ZEEKR: A nearly 25% plunge overnight, is swallowing Lynk & Co a blessing or a curse?

ZEEKR released its third-quarter performance last night. The performance itself was predictable due to sales figures, and the sales trend has been quite good thanks to the launch of the new SUV 7X. The core incremental information shows that the gross margin of the automotive business has slightly increased, which is also within expectations.

Overall, the performance can be considered neither disappointing nor overly exciting. The key issue lies in a shocking announcement made during the earnings call — ZEEKR is set to acquire 51% of the shares and merge with Lynk & Co!

Of course, if this were truly a tightly kept secret, it wouldn't be a problem. After all, in Dolphin's view, reducing friction across businesses is a good thing. However, ZEEKR's stock price in the U.S. plummeted nearly 24 points!

Therefore, in this article, Dolphin will not analyze the performance but will delve into the background of Lynk & Co and ZEEKR, discussing whether Lynk & Co is a good asset and the following questions regarding this acquisition:

1. Is Lynk & Co a good asset? Is the valuation reasonable? How will ZEEKR acquire it? What changes will occur in the equity structure?

① Who is Lynk & Co? What is its relationship with ZEEKR?

Lynk & Co was established in 2016 as a joint venture between Geely Group, the publicly listed Geely Automobile, and Volvo. Its main products primarily cover hybrid and fuel vehicles priced between 100,000 to 250,000 yuan.

ZEEKR was originally the electric vehicle division of Lynk & Co, established by An Conghui with the SEA architecture developed over five years. ZEEKR's popular model 001 is actually the prototype car zero concept that Lynk & Co was preparing to launch.

Since ZEEKR was established in 2021, it has mainly focused on the pure electric segment, targeting high-end luxury electric vehicles, while Lynk & Co has been deeply engaged in the hybrid field, targeting a young sports brand. However, before the transition to new energy vehicles, ZEEKR was not fully established, as it not only sold plug-in hybrid vehicles but also a considerable number of traditional fuel vehicles.

② How will the equity change before and after ZEEKR acquires Lynk & Co, and what is the acquisition price?

This acquisition consists of the following steps:

1. Geely Automobile (0175.HK) will purchase 11.3% of ZEEKR's shares from Geely Holding (the parent company of Geely Automobile) for $800 million. After the acquisition, Geely Automobile's controlling stake in ZEEKR will increase from 51.5% to 62.8%.

2. Geely Holding and Volvo will jointly sell 50% of Lynk & Co's shares to ZEEKR, with ZEEKR needing to pay a total of 9 billion yuan, which values Lynk & Co at 18 billion yuan:

a. Geely Holding (the parent company of Geely Automobile) will sell 20% of Lynk & Co's shares to ZEEKR for 3.6 billion yuan.

b. Volvo (the parent company of Volvo is also Geely Holding) will sell 30% of Lynk & Co's shares to ZEEKR for 5.4 billion yuan.

3. ZEEKR will subscribe for newly issued shares of Lynk & Co at a cost of 370 million yuan. Thus, ZEEKR will acquire a total of 51% of Lynk & Co's shares, paying a total of 9.37 billion yuan

The payment method and source of the acquisition of ZEEKR:

This acquisition requires a payment of 9.37 billion, and since ZEEKR currently has only 8.3 billion in cash, the payment for this acquisition will be financed by Geely Holding (through debt financing) to ZEEKR (Geely Holding obtained 9.4 billion in cash from the sale of Lynk & Co + ZEEKR equity), thus completing the control of ZEEKR.

③ Is the valuation of Lynk & Co by ZEEKR fair?

This acquisition values Lynk & Co at 18 billion RMB, while from January to September 2024, Lynk & Co sold a total of 196,000 vehicles, of which 114,000 were new energy vehicles, accounting for about 58%. With the hot sales of Lynk & Co 07 PHV and Lynk & Co 08 PHV, the current proportion of new energy vehicles has increased to around 70%.

