New Stock Preview | Positive Energy: Accumulated losses of 2.7 billion in three years, can going to Hong Kong for "reinforcements" find the key to turning the situation around?

The Hong Kong stock power battery sector is expected to "welcome new opportunities" again. Recently, Jiangsu Zhengli New Energy Battery Technology Co., Ltd. (referred to as Zhengli New Energy) submitted an application to the Hong Kong Stock Exchange main board, with CICC and CMB International as joint sponsors. The prospectus shows that Zhengli New Energy was established in 2019, with Cao Fang and Chen Jicheng as the core founders and controlling shareholders of the company. It is worth noting that Cao Fang and Chen Jicheng have both worked at Fuyao Glass Industry Group. Cao Fang is the sister of Fuyao Glass Industry Group founder Cao Dewang, and has served as the sales manager, director and vice president of Fuyao Glass Industry Group; currently serving as the chairman and executive director of Zhengli New Energy. Chen Jicheng has held various positions at Fuyao Glass Industry Group, including executive director and vice president of Fuyao Glass Industry Group; currently serving as the executive director and general manager of Zhengli New Energy. In the shareholder structure of Zhengli New Energy, there is a diverse capital force. San Yi Development Co., Ltd., wholly owned by Cao Dewang, holds approximately 2.52% of Zhengli New Energy through its subsidiaries. In addition, state-owned capital from various regions has also entered the picture, such as the venture capital platform under Huafu Securities, a state-owned financial institution in Fujian Province, and a platform under the Changshu Municipal Finance Bureau, among others. However, in the past few years of development, although Zhengli New Energy's business scale has steadily expanded, the company has been in a prolonged state of losses, casting a shadow over its future development. In the fiercely competitive power battery market, whether Zhengli New Energy can break through the difficulties, achieve profitability and sustainable development, is still facing many uncertainties. "Little brother" of lithium-ion battery manufacturers The prospectus shows that Zhengli New Energy is a Chinese lithium-ion battery manufacturer, developing a diverse battery product portfolio driven by market demand and technology. The company primarily focuses on the sale of battery products for electric vehicles (EVs). The company provides integrated solutions for battery cells, modules, battery packs, battery clusters, and battery management systems, dedicated to expanding the large-scale application of electrochemical products in the interconnected land-sea-air (LISA). The company has a pedigree in automotive parts. Thanks to the inheritance and experience of the core management team in the automotive parts industry, the company has insights into the car industry and develops a diverse electric vehicle battery product matrix based on the comprehensive optimal requirements of OEM customers for product safety, quality, performance, and cost, and proactively researches and develops aviation batteries, positioning itself advantageously in the rapid technological iteration and expansion of the battery industry in various scenarios. During the performance period, the company mainly focused on selling battery products for electric vehicles. As one of the top ten participants in the installed capacity of the electric vehicle battery market, the competition in the China Shipbuilding Industry Group Power battery industry where the company is located is fierce and concentrated. As of August 31, 2024, the top ten manufacturers accounted for 96.9% of the total installed capacity in the first eight months. According to data from the China Automotive Power Battery Industry Innovation Alliance, the company held a market share of 1.7% among China Shipbuilding Industry Group Power battery manufacturers, based on the installed capacity as of August 31, 2024. Three years of losses exceeding RMB 2.7 billion From the financial data of Zhengli New Energy, it can be seen that in recent years it has shown a trend of increasing revenue but still in a loss. The company's revenue increased from RMB 1.499 billion in 2021 to RMB 3.29 billion in 2022, and further to RMB 4.162 billion in 2023, with a compound annual growth rate of 66.6%. In the first eight months of 2024, the company's revenue was RMB 2.858 billion, a year-on-year increase of 33.6%. This is mainly due to the increase in sales of power batteries. In terms of profit, the company incurred losses in 2021-2023 and in the first eight months as of August 31, 2024. During the period of 2021-2023, the accumulated net losses attributable to the owners of the parent company exceeded RMB 2.7 billion. The reasons for Zhengli New Energy's losses come from various aspects. On one hand, in the early stages of business operations, the company needs to make substantial upfront investments in production capacity and product research and development, including establishing and expanding production capacity and investing in research and development, which are difficult to generate substantial returns in the short term. On the other hand, in 2022, there were significant adverse changes in the business operations of customer X, resulting in Zhengli New Energy incurring trade receivables and inventory impairment of RMB 601 million, which had a significant adverse impact