Long-Term Planning and Building Branding: Longan Auto in the Eyes of Secondary Market Researchers

The performance of Changan Auto in the capital market this year is highly anticipated. In the secondary market auto sector since 2022, the performance has been tepid and completely unsatisfactory. As mentioned in the previous article by Li, once the auto sector enters a reversal, new energy vehicle representative BYD and technology representative Great Wall Motors will definitely be the first to change course.

According to recent observations, many researchers believe that Changan Auto in 2022 is also worth paying attention to and is likely to join the ranks of the first to reverse. This is because at the Changan Auto 2022 Annual Global Partner Conference last week, Changan Auto released its strategic planning for 2022 and beyond, publicly announcing the Changan Auto pure electric brand – Shenyue, for the first time.

For many years, Changan Auto has always been fluctuating in development, with many highs and lows during the process, and there have been controversies in the secondary market. Today, Li will discuss with everyone the Changan Auto in the eyes of secondary market researchers, and why Changan Auto has begun to focus on brand building. Will Changan Auto with multiple brands become a new darling of the capital market?

Changan in the Eyes of Secondary Market Researchers

Li has always felt that Changan Auto is a magical existence in the Chinese secondary market. The domestic secondary market auto sector is clearly divided, with leading companies such as BYD and Great Wall Motors having excellent performance and a complete layout of new four modernization. However, state-owned big-name enterprises such as SAIC Group, Dongfeng Motors, and GAC Group have always been tepid, and even in big bull markets, the weak independent sector performance still hinders the big market value.

Amongst many companies, Changan Auto is the most difficult to classify. It is neither like BYD and Great Wall Motors, rising rapidly, nor like SAIC and Dongfeng Motors, which are inert. The market capitalization of Changan Auto is the same as its performance, always fluctuating up and down.

Li has mentioned in the past that in the domestic market, institutional opinions, that is, analysts’ views of a target, are the key factors that determine market value trends. In the past few years of roadshows, the opinions of institutions on Changan Auto were divided: a small number of analysts were optimistic about Changan Auto. Their view is that Changan Auto’s performance in the independent brand sector is significant, ranking in the top three, so some fund managers heavily held Changan Auto.

However, there are more analysts who are bearish on Changan Auto, not because they are bearish on the company’s fundamentals, but because they are bearish on the enterprise’s system and mechanism. In the secondary market, state-owned and central enterprises have not performed well, and even those central enterprises with monopolistic positions do not receive high multiples from the market. The auto industry is one of the most competitive industries, and the performance of state-owned and central enterprises is even worse.

From an industry perspective, Changan Automobile is one of the few state-owned enterprises with relatively outstanding market performance in the automotive industry. Among independent brands, Changan Automobile has long been one of the top sellers, although its performance in the joint venture sector is currently average, it has also reached its peak at one time. Changan Automobile has also made multiple adjustments to its development strategy, and has launched multiple “internal entrepreneurship” initiatives.

In such a system, many researchers and fund managers have expressed concerns. Mr. Li and his friends have visited many institutions for roadshows and reverse roadshows for Changan Automobile, and the concerns are mainly from two aspects:

First, as one of the leaders in the independent brand arena, Changan Automobile lacks a distinctive brand image in the secondary market. When people mention Changan Automobile, they cannot think of a unique symbol. Therefore, although its industrial status is relatively high, it has not received the same position in the secondary market as in the industry. In short, Changan Automobile’s “packaging” in the capital market is not enough.

Second, everyone holds a conservative attitude towards the innovation and entrepreneurship capabilities of state-owned enterprises in the whole vehicle industry. In the stage of the new four modernizations, the entire vehicle industry is not “defending the status quo” but “fighting for the status quo”. Whether state-owned enterprises such as Changan Automobile can demonstrate sufficient combat effectiveness and strategic determination, we hold a cautious attitude. In the past few years, Changan Automobile’s new four modernizations strategy has been basically “loud thunder and small raindrops”. Although the industry has a high volume, the actual implementation is mediocre.

At the same time, the major private competitors have been actively performing in the secondary market. “Tesla China” is the newest force that performs the best in both industry and capital. Whether in terms of innovation ability or institutional mechanism, it is relatively well-developed. BYD, Great Wall Motor also have found the right track for the development of their independent brands. GAC Aion, SAIC IM, and RisingAuto Auto are also exploring new ways for the development of state-owned enterprises. Under this background, the next move of Changan Automobile has gained widespread attention in the market.

Multi-brand, good financing?

Two years ago, many researchers asked Mr. Li, what would be the future trend of Changan Automobile in the next few years?

At that time, Changan Automobile was in the reversal period of the trough, from 2017 to 2019, which was the three years of Changan Automobile’s trough, with consecutive three years of declining sales, and the performance of joint venture brands astonished the industry. When the trough came, the peak was not far away.

From 2020 to now, Changan Automobile has experienced two major reversals, one is the reversal of sales, and the other is the reversal of concept.The so-called turnaround of sales refers to the fact that after 2019, Changan Automobile welcomed a growth cycle under a new round of product offensive, and the sales bottomed out and reversed. Through the “PLUS” plan and the “UNI” plan, Changan Automobile led sales back to the top tier of independent brands. In 2021, Changan Automobile’s total sales volume of all brands reached 2.3 million units, a year-on-year increase of 14.8%, and the company’s sales volume exceeded 2 million units for two consecutive years, among which Changan brand sales were outstanding. This performance also boosted Changan Automobile’s market value performance. The fund managers who held a heavy position in Changan Automobile tasted their “sweetness” for the first time, and several fund managers also received high attention due to their heavy positions in Changan.

