Having paid £50 million ($62 million) to accumulate 50% of Lotus in 2017, his Zhejiang Geely Holding Group Co. is getting ready to listing an electrical automobile firm bearing the Lotus title on Nasdaq for a cool $5.4 billion. But reinvigorating a storied western automobile model is one factor; delivering the money flows and value synergies to maintain the holding firm’s 165 billion yuan ($24 billion) debt is sort of one other.
Pretty Woman’s launch marked the apogee for Lotus, which celebrates its seventy fifth anniversary this yr. James Bond, the spy who liked his submersible Lotus Esprit, reverted to Aston Martin; Lotus’s success on the Formula 1 racing observe light; and light-weight, low-slung roadsters just like the Elise, whereas providing excellent dealing with, didn’t chime with shoppers’ rising style for consolation. Today, Lotus sells round 1600 autos a yr, largely to lovers.
Lotus Technology Inc. — the enterprise being listed through particular function acquisition firm L Catterton Asia Acquisition Corp. — is a really totally different beast. Though it’s the worldwide distributor for Lotus sports activities automobiles, together with the spectacular $2.2 million Evija, Lotus Tech’s headquarters are in Wuhan, China, and its core product is a luxurious electrical sports activities utility automobile. Costing round $100,000, the Eletre targets rich Chinese, European and US shoppers, most of whom may by no means have thought-about a Lotus earlier than. A luxurious electrical sedan is about to affix the lineup subsequent yr. (Lotus UK’s revamped Norfolk sportscar manufacturing unit isn’t a part of the transaction).
Thanks to regulatory loopholes, SPACs usually publish very bullish monetary projections, in contrast to in an everyday IPO, and this transaction is not any exception. Lotus Tech predicts annual gross sales will attain 76,000 autos by 2025 whereas revenues will broaden 90% a yr to succeed in nearly $9 billion in the identical time interval — from little or no at the moment (Lotus Tech has not but disclosed 2022 financials). That’s fairly a stretch.
It’s a basic Li maneuver: Zhejiang Geely acquired the unloved Volvo automobile model from Ford Motor Co. in 2010 for $1.8 billion, polished it up, after which listed it in Stockholm in 2021. A SPAC itemizing of Volvo’s electrical affiliate Polestar adopted final yr in New York. Volvo Car AB and Polestar Automotive Holding UK PLC are actually value a mixed $29 billion, and Li’s fortune has swelled to greater than $16 billion. Zhejiang Geely’s sprawling automobile empire bought 2.3 million autos final yr, with Volvo accounting for a few quarter of the whole.
The shift to electrical offers new entrants with a chance to prise shoppers away from extra established manufacturers – Porsche has been gradual to supply electrical variations of its in style Macan and Cayenne SUVs on account of software program issues, for instance. Repurposing the Lotus badge ought to assist win over Western clients who could also be nervous about shopping for a Chinese-made automobile, though such high quality issues are usually now not merited. Investors additionally stay keen to use nosebleed valuations to nonetheless unprofitable luxurious electrical manufacturers — Lucid Group Inc. is value greater than $20 billion regardless of producing simply 7,000 automobiles final yr.
L Catterton, which controls the SPAC concerned within the transaction, additionally is aware of a factor or two about constructing model luxurious manufacturers: the personal fairness agency is backed by LVMH Moet Hennessy Louis Vuitton SE billionaire Bernard Arnault, the world’s richest individual.
So far, although, Lotus Tech has booked solely round 5,000 Eletre pre-orders, and deliveries are solely scheduled to start this quarter, so it’s onerous for potential buyers to gauge whether or not the model and know-how are sufficiently interesting.
After bills, the transaction will initially present solely $335 million of contemporary capital, and the whole could possibly be much less if the SPAC buyers train their proper to ask for his or her a refund. That’s fairly modest by auto trade requirements; Volvo’s IPO raised round $2.6 billion.
So skepticism is warranted — however Li has achieved such breakneck development earlier than. Zeekr Intelligent Technology Holding Ltd, one other of his luxurious auto manufacturers, shipped a staggering 72,000 models in 2022, its first full yr of gross sales. Zeekr filed confidentially for a US IPO in December. And having began deliveries in 2020, Polestar’s automobile gross sales jumped 80% to greater than 50,000 final yr, besting US electrical manufacturers together with Rivian Automotive Inc. and Lucid, which have encountered manufacturing difficulties.
Unfortunately, his automotive empire has but to show it could possibly flip top-line development into bumper earnings. S&P Global Ratings downgraded its outlook on Zhejiang Geely to damaging in November to mirror rising battery prices and rising gross sales of decrease margin EVs. The holding is rated simply as soon as notch above junk, reflecting “considerable leverage pressure.”
Volvo Car’s adjusted working revenue margin declined to simply 4.4% within the third quarter on account of a mix of enter price inflation, intensifying competitors and inferior pricing energy; to place that in context, Mercedes-Benz Group AG’s automobile unit achieved a 14.5% margin. Meanwhile, Polestar continues to burn heaps of money regardless of having a supposedly asset-light enterprise mannequin, related to that claimed for Lotus. (A Geely manufacturing unit in Wuhan will manufacture Lotus Tech autos, whereas Volvo builds automobiles on Polestar’s behalf.)
Lotus Tech hasn’t disclosed how quickly it’s consuming money, however doesn’t count on to report optimistic earnings earlier than curiosity, tax, depreciation and amortization till 2025. Hence there’s quite a lot of hope embedded into the mooted $5.4 billion valuation. To maintain it, Li might want to show he’s a extra cautious Lotus driver than Gere was.
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Chris Bryant is a Bloomberg Opinion columnist protecting industrial firms in Europe. Previously, he was a reporter for the Financial Times.
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