Zeekr’s IPO honeymoon ends with forced marriage to Lynk & Co.

The recently listed maker of luxury electric vehicles controlled by Geely will pay $1.3 billion for 51% of one of its parent’s units that only recently entered the EV market

Key Takeaways:

• Zeekr’s shares fell 27% after it announced its plan to purchase a majority of the Lynk & Co. brand from its parent for 9.4 billion yuan
• Zeekr’s vehicle deliveries grew 51% in the third quarter, down sharply from growth rates in the previous two quarters, as it said it was on track to reach its annual sales target

By Doug Young

Anyone who thought they were buying into a luxury new energy vehicle (NEV) brand when they purchased IPO shares of Zeekr Intelligent Technology Holding Ltd. (ZK.US) in May got a rude awakening last week. That’s when the recently listed company controlled by Chinese auto giant Geely informed the world that it was merging with its more down-market Lynk & Co. sister brand that is a relative latecomer to China’s NEV market.

This deal shouldn’t come as a complete shock to anyone who follows Chinese companies or Geely in particular. Most Chinese companies traded in the U.S. and Hong Kong are controlled by a single individual or parent, and minority shareholders typically have little or no say in big strategic decisions.

In this case Zeekr’s parent is Geely, whose founder, Li Shufu, is arguably one of China’s most successful entrepreneurs. In addition to his original Geely brand, Li has launched other brands like Zeekr and Lynk & Co. over the years. He has also been one of China’s most successful acquirers of foreign brands, most notably Sweden’s Volvo and Britain’s Lotus.

Li said publicly in September that his days of launching and acquiring new brands are over, at least for now, noting his company is moving from a stage of strategic expansion to one of strategic consolidation. So, against that backdrop, this new consolidation move shouldn’t come as a big surprise. Still, investors who purchased Zeekr shares thinking they were getting a luxury NEV startup without the baggage of a legacy gas-powered car maker must be feeling slightly deceived with this latest announcement.

At the same time, the merger does inject something new into Zeekr, whose latest results, issued the same day as the Lynk & Co. announcement, show the company is rapidly running into the inevitable headwinds of slowing growth and price pressures.

While the acquisition will sharply boost Zeekr’s sales as it consolidates Lynk & Co.’s financials into its own income statements, investors were not too impressed. Zeekr’s stock actually rose 12% the day before the announcement to near a post IPO-high, most likely on big expectations for a deal that was previously rumored in the market. But then they tanked 24% the day of the announcement, and continued to sag in the next two trading days. All told, the stock lost about $1.5 billion in market value over the three-day period.

There are quite a few moving parts to the Lynk & Co. acquisition, though the bottom line appears to be that Zeekr is getting the company at a relatively fair price. Under the deal, Zeekr is paying about 9.4 billion yuan ($1.3 billion) for 51% of Lynk & Co. That values Lynk & Co. at about $2.6 billion, which is roughly half of Zeekr’s own latest market value of $5.25 billion. That seems to show that investors believe these two parts will be equal contributors to the new Zeekr 2.0.

At the same time, Geely announced the transfer of 11.3% of Zeekr’s shares between two of its units for a price of $806 million, which values Zeekr at $7.13 billion. That seems like Geely’s way of showing confidence in Zeekr, since the sale price represents a small premium of about 6% to Zeekr’s market value before the big selloff, and an even larger premium of 36% over the company’s latest market value.

Undervalued shares

The latest selloff left Zeekr’s shares trading at a relatively depressed price-to-sales (P/S) ratio of just 0.56, not what you’d normally expect for a high-growth company. Nearly all of its closest peers trade above ratios of 1, including 1.06 for BYD (1211.HK; 002594.SZ), 1.31 for Li Auto (LI.US; 2015.HK) and 1.81 for Leapmotor (9863.HK).

That seems to show that investors will require some convincing before they believe in the logic of this deal. Zeekr co-founder and CEO An Conghui explained on the company’s earnings call that the deal will give the listed company a wider range of price points by merging Zeekr’s own focus on the luxury cars costing 250,000 yuan to 500,000 yuan with Lynk & Co.’s more affordable vehicles in the 150,000 yuan to 300,000 yuan range.

From a sales perspective, Lynk & Co. is currently selling more vehicles than Zeekr, though the two companies aren’t far apart. The former sold 31,074 units in October, compared with Zeekr’s own 25,049 units delivered during the month. Zeekr officials said on the earnings call they are aiming to deliver 30,000 Zeekr vehicles in each of the last two months of this year, which would allow the company to reach its annual target of 230,000 deliveries this year.

Lynk & Co. was launched in 2017 as a joint venture between Geely and Volvo, and has mostly produced traditional gas-powered cars since then. It only recently broke into the NEV market with the launch of its first electric model this year. By comparison, Zeekr has only sold NEVs during its brief history, starting with its first vehicle deliveries in 2021. Zeekr executives pointed out that the merger should help the two companies achieve some major cost savings by combining things like back-office functions and dealer networks.

We’ll close with some quick figures from Zeekr’s latest financial report that show how the company is rapidly coming under pressure in China’s ultracompetitive NEV market. The company’s NEV deliveries rose 51% year-on-year in the third quarter to 55,003 units, slowing sharply from a doubling of sales in each of the previous two quarters. What’s more, the company’s revenue from car sales grew only 42% year-on-year to 14.4 billion yuan, slower than growth in the number of vehicles sold, as it was forced to lower its prices to compete.

Zeekr managed to offset some of the pressure by controlling its own costs. Its R&D expenses that are one of its biggest costs actually fell 2.6% year-on-year. Still, its gross margin fell to 16.0% in the third quarter from 17.2% a year earlier, though its net loss narrowed by about 17% to 1.22 billion yuan. The company had 8.3 billion in cash at the end of September, including $440 million from its IPO. But a big chunk of that will likely go to pay for the Lynk & Co. acquisition.

At the end of the day, the Lynk & Co. purchase is a forced marriage engineered by Li Shufu as he tries to rationalize the many pieces on his auto chessboard. The deal makes sense in many ways and the price looks fair enough. The biggest question will be whether Zeekr management can breathe some new life into Lynk & Co, whose development seems slower than Li Shufu and Geely had originally envisioned.

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