Evergrande Motor: How many steps are there from "the world's strongest"?

 When Evergrande Automobile "formally" faces investors as a new energy vehicle company, the delivery volume will become the core indicator, and the delivery volume will be determined by the market's comprehensive evaluation of the quality of the main models. 

Hengda health after renamed Hengda car (0708.HK), and on September 18 announced that filed Branch board IPO, there were no more doubts Hengda set made Group seriousness of the car.

On October 20, Evergrande Automobile issued an announcement stating that the company had held a general meeting of shareholders on the same day and formally voted on the sci-tech innovation board listing proposal. As of the close of October 23, the market value of Hengda Automobile reached 236.284 billion Hong Kong dollars, more than 30 billion higher than the holding company China Evergrande (3333.HK), which is also listed on the Hong Kong stock market.

The market’s high valuation for Evergrande is not lacking in the premium space brought by new energy vehicles as an industry as a whole, and the imagination space brought by China Evergrande with its total assets of 2.3 trillion yuan. However, under the drastic changes in the electric vehicle industry, a variety of valuation systems are secretly competing. It has not yet seen mass production of new cars to obtain a high market value of more than 200 billion yuan, and it is bound to face value torture from the market. 

In the latest "Group Profile" on the official website of Evergrande Group, the first sentence reads this: "Evergrande Group is a Fortune 500 enterprise group based on people's livelihood real estate, cultural tourism, health and wellness, and new energy vehicles as the leader. "From this introduction alone, no matter what the outside world thinks, Evergrande has planned new energy vehicles as its new business leader. According to public information, Evergrande Automobile claims that it will strive to become the world's largest and most powerful new energy vehicle group within 3-5 years.

In this way, for the future of Evergrande Motors, we have to compare it with the current strongest pioneer-Tesla (TSLA.O). This new energy car company, which has caused huge differences between long and short on Wall Street, held an industry-focused Battery Day conference in September. At that conference, Elon Musk explained in detail the self-developed battery plan, but Tesla's stock price fell more than 10% the next day.

This shows: First, investors have high requirements for this car company and remain skeptical. Second, Musk's strategic focus is very clear. The theme of Tesla’s press conference last year was Autonomy Day. At the 2019 shareholder meeting, Musk clearly stated: “If I were an external investor, I would pay close attention to two things: Autonomy Day. Technology timetable; battery capacity expansion and cost reduction plan.” As Musk said, batteries and autonomous driving are the most important strategic points in the topic of electric vehicle investment.

In China, the main rival that Evergrande needs to catch up with should be BYD. The latter has boosted investor confidence with blade batteries. Its stock price has performed well in the A-share and H-share markets, with a year-to-date increase of more than 200%. But like Tesla, BYD's business also faces challenges. In the first seven months of 2020, the overall industry sales were weak. The cumulative installed capacity of BYD power batteries was 3.2GWh, which has fallen to the fifth place in the world, down 60.8% year-on-year. Limited by the production capacity of blade batteries, BYD Han, the flagship model launched in July, initially delivered much lower than market expectations. In an investor relations event on September 25, BYD stated that “the company has power battery plants in Shenzhen, Xi’an, Chongqing, Qinghai and other places. The blade battery production capacity is currently steadily climbing.”

The subject of Tesla and BYD is the trial that Evergrande Motor will face. Models, production capacity, batteries, pricing... The brief appearance of six "Hengchi" models at the press conference on August 3 was far from satisfying investors' curiosity.

According to official data, from January to September 2020, BYD’s cumulative sales of new energy vehicles were 106,744, and September sales were 19,048. In terms of a single model, according to data from the China Travel Association, in addition to the A00-class Wuling Hongguang MINI, which sold 20150 in September, the highest sales volume was the Tesla Model 3 MV (B-class), which sold 11,329; BYD Han In the third quarter, the overall delivery volume of all models exceeded 10,000.

To be the strongest in the world, Evergrande Motor needs to complete some phased goals in the Chinese market first. For example: Let the monthly sales volume of a certain model of "Hengchi" exceed 10,000 as soon as possible. Before approaching BYD, Evergrande needs to challenge new car-building forces such as Weilai, Ideal, and Xiaopeng, and the corresponding monthly sales threshold will be 4000 or 5000. Taking into account the growth rate of major competitors, similar target values ​​will be higher.

At the first-half performance conference on August 27, Evergrande Motor announced that Hengchi will conduct trial production in the first half of 2021 and mass production will follow in the second half of the year. Then, the more core and basic subject is: how to make new energy vehicle products that will surprise consumers once they come out in the next year, so as to make the growth curve of production capacity and sales as steep as possible.