Since the new ZEEKR (ZEEKR + Lynk & Co dual brand) will focus on small electric vehicles and medium hybrid vehicles, it is expected that Lynk & Co will strategically abandon traditional fuel vehicle models. Therefore, in Dolphin's consideration, no valuation will be made for fuel vehicle sales.

Based on the current sales trend, Dolphin estimates that Lynk & Co will sell 170,000 to 180,000 new energy vehicles in 2024 (currently all hybrids). Since the currently popular models Lynk & Co 07 (medium plug-in hybrid sedan, priced at 158,800-189,800) and Lynk & Co 08 (medium SUV, priced at 178,800-241,800) are relatively high-priced, Dolphin assumes that the average price of Lynk & Co's new energy vehicles is 170,000, corresponding to an annual revenue of 28.9 billion to 30.6 billion RMB from new energy vehicles.

The total valuation of 18 billion for Lynk & Co corresponds to a P/S ratio of about 0.6 for 2024, which is similar to ZEEKR's current valuation of 0.7 (considering only the automotive business), but still has a discount compared to other new energy vehicle companies.

From Lynk & Co's current operational performance, the ASP per vehicle has been improving due to the higher-priced new energy vehicles Lynk & Co 07 and Lynk & Co 08.

In the early stage of the new energy vehicle transformation (starting in 1H22), due to low sales and lack of scale effects, along with lower vehicle prices, the net profit per vehicle was lower than that of fuel vehicles, leading to a decline in net profit per vehicle. However, after 2023, the transformation to new energy vehicles accelerated, and the prices of popular new energy models gradually increased, resulting in a continuous reduction in losses for net profit per vehicle, with the net profit margin rising from the low point in 1H23 to -0.8% in 1H24. Therefore, operationally, Lynk & Co is continuously improvingAt the end of 2023, Lynk & Co made a one-time impairment provision of 1.06 billion due to issues with used cars in Europe, and this year it made another one-time provision of 600 million. Considering the impact of the impairment reversal, Lynk & Co's net profit for 2023 has basically achieved a break-even point, while it is still in a profitable state in 2024. The company also stated that the provision for impairment is very conservative financially, and there will be no further impairment provisions in the future. It is expected that Lynk & Co's net profit per vehicle will continue to show an improving trend.

Meanwhile, it is always said that Lynk & Co is a 'negative asset' company in the market, Dolphin calculates the asset-liability ratio and net debt ratio:

In terms of the asset-liability ratio, since most automative companies take the operation mode that (interest-free liabilities) that takes up money from upstream suppliers, the level of total liabilities/total assets is high, and the level of the asset-liability ratio of Lynk & Co is basically the same as that of NIO and BYD, which is a normal level of operation. It is not the negative asset market said by others.

From the aspect of interst liability index, net liability/ net asset (index measuring the ability of repaying debt) reached the peak in H1 2023, then continued to go down to around 25% in H1 2024, which is still a comparatively healthy standard.

2. Why is ZEEKR acquiring Lynk & Co?

① Serious competition issues within the industry, reducing internal friction

ZEEKR 001 is derived from Lynk & Co ZERO, but there was previously overlap and mutual competition in the product lines. Before the acquisition, Lynk & Co began to expand its pure electric product line this year, launching the Lynk & Co Z10 in September, priced at 196,800 to 288,800, based on ZEEKR's SEA architecture, which conflicts with the pricing and positioning of ZEEKR's 007 and 001.

Before the launch of Lynk & Co Z10, ZEEKR had already launched 25 models of 001 and 007, and before the launch of Lynk & Co Z20, the similarly positioned ZEEKR X model's price was reduced to 150,000. The backend suppliers, platform manufacturing, and product positioning were highly overlapping, leading to serious competition within the industry.

② Avoiding repeated investments in R&D, sales, etc.

Lynk & Co's pure electric vehicle Z10 is based on ZEEKR's SEA architecture, while the hybrid models are based on the CMA architecture (also included in ZEEKR's CEVT asset package). Before the acquisition, Lynk & Co still needed to pay ZEEKR for the use of the technology platform.

