Zeekr released its third-quarter results the day before yesterday. Due to the clear sales figures, the performance itself was solid, and the sales trend was also promising due to the launch of the new SUV 7X. The core incremental information showed a slight marginal increase in the gross profit margin of the automotive business, which was within expectations. The performance itself was neither outstanding nor disappointing, but the key issue arose from a shocking announcement made by the company during the earnings call—Zeekr intends to acquire a 51% stake and merge with Lynk & Co.!

Of course, if the information had been kept strictly confidential, it wouldn't have been an issue. After all, in Dolphin's view, reducing cross-business friction is a good thing. However, Zeekr's U.S. stock price plunged by nearly 24 points!

Therefore, in this article, Dolphin will temporarily set aside the performance analysis and delve into the origins and developments of Lynk & Co. and Zeekr. We will also discuss whether Lynk & Co. is a good asset in this merger.

The following are the concerns regarding this acquisition:

1. Is Lynk & Co. a good asset? Is its valuation reasonable? How will Zeekr acquire it? What changes will occur in the shareholding structure?

① Who is Lynk & Co., and what is its relationship with Zeekr?

Founded in 2016, Lynk & Co. is a joint venture between Geely Group, listed company Geely Automobile, and Volvo. Its main products cover hybrid and gasoline vehicles priced between 100,000 and 250,000 yuan.

Zeekr was originally Lynk & Co.'s electric vehicle business unit. An Conghui founded Zeekr with the SEA architecture, which Lynk & Co. had been developing for five years. Zeekr's popular model 001 is the prototype vehicle zero concept that Lynk & Co. planned to launch.

Since Zeekr's establishment in 2021, it has primarily focused on pure electric vehicles, targeting the high-end luxury electric vehicle market, while Lynk & Co. has delved deeper into the hybrid vehicle field, targeting the young and sporty brand. However, Lynk & Co.'s transition to new energy vehicles was not as thorough as Zeekr's. Besides selling plug-in hybrids, it also sold many traditional gasoline vehicles.

② How will the shareholding structure change before and after Zeekr acquires Lynk & Co., and what is the acquisition consideration?

This acquisition mainly consists of the following steps:

1. First, Geely Automobile (0175.HK) purchased an 11.3% stake in Zeekr from Geely Holding (Geely Automobile's parent company) for a cost of US$800 million. After the acquisition, Geely Automobile's controlling stake in Zeekr increased from 51.5% to 62.8%.

2. Geely Holding and Volvo jointly sold a 50% stake in Lynk & Co. to Zeekr, for which Zeekr needed to pay a total consideration of 9 billion yuan, equivalent to a valuation of 18 billion yuan for Lynk & Co.

a. Geely Holding (Geely Automobile's parent company) sold a 20% stake in Lynk & Co. to Zeekr for 3.6 billion yuan.

b. Volvo (whose parent company is also Geely Holding) sold a 30% stake in Lynk & Co. to Zeekr for 5.4 billion yuan.

3. Zeekr subscribed to new shares in Lynk & Co. for a cost of 370 million yuan. At this point, Zeekr had acquired a total of 51% of Lynk & Co.'s shares, paying a total consideration of 9.37 billion yuan.

Regarding the payment method and source of Zeekr's acquisition consideration:

Zeekr needs to pay a total consideration of 9.37 billion yuan for this acquisition. Since Zeekr currently only has 8.3 billion yuan in cash on its balance sheet, Geely Holding will lend the remaining amount to Zeekr through debt financing, enabling Zeekr to complete the acquisition.

③ Is Zeekr's valuation of Lynk & Co. fair?

This acquisition values Lynk & Co. at 18 billion yuan. From January to September 2024, Lynk & Co. sold 196,000 vehicles, including 114,000 new energy vehicles, accounting for about 58% of total sales. With the popularity of Lynk & Co. 07 PHV and Lynk & Co. 08 PHV, the proportion of new energy vehicles has increased to around 70%.