The industry predicts that Evergrande Motors will still have to rely on intensive capital investment to reduce the business growth cycle and cover the trial and error cost of "Hengchi" as a new car (or N models).

On September 15, Evergrande Automobile raised approximately HK$4 billion (approximately RMB 3.5 billion) through the placement of new shares. Strategic investors introduced include Yunfeng Fund, Tencent, Sequoia Capital, and Didi. The price of each of its placement shares is 22.65 Hong Kong dollars, which is a discount of about 20% compared with the closing price of 28.3 Hong Kong dollars per share on September 14. 

On September 18, Evergrande Automobile announced its intention to be listed on the Science and Technology Innovation Board of the Shanghai Stock Exchange. The specific fundraising scale is also disclosed. The adjacent reference object is Geely Automobile, which announced in June that it will IPO on the Science and Technology Innovation Board of the Shanghai Stock Exchange, with a proposed fund of 20 billion yuan; five years ago, Li Shufu released a new energy vehicle strategy called "Blue Geely Action". One of the core contents of this strategy is: By 2020, sales of new energy vehicles will account for more than 90% of Geely's overall sales. Five years later, Geely has grown to become the leader in domestic passenger vehicles, but the above goals are far from being achieved. In 2019, Geely's new energy vehicle sales accounted for only 5% of total sales. In the first eight months of 2020, Geely failed to enter the top 10 new energy vehicle sales in the domestic market.

The strategic expression of Evergrande Motor shows a kind of optimism and "Musk-style" publicity stepping on the wind. But prudently, investors need to consider the following questions: Is the tens of billions of yuan worth of funds sufficient for the goal of "the world's strongest" of new energy vehicles? How to integrate business modules with different backgrounds that have been acquired heavily? Is Evergrande Motors competitive in terms of production capacity and cost, main models, battery technology, and autonomous driving technology?

How much money do you need to become the strongest? 

Evergrande’s chief financial officer Pan Darong said at the August performance meeting that after Evergrande’s mass production and sales, the group will no longer have capital investment. According to Pan Darong, Evergrande Group invested 14.7 billion yuan in new energy vehicle business in 2019, 3 billion yuan in the first half of 2020, 2.7 billion yuan in the second half of the year, and 9 billion yuan in 2021. It is estimated that a total of 29.4 billion yuan will be invested. Panda Rong said he believes the car will soon Hengda Real cash cash cash flow, profit balance.

On the premise that the group will no longer have blood transfusions, the funding issue will be the top issue for Evergrande Automobile in the next three to five years. There are enough cases to show that in the electric vehicle industry, large-scale acquisitions are only the beginning of huge capital investment, far from the end. 

An example of the historical situation of the industry is as follows: In 2017, Tesla’s capital expenditures (Capex) jumped from US$1.28 billion in 2016 to US$3.41 billion, free cash flow was US$-60.65 million, and Model 3 production capacity climbed slowly, causing The company's debt-to-equity ratio soared to 183%. High daily expenses, high Capex expansion, and maturing debt, combined factors caused Tesla's capital shortage at that time. In the following three years, Tesla experienced repeated transitions of profit and loss: reducing costs-increasing profit margins-turning losses into profits-expanding investment-turning gains into losses... In another example, NIO.N, the representative company of new car-making forces, finally achieved positive operating cash flow and positive gross profit until the second quarter of 2020, and its net loss decreased by 63.6% year-on-year to 1.207 billion yuan. However, according to Barron’s Weekly, some Wall Street analysts predict that Weilai will not achieve annual profits before 2023. 

One of the status quo of industry competition is this: According to Reuters, Volkswagen said at the end of September that it would jointly invest 15 billion euros with FAW Group , SAIC Group and Jianghuai Automobile to produce 15 different pure electric or electric vehicles by 2025. Plug-in hybrid models. Volkswagen Group (China) CEO Feng Sihan also revealed at the 2020 World New Energy Vehicle Conference that by 2025, Volkswagen's battery capacity demand in China will reach 150 GWh. Previous data showed that Volkswagen spent a total of 7 billion euros in the development of a new electric vehicle platform MEB, and it is expected that it will need to reach 20 million sales in 2029 to recover the cost.

In short, high daily expenses and long periods of loss are the norm for new energy car companies. Huge production capacity and R&D investment are standard for competitors, and continuous capital inflow is necessary. Evergrande is no exception.

