New Stock Analysis | Major Customers Help Turn Losses into Profits as Zhengli New Energy Seeks to Increase Production Capacity and Compete in the Electric Vehicle Battery Market

On the evening of March 25, HKEX revealed that Jiangsu Zhengli New Energy Battery Technology Co., Ltd. (hereinafter referred to as "Zhengli New Energy") had a listing hearing on the Hong Kong Stock Exchange, with CICC and CMB International as the joint sponsors. It is worth noting that in the financial data up to the end of August 2024 before the listing hearing, Zhengli New Energy was still in a loss-making state. However, in the prospectus after the listing hearing, as of the end of 2024, Zhengli New Energy had already turned losses into profits. Turning Losses into Profits with Major Customers According to the prospectus, 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 noteworthy that both Cao Fang and Chen Jicheng had previously worked at Fuyao Glass Industry Group. Cao Fang is the sister of Fuyao Glass Industry Group founder Cao Dewang, and had served as the sales manager, director, and vice general manager of Fuyao Glass Industry Group; she currently serves as the chairman and executive director of Zhengli New Energy. Chen Jicheng had held various positions at Fuyao Glass Industry Group, including serving as the executive director and vice general manager of Fuyao Glass Industry Group; he currently serves as the executive director and general manager of Zhengli New Energy. In the shareholder structure of Zhengli New Energy, there is a diverse capital presence. Three Yi Development Co., Ltd. wholly owned by Cao Dewang, holds approximately 2.52% of the shares of Zhengli New Energy through its subsidiaries. In addition, many state-owned enterprises have also entered the scene, such as investment platforms under the Fujian Provincial Government-owned financial institution Huafu Securities and platforms under the Changshu Municipal Finance Bureau. Data shows that as of the end of August 2024, Zhengli New Energy recorded a net loss of 100 million RMB. In 2021, 2022, and 2023, Zhengli New Energy experienced losses of 402 million RMB, 1.72 billion RMB, and 590 million RMB respectively, totaling 2.712 billion RMB in losses over the three years. According to the prospectus, the significant increase in losses for Zhengli New Energy in 2022 was due to the impact of the Weying Automobile event. In November 2022, Zhengli New Energy stopped delivering ternary lithium batteries for BEVs (pure electric vehicles) to Weying Automobile. The Weying Automobile event caused the sales volume of ternary lithium batteries from Zhengli New Energy to decrease from 2.9GWh in 2022 to 1.5GWh in 2023, and the sales revenue of ternary lithium batteries to decrease from 2.629 billion RMB in 2022 to 1.448 billion RMB in 2023. Clearly, the Weying Automobile event was a huge loss for Zhengli New Energy financially and operationally. However, with the industry experiencing low raw material prices and adjustments in business strategies, Zhengli New Energy was able to turn losses into profits in the last four months of 2024, achieving a net profit of 91.014 million RMB in 2024. The prospectus shows that raw material costs accounted for 77.7%, 71.7%, 73.8%, and 74.6% of total sales costs in 2021, 2022, 2023, and 2024 respectively, and 76.1%, 78.0%, 70.1%, and 63.7% of total revenue in the respective years. Meanwhile, Zhengli New Energy adjusted its business strategy to focus on major customers. Data shows that from 2021 to 2024, the sales revenue from the top five customers of Zhengli New Energy were 1.337 billion RMB, 2.973 billion RMB, 3.238 billion RMB, and 4.530 billion RMB respectively, accounting for 89.1%, 90.4%, 77.8%, and 88.2% of total revenue in the respective years. Regarding the concentrated growth in revenue from the top five customers, Zhengli New Energy stated in the prospectus, "In 2024, we strategically focus on major OEM customers (due to production capacity constraints, we are cooperating on more models), and the revenue growth of three customers among the top five customers has increased the proportion of revenue contribution from the top five customers overall." It is worth noting that Zhengli New Energy's collaboration with leading companies in the automotive industry has formed a high-quality customer base. The company's battery products primarily serve electric vehicle manufacturers, including large central state-owned enterprises, emerging automotive companies, and multinational leading vehicle manufacturers. The supply share of battery products for core models from various leading global companies such as FAW Red Flag, GAC Trumpchi, LEAPMOTOR, SAIC-GM Wuling, and SAIC-GM continues to rise. It is important to note that LEAPMOTOR became a "dark horse" in the automotive market in 2024, achieving sales of over 290,000 vehicles for the year, ranking third among new energy companies behind Ideal and Horizon Robotics. In terms of monthly sales, LEAPMOTOR saw a surge in sales after the third quarter of 2024, breaking the 40,000 vehicle mark in November, and turning a net profit in the fourth quarter, becoming the second profitable new energy vehicle company. This aligns with the financial data of Zhengli New Energy. The dynamic battery market is expected to maintain rapid growth In the current market environment, the overall situation in the dynamic battery industry has brought new reflections and challenges to the company. On the one hand, customer dependence and accounts receivable risks threaten the company's financial health like the sword of Damocles hanging over its head; on the other hand, the rapid development of the industry also attracts the company to actively explore paths for breakthroughs and development. In this complex situation of opportunities and risks, Zhengli New Energy must not only address risks but also seize the opportunities in industry development to stand firm in the fierce market competition. According to a Frost & Sullivan report, the dynamic battery industry is characterized by opportunities and challenges. In terms of opportunities, the dynamic battery market has steadily grown in recent years, with global dynamic battery installations expected to increase from 716.0GWh in 2023 to 3,513.1GWh in 2028 at a compound annual growth rate of 37.5%, and China Shipbuilding Industry Group Power's battery installations are expected to increase from 389.0GWh in 2023 to 1,943.3GWh in 2028 at a compound annual growth rate of 37.9%. The rapid development of China Shipbuilding Industry Group Power's battery industry presents unique opportunities for industry participants."tu eres mi razn para sonrer" "you are my reason to smile"However, the industry also faces many challenges. Structural changes in market demand, such as the automotive industry's integrated optimal requirements for product safety, quality, performance, and cost, have driven structural changes in the new energy vehicle and battery industry, making the trend of multi-path development more prominent. Against the background of the subsidy decline for batteries and breakthroughs in lithium iron phosphate battery technology, there has been a switch in the dominant battery types in the market, leading to significant changes in the vehicle structure of the new energy vehicle market. In addition, battery manufacturers need to respond to the rapidly changing market environment, providing diversified product solutions, which pose new challenges to their flexibility and development capabilities. To meet the stable supply and demand of battery products in the early stages of industry development, many battery companies have invested heavily in building production lines. However, under current market demand, there are issues of poor compatibility, low efficiency, and high manufacturing costs. At the same time, automakers have raised higher requirements for standardized battery products that can be adapted to different types of vehicles and compatible with different electrochemical systems. Currently, Zhengli New Energy plans to build a capacity of 50.5GWh by the end of 2026 and further develop aviation battery products. According to the prospectus, Zhengli New Energy is the first company in the China Shipbuilding Industry Group Power battery industry to obtain the AS9100D aerospace quality management system certification. Their aviation battery products mainly consist of high-nickel semi-solid lithium-ion batteries, and they have already started supplying initial samples. The diversified project development provides the company with a broader growth space. In conclusion, with the big customer strategy, Zhengli New Energy has achieved a turnaround. However, relying on big customers also increases the instability of its operations. In addition, the industry competition and financial risks faced by the company also need to be carefully evaluated by investors.