The latest electric vehicle startup to take advantage of a new wave of hype and investment in space is Li Auto, a five-year-old Chinese company that went public on the Nasdaq on Thursday after raising $ 1.1 billion in a public offering. initial. It is the second Chinese electric vehicle startup to become a publicly listed company in the United States, following Nio’s 2018 IPO and subsequent listing on the New York Stock Exchange. Another XPeng will reportedly be next.
With Tesla recently becoming the world’s most valuable automaker, there is suddenly a renewed focus on financing electric vehicle startups. In recent months, both the public and private sectors have been pouring fresh money into people like Rivian, Nikola, Fisker, Karma, and even providers like Velodyne and Hyliion.
While most of those going public are taking advantage of what’s known as a reverse merger (where they combine their business with an already publicly traded company that exists solely as a placeholder on the stock exchange, thus avoiding a traditional OPV), Li Auto was the standard route. It was made public earlier this year and spent months working with banks and investors. This week regulators approved Li Auto’s filing, and the company’s shares began trading on the Nasdaq exchange.
Li Auto’s IPO comes at a strange and tense time, as both the Trump administration and several lawmakers in the Senate have spent months laying the groundwork for increased oversight of Chinese companies on US stock exchanges. “They entirely. In addition to the general tensions of Trump’s trade war with the country, there are concerns about transparency with Chinese companies going public in the US, especially since the watchdog that Supposed to control them, the Public Business Accounting Oversight Board (PCAOB) has struggled to get Chinese banks to accept proper audits.
Li Auto is also taking a different approach to electric vehicles than startups like Nio. The company’s SUVs are hybrids of some kind. They use electric motors to get around (one on the front axle and one on the rear), but those motors run on a combination of a 40.5kWh battery. and a 1.2-liter turbocharged engine paired with a 45-liter (approximately 12-gallon) fuel tank and a 100kW electric generator, which can power the battery in real time. The idea is that the car can be driven for about 180 kilometers (approximately 112 miles) on battery power alone, but it has a total range of around 800 kilometers (almost 500 miles) when the combustion engine is harnessed. (There are different driving modes that can also combine energy sources).
The company says this approach helps bypass China’s “inadequate public and private fast charging infrastructure” while keeping costs lower than all-electric vehicles. She also argues that the approach “will contribute to a broader and earlier adoption of electric vehicles in China.”
Li Auto is looking to sell a variety of SUVs based on its hybrid technology that range from around $ 21,000 to around $ 70,000. The company started shipping its first model in late 2019 and has delivered just over 10,000 so far. It’s a well-equipped midsize SUV packed with touchscreens and other technologies, like an advanced driver assistance system. A full-size premium version will launch in 2022.
Like many of its peers, Li Auto sells its SUVs directly to consumers. But unlike Nio, which pays a state-owned automaker to contract to manufacture all of its cars (and scrapped plans last year to build its own factory), Li Auto builds its own vehicles. The startup’s revenue is modest for an automaker ($ 120 million in the first quarter of 2020) and it lost around $ 344 million in 2019 and around $ 214 million in 2018. But it may have a faster path to profitability than Nio due to that in the production company, since it lost only $ 11 million in the first quarter of 2020, its first full quarter of deliveries.
Sales of the first Li Auto model were driven in these early days by China’s generous subsidies for “new energy vehicles” (including hybrid, all-electric, and even hydrogen-powered cars), and the company admits in documents filed with the Securities and Exchange Commission. that changes in subsidy policy could affect future sales.
However, an even greater political risk could be the hybrid technology approach itself. The Chinese government has different regulatory regimes for internal combustion vehicles and new energy vehicles. Since Li Auto’s vehicles run on both battery and gasoline, the company, by its own admission in these presentations, is vulnerable to the whims of both regimes.
Another notable risk the startup admits is that the accounting firm it hired to prepare for its IPO, the Chinese arm of PricewaterhouseCoopers, found that Li Auto lacks “enough competent staff in financial reporting and accounting with the proper understanding of the US.” GAAP. ” (GAAP stands for “generally accepted accounting principles,” and it is a common set of standards by which companies have to define their financial reports.) According to PCAOB guidelines, Li Auto had to admit that there is “a reasonable chance that a material misstatement of our company annual or interim financial statements will not be avoided or detected in a timely manner.” Li Auto says it has hired additional staff to address this, but admits that other accounting issues may have gone unnoticed.
On top of that, Li Auto is classified as an “emerging growth” company because it generated less than $ 1 billion in revenue last year, under the Obama-era Jumpstart Our Business Startups (JOBS) Act. This means that it is already exempt from certain transparency requirements established in the Sarbanes-Oxley Act of 2002.
Risk factors such as these are in part why lawmakers have raised issues with US-listed Chinese companies Li Auto is also aware of this: The company admits in its SEC filings that the PCAOB did not You will be able to inspect the audits that have been performed on your finances. As a result, Li Auto says: “[i]Investors may lose confidence in our informed financial information and procedures and in the quality of our financial statements. “What if legislation it is Approved that it more tightly regulates Chinese companies not to be listed on the US exchanges, Li Auto admits that its share price may fall or it may have to abandon Nasdaq entirely.
If financial problems ever arise, shareholders won’t have much recourse. Li Auto founder Li Xiang owns 73 percent of the voting power.
Despite all this, Li Auto generated enough interest to attract $ 1.1 billion and has seen its share price rise during the first morning of trading on the Nasdaq stock exchange. Maybe it’s the result of new momentum in the global electric vehicle startup space, or maybe it’s just a side effect of the current volatility and unpredictability of the US stock market. Whatever the answer, the initial success of Li Auto, and the money raised by the other companies mentioned above, must have the EV startups that remain stagnant, like Byton and Faraday Future, wondering how they can ride this wave too before it ramps up.
