Written by: Ning Chengque

Source: Bowang Finance

Amid the wave of the new energy vehicle industry, following the successful listings of NIO, XPeng, LIXIANG, and ZEROPOWER on the Hong Kong stock market, Nezha Auto has also embarked on its journey to the Hong Kong IPO.

On June 26, 2024, Hezhong New Energy Automobile Co., Ltd., the parent company of Nezha Auto, officially submitted an IPO application to the Hong Kong Stock Exchange (HKEX), with CICC and Morgan Stanley serving as joint sponsors. If Nezha Auto successfully goes public, it is expected to become the fifth new force automaker to list on the Hong Kong stock market through IPO.

As a "favorite" supported by tech entrepreneur Zhou Hongyi, Nezha Auto stood out among new force brands in 2022 with its excellent market performance, surpassing the 100,000-unit sales mark and creating an industry legend. However, just one year later, Nezha Auto encountered a sales slide challenge, even becoming one of the few new force automakers whose sales have "reversed."

Nezha Auto is also mired in financial losses. In 2023, Nezha Auto lost approximately 53,000 yuan for every car sold. As competition in the new energy vehicle market intensifies, Nezha Auto not only has to face the challenges of declining sales and continuous losses but also the ongoing price war within the industry, further challenging its profitability.

Facing the severe situation of capital shortage, Nezha Auto has to accelerate its listing process in order to alleviate cash flow pressure through the power of the capital market. It has to be said that in the current "fierce competition" in the new energy vehicle industry, whether Nezha Auto can successfully go public and effectively utilize capital market resources to achieve self-"hematopoiesis" will be the key to its future development.

01

Focusing on cost-effectiveness, the former sales champion rushes to the Hong Kong Stock Exchange

Hezhong New Energy, founded in 2014, is one of the early rising new force automakers in China and successfully launched the Nezha Auto brand in 2018.

2022 was a highlight moment for Nezha Auto, with annual deliveries exceeding 150,000 units, making it the "sales champion" among new force automakers. From 2021 to 2023, Nezha Auto's sales continued to climb, from 64,000 units to 124,000 units, with a compound annual growth rate of 39.0%, demonstrating strong growth momentum.

Nezha Auto's success lies in two core strategies: First, it implements a high cost-effectiveness strategy, adhering to the concept of "technological equality" since its inception, focusing on the market below 200,000 yuan, and quickly occupying market share through an affordable pricing strategy. In 2023, Nezha Auto achieved revenue of 13.555 billion yuan, with annual sales reaching 124,189 units and an average product price of approximately 109,000 yuan.

In terms of model layout, Nezha Auto has precise positioning. Three of its five mass-produced models have starting prices below 130,000 yuan. In particular, the Nezha AYA series has become a best-selling model in the small pure electric SUV market due to its high cost-effectiveness, with deliveries exceeding 50,000 units in 2023, ranking first in this segment market.

Second, it actively explores overseas markets. As one of the earliest new force automakers to go overseas, Nezha Auto has been actively布局ing overseas markets since 2021. In 2023, Nezha Auto exported 17,019 new energy electric vehicles, accounting for 13.7% of its annual total sales and contributing 12.0% of its revenue.

Especially in the Southeast Asian market, Nezha Auto's performance is even stronger. Among the top 5 new energy passenger car brands in terms of sales in the Southeast Asian market in 2023, the top 3 are all Chinese passenger car brands. Among them, Nezha Auto sold 12,958 units, ranking third in the above sales ranking and first among companies that only produce new energy passenger cars, accounting for 10.5% of the Southeast Asian market share.

In the first half of 2024, Nezha Auto continued its good overseas momentum. From January to May 2024, Nezha Auto exported 16,458 vehicles, ranking first in terms of exports among new force automakers.

At the capital level, Nezha Auto is also favored. Since 2017, it has completed 10 rounds of financing, with a cumulative financing amount of nearly 23 billion yuan, attracting numerous star capital such as CATL, Huading Capital, and 360.

Once approved for listing, the improvement in capital will likely bring qualitative changes to Nezha Auto. In its prospectus, Nezha Auto stated that it will continue to launch new models, expand overseas markets, provide more value-added services, and improve manufacturing efficiency through technological innovation and economies of scale to achieve higher revenue and profitability.

It is worth mentioning that before this time, Nezha Auto has also repeatedly rumored IPO plans. As early as July 2020, the company announced its ambition to list on the A-share Science and Technology Innovation Board and set 2021 as the time node to achieve this goal, but Nezha Auto did not complete the listing as expected.

In 2022 and 2023, rumors about Nezha Auto's IPO continued to circulate, but each rumor was quickly clarified by the company. The company's founder Zhang Yong even直言 "The market is not good now, so it doesn't matter much whether we list or not." So, why is Nezha Auto eager to go public now?

02

Nezha Auto is eager to go public for capital infusion

Although the current Hong Kong stock market may not have an optimistic valuation environment for companies, Nezha Auto still chose to push forward with its listing process at this moment, primarily due to a lack of funds.

Although annual sales have exceeded the 100,000-unit mark and annual revenue has reached the 10 billion level, Nezha Auto is still deeply mired in losses, and its financial situation is worrying. According to data disclosed in Nezha Auto's prospectus, from 2021 to 2023, the company's operating revenue grew steadily, reaching 5.087 billion yuan, 13.05 billion yuan, and 13.555 billion yuan, respectively. However, net profit suffered significant losses for three consecutive years, amounting to 4.84 billion yuan, 6.666 billion yuan, and 6.867 billion yuan, respectively, with a cumulative loss of 18.373 billion yuan over three years.