As the newly merged Zeekr (combining Zeekr and Lynk & Co. brands) will focus on pure electric vehicles for small cars and hybrid vehicles for mid-sized cars, Dolphin expects Lynk & Co. to strategically abandon traditional gasoline vehicle models. Therefore, Dolphin will not consider any valuation for gasoline vehicle sales in the following analysis.

Based on current sales trends, Dolphin estimates that Lynk & Co. will sell 170,000 to 180,000 new energy vehicles in 2024 (currently almost entirely hybrids). Considering the higher prices of popular models like Lynk & Co. 07 (a mid-sized plug-in hybrid sedan priced between 158,800 and 189,800 yuan) and Lynk & Co. 08 (a mid-sized SUV priced between 178,800 and 241,800 yuan), Dolphin assumes an average selling price of 170,000 yuan per new energy vehicle, corresponding to annual revenue of 289 billion to 306 billion yuan.

Lynk & Co.'s total valuation of 18 billion yuan equates to a 2024 P/S multiple of around 0.6, similar to Zeekr's current valuation of 0.7 (considering only the automotive business), but still discounted compared to other new energy vehicle companies.

In terms of Lynk & Co.'s current operating performance, the average selling price per vehicle (ASP) has shown an improvement trend, driven by the higher-priced new energy vehicles Lynk & Co. 07 and Lynk & Co. 08.

During the initial phase of Lynk & Co.'s transition to new energy vehicles (starting in 1H22), due to low sales volumes, lack of economies of scale, and lower vehicle prices, the net profit per vehicle was lower than that of gasoline vehicles, leading to a decline in net profit per vehicle. However, as the transition accelerated after 2023 and the unit price of popular new energy vehicle models gradually increased, the net profit per vehicle has been improving, with the net profit rate rising from a low in 1H23 to -0.8% in 1H24. Therefore, Lynk & Co.'s operating performance has been improving.

Additionally, Lynk & Co. recorded one-time impairment charges of 1.06 billion yuan at the end of 2023 due to issues with used cars in Europe and another 600 million yuan this year. Considering the impact of these impairments, Lynk & Co. achieved rough breakeven in net profit in 2023 and remained profitable in 2024. The company has also stated that the provisions for impairments are very conservative and that there will be no further impairments in the future. It is expected that Lynk & Co.'s net profit per vehicle will continue to improve.

There are also many voices in the market claiming that Lynk & Co. is a "negative asset" company. Dolphin has calculated Lynk & Co.'s asset-liability ratio and net debt ratio:

From the perspective of the asset-liability ratio, most automakers adopt an operating model that occupies upstream supplier payments (interest-free liabilities), resulting in a relatively high total liabilities to total assets ratio. Lynk & Co.'s asset-liability ratio is comparable to that of NIO and BYD, indicating a normal operating level. It is not a "negative asset" company as rumored in the market.

Meanwhile, looking at the more risky indicator of interest-bearing liabilities, the net debt to net assets ratio (a measure of a company's solvency) peaked in the first half of 2023 and has since continued to decline, reaching only around 25% in 1H24, indicating a relatively healthy financial position.

2. Why is Zeekr acquiring Lynk & Co.?

① Severe horizontal competition, reducing internal friction

The Zeekr 001 is derived from the Lynk & Co. ZERO, but there was overlap and competition in their product lines. Before the acquisition, Lynk & Co. began expanding its pure electric product line, launching the Lynk & Co. Z10 in September, priced between 196,800 and 288,800 yuan. Based on Zeekr's SEA architecture, the pricing and positioning of the Z10 conflicted with Zeekr's 007 and 001 models.

Before the launch of the Lynk & Co. Z10, Zeekr introduced 25 versions of the 001 and 007. Similarly, before the launch of the Lynk & Co. Z20, the price of the Zeekr X, a model with a similar positioning to the Z20, was reduced to 150,000 yuan. With overlapping backend suppliers, vehicle manufacturing platforms, and product positioning, horizontal competition was severe.

② Avoiding duplicate investments in research and development, sales, etc.