According to the planning data disclosed at the interim results meeting, in 2020, Evergrande will have 60.8 billion yuan in cash inflow in the new energy vehicle business, of which financing income is 30.2 billion yuan, sales revenue is 22.1 billion yuan, and the group investment is only 5.7 billion yuan. RMB 2.8 billion in other inflows. The cash inflow mentioned here and the group investment mentioned above are two concepts.

These funds correspond to Evergrande Automobile's full-blown, one-step investment method. The first is the simultaneous advancement of six ambitious models, covering conventional models such as A to D sedans, SUVs, and MPVs; correspondingly, factory construction projects. The Shanghai and Guangzhou production bases should have trial production in September this year according to the announced plan. Conditions, the planned production capacity of the first phase is 200,000 vehicles; at the same time, there are also "three major centers" under rapid construction, including 36 Hengchi display and experience centers, 1,600 Hengchi sales centers, 3,000 self-built and authorized maintenance Service center.

According to the disclosure of the 2020 interim performance report, Evergrande Automobile achieved revenue of 4.51 billion yuan in the first half of the year, an increase of 70.3% year-on-year; realized gross profit of 1.262 billion yuan, an increase of 106.55% year-on-year; a loss of 2.457 billion yuan, an increase of 23.84% year-on-year. The report said that the main reason for the loss was the expansion of the new energy vehicle business. According to the plan to realize the mass production of "Hengchi" in the second half of 2021, this loss trend is likely to continue.

From the perspective of revenue share, health management is still Evergrande’s main business, and revenue has increased significantly. Among them, Evergrande Health Valley’s revenue was as high as 4.446 billion yuan, an increase of 88.80% year-on-year. During the reporting period, the new energy vehicle business revenue was only 53 million yuan, a year-on-year decrease of 81.36%, mainly due to a serious decline in lithium battery sales orders and transaction volume.

Investors need to pay attention to that, compared with car manufacturing, Evergrande Auto's health management business has a higher degree of certainty. According to the business outlook in the interim report, in the second half of 2020, the company will open at least 18 Evergrande Health Valley Parks and 6 large-scale healthcare complexes (Xi’an, Zhengzhou, Zhenjiang, Kunming Jialize , Shenfu) across the country . New District, Wuzhou) and 3 residence apartments; in the next three years, we plan to deploy 70 livable health resorts .

According to the analysis of the Chinese version of Barron’s, investors should pay close attention to the progress of Evergrande’s automotive health management business. If the above-mentioned health-care valley business can be carried out as planned and continue to maintain considerable revenue and gross profit growth, it will provide the automotive business with Stable cash flow support will also help improve its ability to respond to changes in the external financing environment.

For those who hold shares of the company, in the short term, until Evergrande’s new energy vehicle is launched, the health management business is the company’s pivotal fundamentals.

How to efficiently integrate the purchased industrial chain? 

In the eyes of investors, the biggest uncertainty of Evergrande is that it may not be possible to see a "Hengchi" vehicle as a reference in the next six months. 

The interim performance report stated that Evergrande Motors “has built a new energy vehicle industry chain covering vehicle manufacturing, motor electronic control, power batteries, vehicle sales, smart charging, shared travel and other fields, and has the world’s top Core technology; the establishment of Evergrande New Energy Automobile Global Research Institute and the implementation of a global integrated research and development model". Up to now, Evergrande Motors has not disclosed the details of the "Global Research Institute", "Integrated R&D Model" and Hengchi's vehicle design work to the outside world. 

Vehicle design and manufacturing is a well-known complex system engineering.

A veteran in the automotive industry told the Chinese version of Barron Weekly: How to integrate and collaborate with business modules and technical teams of different backgrounds is a problem that Evergrande must properly solve. If integrated well, it will effectively reduce the overall cost. The more pressing issue is time. The traditional vehicle development cycle lasts for more than three years. Even with a more mature technical framework as the foundation, Hengchi’s current timetable is very tight, and it is in the absence of a mass-produced vehicle. Under the circumstances, six new models are being promoted at the same time, which means a huge amount of interrelated details, and each technical node affects the passenger experience of the entire vehicle. Evergrande has the strength to build models that are sufficient for market sales, but whether it can surpass mature rival models and be widely recognized by the market requires further observation. Consumers’ awareness of electric vehicles is much better than it was ten years ago, but the number of competing products is far greater than before.