Nezha Auto has obvious shortcomings in cost control and profitability. The loss per vehicle sold increased from 44,000 yuan in 2022 to 55,000 yuan in 2023, indicating that cost reduction and efficiency enhancement measures have not been effective. In contrast, LEAPMOTOR, a similarly sized automaker, has achieved a significant decline in losses per vehicle, down to only 29,000 yuan.

Gross margin, an important indicator for measuring the health of a company's operations, Nezha Auto's gross margin from 2021 to 2023 was -34.4%, -22.5%, and -14.9%, respectively, consistently negative and improving slowly. In the same period, LEAPMOTOR, which had a similar sales scale as Nezha Auto, has successfully turned its gross margin positive, reaching 0.5%. Nezha Auto is also the only automaker among the top listed new forces that has not achieved a positive gross margin.

In terms of sales, Nezha Auto has not been spared from the severe market challenges. In 2023, Nezha Auto sold 124,000 units, a year-on-year decrease of 18%, making it the only new force automaker among the top players to experience negative sales growth. During the same period, LIXIANG, NIO, and XPeng saw sales growth rates of 183%, 31%, and 17%, respectively.

In May of this year, Nezha Auto sold 10,113 units, still down 22% year-on-year. During the same period, the sales growth rates of LIXIANG, NIO, XPeng, and LEAPMOTOR were 24%, 234%, 35%, and 51%, respectively. Additionally, based on sales data from the first five months of this year, Nezha Auto has only completed 14.5% of its annual sales target of 300,000 units, far below the industry average.

The cash flow situation is also severe. Nezha Auto's operating cash flow has been negative from 2021 to 2023, with a net cash flow from operating activities reaching -4.354 billion yuan in 2023. As of the end of 2023, its cash and equivalents were only 2.836 billion yuan, while payables within half a year reached 5.476 billion yuan, highlighting the pressure on its capital.

Facing such severe financial and market challenges, Nezha Auto is also actively seeking external financial support. In April of this year, the company successfully obtained financing of no less than 5 billion yuan from investment institutions with state-owned backgrounds in Tongxiang, Yichun, and Nanning. These investors promised to coordinate resources to help Nezha Auto achieve IPO as soon as possible.

However, even with these capital injections, it is still a huge unknown whether Nezha Auto can successfully reverse its downturn and achieve a double breakthrough in profitability and the market.

03

Intense competition in the new energy sector, Nezha Auto shows a clear trend of falling behind

Nezha Auto faces an increasingly significant trend of falling behind in the current competition in the new energy vehicle market, mainly due to the intertwined influence of multiple factors.

First, capital markets are increasingly focused on a company's core competitiveness and long-term value when assessing them. However, compared to leading new force automakers such as XPeng, LIXIANG, and NIO, Nezha Auto lacks distinctive highlights and a solid market barrier.

For example, XPeng Auto relies on its intelligent positioning, with smart driving capabilities rivaling that of Huawei, while its car-making capabilities are widely recognized. LIXIANG Auto accurately insighted into market demand and created a unique automotive culture of "refrigerators, TVs, and sofas." NIO has made long-term investments in battery swap infrastructure, attracting cooperation from multiple traditional automakers.

In contrast, Nezha Auto still relies primarily on a low-price strategy, which has gradually lost its appeal against the backdrop of the escalating price war in the new energy vehicle market, even leading to a low-end brand image and affecting the improvement of profit margins.

More severely, Nezha Auto's R&D investment in the field of intelligent driving is relatively insufficient, with a relatively low proportion of R&D personnel and R&D expenses. In the past three years, Nezha Auto's R&D expenses accounted for 10.6%, 6.9%, and 11.8% of total revenue, respectively. In contrast, LEAPMOTOR, which also targets the下沉 market, has maintained an R&D ratio of no less than 12% from 2019 to 2023, with a peak of 306.4%.

This has led to Nezha Auto lagging behind its competitors in the development of intelligent driving functions, making it difficult for the company to occupy a place on this future competitive high ground.

At the same time, frequent internal management issues within the company, such as unpaid year-end bonuses and factory shutdowns, have further exacerbated its market difficulties.

Facing challenges such as intense domestic market competition, declining sales, worsening losses, negative operating cash flow, and insufficient cash on hand, Nezha Auto has to turn its attention to overseas markets, hoping to find new growth points in markets such as Southeast Asia by leveraging the advantages of Chinese manufacturing through a "high-dimensional to low-dimensional" strategy.

However, overseas markets are also full of challenges, including trade barriers, differences in consumer habits, policies and regulations, certification thresholds, and infrastructure construction issues, which are obstacles that Chinese automakers must overcome when going overseas. Additionally, competition among Chinese automakers in the Southeast Asian market has become fierce, with many automakers having already established a complete production and sales system. The competitive pressure faced by Nezha Auto cannot be underestimated.

Nevertheless, Nezha Auto has still formulated ambitious overseas expansion plans. In 2024, Nezha Auto's target sales volume is 300,000 units, of which 100,000 units will be for overseas markets. By 2026, it aims to achieve sales of 1 million units, with domestic sales accounting for 65% and overseas sales reaching 35%.

Whether going overseas can become an opportunity for Nezha Auto to make a comeback is still unknown, but judging from the current situation, Nezha Auto must first convince capital and tell a new, attractive story. It must survive before talking about development.