Decoding the Joint Power IPO: The Potential and Challenges of Xiaomi and Li Auto's Electric Drive Businesses

On February 14 this year, the Xiaomi SU7 Ultra made its debut at the Shanghai International Circuit (F1 track), achieving a time of 2 minutes 9.944 seconds, becoming the "fastest production car" at the Shanghai Auto Show, breaking the previous record of 2 minutes 11.28 seconds held by the Porsche Taycan Turbo GT.

Behind this impressive performance, the SU7 Ultra is equipped with two self-developed V8s motors and one V6s motor.

The V6s motor comes from Suzhou Huichuan United Power System Co., Ltd. (hereinafter referred to as "United Power"), which is currently queuing for an IPO on the Growth Enterprise Market.

United Power's parent company is the leading motor manufacturer Huichuan Technology (300124.SZ), whose actual controllers, including Zhu Xingming, have experience working at Huawei.

This time, Huichuan Technology integrated its new energy vehicle motor-related business into United Power, promoting the latter's independent listing.

United Power only turned a profit in 2023, with revenue and net profit attributable to shareholders reaching 9.365 billion yuan and 186 million yuan, respectively, representing year-on-year growth of 86% and 203%.

As a "shovel seller," United Power's market share of electric control products in the first half of 2024 is about 11%, ranking first among third-party suppliers.

In this IPO, United Power plans to raise 4.857 billion yuan, which will be invested in projects such as "core component production construction for new energy vehicles," "R&D center construction and platform R&D," and digital system construction.

The core challenge facing United Power is that many vehicle manufacturers are developing their own motors, further enhancing their bargaining power, which may further squeeze its profit margins.

Pressured Unit Price

United Power is the result of years of cultivation by Huichuan Technology.

As early as 2011, Huichuan Technology recognized the development prospects of new energy vehicles and established the "Production of New Energy Vehicle Motor Controllers Project" with Suzhou Huichuan Technology Co., Ltd. (hereinafter referred to as "Suzhou Huichuan") as the main body, building 8 production lines for new energy vehicle motor controllers for mass production.

With the increase in new energy motor production, Huichuan Technology integrated Suzhou Huichuan, Suzhou Huichuan United Power System Co., Ltd., and others into United Power in 2021, and began preparing for United Power's "independence" the following year.

Before the IPO application, Huichuan Technology held 94.51% of United Power's shares.

After the product ramp-up, United Power's contribution to Huichuan Technology has been increasing year by year.

From 2021 to 2023, United Power's revenue was 2.903 billion yuan, 5.027 billion yuan, and 9.365 billion yuan, respectively, with its proportion of Huichuan Technology's revenue rising from 15% to 29%.

However, the other side of nearly 10 billion yuan in revenue is that United Power has just turned a profit.

In 2021 and 2022, United Power's net losses reached 250 million yuan and 179 million yuan, respectively, and it only turned a profit of 186 million yuan in 2023.

Turning a profit is also the financial foundation for United Power's IPO on the Growth Enterprise Market Despite the fact that the Shenzhen Stock Exchange had already established the third set of listing standards at the beginning of the pilot registration system reform for the Growth Enterprise Market in 2020, which requires "an expected market value of no less than 5 billion yuan and a revenue of no less than 300 million yuan in the most recent year," there has been no unprofitable company listed on the Growth Enterprise Market to date.

The second set of listing standards chosen by Huichuan Technology includes the requirement for net profit, specifically "an expected market value of no less than 1.5 billion yuan, a positive net profit in the most recent year, and a revenue of no less than 400 million yuan."

The significant motivation for turning losses into profits is that the products have benefited from the development of new energy vehicles, achieving large-scale production.

"The automotive parts industry is essentially 'low profit, high sales,' requiring cost reduction through large-scale production to support profitability," pointed out an automotive industry researcher in Beijing.

Currently, the products of United Power are mainly divided into two categories: electric drive and power systems, which are core components of new energy vehicles.

The former can convert electrical energy into kinetic energy and other functions, while the latter can regulate the charging and discharging of power batteries.

The electric drive system is the main source of revenue, generating 7.746 billion yuan in 2023 with sales of 1.68 million units, a year-on-year increase of 65.65%, accounting for over 80% of total revenue.

However, the average unit price of the electric drive system has shown a downward trend, with an average selling price of 4,474.33 yuan/unit in 2023, a year-on-year decline of 13.3%.

The power system has also shown a similar trend, with sales reaching 532,500 units in 2023, a year-on-year increase of over five times, but the average price during the same period was 2,636.18 yuan/unit, a year-on-year decline of over 16%.

Regarding the price reduction, United Power explained that it was mainly due to adjustments in the product sales structure. For example, the proportion of lower-priced stator components, rotor components, and other motor products has increased, which lowered the average selling price of electric drive system products.

A potential challenge is that the price war in new energy vehicles is continuously being transmitted to upstream suppliers, putting more pressure on United Power's profits.

