Zhou Hongyi suffered significant losses on Nezha Auto

On June 26, as the only existing new force that has not yet gone public, Nezha Auto, its parent company Hezhong New Energy made another push and submitted an IPO application to the Hong Kong Stock Exchange. Many people may associate Nezha Auto with ride-hailing services or the live broadcast where Qihoo 360's major shareholder Zhou Hongyi criticized Nezha CEO Daniel Zhang. Ironically, the car company that made headlines is not even a car manufacturer. Zhou Hongyi's harsh criticism of Daniel Zhang in front of a large number of netizens is understandable because he is a major investor in Nezha Auto through 360. Over the past three years, Nezha Auto has accumulated losses of 18.3 billion, a performance that has also caused significant losses to 360. Although Zhou Hongyi's net worth has exceeded tens of billions, it is normal to vent frustration over losses of over ten billion. What is even more embarrassing is that Nezha's IPO has taken the longest time among his investment cases. Nezha, along with Nio, XPeng, Li Auto, and Leapmotor, was established around the same time and has been aiming for an IPO since 2020. However, while other new forces have successfully gone public, Nezha is still struggling for its IPO. In the rapid expansion of the past few years, Nezha, which is determined to make everyone afford an electric car, has encountered various difficulties due to this simple ideal. The core contradiction can be summarized in one sentence: the inability to escape the dilemma of imitators has led to unstoppable losses, and this inherent weakness in competitiveness has made the already vulnerable main investor more cautious about its investment. I. The Tragedy of Imitators The biggest characteristic of new energy vehicles is their short lifecycle. Without continuous updates, there is no traffic, and without traffic, there are no sales. In 2022, Nezha's cumulative sales reached 152,073 vehicles, a year-on-year increase of 118%, making it the first new force car company to deliver over 150,000 vehicles in a year. However, in 2023 and the first half of this year, despite high-profile exposure events like "Zhou Hongyi's confrontation with Daniel Zhang" and the launch of new models L and GT, Nezha Auto did not achieve significant sales. In 2023, Nezha delivered 127,000 new vehicles, a 16.2% year-on-year decline. In the first half of 2024, only 26% of the annual sales target was achieved, and the annual delivery fell short of expectations. The shining year of 2022 saw Nezha hitting the blank space in the 100,000 yuan new energy vehicle market. A 5-door 5-seat all-electric SUV with a guide price of only 79,900 yuan, making Nezha a good choice for consumers who want to show off on a budget After a fierce price war, Nezha's once comfortable zone has turned into the most intense battlefield. In February this year, a total of 27 models reduced prices, increasing to 37 in March. BYD's Qin PLUS DM-i Honor Edition officially entered the price range below 80,000 yuan. SAIC-GM-Wuling, Chang'an Qiyuan, Geely Auto, and many other car companies have also accelerated price cuts. Source: "Research Report on Trends and Pricing Strategies of Chinese Passenger Cars" The price reduction of products from these mature OEMs has dealt a blow to Nezha, which only obtained the qualification to produce cars in 2018. More importantly, in the highly homogenized new energy vehicle market, Nezha, which no longer has a price advantage, does not have outstanding products either. In terms of design, Nezha's series of models are either a shorter version of Li Auto L8, a Xiaomi SU7 with different headlights, or a basic version of XPeng P7. The recent Nezha S Hunting Edition has revived the concept of ZEEKR. For new forces, it is already difficult to survive with limited resources. Nezha has always taken the approach of imitating products from the perspective of imitators, which seems to be difficult to establish brand awareness. But to be honest, what brand awareness can a car priced below one hundred thousand have? This continuous and brainless approach of stacking product matrices fundamentally increases costs. Second, unstoppable losses Most of the models of new force brands are nesting dolls, because the larger the sales volume of the same series of products, the lower the cost of production for the nested dolls developed on the same platform. Leapmotor has a total of 5 models on sale, with 4 in the C series; ZEEKR's 001 and 007 account for over 90% of total sales; Li Auto, on the other hand, is the absolute mainstay with the L series. Therefore, Leapmotor's gross profit margin turned positive in 2023, ZEEKR's gross profit margin level is at the forefront of the industry, and Li Auto is the most profitable new force. However, if you open Nezha's model introduction, you might mistakenly think you've opened a menu from a restaurant. After imitating existing benchmark products to enter the market, they are ruthlessly suppressed by the main players, constantly launching copycat products. However, each model cannot stay popular for long, leading to the need for new R&D, never making substantial profits. Nezha, deeply trapped in this turn-based game, is unable to escape financial losses. Source: Autohome Between 2021 and 2023, Nezha achieved revenues of 5.086 billion yuan, 13.04 billion yuan, and 13.555 billion yuan respectively, but correspondingly incurred losses of 4.84 billion yuan, 6.66 billion yuan, and 6.867 billion yuan in the same years Financial losses are like a snowball rolling bigger and harder to contain. However, the domestic market's dilemma of difficulty in controlling costs to achieve profitability due to structural product issues has not dampened Nezha's ambition to expand overseas. In 2023, Nezha Motors delivered a total of 127,496 vehicles throughout the year, with nearly 20,000 units sold in overseas markets, accounting for 13.7% of global deliveries, a year-on-year increase of 567%. Based on the sales volume in 2023, Nezha ranks third in the Southeast Asian market for new energy passenger vehicle sales (with BYD and SAIC likely ranking first and second), and ranks first among companies exclusively producing new energy passenger vehicles, holding a 10.5% market share in Southeast Asia. The rapid growth in overseas sales is crucial for Nezha, as the overseas market has reached a point where development is imperative. In March last year, Nezha Motors established its first overseas factory in Thailand. In May this year, Indonesian electric vehicle manufacturer PT NETA Auto officially began local production in CKD form (completely knocked-down assembly). In the future, Nezha plans to expand its presence in Latin America, the Middle East, and Africa, and strategically break into the