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The 582 billion yuan private placement financing plan by CATL (300750.SZ) is still fermenting. On September 30th, the Shenzhen Stock Exchange issued a “Review Inquiry Letter” to CATL requesting a reasonable explanation for the necessity and scale appropriateness of issuing 58.2 billion yuan of financing.
On the evening of October 18th, CATL officially replied to the Shenzhen Stock Exchange’s review inquiry letter, stating that there is no excessive financing, and the existing funds cannot fully satisfy the future business development needs.
CATL replied that since 2020, the company has planned to invest approximately 110 billion yuan in battery production base construction. Along with the increase in R&D expenses, operating capital, and other costs, the company’s asset-liability ratio has also increased. Currently, the company’s finances cannot meet the future capital needs for development.
As the hottest star company in the A-share market, is there really a need for CATL to significantly increase production? Is it really necessary to raise such a large amount of financing? Is the financing commitment going to be fulfilled, and will such means disturb the secondary market? There is still no ready answer.
Can A-share’s largest private placement financing commitment be fulfilled?
On the evening of August 12, CATL planned to raise no more than 58.2 billion yuan in non-public offerings, and invest in the lithium-ion battery field and supplement working capital.
According to the announcement, in CATL’s financing, which has set many records, 16.3 billion yuan will be used for research and development and supplementing working capital, and the remaining 41.9 billion yuan will be used to expand the scale of lithium-ion battery production, covering five lithium-ion battery projects.
The payback period for the five expansion projects is within 6-8 years, and the internal rate of return is over 16%. After all of them are put into operation, CATL’s total lithium-ion battery production capacity is expected to increase by 137GWh (equivalent to 137 million kWh).
Upon the announcement, the industry was in an uproar. According to Wind data, the financing amount of 58.2 billion yuan not only exceeded the total equity and debt financing during CATL’s listing period (39.7 billion yuan, of which equity financing (IPO + private placement) was 25.2 billion yuan, bond financing was 4.5 billion yuan, indirect financing was 10 billion yuan), but also exceeded CATL’s total revenue in 2020 (50.319 billion yuan).As of now, only 265 out of over 4400 A-share listed companies have a market value surpassing RMB 58.2 billion. This means that the single financing amount of Ningde Times exceeded the market value of over 90% of A-share listed companies, making it the largest private enterprise private placement financing in the history of A-shares.
The rationality of such a massive private placement has been questioned by industry professionals. Many brokerages have issued analysis reports expressing their optimism for Ningde Times’ future plans. For example, Xingye Securities believes that the expansion of the industry leader’s production capacity ahead of time is in line with the company’s positioning in the industry, and energy storage will play an important role in this private placement. It is expected that the high level of approval for the private placement will further enhance the determination of the Ningde Times’ industrial chain companies.
However, there are also concerns about the rationality of Ningde Times’ plan, particularly in the question of whether there will be divergence in the technological routes of electric vehicles in 6-8 years’ time, and whether Ningde Times can maintain its existing market share. If this leads to overcapacity, this largest private placement financing in the history of A-shares will become a joke and will not be conducive to healthy competition in the industry.
On September 30th, the Shenzhen Stock Exchange sent an inquiry letter regarding Ningde Times’ massive RMB 58.2 billion refinancing plan.
The Shenzhen Stock Exchange investigated five key issues, including the necessity and rationality of financing in the context of holding large amounts of monetary funds, high cash inflows, and sustained large-scale external investments; the reasons and rationality for the continuous increase in the proportion of inventory goods in the inventory structure; the rationality of the scale of the project’s capacity expansion; and whether it involves real estate development-related businesses.
In addition, the significant risk warning section of Ningde Times’ prospectus was requested to be rewritten, and sorted by the importance of the information needed for investors to make value judgments and investment decisions.
Now Ningde Times has responded positively to the Shenzhen Stock Exchange’s inquiries, stating that the company does not have the situation of excessive financing. Since 2020, the company has required approximately RMB 110 billion in construction capital for new battery production base projects, and the previous financing has been used up for the most part, with the unused portion being relatively low in proportion.
Lack of production capacity and funding is a true portrayal of Ningde Times’ current situation. However, whether such replies can make the private placement plan proceed as planned remains to be seen.
Is a massive financing really necessary?
Currently, the main question about Ningde Times’ private placement is whether it really needs to expand its production capacity dramatically, whether it really needs such a massive financing, and whether its financing approach is reasonable.
According to the plan, the main goal of Ningde Times’ RMB 58.2 billion financing is to expand production. To evaluate the necessity of the RMB 58.2 billion financing, let’s calculate Ningde Times’ production capacity layout. As per publicly available information, Ningde Times has already built eight production bases globally and has jointly established five battery production centers with car manufacturers.The eight self-built bases of CATL are located in Ningde Zhangwan District (Dongqiao/Hudong/Huxi), Ningde Cheliwan, Ningde Fuding, Liyang Base, Yibin Base, Qinghai Base, Zhaoqing Base and Thuringia, Germany with a total production capacity of approximately 500 GWh. The five joint venture bases include SGEM, SGEL, SGA, SAIC CATL and Dongfeng CATL, with a total production capacity of approximately 110 GWh.
The thirteen production bases are expected to be put into operation around 2025, and by then the lithium-ion battery production capacity of CATL will exceed 600 GWh, making it the world leader, followed by LG with approximately 430 GWh and SK with approximately 200 GWh.
