Article by Finance Street’s Lao Li

Two days before National Day, Leapmotor Automotive successfully completed its Hong Kong listing with the stock code “9863.HK”, becoming the fourth new energy vehicle startup to go public after NIO. Unlike NIO, Leapmotor has directly opened the channel for domestic new energy vehicle startups to go public in Hong Kong, becoming the only new energy vehicle company in Hong Kong with a Chinese corporate structure.

Many analysts believe that Leapmotor Automotive’s Hong Kong listing is not the end but the beginning. Because everyone sees the shadow of Tesla and BYD in Leapmotor Automotive.

Over the past five years, Leapmotor has not been the most well-known or well-funded car company in the industry, but it has become the “most cost-effective” new car company, gradually becoming one of the top new energy vehicle startups. Today, Lao Li, together with you all, will talk about why Leapmotor has been honing its skills for seven years, why it is a benchmark for precision development enterprises, and how the secondary market views its future development.

Hone Skills for Seven Years

On September 29th, Leapmotor Automotive was listed on the main board of the Hong Kong Stock Exchange. Although it suffered a decline on the first day of listing, its market value was still as high as HKD 36.452 billion, exceeding many people’s expectations. On the eve of the listing, Leapmotor Automotive’s fourth car model C01 was also officially launched. Interestingly, at the bell-ringing ceremony, besides Leapmotor Automotive founder Zhu Jiangming and shareholder Fu Liquan, all the other bell-ringers were the first owners of Leapmotor C01.

We all know that this year’s domestic and foreign capital markets are not optimistic. In the environment of tight funding in the Hong Kong stock market and the decline of new energy vehicle valuations, Leapmotor’s ability to land on the Hong Kong Stock Exchange is a success, considering that many other auto companies planning to list on the Hong Kong Stock Exchange have been “rejected”.

The domestic secondary market is also paying attention to Leapmotor Automotive’s changes. Before National Day, many sellers held a series of conference calls on Leapmotor’s IPO, analyzing Leapmotor’s corporate positioning, product positioning, and future investment opportunities. Lao Li also participated, and some investors in the secondary market feel that “the opportunity belongs to Leapmotor Automotive”, just like when the Chinese new energy vehicle startup Chang’an challenged Ningde Times’ market position. Leapmotor, which was once the leader of the second-tier of new energy vehicle startups has been officially included in the “first tier” with NIO after going public.When it comes to LI (Li Auto) Motors, Mr. Li prefers to describe it as “Seven years of hard work for one sword”, because since its establishment in 2015, LI Motors has been developing for exactly seven years. Seven years ago, some visionary investors paid attention to LI Motors for three reasons:

Firstly, LI Motors’ shareholder is the well-known Dahua Technology Co., Ltd, which is the second largest supplier of video surveillance equipment and solutions globally. Dahua has more than 20 years of experience in visual system development and has established unique technological advantages in algorithm, data, and hardware, surpassing even Tesla, its competitor. The shareholder background of Dahua lays the foundation of LI Motors’ development in technology.

Secondly, at that time, Sequoia Capital invested in LI Motors and Shen Nanpeng even went to Wuzhen personally to support LI Motors. The classic phrase “entrepreneur behind entrepreneur” is still fresh in everyone’s memory.

Thirdly, the management team of LI Motors, with Zhu Jiangming as the core, has left a deep impression on everyone. Just like Zhu Jiangming’s low-key and practical style, LI Motors has also been cultivating and developing pragmatically.

After seven years, Mr. Li believes that these factors have also driven the development of LI Motors at a critical moment.

Firstly, like the founding shareholder Dahua Technology’s style, LI Motors is also focused on technology, research and development, and products. Chairman of the board Zhu Jiangming was a joint founder and CTO of Dahua Technology, and is one of the few technical founders among many new Chinese carmakers.

Secondly, LI Motors has always been praised by investors as the “most cost-effective” company, with the smallest financing and the most accomplishments. From 2019 to 2021, LI Motors had a net loss of RMB 901 million, RMB 1.1 billion and RMB 2.846 billion respectively. Its net loss in the first quarter of this year alone was RMB 1.042 billion, with cumulative losses exceeding RMB 5.8 billion, which is the smallest amount among all new Chinese carmakers that have gone public.

Lastly, LI Motors has always focused on user-centered, fine-grained operations. One detail is enough to reflect this: the press conference for the launch of Model C01 was the largest investment and most elaborate production for LI’s history, and took three days for Zhu Jiangming and his team to perfect the conference in order to showcase the true innovative and product strengths, and real charm of LI Motors to users.

A Benchmark for Precision Development

Many people have asked Mr. Li, what sets LI Motors apart from XPeng Motors? This is a big question, but in terms of the capital market, it boils down to financing and investment.In terms of financing, according to incomplete statistics, in the past few years, NIO, XPeng, and Li Auto have raised more than 30 billion yuan, 15 billion yuan, and 12 billion yuan respectively. As a capital-intensive industry, the new energy vehicle industry is the field with the most financing in the real economy in recent years. In the past five years, the cumulative financing scale of the entire industry chain has exceeded 200 billion yuan.

There is an unwritten classification in the capital market, and we generally divide new forces in the auto industry into two camps. One is the “extensive” camp represented by NIO, XPeng, and Li Auto, and the other is the “refined” camp represented by Leap Motor. This classification has gradually been recognized by everyone since 2018. As first-tier market funds become tight, the focus of capital on the capital utilization efficiency of new car-making forces has also been put back on the agenda.