At the same time, R&D and sales used different teams, which inevitably led to issues of repeated investments in R&D and sales.

3. What changes occur after the merger?

The main changes resulting from this acquisition include:

① Brand side: The brands remain independent, adopting a dual-brand strategy. ZEEKR covers the mainstream luxury market, while Lynk & Co covers the mid-to-high-end market, with both brands able to sell pure electric and hybrid vehicles.

② Product side: Replanning the products of ZEEKR and Lynk & Co, reducing the number of models, and creating blockbuster models.

At the same time, in terms of vehicle size and energy type, efforts will be made to avoid conflicts in market products between ZEEKR and Lynk & Co:

a. In terms of size: ZEEKR will focus on mid-to-large models (wheelbase over 4.8 meters, B-class to D-class vehicles), while Lynk & Co will target small to mid-sized models (A-class to C-class).

b. In terms of energy type: Lynk & Co will focus on small pure electric vehicles (A-class will launch pure electric), and mid-sized hybrid vehicles; ZEEKR will focus on pure electric in mid-sized vehicles and hybrid in large vehicles (C-class to D-class will launch hybrid models); this effectively breaks the previous invisible boundary where Lynk & Co primarily focused on hybrids and ZEEKR on pure electric vehiclesIn terms of hybrid technology, the Lynk & Co brand will still use Geely's EMP system, while ZEEKR is developing a super electric hybrid system suitable for large plug-in hybrid models, which is expected to be equipped on large SUVs and MPVs, and will be launched at the Shanghai Auto Show in April next year.

② Technical Side: Achieving Integration of Technical Architecture and Platform

Focusing on mechanical architecture, electronic architecture (EEA), intelligent cockpit, and ADAS intelligent driving over a period of 2-3 years.

In terms of mechanical architecture, the number of architectures will be minimized, while for intelligent driving, mid-to-high-end models will adopt NVIDIA Orin X hardware and self-developed algorithms, but Lynk & Co's low-end models will still use the current ADAS solution, targeting economical sellers.

On the platform side: Lynk & Co currently still uses traditional CMA and SPA architectures, and in the future, Lynk & Co's architecture will be unified with ZEEKR to achieve cost savings and improve supply chain bargaining power.

In terms of intelligent cockpit: the hardware side will be unified, while the application side will still use Lynk & Co's Flyme, and the ZEEKR OS system will remain unchanged.

③ Supply Chain and Manufacturing: Through technological synergy, integration of platforms and architectures, the commonality rate of parts will be increased, the capacity utilization rate of existing factories will be improved, procurement cost synergy will be reduced, further lowering costs.

It should be noted that ZEEKR originally adopted a light asset operation model, with its manufacturing plant under Geely Auto. After this acquisition, since Lynk & Co's asset package includes three manufacturing facilities, the completion of the acquisition means that ZEEKR has introduced Lynk & Co's three manufacturing plants, indicating that ZEEKR is likely to shift from the original light asset model to a normal OEM heavy asset production model.

④ Channels: In terms of channel construction in the future, Lynk & Co will continue to maintain the dealer model, while ZEEKR currently mainly adopts a direct sales model, focusing on first- and second-tier markets. Therefore, the two brands will maintain different sales channels in first- and second-tier cities, but in lower-tier markets, ZEEKR can quickly advance to third-, fourth-, and fifth-tier markets through Lynk & Co's channels. Currently, Lynk & Co has a total of 437 stores, while ZEEKR has 442 stores.

In terms of going overseas: Lynk & Co and Volvo are currently cooperating in Europe, and even after Volvo divests its equity in Lynk & Co, they will continue to cooperate. Currently, they are using over 30 Volvo channels, which will increase to over 100. After integration, ZEEKR can quickly advance into overseas markets using Lynk & Co's overseas channels, but for export models to Europe, they will still adopt plug-in hybrid models to avoid European tariff impacts.

⑤ After-sales Service: ZEEKR can utilize Lynk & Co's 128 service centers, still adhering to Lynk & Co's service standards, but managed by ZEEKR's after-sales service team.