In 2025, a critical year for the new energy industry, GGII predicts that the global penetration rate of new energy vehicles will exceed 20% and the output of power batteries will reach 1,100 GWh.
According to the statistics released by SNE Research, a Korean energy market analysis agency, the global installed capacity of vehicle power batteries reached 114.1 GWh in the first half of this year, of which the installed capacity of CATL’s batteries was 34.1 GWh, accounting for 29.9% of the global market share, ranking first in the world.
From 2017 to 2020, CATL has won the annual global power battery installation volume championship for four consecutive years. Based on this market share, CATL’s market size in 2025 is expected to be close to 500 GWh, roughly equivalent to its planned production capacity.
From the perspective of production capacity gap, CATL’s financing and expansion is understandable, but the premise is that CATL can always maintain its current market competitiveness.
From the perspective of funds, CATL has raised money through three rounds of financing since it went public. In 2018, CATL raised CNY 5.352 billion through its initial public offering; in 2020, it raised CNY 19.618 billion through non-public issuance of shares; in 2021, CATL again proposed a private placement plan to raise CNY 58.2 billion.
CATL stated that there will be a great demand for business development capital in the future. On the one hand, there is a great demand for production capacity construction funds. Since 2020, the company’s newly added battery production bases include Ningde Cheliwan production base, Fuding production base, Yichun production base project, etc, with a total capital requirement of approximately CNY 110 billion.
On the other hand, the company plans to increase its investment in research and development (R&D). R&D expenses increased from CNY 1.991 billion in 2018 to CNY 3.569 billion in 2020, and the R&D expense for January to June 2021 was CNY 2.794 billion, a year-on-year increase of 115.16%.Meanwhile, investing in the industry chain is another “money-burning” sector of CATL. The company’s total external investment in the upstream and downstream of the industry chain was 9.815 billion yuan from 2020 to 1H 2021, of which direct equity investment was 7.846 billion yuan, and the amount of subscribed limited partnership enterprises was 1.969 billion yuan.
CATL stated that investing in the industry chain is not mainly to obtain short-term investment returns, but a necessary way for the company to guarantee and promote business development. On the one hand, it ensures the supply of key resources in the industry, and on the other hand, it promotes industrial chain cooperation and synergy, expands business model innovation, and further enhances the company’s core competitiveness.
Is the 58.2 billion private placement really reasonable?
From the perspective of industry demand, CATL has sufficient reasons to expand its production capacity with such a huge amount of funds and enhance its competitiveness in the future market. However, financing 58.2 billion yuan through the secondary market is a far-reaching matter.
“Generally speaking, if the stock market is compared to a pool, dividends are adding water to the pool, and private placement is drawing water from the pool. If the purpose of drawing water is to add water better, then everyone will be happy. However, CATL’s drawing of water this time cannot be compensated for a long time.” A fund manager told Carcaijing (ID:carcaijing).
According to CATL’s 2021 semi-annual report, the company’s revenue in the first half of this year reached 44.075 billion yuan, a year-on-year increase of 134.07%; its net profit attributable to shareholders of the listed company was 4.484 billion yuan, a year-on-year increase of 131.45%, and its net profit after deduction of non-recurring gains and losses was 3.918 billion yuan, a year-on-year increase of 184.6%. In the whole year of 2020, CATL’s adjusted net profit was only 4.265 billion yuan, which is almost negligible compared to the amount of private placement.
The fund manager said that “CATL’s profitability does not match such a large amount of financing. Investment is for dividends. How many years will it take for this private placement to recover its cost? What is even more unacceptable to stockholders is that CATL has raised funds from the secondary market.”
Raising 58.2 billion yuan is equivalent to more than 90% of the market value of A-share listed companies, which is comparable to a giant company’s listing and will bring obvious diversion effects. “The secondary market funds are limited. With 58.2 billion yuan pouring into CATL, other listed companies will get even less.” A stockholder who has been focusing on new energy for a long time told Carcaijing(ID:carcaijing). He said that “not speaking of martial ethics has become the evaluation of CATL’s private placement by many stockholders.”
At the same time, some of CATL’s shareholders were also very dissatisfied with this private placement. Generally speaking, a large private placement brings short-term negative effects because the lower the stock price, the lower the investment cost for investors participating in the private placement; In the long run, there is also a certain risk.### 582 Billion Private Placement Overdrafted Ningde Times’ Future Profits for Many Years to Come
The private placement of 582 billion yuan has overdrafted the future profits of Ningde Times for many years to come, which is actually a huge gamble. The placement will only make sense if Ningde Times’ market returns for a long period of time meet expectations. However, long-term cycles have always been a “minefield” for investments.
The volatility of the new energy vehicle market, technological changes, and competition from peers are all full of uncertainty. No one has an accurate conclusion about whether Ningde Times can maintain its existing market competitiveness in the future.
In the office of Ningde’s chairman, Zeng Yuqun, four big characters saying “Strong Gambler” are hanging. This huge financing is accompanied by shareholders participating in this gamble, which does not necessarily represent the will of all Ningde Times shareholders.
Although it has been questioned, from a logical, regulatory, and market perspective, Ningde Times’ financing is still justified. As a fund manager told Chuxing Yike (ID: Carcaijing), “If it can be sold, it means that the secondary market accepts it, and it is reasonable.”
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.