HONG KONG (Reuters Breakingviews) - Chinese electric-vehicle battery-maker CATL boasts a fully charged valuation. To live up to it, the company needs to power up abroad. Many Chinese champions stall overseas – but this one might not. A $2 billion initial public offering will help.
The group plans to raise 13.2 billion yuan($2 billion) in a Shenzhen IPO next year. A projected $20 billion market capitalisation would make it the largest company on the Nasdaq-style ChiNext board. In the first half of 2017, earnings at CATL topped 2 billion yuan. Assume that pace was sustained in the second half, it implies a valuation of 32 times estimated annual earnings – far higher than rival Samsung SDI, trading at 22 times.
The company is an industry leader at home, where it benefits from supportive policies and relationships with state-backed automakers. But to justify its heady price it needs to win overseas, where its market share is thin and success isn’t guaranteed. Carmakers are conservative when it comes to taking on new suppliers.
Although it isn’t a state-owned enterprise, Beijing’s clear support is another risk. Government links are a real turn-off for foreign regulators these days. Following the party line generally leads to poor investment choices, and sudden policy changes can undermine entire business models. If Beijing backs off on its electric vehicle push, for example, it would be catastrophic for company earnings.
Assuming it doesn’t, there is reason for optimism. CATL plans to reach 50 gigawatt hours in annual production capacity by 2020 – almost 50 percent more than Tesla’s gigafactory - ensuring unrivalled economies of scale. The company is investing heavily in the denser energy chemistries preferred by foreign automakers. Nearly a third of the IPO funds will go to research, the company says.
The challenge will be forging relationships. Samsung SDI, Panasonic and LG Chem have already buddied up with many major carmakers. Even so, CATL is starting to make inroads in Europe, a crucial EV market, developing partnerships with Daimler, BMW, and Volkswagen. In 2017 it invested in Finland’s Valmet Automotive, which bills itself as a “pioneer” in EV manufacturing and contracts with Porsche and Mercedes-Benz.
Beijing’s anointed champions rarely thrive away from home. This one could be different.
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