Cash-hungry Chinese EV startup Zeekr embraces US IPO, but a bumpy road ahead - P...

Cash-hungry Chinese EV startup Zeekr embraces US IPO, but a bumpy road ahead

Cash-hungry Chinese EV startup Zeekr embraces US IPO, but a bumpy road ahead

Rebbeca Ren

posted on 2 hours ago

Will Zeekr be able to help its parent Geely, once China's largest automaker, regain “glory days”?

Zeekr, the electric car brand owned by Chinese auto giant Geely, filed for a US IPO on December 7, aiming to raise more than $1 billion at a valuation of more than $10 billion. Comparatively, last year, when it conducted its maiden external fundraising, its valuation was around $9 billion.

According to people familiar with the matter, Zeekr considered Hong Kong as a potential venue for its IPO, but with the ambition of seeking a higher valuation, it opted for New York. The IPO could take place as early as the second quarter of 2023.

The news comes as the audit dispute between China and the US subsides. If proceeded, it will become the first major Chinese company to list in the US in the past year and a half.

Last July, Didi’s hasty US IPO irritated Chinese regulators, leading to stricter scrutiny of overseas listings. Under new rules from the securities regulator, Chinese companies seeking overseas listing has to register with the agency first, and then meet a set of requirements set forth by government officials.

The wrangle between China and the US over audits has cooled IPOs as well. In recent years, the Public Company Accounting Oversight Board (PCAOB), the audit regulator, has requested full access to audit documents from US-listed companies, but Chinese authorities, citing data security concerns, have refused to cooperate.

According to the Holding Foreign Companies Accountable Act (HFCAA), companies will be delisted if their auditors failed to be inspected for three consecutive years. As a result, the SEC has added more than 200 Chinese firms to its delisting watchlist, warning them that they could be removed from US exchanges as early as 2024.

It appears that the delisting risks have been mitigated, as the PCAOB was granted full access to the audit work of US-listed Chinese companies last week.

While shifts in the regulatory landscape made an IPO in the US possible, the cash-hungry company still faces challenges ahead.

Founded by Geely in April 2021, Zeekr targets the Chinese premium EV market. It introduced the 001 model last year with a starting price of 299,000 yuan ($42,779.68), slightly higher than Tesla's Model Y.

Thanks to its parent company’s established capabilities in automobile production, the newly launched brand was able to swiftly start deliveries. According to the China Passenger Car Association, Zeekr sold 60,600 cars in the first nine months of 2022. That number, while dwarfed by the 285,900 Model Y deliveries in China during the same period, is still staggering for a startup less than 2 years old.

Like every other Chinese EV startup, including Nio, Li Auto, Xpeng Motors, and Leap Motors, Zeekr is not profitable and is instead spending money at an increasing rate to expand. In the meantime, rising raw material prices and supply chain costs have further squeezed their profit margins.

With 8.8 billion yuan in revenue and a net loss of 759 million yuan in the first half of the year, Zeekr had a significant impact on the profitability of its parent company. Geely’s revenue for the same time period was 1.55 billion yuan, down 35% from the previous year.

Having an affluent cash reserve is crucial for electric carmakers to gain a foothold amid growing competition, which is why Hong Kong-listed Geely had to spin off Zeekr and list it separately.

To capitalize on the future of electrified transportation, several other well-known conventional automakers are also joining the ranks of spinning off and listing their EV businesses. Changan New Energy, a subsidiary of Changan Automobile, revealed that it plans to go public around 2025. GAC Aion, a new energy vehicle brand under GAC, announced in October that it was seeking an adequate time to go public.

Even the deep-pocketed Volkswagen is taking the same approach. By sending Porsche to the secondary market, the German automaker secured about $9.4 billion to fund its EV strategy.

In addition to reducing Geely's financial burden and accumulating substantial cash support, listing in the US, the world's largest financial market, will assist Zeekr in reaching a wider range of investors and establishing a global brand image. Last month, Zeekr CEO An Conghui confirmed the company will start selling the 001 liftback in select European markets next year.

Zeekr is expected to reach 70,000 sales this year, according to the company's CEO. He also said the brand maintains an earlier target of selling up to 650,000 vehicles per year by 2025.

But the near-term outlook for Zeekr's IPO is clouded. Triggered by the Federal Reserve's war on inflation, the US stock market experienced extreme volatility this year, and the number of IPOs in New York plummeted. Also, propping up high valuations is challenging in a market with tight liquidity. Since the beginning of this year, the market cap of Tesla has dropped 64.42%, and Nio has dove 64.36%.

To make things worse, global automakers could face a decline in EV adoption amid rising supply chain issues and economic concerns. 

According to a survey released by KPMG on Tuesday, global automotive executives are less confident about the rate of adoption of electric vehicles than they were a year ago. Estimates of new vehicles sold being EVs by 2030 globally ranged from 10% to 40% in this year’s survey, down from 20% to 70% a year earlier.

Commenting on the recent survey, Gary Silberg, global head of automotive at KPMG, revealed that EV makers are optimistic about long-term sales growth, but are less bullish about a sales surge given the near-term environment.

Even though this is not the best time to take Zeekr public and maximize its valuation, Geely has to do this to gain more financial support, or competitiveness, for its EV business. The Zhejiang-based company, once China's largest automaker, has lost its frontrunner status as the era of EVs dawns.

The company has a tough time finding a strategic focus and consolidating its resources to cut production costs because it owns too many brands that produce EVs — It's the kind of complexity that big EV makers BYD and Tesla avoid. Besides Zeekr and its own brand, Geely also owns several sub-brands that sell EVs, including Volvo, Polestar, Lotus, Lynk & Co, etc.

It is worth noting that Geely already has a pure electric vehicle company listed in the US, that is Polestar. The market value of the company, which went public in June via a merger with blank-check company Gores Guggenheim, has shrunk by more than 50% to around $10 billion. The startup, which set a target of 50,000 deliveries in 2022, delivered about 30,400 vehicles as of the third quarter.