Recently, Evergrande Auto (00708.HK), which had been relatively quiet, has once again found itself in the limelightOn August 14, the company announced a significant strategic investment from the Newton Group, headquartered in Dubai, amounting to approximately $500 millionAdditionally, Evergrande Group, along with Xu Jiayin and his wife Ding Yumei, lent a total of HKD 20.895 billion to Evergrande Auto, which is set to be converted into equity in the company.
The Newton Group also declared that its $500 million investment would give it a 27.5% stake in the enlarged share capital of Evergrande AutoHowever, this proposed deal is subject to a slew of conditions, including the successful execution of Evergrande Group's debt restructuring, the conformity of certain creditors of Evergrande New Energy Vehicle Group to the debt repayment plan, and the necessary approvals from regulatory bodies and shareholdersFurthermore, the statement indicated that the Newton Group would assist Evergrande Auto in spreading its wings in overseas markets, particularly with plans to export between 30,000 to 50,000 Hengchi vehicles annually to the Middle East market.
On the surface, it seems that Evergrande Auto has found its "white knight." Yet, it is important to note that if the debt-to-equity conversion is successfully executed and the Newton Group's investment materializes, Evergrande Auto will no longer be a wholly-owned subsidiary of Evergrande GroupInstead, the Newton Group will emerge as Evergrande Auto's single largest shareholder and will possess the power to nominate the chairman.
However, the market reaction has been cautious following this announcementA few days after the news broke, stock price trends indicated that investors were not as optimistic as one would expect; the overall performance of the stock remained relatively weak.
But who is the Newton Group? For most people, it raises a question about the profile of the company that is injecting $500 million into Evergrande Auto
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Prior known as a car manufacturer operating out of Tianjin, China, the Newton Group (NASDAQ:NWTN) has a backstory worth notingThis company was once tangled in the skepticism surrounding a cluster of "PPT car manufacturers" alongside entities like FF and BytonAlthough some of these companies have begun producing vehicles, the sales performance has been far from stellar in the burgeoning electric vehicle (EV) market.
Currently, the Newton Group stands as the only electrified vehicle manufacturer in the United Arab Emirates that is publicly traded in the U.SThe major shareholders include Chunyi (Charlie) Hao, Double Ventures Holdings Limited, and Xiaoma (Sherman) LuNotably, executive control lies predominantly with individuals of Chinese descent, particularly with Wu Nan commanding more than 70% of the voting powerAaron Huainan Lia serves as an independent non-executive director along with Changqing Ye, Xinyue Geffner, and Lu Xiaoma, while the CTO is Yu ShixuanThe executive roster reveals a strong Chinese influence.
From 2018 to 2019, Wu Nan represented the former Aiways Motors (the previous name of Newton) at various events and even drew attention with claims of collaborations with the acclaimed hypercar manufacturer W MOTORSDuring the Shanghai Auto Show in 2019, the company unveiled concept vehicles, significantly bolstering its imageHowever, the rise of new EV manufacturers capitalizing on favorable policies and global energy concerns overshadowed Aiways, plunging the company into relative obscurity.
Now, under its new identity and based in the UAE, the question arises: can the Newton Group indeed rescue Evergrande Auto from the brink?
Despite its role as a savior, the Newton Group's financial health raises eyebrowsOfficial financial records reveal that the company reported zero revenue for the years 2020, 2021, and 2022, with total operational expenses reaching $62.115 million over the same periodThey reported a net loss of $40.719 million for the year 2022, and by the end of the year, Newton had about $211.9 million in cash and cash equivalents
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However, $146,000 of that was classified as restricted cash, with total liabilities accumulating to $71.97 millionIt is evident that in order to furnish the $500 million strategic investment, the company would need to seek external financing.
Consequently, some industry experts speculate that Newton Group might be eyeing Evergrande Auto's corporate "shell," orchestrating a series of maneuvers to take controlYet, the extent to which this will genuinely facilitate mass production and sales for Evergrande Auto remains to be seen.
Moreover, it is crucial to point out that Evergrande Auto is essentially parting with equity in what can be described as a "tearful" transactionAccording to the detailed arrangements announced, Newton Group's participation hinges on Evergrande Auto issuing approximately 5.441 billion new shares to various stakeholders at a subscription price of HKD 3.84 per share, amounting to HKD 20.895 billionIn other words, each of the shares issued to existing lenders comes at a premium of about 1.26 times the closing price of HKD 1.70 on August 14, 2023. Conversely, the subscription price offered to Newton Group is a mere HKD 0.6297 per share, representing a discount of more than 60% compared to the August 14 closing price.
Once the aforementioned debt-to-equity conversion and the restructuring plans are executed, Evergrande Auto's shareholding structure will resemble this: the Newton Group will own 27.5%, Evergrande Group 21.75%, creditors of Evergrande Group 28.18%, while the remaining public shareholders will control 19.98%. Typically, the dispersed nature of Evergrande Group's creditors creates a challenging landscape for unified action among themHence, if the plans unfold as expected, Newton Group is poised to become Evergrande Group's single largest shareholder.
However, whether this equity influx will revive Evergrande Auto is still uncertainInvestor responses following the announcement of this fundraising initiative were fleeting; stock prices again dipped into lethargy, which may reflect the lingering concerns surrounding Evergrande Auto's future performance.
Indeed, addressing the existing financial quagmire, in conjunction with the forthcoming transitional capital of 600 million yuan and the forthcoming $500 million from Newton Group, seems just barely feasible for Evergrande Group
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Announcing the 2022 fiscal results, Evergrande Auto reported a staggering loss of approximately 27.664 billion yuan as of December 31, 2022, with cash and equivalents lingering at a mere 220 million yuanConcurrently, total liabilities soared to 183.872 billion yuan with asset values reported at 115.22 billion yuan, leaving the company seriously undercapitalized.
At the end of 2022, overdue debts unable to be settled by Evergrande Auto reached around 11.626 billion yuan, coupled with overdue commercial bills amounting to about 18.512 billion yuanThe company has disclosed that a significant amount of funding will be necessary in the foreseeable future to meet various contractual financial obligations and capital expenditures.
Furthermore, Evergrande Auto's core operational capacity—its vehicle manufacturing and sales operations—still seems unable to be ramped up on a large scaleWhile production at the Tianjin plant resumed on May 23, allowing for the continuation of Hengchi 5 vehicle manufacturing, only about 1,000 Hengchi 5 units have been delivered thus far.
With revenue generation falling short, Evergrande Group has undertaken a variety of cost-cutting measuresAccording to annual reports, the workforce of Evergrande Auto dwindled from 9,207 employees in 2019 to fewer than 3,000 by the end of the first quarter of 2023. Given the substantial earlier investments and the legacy left by Evergrande Group's mismanagement, Evergrande Auto faces an uphill battle before it can truly shed its burdens and accelerate its progress; the current actions taken are simply not sufficient.
In addition, available information suggests that the Newton Group presently possesses distinct competitive advantages in critical technological aspects such as modular pure electric platforms, digital vehicle interconnectivity systems, electronic architecture, and autonomous driving capabilitiesIts primary product lineup includes hypercars, full-sized SPVs, and compact SPVs
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