How the Li Auto IPO is plugging into a US market electrified by EVs and ESG

The $1.1 billion listing not only measures investor appetite for US-listed Chinese companies, but also guages EV technology interests amid surging ESG investment demand

Li Auto, the Beijing based EV startup, raised more than $1.1 billion during its Nasdaq IPO at the end of July. The stock price closed 40% higher after the first day of trading.

The Chinese automotive company which includes Tik Tok owner Bytedance and e-commerce group Meituan Dianping as key shareholders, extends a trend of Chinese EV automakers floating shares in New York.

Li Auto follows Tencen- backed NIO Limited’s $1.2 billion IPO in 2018. Alibaba and Xiaomi-backed Xpeng Motors looks to go public in the US later this year. 

Li Auto’s IPO and Xpeng Motors’s pending listing serves as an investor litmus tests for multiple factors. Both deals not only measure investor appetite for US-listed Chinese companies amid a souring relationship between Washington and Beijing, but also gauges confidence for ESG investments as oil prices remain depressed.

New York Still Attracting Deals

The reputational damage from the Luckin Coffee scandal continues to linger over US-listed Chinese companies.  The group’s admission to fabricating sales has re-energised US legislation efforts that could force American listed Chinese firms to delist based on their compliance with local auditing standards.

Along with new listing reforms in Hong Kong, many Chinese technology giants are choosing to raise capital closer to their home markets. Alibaba raised $13 billion in late 2019, while JD.com and NetEase together accumulated $7 billion in secondary offerings this past June.

Ant Group, the $200 billion mobile payment operator behind Alipay, announced intentions to dual list on Hong Kong and Shanghai’s STAR board this year.

Even as many Chinese groups look outside the US, New York continues to draw in deals. Prior to Li Auto, New York hosted 19 Chinese IPOs in 2020, compared to just nine a year ago. The nearly $3 billion raised is also a third higher from the same period in 2019.

Despite the political uncertainty, analysts cite New York’s deeper capital markets and brokerage exposure as structural draws, adding that any meaningful regulation to force a delisting off the US exchange remains several years into the future.

ESG Investing During Coronavirus

The Li Auto IPO also acts as a harbinger for ESG investing when many pondered whether interests for sustainable investments would wane during the Covid-19 crisis. But even with depressed oil prices, investors acknowledge that addressing climate change is a perennial risk for money managers.

“The Covid pandemic has shifted the importance investors attach to sustainable finance,” said Helene Li, of Hong Kong ESG advocacy group GoImpact Capital Partners, in an interview with FinanceAsia. “ESG is not just a buzzword, it has significant bearings on the world we live in."

Better returns for higher scoring ESG companies are helping its cause. A report from SynTao Green Finance, a consultancy that provides services in green financing and responsible investing in China, showed that between July 2018 and May 2020, the share price of the top 100 companies by ESG ratings in the CSI 800 Index were almost 7% higher than  the subsequent 100 with lower ESG scores.

“Huge flows into ESG funds mean big money can be made identifying stocks where the flows will go. Witness the recent surge in the share price of Tesla,” according to Christopher Wood, an equity strategist at Jefferies.

EV Valuations

Chinese EV companies are hoping to leverage off this trend, particularly in respect to the market multiples given by shareholders. After reporting profits for four consecutive quarters, investors now value Tesla at almost 200 times its forward earnings projections, pushing the share price higher and taking over Toyota as the world’s most valuable automotive company in the world.

But Tesla’s valuation could end up being an aberration rather than a trend for Chinese EV automakers, as the US-based company holds the top spot at almost a quarter of the domestic market share, according to the China Passenger Car Association. Fitch Ratings notes that incumbent luxury brands are also facing competition pressure from Tesla sales due to similar selling price points.

With China being the largest EV market in the world, recording 1.2 million sales last year, competition is not sparse. At one point over the past few years, nearly 500 EV manufacturers were registered in China.

But it appears many investors have given Chinese EV companies the benefit of the doubt, evident by the share price rally for those that have ramped up productions and executed commercial deliveries.  

A year ago, NIO’s share price dropped by almost a third after the company reported its biggest quarterly loss since its inception, as the company was also coping with battery and operational issues.  After receiving a $200 million cash injection from Tencent, the fortunes have begun to turnaround.

NIO reportedly sold more than 10,000 EVs during the second quarter of 2020. In 2019, it took the group twice as long, six months, to hit that mark. Li Auto sold 10,000 EVs during the first half of this year.

Fitch Rating notes that the new-energy vehicle market declined more than 36% in the first half of 2020 due to a high base as buyers took advantage of last year’s subsidies. However, a pickup in local policy stimulus should spur demand in the second half of 2020, as authorities encourage Chinese EV makers to provide discounts to rural buyers.

New energy vehicles are expected to account for a quarter of vehicles sales by 2025. Since US investors have yet to completely ignore Chinese EV companies, expect more deals to follow in New York soon.

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