Many friends say that Li Auto is the most “cost-saving” company, but if we look at Leap Motor, we will find that Leap Motor is the most cost-saving company. According to the prospectus data, since the Pre-A1 round of financing in January 2018, Leap Motor has completed eight rounds of financing, with a total amount of 11.866 billion yuan. This number is not only lower than NIO but even lower than WM Motor and NIO. However, Leap Motor has established a relatively complete technology system and market response with such a funding amount.

In the early stages of development, Leap Motor determined the strategy of self-research and production of the three major components: batteries, motors, and electronic control, as well as self-development and production of smart driving, software, and the Internet of Things. In the past seven years, Leap Motor has completed the core layout of the intelligent electric vehicle industry chain and self-developed the three-electric system, built the Jinhua vehicle factory, and also released the first fully autonomous smart driving chip with independent intellectual property rights in China-“Lingxin 01”.

Mr. Li believes that Leap Motor has a very strong sense of technical brand. In the IPO prospectus, Leap Motor announced that it has achieved independent research and development, design, and production and manufacturing of all core systems and electronic components of intelligent electric vehicles, and has built smart power systems (Leapmotor Power), automatic driving systems (Leapmotor Pilot), and intelligent cabin systems (Leapmotor OS). After the IPO, many secondary market research analysts were impressed by these three technical brands.Last year, many media outlets reported that Leapmotor would come infinitely close to “WmAuto Little Reason” this year. This year, Leapmotor’s sales have surpassed WmAuto Little Reason. According to the statistics of China Passenger Car Association, Leapmotor delivered a total of 11,039 cars in September, achieving continuous sales of more than 10,000 units and accumulatively delivering 87,602 units from January to September.

Looking at the subdivision market, “LEAP C11” ranked second in the delivery volume of B-class pure electric SUVs, and “LEAP T03”, a five-door pure electric sedan that focuses on sinking, achieved the first sales volume in the price range within 100,000 yuan. This sales volume is inseparable from Leapmotor’s product strength and channel capabilities.

As of the end of July this year, Leapmotor has 49 self-operated stores and 394 channel partner stores (an increase of 47% from the end of 2021), totaling 443 stores, and the sales and service network has expanded to 151 cities, more than double the number at the end of 2021. From the channel, it can be seen that Leapmotor is taking a lightweight asset channel route.

In the past few years, high R&D investment and relatively low marketing costs mean that Leapmotor has not gained high brand awareness like WmAuto Little Reason. Among new carmakers, both the company’s brand awareness and product awareness are at a general level. However, by relying on its own technology and product sales, Leapmotor has risen from the middle and lower levels to the first echelon. This is most valued by the capital market.

Before discussing the view of the secondary market, let’s talk about a story. Five years ago, Leapmotor went to dig people from a car company next to Hangzhou. The candidates felt that new forces had no future and were unwilling to go, but now they may lack the ability to join; five years ago, a certain fund wanted to invest in Leapmotor but hesitated, and when they wanted to invest before going public, they missed the chance.

This reflects Leapmotor’s growth over the years. Since its establishment seven years ago, Leapmotor has attracted the attention of a group of well-known funds in the primary market, including Sequoia China, Shanghai Electric, CRRC, Gaofei Asset, Guosen Securities, and CICC Capital. It has also received support from Hangzhou State-owned Assets. Before going public, Leapmotor also received a 5 billion yuan credit line from Beijing Bank.

Overall, the capital market is optimistic about Leapmotor’s development. People believe that after WmAuto Little Reason, there will be a new force that will monopolize the economic market. In the case of several other forces developing not so well, everyone is starting to bet on Leapmotor.On a technical level, LingPao has been recognized for its R&D capabilities, with the ability to independently develop and produce core software and hardware, and shares similarities with Tesla and BYD. Many may not agree, but looking at LingPao’s current layout, it does resemble earlier Tesla and BYD.

Furthermore, LingPao’s market sales are doing well. T03 has already proven itself in the sub-100,000 RMB market, and the 100,000-200,000 RMB market will be C01’s stage. After the official release of C01 on September 28, orders will gradually be released and enter the mass delivery stage. It is foreseeable that LingPao’s sales will continue to increase this year.

As LingPao’s chairman, Zhu Jiangming, said in an interview: “At present, LingPao’s brand value is to make everyone feel that it’s worth it. Now LingPao’s slogan is ‘LingPao Auto, Beyond Your Expectations’, hoping that everyone will feel that LingPao is a brand that offers great value for money.” This means that LingPao is positioned as a high-volume brand, with sales and market share in the secondary market translating into market value.

In fact, the focus of LingPao Automotive’s next step in development can also be seen from the use of funds raised through its IPO. About 40% of the net proceeds from this IPO will be used to fund research and development, including expanding and upgrading its intelligent electric vehicle portfolio, recruiting more R&D personnel, providing funding for the development of advanced smart vehicle technology, and improving electrification technology. Approximately 25% of the funds will be used to enhance production capacity, about 25% to expand sales and service networks, and enhance brand awareness, and about 10% will be used for operational capital and general corporate purposes.

Many investors appreciate LingPao’s chairman, Zhu Jiangming’s frankness and straightforwardness. Facing the first day of listing plummeting, Zhu Jiangming said: “The current environment dictates that the timing of LingPao Automotive’s listing is not very favorable, but we do not care very much about how the stock market is doing during this period. Because making cars is a long-distance race, only by weathering the storms can the true value be reflected.”

Lao Li believes that LingPao’s first-day losses are not worth paying attention to. Thinking back to July 2018, Xiaomi Group encountered the same situation on its first day of listing on HKEX, but it did not affect its development.

Currently, the A-share market sets many conditions for emerging technology companies that are yet to be profitable making it difficult for them to go public. With the US market’s doors gradually closing, Hong Kong has become one of the few choices for companies to go public. LingPao’s IPO is significant for providing a replicable path for emerging Chinese technology firms.

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.