9863.HK 002236.SHE
Leapmotor issued shares to Stellantis

The former Leapmotor stakeholder earned a $600 million profit by selling its shares in the struggling EV maker to the Euro-American parent of Chrysler and Fiat

Key Takeaways:

  • Leapmotor’s shares initially surged after introducing Stellantis as a major new investor, but quickly went into reverse as investors worried about its future
  • As part of the deal, Leapmotor founder Zhu Jiangming promised not to sell his stake in his company for a decade 

      

By Bai Xinrui

China’s overseas car sales have zoomed this year, overtaking Japan and Germany to make the country the world’s largest exporter on the strength of surging demand for its electric vehicles (EV). That’s sparked a rush by overseas investors determined not to miss out this potential Chinese gold mine. 

One of the earliest of those was Warren Buffett, whose investment in BYD (1211.HK; 002594.SZ) has increased many-fold since he made it in 2008. More recently, Abu Dhabi’s CYVN Holdings invested in Nio Inc. (NIO.US; 9866.HK). And earlier this year Germany’s Volkswagen (VOW. DE) placed its bets on XPeng (XPEV.US; 9868.HK), while its SAIC Audi joint venture signed an agreement with SAIC Motor (600104.SH) to speed up its development of their EVs. 

Last month that club was joined by Euro-American giant Stellantis (STLA.US), the world’s fourth largest car company whose brands include Chrysler and Fiat, which became a major stakeholder in the struggling Zhejiang Leapmotor Technology Co. Ltd. (9863.HK). Investors initially cheered the deal, with Leapmotor’s shares surging 11.4% when the Hong Kong market opened that day. 

But the rally quickly went into reverse, and Leapmotor’s shares actually ended down 11% on the day as earlier worries about the company’s future quickly overshadowed excitement over the new tie-up. The biggest winner of the deal so far is one of Leapmotor’s early investors, which cashed out its stake in a company that has posted massive losses since its Hong Kong listing a year ago.

Stellantis stake

Leapmotor raised HK$8.51 billion ($1.1 billion) by selling newly issued shares to Stellantis at a 19% premium to the closing price the previous day, according to its announcement of the deal. At the same time, longtime stakeholder Zhejiang Dahua Technology(002236.SZ) sold 90 million of its Leapmotor shares to Stellantis, equivalent to 6.73% of Leapmotor’s stock after the new share issue.

The deal gives Stellantis more than 20% of Leapmotor shares, entitling it to two board seats. The pair also established a joint venture that will develop Leapmotor’s export business outside Greater China while also manufacturing Leapmotor products.

Dahua is a leader in China’s video-focused security market and has close ties with Leapmotor. Leapmotor’s founders Zhu Jiangming and Fu Liquan, as well as vice presidents Cao Li and Zhou Hongtao, all worked for Dahua in the past. Dahua’s share sale formally ended its equity connection with Leapmotor, though it continues to supply the EV maker with intelligent cockpit controllers, intelligent driving controllers, software and other related technologies.

Following the Stellantis investment, Leapmotor founder Zhu Jiangming promised not to transfer or reduce his stake in the company for the next 10 years. Zhu holds 8.1% of Leapmotor’s shares, though that will fall to 6.93% after the new share issue to Stellantis.

Foreigners pile in 

Chinese companies have taken pole position in the emerging global EV industry, especially after U.S. leader Tesla (TSLA.US) set up one of its factories in Shanghai. That factory uses China-made parts for its production, providing a lift for the domestic sector. 

In recognition of China’s leading position, traditional car makers worldwide have begun investing in Mainland manufacturers to avoid falling behind rivals and quickly accessing the latest technologies. Before investing in XPeng, Volkswagen bought shares in battery maker Gotion High-tech (002074.SZ) as early as 2021 and is its largest shareholder with 24.7% of the company. Volkswagen is also a strategic shareholder of QuantumScape (QS.US), a U.S.-listed solid-state battery company.

As the world’s fourth largest car maker, Stellantis currently has as many as 14 car brands such as Peugeot, Citroen, Jeep and Maserati under its hood. Despite that, it lacks EV technologies even though it has rich experience in traditional gas-powered cars.

Haitong Securities has pointed out Stellantis faces many challenges as the China car market electrifies, with only its Peugeot and Citroen brands currently represented as minor players in the Mainland. But both brands lack competitive electric models, putting Stellantis at a disadvantage. The Leapmotor investment looks designed to address that. 

The global EV market will only get hotter. In addition to Chinese leaders like Nio, XPeng, and Li Auto (LI.US; 2015.HK), smartphone maker Xiaomi (1810.HK) is also edging into the space, with plans to mass produce its first EVs in the first half of next year. There’s no shortage of overseas rivals either, including U.S.-based Rivian (RIVN.US) and even Apple (AAPL.US), which is expected to roll out its own EV models.

As if the growing competition weren’t bad enough, nearly all of the Chinese startups are still losing big money – something their foreign investors are acutely aware of. Without lifelines from such foreign sources, Leapmotor could easily have ended up on the EV scrapheap alongside names like Singulato Motors, once considered an EV star with backing from Intel Capital and Itochu before its collapse. Byton Motors, which had a strategic partnership with Apple manufacturing partner Hon Hai Group (2317.TW), also filed for bankruptcy.

Leapmotor lost 2.28 billion yuan in the first half of this year, marking a slight improvement from a year earlier, while its revenue grew by an unimpressive 14% to 5.81 billion yuan. Analysts expect the company to keep losing money through at least 2025, with profits not coming until 2026 at the earliest.

The Stellantis bet on Leapmotor looks precarious at best, while Dahua looks like the transaction’s biggest winner. It has washed its hands of Leapmotor and said it expects to its exit to yield a profit of 4.55 billion yuan, according to its own announcement of the deal. At the same time, if Leapmotor can become profitable with Stellantis as a partner, Dahua can expect a robust flow of orders from Leapmotor due to their previous supply relationship, providing a big boost to Dahua’s auto business. 

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