Judging from the published information, Evergrande’s hardware conditions in the manufacturing link are good enough. Vehicle production bases have been deployed in Guangdong, Shanghai, Tianjin, Liaoning and other places; among them, the Guangdong and Shanghai bases that adopt the Industry 4.0 standard have assembled 2,545 intelligent robots, and have entered the stage of equipment debugging and installation. Production of 1 car per minute; stamping workshop equipment from Schuler, Germany, with MMS intelligent self-diagnosis system; body workshop using German KUKA and Japanese FANUC equipment, using digital twin technology, belonging to high-end intelligent "black light factory." The painting workshop and assembly workshop are imported from Dürr, Germany, and the level of automation is also the world's advanced level.

According to the planning of the production base, the production ramp-up problem that has generally plagued new car companies in the past may have a much smaller impact on Evergrande. The market focus will be more on Hengchi's technical parameters and product quality.

The acquired Sweden NEVS (Complete Vehicle Electric Vehicle Company), the acquired shares of Carnegie New Energy (lithium battery company), the Dutch e-Traction acquired (commercial wheel hub motor company), the British Protean company (passenger vehicle field) Hub motor company), German Hofer (powertrain system company) and Koenigsegg (Swedish super sports car company) that established joint ventures. In what way and to what extent will the technological advantages of these powerful companies be related to acquisitions The 3.0 chassis architecture (from the German BENTELER Group, FEV Group) integration? At this stage, investors need to wait for the further explanation of Evergrande Auto or the detailed disclosure of the prospectus.

Judging from the performance of the Hong Kong stock market, Evergrande Motor announced on June 11 this year that it had acquired the remaining 17.6% equity of Sweden’s NEVS to be wholly-owned, and its stock price rose rapidly. After August, it experienced two declines. The first time was just after the release of six Hengchi models on August 3. Since August 4, its stock price has fallen for 7 consecutive days, from close to HK$38 to about HK$25. Another time, after the IPO application on the Sci-tech Innovation Board was announced on September 18, its share price fell from about 25 Hong Kong dollars to around 17 Hong Kong dollars. Although this is affected by the overall ups and downs of the industry, it also reflects investors' doubts to a certain extent.

Similar to Wall Street’s disappointment with the content of Tesla’s battery day, the Hengchi models with only exterior design were released, which was lower than the market’s potential expectations for Evergrande. In the first half of October, with the overall rise in new energy vehicle concept stocks, Evergrande’s valuation has been restored to a certain extent, and it has now rebounded to around 27 Hong Kong dollars.

How are batteries and autonomous driving technologies deployed?

Accelerating technological advancement through acquisitions is not a problem in itself. Tesla also completed the acquisition of electrochemical company Maxwell in May 2019, thus starting to iterate on the process and equipment of self-developed batteries. However, Evergrande’s acquisition volume is huge and intensive, unprecedented in the industry.

The market has two typical expectations for the core technology advancement of new energy vehicle companies. One type is represented by Tesla, which carries out systematic improvement and gradual innovation, and upholds the philosophy of "fast action, fast failure, fast correction, and fast breakthrough". The other category is based on the subversive innovations that turned out to tell stories that are beyond old imagination. For example, Toyota announced the deployment of solid-state battery technology in 2017 and mass production in 2020, but in July this year, Toyota again Announced that solid-state battery production will be postponed to 2025 in small batches. While Evergrande may not belong to either of these two categories, investors have no way of judging its "technological philosophy."

The reason why Battery Day disappointed Wall Street is that they originally expected Tesla to release some kind of black technology, but as a result, Musk came up with a comprehensive and detailed lithium battery iteration roadmap. In response to the more disruptive solid-state battery camp, Musk has repeatedly stated that the theoretical limit of lithium batteries has been greatly underestimated. It is said that several technologies demonstrated on the battery day will reduce the cost of Tesla's battery per kilowatt hour by more than 50%.

In any case, batteries are the lifeblood of electric vehicle companies, as well as user safety, cruising range, cost and production capacity.

"Barron's" report in September pointed out that in order to avoid the risk of high valuation of electric vehicle stocks, investors will have to upgrade their investment strategies. As sales increase, electric vehicles will separate winners and losers. For any electric vehicle manufacturer, the battery system is the primary and real difference. What investors should pay most attention to is who can get similar mileage at a lower cost. In the end, the outcome will be reflected in the profit margin. From the perspective of investors, who is better at profitability will be used to measure who is best at battery system design. 

According to the outlook of the 2020 interim performance report, Evergrande Motors “will accelerate its global deployment around the new energy industry, and will continue to work hard to set up multiple super factories with an annual production capacity of 30GWh within 10 years, to build battery materials, power lithium batteries, solid-state batteries, The complete industrial ecological chain of business sectors such as hydrogen fuel cells, energy storage batteries, wireless charging, and battery echelon recycling."

