Billion-dollar Financing + Over 1 Billion Cash-out by SMOORE INTL, Can Eway Fund Realize the Lithium Battery Dream? | Insight Research

The lithium-ion battery industry in China is becoming increasingly competitive, not only because of the continuous emergence of new technologies, but also due to the expansion of battery production capacity and the supply of high-quality products. Yiwu Lithium, as a leading power battery manufacturer, is no exception. Since 2019, Yiwu Lithium has raised billions of yuan through various means in order to expand its battery production capacity.

However, it seems that these fundraising efforts are still not enough to meet the financial needs of Yiwu Lithium. SMOORE, which used to be a profitable pillar for Yiwu Lithium, has become the target for reducing holdings and obtaining funds.

After announcing its plan to reduce its stake in SMOORE by 3.5% for the first time last year, Yiwu Lithium once again announced on June 27th this year that it will reduce its stake in SMOORE International's stock by up to 3.5% through block trades within one year from the date of approval by the board of directors.

Is Yiwu Lithium really in need of money and relying on selling SMOORE to raise funds?

According to Wall Street News, as of now, Yiwu Lithium holds approximately 31.27% of SMOORE's shares. If the reduction is successful, Yiwu Lithium's stake in SMOORE will be reduced to below 30%.

If Yiwu Lithium really carries out such a large-scale reduction, it will definitely reduce the investment return of SMOORE to some extent in the short term. However, considering Yiwu Lithium's project financing plan, cash flow and financial indicators for multiple quarters, as well as the demand from downstream customers, Yiwu Lithium is gradually reducing its reliance on SMOORE and urgently needs a large amount of funds to expand its power battery production. From a long-term perspective, this may not be a bad thing.

1. Yiwu Lithium's domestic and international battery projects are booming, but funds seem tight

Over the past four years, Yiwu Lithium has continuously announced new capacity expansion plans, accompanied by frequent financing announcements.

In 2019, 2020, and 2022, it raised 2.5 billion yuan, 2.5 billion yuan, and 9 billion yuan respectively. In May of this year, it also applied for a convertible bond issuance of 7 billion yuan. (1) Progress of domestic battery projects

In terms of financing projects, the expansion of Yiwu Lithium's cylindrical lithium iron phosphate batteries and 46 series large cylindrical batteries (including power batteries and energy storage batteries) is the main focus. In the first half of this year alone, Yiwu Lithium made investment progress in 5 domestic projects related to power batteries and energy storage batteries. Previously, Yiwu Lithium has been developing three types of batteries simultaneously in the field of power batteries: pouch batteries, prismatic batteries, and cylindrical batteries.

However, with the increasing preference and investment from new energy front-runner companies such as Tesla and BMW for 4680 and 4695 large cylindrical batteries, Yiwu Lithium has gradually shifted its focus to the research and development of large cylindrical batteries. It has planned production capacity for large cylindrical batteries in Jingmen, Hubei Province, Chengdu, Sichuan Province, Shenyang, Liaoning Province, and has already secured orders from many top domestic and foreign automotive customers such as Chengdu Dayun and BMW in Germany. （2）Progress of Overseas Battery Projects

In addition to the orderly expansion of domestic battery production plans, the progress of EVE Energy's overseas battery projects is also advancing rapidly.

To meet the needs of major customers, EVE Energy is investing 9.97 billion yuan in the construction of a cylindrical battery project for passenger vehicles in Debrecen, Hungary, and 420 million US dollars in the construction of a cylindrical lithium battery manufacturing project in Malaysia. The simultaneous development of battery production capacity at home and abroad has increased EVE Energy's cash requirements.

（3）Apparent Abundance of Funds, but Actual Tightness

Looking at EVE Energy's overall liquidity situation in recent years, it is still relatively abundant. At the end of the financing-intensive period from 2019 to 2022, the company's cash and cash equivalents reached 1.91 billion yuan, 3.426 billion yuan, 36.102 billion yuan, and 7.209 billion yuan respectively. In the first quarter of 2023, it reached 8.091 billion yuan. From a debt repayment perspective, there is still an overall funding gap with bank loans due within one year amounting to 4.903 billion yuan and project expenditures of 8.3 billion yuan.

However, the increase in EVE Energy's cash and cash equivalents each year has decreased, from a peak of around 2.676 billion yuan to around 1.1 billion yuan, and in the short term, it still needs to repay bank loans due within one year amounting to 4.903 billion yuan and project expenditures of 8.3 billion yuan, as well as operating capital of 2.605 billion yuan in 2023 and cash dividends of 327 million yuan in 2022. Therefore, although EVE Energy's apparent funds seem abundant, they are actually tight. Due to the significant investment in battery expansion and considerations for operational security, EVE Energy has frequent refinancing activities. This time, EVE Energy's reduction of its stake in SMIC does not rule out the possibility of further support for cash flow in the short term. It is worth noting that EVE Energy's cylindrical lithium iron phosphate batteries have obtained customer intentions for a total demand of approximately 88 GWh in the next five years, and its ternary cylindrical batteries have obtained customer intentions for a total demand of approximately 392 GWh in the next five years, which is enough to cover the newly added energy storage battery capacity from the company's current fundraising project.

2. CATL's Profitability Gradually Recovering, but the Halo of SMIC's Support is Fading Away

CATL's lithium battery business has experienced rapid growth in the past two years. Even in 2022, when the cost increased due to the rise in lithium prices, it did not hinder the growth of CATL's lithium battery business. In contrast, the proportion of profits brought by SMIC, which used to be the major contributor, has significantly declined.

CATL is gradually diminishing the influence of SMIC and is now in a phase of rapid growth in its lithium battery business. It is worth noting that, in addition to the growth of the lithium battery business, the decline in SMIC's own profits has also had an impact on the decrease in the proportion of profits from SMIC. Looking back at SMIC's profits, it decreased from 1.677 billion yuan in 2021 to 782 million yuan in 2022, a year-on-year decrease of 53%. The proportion of profits during the same period also dropped from 57.8% to 22.3%. Obviously, CATL's core source of profits has completely changed. It is no longer investment income dominated by SMIC, but profits brought by core power battery products. Therefore, the funding needs of the power battery project are more likely to be the reason for CATL's reduction of its stake in SMIC.

This point was reflected in CATL's first announcement of its intention to reduce its stake in SMIC by 3.5% in April last year (although it did not actually reduce its stake). Therefore, CATL's recent decision to reduce its stake in SMIC is also normal.

In summary, the proportion of CATL's equity in SMIC is no longer important. The most crucial factor is the development of the lithium battery business.