Jinsheng New Energy gets price volatility shock on road to IPO

Plunging lithium prices caused the NEV battery recycler’s revenue to flatten in 2023 and start contracting in the first half of last year, as it files to list in Hong Kong

Key Takeaways:

• Jinsheng New Energy is charging ahead with plans to list in Hong Kong despite reporting a 35% decline in revenue in the first half of last year
• The world’s second-largest lithium battery recycler is losing money as it records high inventory impairment charges, although its losses are narrowing

By Edith Terry

The concept of “circular economy” is dear to the hearts of environmentalists, as it promises that items produced with big carbon footprints get used more than once. It’s also key to the success of Guangdong Jinsheng New Energy Co. Ltd., a company founded by five brothers surnamed Li who were among the first to embrace that concept for lithium-ion battery recycling in 2014.

After soaking up millions of lithium batteries for recycling in the decade since its founding, Jinsheng is now hoping to soak up some investment dollars through a Hong Kong IPO, according to its listing application filed on Dec. 20. But first Jinsheng will have to convince the market that it can manage the price volatility for the materials it recycles.

The company has raised 1.4 billion yuan ($190.9 million) in four rounds of financing between 2021 and 2022 from investors including auto giant Bosch GmbH, and the Hurun Global Unicorn report published last April listed its value as $1.7 billion. The listing also has some major co-sponsors in CICC, CMB International and BOCI Asia, among others, meaning it’s likely to raise some sizable funds, probably more than $200 million.

Jinsheng reprocesses new energy vehicle (NEV) and other batteries into raw materials, 70% of which are lithium and nickel. China is the world’s undisputed largest NEV market with millions of such vehicles on its roads, offering huge opportunity for a company like Jinsheng.

According to independent market research in the prospectus, the volume of lithium-ion batteries in Mainland China treated for recycling increased from 27,900 tons in 2019 to 586,900 tons in 2023, more than doubling each year over that time. And as China heavily promotes NEVs, the country’s annual recycling volume is expected to reach 7.9 million tons by 2030.

While the supply of batteries for recycling is expected to grow strongly, demand for materials recycled from those batteries tells an even better story. Sales of recycled lithium-ion battery materials in China increased from 16,900 tons in 2019 to 544,700 tons in 2023. The figure is expected to explode to 4.9 million tons by 2030, since batteries in the millions of NEVs on China’s roads typically have a life of five to eight years.

The problem for a company like Jinsheng is managing the volatility of prices for commodities like lithium, and to a lesser extent nickel, which are set in global markets and determine how much the company can charge for its recycled products.

After a huge run-up in 2023, lithium prices tanked last year and continue to slump this year. And even though NEV sales have been slowing in China over the last two years as the government withdraws incentives, lithium miners have kept their output largely unchanged, resulting in a glut that looks unlikely to ease in the near-term.

Lithium oversupply

With so many NEVs on the roads and fresh lithium in oversupply, it should come as no surprise that there’s also been a glut in both the supply of retired lithium-ion batteries and recycled materials since 2022. That’s caused the average price of retired batteries to fall from 32,500 yuan per ton in 2022 to just 16,800 yuan per ton last year. Meantime, the average price of recycled raw materials from those batteries plummeted by an even larger 80%, from 426,900 yuan per ton to 82,900 per ton over that period.

For Jinsheng such volatility has created big headaches, which look set to continue until lithium prices stabilize. Between 2021 and 2022 the company’s revenue jumped by 156% to 2.91 billion yuan as lithium prices boomed. But then it flattened at 2.89 billion yuan in 2023 as prices crested, and began to fall last year as the bubble burst.

In the first six months of 2024, the company’s revenue fell by a third to 995.4 million yuan from 1.53 billion yuan in the first half of 2023. After posting profits of 69 million yuan and 151 million yuan in 2021 and 2022, respectively, the company slipped into the red with a loss of 473 million yuan in 2023. It lost another 147.2 million yuan in the first half of last year, though that was 28% narrower than the 204 million yuan loss a year earlier as lithium carbonate and nickel sulfate prices started to stabilize.

A big piece of the loss in 2023 owed to impairment losses of 108.8 million yuan related to inventories. The company’s inventory ballooned to 812.8 million yuan in 2022, perhaps as Jinsheng stocked up in anticipation that prices would continue rising. But as prices for retired batteries and recycled materials fell precipitously starting in 2023, write-offs were needed.

With so much volatility in its recent history, what can investors expect going forward from Jinsheng’s IPO? The company says that it has a “path to profitability” which includes building a new factory with a subsidiary of domestic auto giant Dongfeng, with capacity to recycle 180,000 tons of retired lithium-ion batteries per year. This will help reduce manufacturing costs, and the prospectus notes that unit manufacturing costs of nickel recycled products declined about 18% between 2023 and 2024 through capacity expansion.

Meanwhile, Jinsheng posted positive cash flow of about 40 million yuan from its operating activities in the first half of last year, compared with negative operating cash flow in the previous three years. But its cash dropped to just 39 million yuan by the end of last June from 178 million yuan a year earlier, as it continued to spend on new investments.

The five Li brothers, who own 55% of the company, may be hoping investors are attracted to their shares amid a recent wave of NEV-related IPOs in both Hong Kong and on China’s domestic A-share markets in Shanghai and Shenzhen.

Last December, Zhejiang E-P Equipment (603194.SH), which uses lithium battery related systems for warehouse automation, listed in Shanghai. Meantime, Haibo Sichuang, a maker of energy storage systems, has reportedly been approved for an IPO on Shanghai’s STAR market; and Honggong Technology, a provider of processing systems for bulk materials, has registered for a listing on Shenzhen’s ChiNext. Hydrogen fuel cell maker Shanghai Refire Energy (2570.HK) raised HK$709.7 million ($91.2 million) in a Hong Kong listing last month, and its shares have risen by over 20% since then.

Leading global electric vehicle (EV) battery maker CATL (300750.SZ) is also said to be considering a Hong Kong IPO to raise as much as $7.7 billion, complementing its existing listing in Shenzhen. That would be the largest fundraising on the Hong Kong Stock Exchange since 2021, though the company may alter its plans after landing on a U.S. Defense Department blacklist earlier this week.

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