From this general description, it is not yet possible to know the focus of Evergrande on the battery technology route. It is worth noting that the interim performance report also specifically stated that the revenue of the new energy vehicle business has dropped significantly year-on-year, mainly due to the severe decline in the sales of lithium batteries; in the first half of 2020, the sales of lithium batteries were approximately 26.6 million yuan, compared with the same period last year The figure is 253 million yuan. Although the report did not mention specific companies, there are reasons to speculate that this refers to the battery company Kanai New Energy acquired by Evergrande.

On January 24, 2019, Evergrande invested 1.06 billion yuan to hold 58.1% of the shares in Kanai New Energy. This is a Sino-Japanese joint venture company, mainly engaged in the R&D and production of lithium batteries, with a technical route of ternary soft packs. According to data from the Advanced Industry Research Institute (GGII), in 2018, Carnegie New Energy ranked tenth among the top 10 power battery companies in China in terms of installed capacity, with a market share of about 1.02%; in 2019, Carnegie New Energy fell out Top10 ranks, today from January to July, the situation has not improved. The reason why its battery sales has experienced a serious decline remains to be explored. The question that arises from this is, can Carnegie New Energy support Evergrande’s battery responsibility?

There is also a second possibility, the answer comes from South Korea's SK Group. In June last year, Xu Jiayin visited South Korea in person and reached a cooperation agreement with him. SK Innovation, a subsidiary of the SK Group, is one of the main suppliers of high-density ternary lithium batteries. However, there is no official follow-up of the substance of the cooperation between the two parties. According to a person familiar with Evergrande, the director of SK Battery Research Institute Li Junxiu and his team introduced by Evergrande have already been in place. They will preside over the production of batteries in the newly built intelligent manufacturing base. The goal is to reach the world's leading level in the second half of next year. .

Over time, the market will gradually set expectations: Do you regard Evergrande Motors as a new entry into the game? Or will it be regarded as a star company of the same magnitude as Tesla and BYD in the future? If it is the former, it is inconsistent with Evergrande’s investment; if it is the latter, investors will have completely different requirements for Evergrande. In the short term, the industry has not been able to confirm the true technical capabilities of Evergrande in the key area of ​​batteries, and cannot predict the cost and selling price of the entire vehicle that will be significantly affected by it. 

According to Musk's standards, leading car companies must lead in both battery and autonomous driving. In the interim report, Evergrande did not mention "autonomous driving."

However, according to the latest report from the automotive media AutoCar, Sweden’s NEVS under Evergrande has designed and manufactured an L4-class 6-seater self-driving car Sango at the Saab’s legendary factory in Trollhattan, and plans to start it in the second half of 2021. test.

If NEVS Sango can achieve initial success in L4 autonomous driving, it will undoubtedly enhance investors' confidence in the future of Evergrande.

The latest strategic investors of Evergrande Auto, Ali, Tencent, and Didi, are also considered to be making extensive deployments in the field of smart car terminals.

The joining of Ali and Tencent is a source of greater confidence for some investors in Evergrande Auto. But another view is that Alibaba and Tencent are just doing regular layouts, and Evergrande’s declaration of “becoming the world’s strongest in five years” has increased its uncertainty. Ordinary investors do not need to make such “strategic investments”. Nature bets. In addition to Evergrande, Tencent also invested in Weilai and Weimar, and Ali also invested in Xiaopeng.

In response to the construction progress of the production base and the three major centers, the work model of the global R&D team, the detailed information of Hengchi models, the design concept of the whole vehicle, the battery technical route, the reason for the decline in lithium battery sales, and the reserve of autonomous driving technology, "Barron Weekly" Chinese Bian once sent a letter to Evergrande Automobile Research, but had not received a response as of the time of publication.

The Chinese version of "Barron's Weekly" believes that due to the lack of detailed materials related to the core technology details, it is currently impossible to give a clear judgment on the investment value of the stock of Evergrande. In the short term, investors need to continue to pay attention to the income and profit of Evergrande's health management business, and wait for the company to disclose more detailed new energy vehicle business information.

As of late October 2020, the H stock market value of Evergrande Auto is about 230 billion Hong Kong dollars (about 30 billion US dollars). During the same period, the market value of NIO was approximately US$37 billion, the market value of Ideal Auto was approximately US$15 billion, the market value of Xiaopeng Motors was approximately US$14 billion, and the total market value of BYD’s A shares and H shares was approximately US$54 billion. The market value of pull is as high as about 400 billion US dollars. On valuation, Hengda car owner has charge points for imagination, the situation will become clearer early in the first half of 2021 after the Chi Heng started trial production.