As the global war for NEV market share intensifies, the company could get an edge through its joint venture with US-European auto giant Stellantis.
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This article by Edith Terry was first published in The Bamboo Works, which provides news on Chinese companies listed in Hong Kong and the United States, with a strong focus on mid-cap and pre-IPO companies.
Key Takeaways:
Leapmotor has added $84.3 million to its war chest with new share purchases by two state investors, following a much larger $1.6 billion infusion from Stellantis last year.
The Hangzhou-based startup shipped 144,155 vehicles last year, up 30 percent from 2022, making it China's 10th largest EV maker.
With the Lunar New Year coming up, the road ahead for Zhejiang Leapmotor Technology Co Ltd (9863.HK) could be interpreted in two ways.
Under one, a new HK$659 million ($84.3 million) investment by two state entities announced on January 19 could be seen as a move of desperation, as Leapmotor begs for funds from local state-run entities to help offset its huge losses.
Alternately, the new funding could be belated recognition that global auto giant Stellantis (STLA.US) was onto something last October when it bought a 20 percent stake in the company.
Before weighing these two scenarios in more detail, let's review the deal announced last week. The two new investors, Jinhua Industrial Fund and Wuyi County Financial Investment, are state-owned entities in the city and county where Leapmotor builds its EVs, in a factory with an annual capacity of 200,000 units, according to its 2022 prospectus.
Leapmotor's first model rolled off the production line back in July 2015 at the Jinhua New Energy Automobile Town, and was featured on the website of the Jinhua municipal government.
Jinhua Industrial Fund will buy about 5 million of Leapmotor's H shares on top of 11.5 million it already owns, giving it 1.22 percent of the company. It will pay HK$43.80 per share, the same price paid by Stellantis, which last October announced a much larger $1.6 billion investment in Leapmotor.
Wuyi County, meanwhile, will buy 10 million of Leapmotor's domestic shares, also for the yuan equivalent of HK$43.80 per share, giving it 0.74 percent of the company. Wuyi is wholly-owned by the Wuyi County Financial Bureau of the city of Jinhua.
Stellantis, which now has two members on Leapmotor's board, may have insisted that the two state-owned investors pay the same price for their Leapmotor shares as it did in October, even though the stock has now nearly halved from that level at Monday's close of HK$22.50. Neither of the new investors disclosed why they were paying such a huge premium to the latest share price.
If the big premium was meant to send a positive signal, it actually had just the opposite effect, with Leapmotor's shares sinking by nearly 13 percent after the announcement. Investors were similarly unimpressed with the original Stellantis deal announcement on October 26, though they haven't been particularly impressed with any Chinese stocks in general these days.
So, it's quite possible that Stellantis picked a loser. Leapmotor wasn't even among China's top 10 new energy vehicle (NEV) makers in December, according to data from the China Passenger Car Association (CPCA).
It posted a personal-best of 18,618 in sales for the month, but that was still well below the 20,041 for Xpeng (NYSE: XPEV) and light years behind the 263,066 electric vehicles (EVs) sold by market leader BYD (1211.HK; 002594.SZ).
The December performance did propel Leapmotor into China's top 10 for the whole year, putting it in 10th place with 144,155 vehicles sold, just behind Nio (NYSE: NIO) with 160,038. But its final tally was still nearly 30 percent short of its target of 200,000 units.
Overseas potential
Still, that's not bad for a hyper-competitive domestic EV market like China, where about 100 new models were introduced last year alone, and some 15 companies closed down. But the domestic EV market is expected to slow to 20 percent growth this year from roughly 30 percent in 2023, according to a Fitch Ratings report in November.
Instead of looking at the slowing domestic market, we should perhaps turn our sights to NEV exports that are on a more solid growth track, according the Chinese Association of Automobile Manufacturers (CAAM).
NEV sales by Chinese manufacturers rose by 38 percent to 9.5 million units last year, while NEV exports alone rose by a much larger 78 percent to 1.2 million units, according to CAAM.
That surge propelled China to the world's largest car exporter for the year, overtaking a spot long held by Japan.
And that is just where the deal with Stellantis, the world's fourth largest carmaker with brands including Fiat, Chrysler and Peugeot, may help Leapmotor to sharply boost its sales.
Stellantis is targeting the global market with its Leapmotor investment by setting up a Netherlands-based joint venture with a target of 500,000 in annual unit sales outside China by 2030, according to its third-quarter investor presentation.
Europe will be the first overseas market to get the Leapmotor NEVs. And the joint venture has an option to manufacture in Europe as a hedge against potential anti-dumping tariffs if an expected EU probe determines China provides unfair state support to its NEV makers.
Stellantis believes Chinese companies can produce EVs 30 percent more cheaply than Western ones. "I am putting in my portfolio a Chinese carmaker that can compete against the Chinese competitors," CEO Carlos Tavares told analysts in a recent earnings call, referring to the Leapmotor tie-up.
So, is Leapmotor up to the challenge? From a strategic perspective, the company made a mistake with its early focus on pure-electric vehicles. When sales fell to a low of about 1,139 units last January, it launched a plug-in hybrid in March and began delivering another hybrid model in September.
Leapmotor's first global model, the C10, will similarly be available in both pure electric and plug-in hybrid models. Shown first at the Munich auto show in September, the C10 began pre-sales on January 10 at prices starting at about 152,000 yuan ($21,146), roughly half those of the Li L7, a comparable model from rival Li Auto (NASDAQ: LI). Leapmotor said it received 15,510 pre-orders for the model in the first 24 hours.
While plenty of uncertainty surrounds Leapmotor and its peers as China's NEV sales slow, at least its price-to-sales (P/S) ratio of 2.05 is in the same general league as similarly loss-making Nio at 1.47, Xpeng at 2.81 and Li Auto at 2.75.
Of the analysts canvassed by Yahoo Finance, most see big potential upside for its beaten-down shares, betting the Stellantis tie-up may be just what's needed to send its sales into overdrive.
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