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China’s Tesla challengers, Xpeng and Li Auto, rev up capital-raising drive as the electric car startups target US IPOs

Written by South China Morning Post Published on   5 mins read

Xpeng files secretly for US IPO; Hillhouse Capital backing Li Auto’s Nasdaq listing.

China’s electric car startups are tanking up on capital to gear up for expansion in the world’s largest car market.

Xpeng Motors has made a confidential filing for a listing in the US, Li Auto is marketing a USD 950 million initial public offering on Nasdaq this week, while New York-listed Nio shares have tripled so far this year.

Elsewhere, Zhejiang-based carmaker Geely Automobile Holdings, which makes the Geometry A electric car, said it plans to list on Shanghai’s Nasdaq-style Star Market later this year.

Investors are keen to jump on the electric vehicle bandwagon after watching 17-year-old, California-based Tesla overtake Toyota Motor, Volkswagen, and Hyundai Motor this year in terms of combined market value to become the world’s most valuable carmaker. Tesla sells its Model 3, Model S, and Model X in China.

China’s government also boosted investors’ confidence by affirming its support for electric vehicle makers during the coronavirus crisis, which was followed by a sharp recovery in sales after the slump in February when car showrooms were closed as the virus spread rapidly across the mainland.

The China Passenger Car Association secretary general Cui Dongshu said the association expects new energy vehicle sales, a combination of pure electric vehicle and hybrid models, in the second half of 2020 to be significantly higher than in the same period last year.

By 2025, Beijing wants homegrown carmakers to command 80% of China’s electric vehicle market, according to the government’s “Made in China 2025” industrial master plan.

Chinese electric vehicle makers mushroomed to number around 400, supported by Beijing’s efforts to lower pollution in the country’s cities and an abundance of private equity capital.

However, significant roadblocks lie ahead for these startups, including embryonic charging infrastructure and the relatively high cost of making an electric car versus one with an internal combustion engine.

After the government started to turn off the spigot of subsidies last year, smaller firms have floundered. The largest—Nio, Li Auto, Xpeng, and WM Motor—are now looking to grab market share, fueled by investors’ capital.

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The startups are targeting tech-savvy 30-somethings who are buying into the idea of smart electric vehicles, cars with souped-up features such as tools for automated parking at the click of a smart key, roof cameras for selfies, and voice-automated assistants. Smart electric car companies are increasingly cutting out dealerships and selling directly to the consumer and maintaining that relationship with upgrades over the air every one and a half months and responding to customer feedback.

Guangzhou-based Xpeng Motors has filed confidentially to list in the US, but has not yet chosen between Nasdaq or the New York Stock Exchange, according to a person familiar with the matter.

Xpeng has hired investment banks JP Morgan, Bank of America, and Credit Suisse to help it find investors, the person said. The startup is expected to raise well over USD 500 million in the IPO, though it has not yet fixed the exact size and percentage of the company for sale. A spokesperson for the company declined to comment; spokespeople for the banks either did not respond immediately or declined to comment.

Founded by Alibaba veteran Xiaopeng He, the eponymous firm announced USD 400 million of fresh capital in November when it was valued at nearly USD 4 billion. Since then, the startup has surpassed several landmarks.

Its second production model, the P7, premiered at the Shanghai Auto Show in April 2019. The sports sedan retails at between 240,000 yuan (USD 34,240) and 370,000 yuan, nearly a third of the price of a Tesla Model S in China.

Xpeng also secured a production licence for its self-built, fully owned factory in Zhaoqing, in Guangdong province in May.

One risk for would-be Xpeng investors is an accusation by Tesla that the Chinese company hired one of the US carmaker’s former engineers who still had access to some its technology. To be sure, Xpeng is not a party in the court case slated for January and it has put the former Tesla employee on administrative leave.

Xpeng targets the middle and high-end of the smart electric vehicle market in China and prides itself on building its software end-to-end.

Li Auto is marketing American depositary shares for an IPO on Nasdaq worth up to USD 950 million, within a range of USD 8 to USD 10 each, according to its prospectus.

Bookrunners for the loss-making company include investment bankers at CICC, Goldman Sachs, Morgan Stanley, and UBS. Chinese private equity firm Hillhouse Capital will buy up to USD 300 million of the stock. ByteDance will also be an investor in the company.

Xpeng and Li Auto have chosen to list in the US despite rising US-China tensions.

Legislation passed by the Senate would kick Chinese companies off US stock exchanges unless their audits are open to inspection by US regulators.

However, New York still has a far deeper pool of liquidity for startups to tap than Greater China, meaning Xpeng and Li Auto could potentially achieve a higher valuation in the US than they would have done closer to home.

Also, Hong Kong is still not as flexible as the US and does not allow companies to raise funds less than 28 days before their IPOs. Xpeng said it closed a USD 500 million Series C+ round of fundraising earlier this month.

China’s leading electric vehicle startup in terms of sales among individual buyers, Nio, listed on the New York Stock Exchange in 2018. So far, its stock has tripled in value this year. This stellar stock market performance comes after it teetered on the brink of collapse before Hefei government rode to the rescue and bailed it out in April.

The capital injection has reassured investors that Nio will survive and expanded its market cap to USD 14 billion. Analysts at investment bank CICC expect Nio to break even in EBIT terms by 2022.

China has been gradually cutting subsidies for electric cars since 2015, with plans to completely eliminate them by 2020. However, the government said in March that it would extend them to 2022 for cars costing less than 300,000 yuan as it seeks to bring down pollution in its cities.

Li Auto said in its prospectus that its revenues for the three months ended June 30 reached 1.9 billion yuan, including vehicle sales of 1.9 billion yuan, up 128.6% from revenues of 851.7 million yuan for the three months ended March 31, including vehicle sales of 841.1 million yuan.

Xpeng’s July sales are pointing up year-on-year, according to the person familiar.

This article was originally published in the South China Morning Post


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