations" in the Hong Kong stock market. The unfavorable economic environment hit the performance of new stocks, and its IPO market fell into a situation of double declines in scale and quantity.

Although there have been some signs of recovery in Hong Kong IPOs this year, institutions still hold a relatively cautious attitude towards Hong Kong IPOs, and the valuations given by Hong Kong IPOs are generally low. With continuous losses, the prospects of Nezha Auto's IPO in Hong Kong stocks are still full of uncertainties.