⑤ Management Side: Forming a management team with two execution teams, and after the reorganization, ZEEKR will still have the original CEO An Conghui directly managing.

According to the company's statement, after synergy, ZEEKR expects that joint procurement will reduce BOM costs by 5-8%, capacity utilization will increase by 3-5%, combined R&D investment will be reduced by 10%-20% through R&D synergy, and optimization of functional support department organization will reduce expenses by 10%-20%.At the same time, Lynk & Co and ZEEKR aim to sell a total of 500,000 units this year, and after the merger, ZEEKR hopes to quickly establish a luxury new energy vehicle brand with annual sales of one million units.

4. Why did ZEEKR's stock price drop significantly after the acquisition announcement?

① Market concerns about major shareholder cashing out:

Due to this operation, Geely Holding lent 9 billion yuan in cash to ZEEKR to buy the assets of Lynk & Co held by Geely Holding (equivalent to a grandfather lending money to his grandson to buy assets from himself).

Of course, the result is that the grandfather sold off the equity, raising suspicions of major shareholder cashing out. However, a difficult point to evaluate here is that this essentially converts an equity that may be worth very little or very much into a stable income-generating debt, rather than a simple asset sale.

The original intention of this design, Dolphin believes, is to clarify the equity relationship, positioning Lynk & Co as a direct domestic grandchild asset, while overseas assets like Volvo and the grandfather-level Geely Holding no longer hold shares directly. In other words, the so-called major shareholder cashing out is somewhat a passive act of clarifying equity relationships.

② Negative attitude towards Lynk & Co's assets and valuation:

The core issue here is still the valuation of 18 billion yuan, which raises the question of whether it is worth it for ZEEKR. The market does not view Lynk & Co as a good asset target. However, from Lynk & Co's profitability perspective, with the acceleration of the transition to new energy vehicles and the increasing proportion of sales, coupled with the success of models like Lynk & Co 07 and Lynk & Co 08, the operational situation is actually improving.

Currently, the valuation corresponds to a 2024 P/S ratio of around 0.6 times. Given its current second-tier hybrid level, one can only say that the market's "fair value" means ZEEKR's shareholders do not have a clear advantage, but they are not at a significant disadvantage either.

③ Concerns about further acquisitions of other loss-making brands like Polestar:

There are reports that An Conghui will succeed Shen Ziyu as the chairman of Polestar, raising concerns that ZEEKR might also acquire Polestar. However, during a recent conference call, the company stated that there are no acquisition plans at this time.

Summary:

Overall, it is clear that as we enter the new energy era, Li Shufu hopes to create a "scattered stars" effect for Geely's new energy matrix through a broad-based horse racing mechanism.

However, after several years, the actual results are not satisfactory. Geely has very few new energy assets that can stand out, whether in the hybrid or pure electric tracks, and regardless of whether they are high-end or mid-to-low-end.

In this context, internal mergers and integrations have begun—overall, the situation is characterized by strong mergers with weak, large eating small, whether it is ZEEKR merging with Lynk & Co or Galaxy merging with Geometry, both indicate this trend. Clearly, Geely's next step hopes to consolidate its new energy assets into a "tight rope."

For ZEEKR borrowing 900,000 (interest rate unknown) to acquire Lynk & Co at a 0.6X P/S valuation (assuming the pricing is basically reasonable), Dolphin believes that under the current circumstances, such resource integration is necessary and an unavoidable step, marking a key move in the right direction.

However, whether the actual integration effect can truly manage internal personnel relationships, unify decision-making authority, improve execution effectiveness, and increase sales volume—not just reduce costs to achieve a 1+1>2 effect—Dolphin can only say we will have to wait and seeThe sharp decline yesterday, viewed from the recent sharp upward trend, indicates that the funds in the market that "reduce information dimensions to strike ordinary people" were clearly trading in advance. Therefore, when this news came out, the stock price directly reacted to the good news with a "celebration turned into a funeral" approach to cashing in on the positives.