business, companies, electric cars, ipo, banking & finance, autos, china evergrande group, geely, china stock market, china’s electric car start-ups turn to private equity, venture capital for funds as they are turned away from shanghai’s star market

China’s cash-hungry electric vehicle (EV) start-ups, are actively looking to private equity and venture capital for funding, as they seek alternative financing sources in the face of tougher thresholds for initial public offerings (IPOs) on Shanghais Star Market.

Evergrande New Energy Vehicle Group, Geely Automobile and WM Motor Technology were three of the most recent assemblers of electric cars to be turned away in recent months from Star Market, as the Nasdaq-like market – set up in July 2019 at the order of the Chinese President Xi Jinping – tightened its definition of what passes muster as “technology” and “innovation” to qualify for a Star Market listing.

WM Motor, backed by the largest Chinese company Tencent Hodings, the internet search engine Baidu and China’s largest state-owned carmaker SAIC Motor, halted its Star Market listing in April, even after it completed its pre-listing tutorial programme three months earlier.

Geely, the owner of Volvo Cars and 9.7-per cent shareholder of Daimler, withdrew its listing application in June on Star Market, which would have raised 20 billion yuan (US$3.1 billion) to finance its push to have 10 electric cars in its vehicles portfolio by 2025.

Evergrande NEV, which is supposed to assemble electric cars for the world’s most indebted property developer, shelved its 30 billion yuan Star Market IPO in late September, losing a vital lifeline for China Evergrande Group and its US$300 billion in liabilities.

business, companies, electric cars, ipo, banking & finance, autos, china evergrande group, geely, china stock market, china’s electric car start-ups turn to private equity, venture capital for funds as they are turned away from shanghai’s star market

The research headquarters of China Evergrande New Energy Vehicle Group in Shanghai on September 24, 2021. Photo: Bloomberg

These applicants fell victim to Star Market’s tighter approval procedure, requiring substantial investments in research and development (R&D), as well as products that contain “hard technologies.” Electric carmakers failed to convince the review committee that they possessed core technology that could help them lead the future of mobility. A trio of Chinese EV makers with the best prospects of grabbing market share from Tesla – Li Auto, NIO and Xpeng – are listed in New York and Hong Kong.

Electric cars “remain a bright spot in China’s economy and the market still expects to see a bunch of IPOs by prospective carmakers in the coming two years,” said Ivan Li, a fund manager at Loyal Wealth Management. “But they need to invest more capital into R&D and churn out a certain number of intelligent vehicles that are well received by drivers before submitting listing applications again.”

SCMP Infographics: The electric car industry in the Made in China 2025 master plan

What the Star Market wants is hardcore scientific and technological innovations, such as companies involved in basic science, semiconductors, biotechnology, and robotics, among the priorities under the Made in China 2025 industrial master plan.

An example of Star Market’s higher threshold requires applicants to have at least 10 per cent of their total headcount in R&D. Other criteria include having at least 5 per cent of their revenue devoted to research expenses for the most recent three years, or at least 60 million yuan in aggregate.

“The technologies in autonomous driving, and new-energy vehicle continue to represent huge market opportunities for venture capitalists and private equity firms,” said Jarlon Tsang, managing partner and head of China at Eight Roads, the proprietary investment arm of Fidelity International. “Interest in investing in the China‘s EV sector has not slowed down.”

business, companies, electric cars, ipo, banking & finance, autos, china evergrande group, geely, china stock market, china’s electric car start-ups turn to private equity, venture capital for funds as they are turned away from shanghai’s star market

A sign of the Star Market, China's new Nasdaq-style tech board. Photo: Reuters

Chinese carmakers and component suppliers are ramping up development of smart vehicles powered by batteries which feature autonomous driving, internet of things (IoT) and voice recognition technologies.

The number of investments and deals related to the new energy vehicle industry rose to 35 valued at US$4.4 billion so far this year, from 25 deals worth US$6.2 billion for the whole of 2020, according to data provided by the research firm Preqin.

Turned away by Star Market, some of the NEV start-ups are turning to private equity. WM Motor said it raised US$300 million earlier this month in a Series D1 round of financing from investors led by Hong Kong’s telecommunications network PCCW and the Macau casino owner Shun Tak Holdings. Several other international investors are likely to follow, bringing WM Motor’s fundraising haul to US$500 million, the company said.

Hozon Auto, a Shanghai-based EV start-up, raised 3 billion yuan in April in a new financing round led by the antivirus software developer 360 Security Technology.

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