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“Past performance is no guarantee of future results.”
Fund managers include this standard disclaimer in their marketing materials. And it’s a maxim that the Chinese auto group Geely presumably subscribes to.
Last week Geely floated its premium-brand electric vehicle maker Zeekr on the NYSE, raising $441mn at the top of the indicated price range. The IPO marked the largest US listing of a Chinese company since ride-hailing firm Didi’s ill-starred $4.4bn debut nearly three years ago.
For China-based investment bankers suffering in a severe deal drought, the Zeekr offering offers an oasis of hope. “Chinese EV maker Zeekr soars nearly 35 per cent in stellar US market debut,” headlined Reuters. IFR wrote: “Zeekr fuels hope for US listings.” And MainFT cited the deal’s success as a “sign of improved sentiment towards Chinese-linked stocks,” with a “flurry of upcoming Chinese EV IPOs” to come.
This all coincides with rave reviews of new Chinese EV models, despite looming import tariffs from the EU and US. “Western automakers are cooked,” wrote one industry expert after reviewing a slew of Chinese EVs at the Beijing Auto Show.
But a closer look under the hood warrants caution about drawing conclusions from the IPO. The offering raises more questions about investor appetite than it answers.
First, Geely compromised a lot of price, at least optically. Zeekr shares were offered at a 50 per cent discount to forecast 2024 enterprise value-to-sales multiples of quoted Chinese EV peers. The IPO valued the company at $6.8bn on a fully-diluted basis, versus a $13bn valuation achieved in a $750mn Series A funding 15 months ago. Humble pie never tastes good.
Second, barely any shares were even distributed in the IPO. Of the shares on offer, $270mn were allocated to Geely’s Hong Kong-listed subsidiary, $10mn to Israeli self-driving tech firm Mobileye and $19mn to Chinese EV battery maker CATL. Even assuming full exercise of the overallotment option (aka “greenshoe”), it leaves the free float at around 4 per cent.
The tight rationing of freely tradable shares continues a pattern of low-float IPOs seen last autumn in the US. The tiny supply of stock can inflate the share price, albeit at the cost of impaired secondary market liquidity. Zeekr’s IPO is not as extreme as last August’s Nasdaq listing of Vietnamese EV maker VinFast — whose minuscule free float meant the shares traded at a price unmoored from reality — but a small free float can squeeze share prices higher than the fundamentals might warrant. It will certainly make the shares harder for hedge funds to short.
What’s also striking isn’t just the disproportionate size of the cornerstone allocation, but the lack of third-party money. Geely’s Hong Kong unit has put in the bulk of the money, and two industrial partners have invested relatively modest amounts. There are precedents for large existing shareholders to act as cornerstones — such as the commitment from Sequoia and D1, who together held one-third of Instacart at the time of its IPO last autumn — but this is of a different dimension. Barely over $200mn of shares were sold to the market, even after increasing the deal size for the greenshoe.
In short, this is a highly engineered stock market listing in which fund managers will struggle to buy or sell shares in meaningful size in the secondary market.
Third, the share prices of Zeekr’s peers suggest investors are steering clear of the sector for now. Year-to-date, shares in US-listed Chinese EV makers Li Auto, NIO and Xpeng have fallen by around 26 per cent, 36 per cent, and 42 per cent, respectively.
If it’s any consolation, the pain isn’t confined to Chinese names: Tesla stock has dropped by around 30 per cent so far this year, although from a much higher starting point.
Finally, there is the matter of Geely’s previous forays into the equity capital markets. Geely has been a serial lister of auto subsidiaries, and their after-market performance has ranged from soul-crushing to bone-crunching.
Lotus, which went public on Nasdaq in late February by combining with a special purpose acquisition company (Spac), has fallen around 42 per cent. Geely’s Swedish unit Polestar has tumbled over 85 per cent since its Nasdaq listing (again via a link-up with Spac) three years ago. Recently, it announced for the second time a delay in publishing its 2023 financial results due to accounting errors in prior years. Whatever the reality, that’s not a confidence booster.
Meanwhile, Volvo Cars shares today trade at over 30 per cent below its 2021 Stockholm IPO price. And in late 2022 Geely listed its auto tech arm ECARX on Nasdaq — again via a Spac — and the shares are down over 80 per cent.
Even the savviest market experts can find themselves on the wrong side of a Geely stock offering. Just last month, three global investment banks got stuck with a substantial residual position after Geely auctioned a $1.3bn block of truckmaker Volvo shares at “an aggressive discount”. The banks couldn’t fully distribute the block, and the stock price slid below the re-offer price.
Past performance may not be a guarantee of future results, but investors presumably keep it in the back of their minds.
Oh, and one final disclaimer: Nothing herein should be construed as investment advice.