The Lynk & Co. pure electric vehicle Z10 is based on Zeekr's SEA architecture, while the hybrid models are based on the CMA architecture (also part of Zeekr's CEVT asset package). Before the acquisition, Lynk & Co. needed to pay Zeekr for the use of its technical platform. At the same time, due to the use of different teams for research and development and sales, duplicate investments in these areas were inevitable.

3. What changes will occur after the merger?

The main changes after this acquisition are as follows:

① Brand side: The brands will remain independent, adopting a dual-brand strategy. Zeekr will cover the mainstream luxury market, while Lynk & Co. will cover the mid-to-high-end market. Both brands will sell both pure electric and hybrid vehicles.

② Product side: Replan Zeekr and Lynk & Co.'s products, reduce the number of models, and create popular models.

At the same time, from the perspective of vehicle size and energy type, efforts will be made to avoid conflicts between Zeekr and Lynk & Co. in the market:

a. In terms of size: Zeekr will focus on mid-to-large-sized vehicles (wheelbase exceeding 4.8 meters, B- to D-segment vehicles), while Lynk & Co. will focus on small-to-mid-sized vehicles (A- to C-segment vehicles).

b. In terms of energy type: Lynk & Co. will focus on pure electric vehicles for small cars (A-segment) and hybrid vehicles for mid-sized cars; Zeekr will focus on pure electric vehicles for mid-sized cars and hybrid vehicles for large cars (C- to D-segment hybrid vehicles will be launched). This essentially disrupts the previously implicit boundary between Lynk & Co., which primarily focused on hybrids, and Zeekr, which primarily focused on pure electric vehicles.

In terms of hybrid technology, the Lynk & Co. brand will continue to use Geely's EMP system, while Zeekr is developing a new super hybrid system suitable for large plug-in hybrid vehicles, which is expected to be launched on large SUVs and MPVs at the Shanghai Auto Show next April.

② Technology side: Achieving integration of technical architectures and platforms

Focus will be placed on mechanical architecture, electronic architecture (EEA), smart cockpits, and ADAS intelligent driving over the next 2-3 years.

In terms of mechanical architecture, the number of architectures will be minimized to the greatest extent. For mid-to-high-end models, NVIDIA Orin X hardware and self-developed algorithms will be used for intelligent driving, but Lynk & Co.'s lower-end models will still use the current ADAS solution targeting budget-conscious buyers.

In terms of platforms, while Lynk & Co. currently uses traditional CMA and SPA architectures, its architectures will be unified with Zeekr in the future to achieve cost savings and improve supply chain bargaining power.

In terms of smart cockpits, hardware will be unified, while the application end will retain Lynk & Co.'s Flyme and Zeekr's ZEEKR OS systems.

③ Supply chain and manufacturing: Through technical collaboration, platform and architecture integration, the parts commonality rate will increase, existing factory capacity utilization will improve, procurement costs will be reduced through collaboration, and costs will be further lowered.

It should be noted that Zeekr originally adopted an asset-light operating model, with its manufacturing facilities under Geely Automobile. However, after this acquisition, as Lynk & Co.'s asset package includes three manufacturing facilities, Zeekr will introduce these three facilities, indicating that it is likely to shift from its original asset-light model to a normal OEM heavy asset production model.

④ Channels: In terms of channel construction in the future, Lynk & Co. will continue to maintain its dealer model. Although Zeekr currently primarily uses a direct sales model, it focuses on first- and second-tier markets. Therefore, in these markets, the two brands will maintain different sales channels. However, in lower-tier markets, Zeekr can quickly expand into third- to fifth-tier markets through Lynk & Co.'s channels. Currently, Lynk & Co. has 437 stores, and Zeekr has 442 stores.

In terms of overseas expansion, Lynk & Co. and Volvo are currently cooperating in Europe. Even after Volvo divests its stake in Lynk & Co., the cooperation will continue. Currently, they share over 30 Volvo channels, which will increase to over 100 in the future. After the integration, Zeekr can leverage Lynk & Co.'s overseas channels to quickly expand into international markets, but it will continue to use plug-in hybrid models for European exports to avoid tariff impacts.