on its operating performance. It is worth noting that Zhengli New Energy has partnered with leading companies in the automotive field, forming a high-quality customer base. The company's battery products are mainly for electric vehicle manufacturers. The company's power battery customers include large central SOEs, new energy vehicle manufacturers, and leading multinational vehicle manufacturers. The company's supply of battery products for core models of global leading enterprises such as FAW Red Flag, GAC Trumpchi, LEAPMOTOR, SAIC-GM Wuling, and SAIC-GM continues to increase. Since 2021, Zhengli New Energy has seen a growth trend in the number of customers, reaching 92 in 2023, with 11 OEM customers in 2023. However, this has not completely freed the company from reliance on a few customers. In 2021, 2022, 2023, and for the first eight months up to August 31, 2024, the sales revenue from the top five customers of the performance record periods for each year/period of the company was RMB 1.337 billion, RMB 2.973 billion, RMB 3.238 billion, and RMB 2.477 billion, accounting for 89.1%, 90.4%, 77.8%, and 86.7% of the total revenue for each period, respectively. During the same period, trade receivables, bills receivable, and contract assets of the company increased gradually from approximately RMB 322 million to RMB 1.393 billion. Zhengli New Energy pointed out in the prospectus that the company cannot guarantee that it will be able to maintain the turnover days of trade receivables and bills receivable at a reasonable level. If the credit status of customers deteriorates, or if a large number of customers fail to pay for any reason, it could adversely affect the company.Settling its trade receivables, the company may continue to incur impairment losses in the future, which could have a significant adverse impact on the company's operating performance and financial condition.The power battery market is expected to maintain rapid growth. Despite facing risks such as customer concentration and trade receivables, the overall situation of the power battery industry in the current market environment has brought new thoughts and challenges to the company. On one hand, customer dependence and accounts receivable risks are like the sword of Damocles hanging over the company's financial health; on the other hand, the rapid development of the industry also attracts the company to actively explore breakthroughs and development paths. In this complex situation of opportunities and risks, the company must seize the opportunity of industry development while dealing with risks in order to stand firm in the fierce market competition. According to Frost & Sullivan's report, the power battery industry currently faces both opportunities and challenges. In terms of opportunities, the power battery market has steadily grown in recent years. The global installed capacity of power batteries is expected to grow at a compound annual growth rate of 37.5% from 716.0GWh in 2023 to 3513.1GWh in 2028. China Shipbuilding Industry Group Power's battery installed capacity is expected to grow at a compound annual growth rate of 37.9% from 389.0GWh in 2023 to 1,943.3GWh in 2028. The rapid development of China Shipbuilding Industry Group Power's battery industry presents a unique opportunity for industry participants. However, the industry also faces many challenges. Structural changes in market demand, such as the automotive industry's comprehensive optimal requirements for product safety, quality, performance, and cost, have driven structural changes in the new energy vehicle and battery industries, with the trend towards diversified development becoming more significant. Against the backdrop of the phasing out of battery subsidies and breakthroughs in lithium iron phosphate battery technology, a switch in dominant battery types in the market, and significant changes in the vehicle structure of the new energy vehicle market have occurred. In addition, power battery manufacturers need to adapt to the rapidly changing market environment and provide diversified product solutions, posing new challenges to their flexibility and development capabilities. Many power battery companies have invested heavily in building production lines to meet the stable supply and demand for battery products in the early stages of industry development. However, under current market demand, there are issues such as poor compatibility, low efficiency, and high manufacturing costs. At the same time, OEMs demand standardized battery products that can be adapted to different types of vehicles and compatible with different electrochemical systems. The listing of A123 Systems on the Hong Kong Stock Exchange is an important milestone in its development. Through the listing, the company will receive more financial support for capacity expansion, technological research and development, and market expansion, further enhancing its competitiveness in the power battery market. For investors, A123 Systems' technological strength, market position, and development potential in the power battery field make it a worthwhile investment. However, investors should evaluate the industry competition and financial risks that the company faces with caution. In the background of the continued development of the new energy vehicle industry, whether A123 Systems can stand out in the fierce market competition, achieve profitability, and sustain growth is worth continuous attention.