The so-called concept turnaround is that after reaching the peak of sales, Changan Automobile has opened up the development of innovative concepts. As Mr. Li just mentioned, Changan Automobile’s development in the past has been ups and downs. After reaching the peak of sales, many fund managers have sold out Changan Automobile because they believe that under a good sales foundation, Changan is unlikely to have major strategic changes. But this time, everyone was wrong.

At the 2022 Changan Automobile Global Partners Conference, Changan Automobile proposed a series of new development goals:

By 2025, the total sales volume of automobiles will reach 4 million units, of which Changan brand will account for 3 million units, and new energy vehicle sales will reach 1.05 million units, accounting for 35%;

By 2030, Changan Automobile’s sales volume will reach 5.5 million units, of which Changan brand will account for 4.5 million units, new energy vehicle sales will reach 2.7 million units, accounting for 60%, and overseas sales will account for 30%.

The total annual sales volume will increase by 1.7 million units in the first four years and 1.5 million units in the following five years. Obviously, this is a relatively “practical” plan. In addition, in the “New Car, New Ecology” strategic development blueprint of Changan Automobile, six strategic actions are proposed, namely “developing a new image with a new brand, creating new products with a new platform, creating new life with new cars, creating new value with new marketing, adding new experience with new services, and building a new pattern with a new ecology”, aiming to move towards a world-class automobile brand. Changan Automobile also released a new pure electric brand-called Deep Blue.

In the secondary market, BYD, Great Wall Motors, and “We Xiaoli” are all systemic market value marketing players. BYD plays the new energy card, Great Wall Motors uses technology and brand as the main tools, and We Xiaoli keeps breaking new heights in the field of racing. However, in the past few years, Changan Automobile has not done well in the fields of electrification and intelligence, but Old Li believes that this time Changan has played a good hand.

There are two reference rules for valuation in electrification and intelligence: brand matters in electrification, and product matters in intelligence. As long as both are done well, the capital market will provide good valuations. Frankly speaking, at present, there is not much difference among the major brands in the field of intelligence, but the biggest gap lies in electrification. The most important factor in electrification is brand. Only by building a brand can the primary and secondary markets give corresponding valuations. Changan Automobile’s brand building strategy is based on this point.

At present, Changan Automobile has independently operated the UNI series as a brand, developed Deep Blue as a new energy brand, and developed Abata as a high-end brand in partnership with CATL and Huawei. The development of the three major brands will bring new directions to Changan’s market value.

Can Changan Automobile become the new darling of the market?

Old Li used to talk mostly about the secondary market in market value planning, where any changes in the industry will cause changes in market value. However, Changan Automobile’s future development not only involves the secondary market but also the primary market. With the flexible strategy around multiple brands, it will bring different pricing for Changan.

At present, Changan Automobile has many high-quality assets and brands, including traditional passenger car brands (V symbol, UNI, etc.), digital pure electric brands (Deep Blue), and joint venture high-end pure electric brands (Abata). However, in the capital market, Changan Automobile has only one financing window, A-share Changan Automobile, and the combination of multiple brands and financing windows of Changan Automobile is worth studying.

Recently, GAC Aion plans to go public independently, creating a new strategy for domestic brands. Despite the cold capital market, the fundraising effect was immediate due to more assets and brands under its umbrella. Changan Automobile is in a better position to play the combination of multiple brands and financing windows in both primary and secondary markets.

Let’s take Deep Blue brand as an example. The essential nature of the Deep Blue brand is that Changan New Energy is the main operator. This year, it will launch two models, C385EV and C673EV, and there will be a total of five planned models. The product strength is beyond doubt. In January of this year, Changan New Energy completed round B financing with a high top-up amount of 4.977 billion yuan. After this round of financing, Changan Automobile’s shareholding was diluted from 48.95% to 40.66%, and its valuation was estimated to be between 50-100 billion yuan. After the release of the Deep Blue brand, its valuation will continue to rise.

Next is the AVITA brand. As a brand jointly created by well-known shareholders such as Changan Automobile, CATL, and Huawei, AVITA completed its latest round of capital increase. CATL became its second largest shareholder with 23.99% of shares, and Changan Automobile remained the largest shareholder with 39% of shares. However, there has been a significant change in the company’s mechanism: AVITA has changed from a subsidiary of Changan Automobile to a joint venture, and is no longer included in the consolidated financial statements.

From the perspective of financing, Changan Automobile will most likely develop the Deep Blue brand and the AVITA brand separately, rely on the resources of shareholders to carry out financing in the primary market, and then achieve an ideal market value through spin-off listings, bringing excess returns to their respective shareholders and forming a virtuous cycle.

In this case, the new Changan Automobile’s financing window for the capital market includes Changan Automobile, Changan Deep Blue, and AVITA Technology, positioning itself as a fuel vehicle company + a traditional high-end new energy vehicle company + a high-end joint venture.

Changan Automobile’s strategy is quite clever. As mentioned by Old Li before, in the past year, the secondary market was only interested in the spin-off AVITA Technology, and didn’t have high hopes for the spin-off of Changan New Energy. This situation, if it were to occur, would cause the greatest damage to Changan Automobile. However, with the launch of the Deep Blue brand, Changan New Energy has transformed into a high-end digital brand. From the perspective of the capital market, if Deep Blue’s monthly sales can reach 10,000 units, its valuation will naturally rise.

As a joint venture, AVITA will follow the route of “Automobile + Energy + Technology”. Once the product is launched and has a good market response, its valuation will be comparable to that of Tesla or BYD. Of course, AVITA cannot become Tesla or BYD from a business perspective, but from the perspective of storytelling, its recognition in the capital market is very high, and the total market value of the new Changan Automobile will be very imaginative.

This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.