Even industry leader Bosch is feeling the pressure.

Bosch's negotiations with OEMs usually determine the prices for the entire year in the first quarter, but Xu Daqian, President of Bosch China, admitted earlier this year that this process is becoming lengthy, with situations such as "after negotiations in the first quarter, needing to renegotiate in the second quarter" occurring.

"If negotiations do not go well, there may be situations where payments are temporarily withheld, but overall we approach negotiations with sincerity with each OEM," Xu Daqian pointed out.

United Power's comparable company, Giant Technology (688162.SH), has already reported a loss of 15 million yuan in 2024.

Under the scale advantage, United Power's gross profit margin still outperforms its peers, reaching 14.92% in 2023, which is 9.4 percentage points higher than the average of four comparable companies, including Weimaisi (688612.SH).

Risks of Substitution and Dependence Await Resolution

United Power's current clients mainly include GAC, Li Auto, Xiaomi, and other vehicle manufacturers.

In 2023, GAC, Li Auto, Great Wall, Geely, and XPeng, as the top five clients, contributed a total revenue of 7.12 billion yuan, accounting for over 70%.

Since Xiaomi's car is set to launch in March 2024, and United Power's financial report benchmark date is at the end of June 2024, the impact of Xiaomi's performance has not yet been reflected in the current reports, but it may still provide momentum for future performance growth.

In fact, the currently popular model, Xiaomi SU7, is equipped with an electric motor drive system supplied by United Power.

The continuous increase in SU7's production is bringing more performance imagination space for United Power.

The unit price of high-performance motors is approximately 10,500 to 14,000 yuan. If we estimate based on a price of 10,000 to 12,000 yuan per unit and a delivery volume of 135,000 units for Xiaomi SU7 in 2024, it is expected to bring United Power revenue of 1.3 billion to 1.6 billion yuan.

At the same time, if Xiaomi successfully achieves its delivery target of 350,000 units in 2025, it is roughly estimated that it could bring around 4 billion yuan in revenue to United Power.

Currently, multiple products of Xiaomi SU7 are fully booked, and it takes several months to complete the delivery. Coupled with the Yu7 release within the year, the probability of achieving this target remains high.

However, the recent highway accident involving Xiaomi cars in Anhui has also attracted significant public attention, and whether this will bring uncertainty to future Xiaomi orders remains to be tested.

From the perspective of subsequent orders on hand, United Power still has considerable growth potential. As of the end of 2024, the unexecuted orders on hand are approximately 5.9 billion yuan.

However, challenges and risks coexist.

Large automakers are constrained by the fierce competition in the current market, which may further squeeze the profit margins of upstream suppliers.

As a major client of United Power, GAC reported a significant loss of 494 million yuan in 2024, a year-on-year decline of 113.21%.

In response, GAC explained that this was mainly due to factors such as price competition in the automotive industry and changes in the competitive landscape, leading to a decrease in vehicle sales. To cope with the intense market competition, GAC has added approximately 18 billion yuan in sales subsidies and other investments, resulting in a substantial decline in its 2024 performance.

In the first half of 2024, GAC's procurement from United Power was only 847 million yuan, making it the second-largest client.

All of this may be putting more pressure on United Power's performance.

Moreover, some leading automakers are developing their own motors, which is also a potential competition that United Power has to face.

Xiaomi has developed its own V8s motor, which has been used in the SU7 Ultra model, and it is not ruled out that more self-produced motors will be used in other models in the future;

In 2024, GAC Group's GAC Aion Ruipai Intelligent Ecological Electric Drive Factory officially completed construction and production, and it is expected to achieve an annual production of 400,000 sets of IDU electric drive system assemblies and 100,000 sets of electric motors and electronic control systems for GAC hybrid systems by 2025; Geely's 11-in-1 intelligent electric drive has already been equipped in the Geely Galaxy E5 model.

However, United Power believes that a model platform needs to sell more than 200,000 units annually to cover R&D and production line costs, while the characteristics of the new energy vehicle market, such as "many models and rapid iterations," make it difficult for most single models to achieve effective scale effects. In contrast, third-party suppliers can smooth fluctuations and reuse R&D results by serving multiple clients, thus there remains a necessity for third-party suppliers Under the wave of integration among vehicle manufacturers, downstream car manufacturers are gradually showing a "the strong get stronger" trend, which may also drive various parties to develop their own motors, thereby squeezing the market share of third-party suppliers such as United Power and bringing more challenges to their profit margins.

As competition in the new energy vehicle market intensifies, the probability of industry clearing and the financial risks of small and medium-sized new forces may pose repayment risks to the supply chain.

For example, the now-bankrupt new energy vehicle company "WM Motor" was once an important customer of United Power.

In 2021, WM Motor brought in revenue of 216 million yuan for United Power, ranking as the third-largest customer. However, due to WM Motor's subsequent "insolvency" and inability to repay, United Power made a 100% bad debt provision for this in 2022.

These may be the challenges that United Power will face in the future