⑤ After-sales service: Zeekr can use Lynk & Co.'s 128 service centers, which will still adhere to Lynk & Co.'s service standards but will be managed by Zeekr's after-sales service team.

⑤ Management side: A management team will be formed, consisting of two execution teams. After the reorganization, Zeekr will still be directly managed by its original CEO, An Conghui.

According to the company, after synergies are achieved, Zeekr expects that joint procurement will reduce BOM costs by 5-8%, capacity utilization will increase by 3-5%, R&D investment will be reduced by 10-20% through R&D synergies, and functional support department reorganization will reduce expenses by 10-20%.

At the same time, in terms of sales targets, Lynk & Co. and Zeekr aim to sell a total of 500,000 vehicles this year. After the merger, Zeekr hopes to quickly build a luxury new energy vehicle brand with annual sales of one million units.

4. Why did Zeekr's stock price plummet sharply after the acquisition announcement?

① Market concerns about major shareholder cash-outs:

Due to this operation, Geely Holding lent 9 billion yuan to Zeekr to buy the assets of Lynk & Co. from Geely Holding (equivalent to a grandfather lending money to a grandson to buy assets from the grandfather).

Of course, the result is that the grandfather sold his stake, raising suspicions of major shareholder cash-outs. However, it is difficult to evaluate this point because essentially, it converts a stake that may have low or high value into a stable interest-bearing debt, rather than a simple asset sale.

Dolphin believes the original intention of this design was to clarify the shareholding structure, making Lynk & Co. a direct domestic asset for Geely Holding, with overseas asset Volvo and parent company Geely Holding no longer directly holding shares. In other words, the so-called major shareholder cash-out is more of a passive move to clarify the shareholding structure.",

Of course, the core here is whether the valuation of 18 billion yuan is worth it for Zeekr. The market does not consider Link&Co a good asset target. However, from Link&Co's profitability perspective, as the transition to new energy vehicles accelerates and its market share increases, coupled with the popularity of hit models such as the Link&Co 07 and Link&Co 08, its operating performance has been continuously improving.

Currently, the estimated P/S ratio for 2024 corresponds to around 0.6 times the valuation. Considering its current position in the second-tier hybrid market, this can only be considered the market's "fair value." Zeekr's shareholders do not appear to have gained a significant advantage, but they have not been significantly disadvantaged either.

③ Concern about continuing to acquire other loss-making brands such as Polestar:

News indicates that An Conghui will succeed Shen Ziyu as Chairman of Polestar. There is concern that Zeekr will also acquire Polestar in the future. However, the company stated in a conference call that there are no plans for future acquisitions.

Summary:

Overall, it is clear that entering the new energy era, Li Shufu hopes to create a diversified Geely new energy matrix through a horse-racing mechanism, aiming for a "scattered starry sky" effect.

However, over the past few years, the actual results have been disappointing. Whether in the hybrid or pure electric vehicle segments, or in the high-end or low-end markets, Geely has only a handful of noteworthy new energy assets.

Under these circumstances, internal mergers and acquisitions have begun, generally following the pattern of the strong acquiring the weak and the larger consuming the smaller. This trend is evident in both the merger of Zeekr and Link&Co and the integration of Geometry into Geely Auto's Yinyi brand. Clearly, Geely's next step is to consolidate its new energy assets into a cohesive force.

Regarding Zeekr's loan of 900,000 yuan (interest rate unknown) to acquire Link&Co at a valuation of 0.6X PS (assuming pricing is generally reasonable), Dolphin believes that under the current circumstances, such resource integration is necessary and a crucial step in the right direction.

However, the true effectiveness of the integration, including whether it can effectively manage internal personnel relationships, unify decision-making authority, improve execution efficiency, and increase sales, rather than merely reducing costs to achieve a 1+1>2 effect, remains to be seen. Dolphin suggests taking a wait-and-see approach.

Regarding yesterday's sharp decline, considering the recent erratic upward trend, it is evident that funds taking advantage of "informational dimensionality reduction" were trading ahead of time. Therefore, when this news emerged, the stock price directly traded on the realization of positive news in a somewhat pessimistic manner.