European overseas market in due course. However, this direct investment and factory establishment overseas undoubtedly will increase Nezha's financial pressure. For reference, Changan Automobile invested 9.8 billion Thai baht (approximately RMB 2 billion) to build an electric vehicle factory in Thailand; GAC Aion plans to invest 6.4 billion Thai baht (approximately RMB 1.3 billion), and this is just the expenditure in one country. For Nezha, which has been in the red for three consecutive years, the financial pressure can be imagined. Moreover, although going global has become a consensus in the Chinese automotive industry, there are still few new forces venturing into Southeast Asia, and a significant reason for this is that it is challenging to compete with traditional OEMs overseas, especially in Southeast Asia. Firstly, from the per capita income, it is evident that the average car price in Southeast Asia is not high; secondly, the industrialization level of these countries lags far behind China, with low efficiency leading to a sharp increase in costs. This kind of business with high upfront investment, high production costs, and low unit prices is not something that ordinary car companies can handle. New forces that have experienced challenges in the domestic market would rather venture to Europe, where there are tariff risks but higher product premiums, than take a wait-and-see approach towards Southeast Asia. Nezha's overseas revenue growth is indeed impressive, but current growth rates do not guarantee future growth, as many new energy brands have already experienced In Southeast Asia, Nezha, currently the top new force, has overseas sales of less than 20,000 vehicles, making it premature to say that it has a first-mover advantage in overseas markets. What's even more worrying is that at the crucial time of expanding production overseas, Nezha's major investors are also clearly feeling the pinch, becoming increasingly cautious about their investments. 3. Even the major investors are struggling From the beginning, Nezha Motors has been raising money through real estate developers and local governments, representing a typical example of "real estate making cars". Looking at the shareholder information, the concerted action entity is a government industrial fund under Yichun City, also the company's largest shareholder with a 20.28% stake, while political figure Fang Yunzhou and his team hold an 11.82% stake, making them the second largest shareholder. The remaining shares held by Minsheng Equity, Tongxiang Finance Bureau, etc., are all backed by local state-owned assets. The purpose of these local governments leading the investment in Nezha Motors is clear, they want to stimulate the local economy through investment and production. In 2020, Nezha Motors has built or committed to building factories in three cities: Jiaxing, Zhejiang, Yichun, Jiangxi, and Nanning, Guangxi. However, from the IPO prospectus in June this year, only the Tongxiang factory in China was disclosed, with no mention of the other factories. Earlier reports indicated that the Nanning factory had already ceased production, unable to even pay year-end bonuses. In response to netizens' questions, Daniel Zhang stated that "the Nanning factory still has an export task of 50,000-60,000 sets of KD parts this year". However, the factory's planned annual capacity is 100,000. This kind of scenario where a large-scale expansion in the past now sees half of its capacity idle truly has the taste of real estate. Compared to these local state-owned assets, the 360 Group, which led the Nezha Series D financing with its own funds of 2.9 billion yuan in 2021, has a slightly weaker background. However, this does not affect Zhou Hongyi's optimism about Nezha. For reference, in the third quarter of 2021, 360 had cash and cash equivalents of 20.98 billion yuan, with the 2.9 billion yuan equivalent to 14% of the group's cash at the time. Zhou Hongyi has high expectations for Nezha. But as mentioned at the beginning, Nezha has caused Zhou Hongyi to suffer significant losses. According to the 360 Group's financial report, in 2022, the investment losses mainly from Nezha Motors amounted to 593 million yuan, increasing to 700 million yuan in 2023. This buying and selling of losses also led 360 to reduce its stake in Nezha Motors from 16.6% in 2021 to 9.12%, with Zhou Hongyi unwilling to linger too much on a company that only knows how to "self-indulge" In April this year, the local state-owned assets mentioned above once again provided 5 billion yuan in investment for Nezha Auto, with 21 billion yuan already received. However, compared to a few years ago when a state-owned asset in Yichun invested 3 billion yuan in a bold manner, the major backers of Nezha also clearly felt the chill due to the impact of the real estate market. As of April 2024, Nezha Auto only has 400 million yuan in cash and cash equivalents left, but short-term borrowings still amount to as high as 3.77 billion yuan. Even if the full 5 billion yuan is received, it is not enough to turn the situation around. A clever woman cannot cook without rice. Even though Nezha is full of courage, with its major investors becoming extremely cautious about investing in it, it must also face the reality of a shortage of funds. Currently, the domestic market still accounts for 88% of Nezha's revenue, but with Nezha's current competitiveness, it is difficult to achieve profitability in this market. Moreover, the expenses of establishing factories overseas are substantial, and the major backers are also feeling the pinch. The future of Nezha is still shrouded in uncertainty.

IV. Conclusion In 2024, the proportion of new energy vehicle companies in China that experience performance growth in the domestic market will be less, and the overseas market may become the main source of incremental growth to support the annual growth of car companies. The global market is so vast that even small successes are significant for medium-sized brands in terms of sales growth. From this perspective, Nezha's path to going global is not wrong, but selling products at a loss is not a true skill. As of now, Nezha Auto has completed 10 rounds of financing, with a total financing amount of up to 22.844 billion yuan. According to the valuation of the last round of financing, Nezha Auto is valued at about 42.4 billion yuan, with a PS ratio of about 3 times based on the 13.55 billion yuan revenue in 2023. This valuation is higher than many other new forces. However, not only is Nezha's sales disappointing, but its shareholders also possess the real estate attributes that investors currently keep at arm's length. Even if it successfully lists on the Hong Kong Stock Exchange in the future, there is a considerable risk of valuation contraction