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LGES gains from China EV blues – IFR Asia


Positive sentiment for the electric vehicle sector helped LG Energy Solution break South Korea’s IPO record, but fundraisings by Chinese companies are set to suffer from the removal of subsidies.

EV battery maker LGES on Friday priced its W12.8trn (US$10.7bn) IPO at the top of an indicative range of W257,000–W300,000 per share, for a market capitalisation of US$59bn.

The deal size exceeded the W4.88trn IPO of Samsung Life Insurance in 2010 to become the country’s largest float.

Meanwhile, the Hong Kong listing of ChiNext-listed JL Mag Rare-Earth faced challenges – as will other fundraisings by Chinese EV companies down the road – after China announced it would cut subsidies for new energy vehicles.

China said on December 31 that subsidies on new energy vehicles such as electric cars will be reduced by 30% in 2022 and withdrawn altogether at the end of the year. The timeline is in line with what the authorities announced in 2020, when the subsidies were originally due to expire, but the news still weighed on EV stocks.

The development fuelled demand for the already hot IPO of LGES, which has vowed to overtake Chinese rival Contemporary Amperex Technology as the world’s top EV battery maker.

A total of 1,988 institutional investors bid for a record US$12.8trn of shares in the IPO, according to a filing.

In contrast, CATL’s shares fell a combined 6% in the two trading days after the Chinese subsidies news, while EV maker Li Auto fell a total of 7%.

The A-shares of JL Mag, a producer of high-performance rare earth permanent magnets used in EV batteries, plunged 11% on January 4, when the A-share markets resumed trading following the new year holidays.

Some market observers attributed the fall to JL Mag’s announcement on January 3 that it expects its 2021 net profit to rise 65%–100% from 2020, which highlighted the importance of the sales of new energy vehicle parts to the company.

“The announcement is supposed to be positive but it also highlights how heavily the company relies on demand for EV products. A sharp drop in JL Mag’s A-shares hurt demand for its Hong Kong listing,” said a person with knowledge of the matter.

JL Mag started bookbuilding on January 3 for the Hong Kong listing of 125.5m primary shares at HK$33.80–$40.30 each or at a 2022 P/E of 35.2–42. Five cornerstone investors pledged a total of US$278m or around half of the float.

It eventually priced the deal at the bottom of the range on Monday to raise HK$4.24bn (US$544m), having delayed pricing from January 7. However, it had to allocate 20% of the IPO shares (from 10%) to the retail tranche even though that portion was just 2.39x covered. The institutional tranche was 1.57x subscribed.

“The books were just covered and the banks couldn’t allocate investors in full. They had to find a solution,” said another person familiar with the situation.

At HK$33.80 each, the Hong Kong shares were sold at a 29.8% discount to JL Mag’s A-share close of Rmb39.34 (HK$48.12) on Monday.

JL Mag’s H-shares fell 16.6% on their trading debut on Friday to close at HK$28.20.

Stark contrast

A competitive valuation was the key for LG Energy’s success but analysts also believe China’s cut to subsidies will level the playing field and allow South Korean battery makers with superior technology to win more market share. Chinese authorities have granted subsidies mostly to EVs powered by China-made batteries.

Kwon Young-soo, CEO of LGES, told reporters on Monday that CATL’s growth has been supported by the preference of Chinese carmakers for locally produced batteries, but claimed LGES has better technology and more diverse clients in the US and Europe. The EV battery unit, which was spun off from chemical giant LG Chem in December 2020, is a major supplier to customers including Tesla and General Motors.

The withdrawal of subsidies will also hit the huge pipeline of Chinese EV fundraisings, although smaller players are more likely to be affected.

“It’s going to be a binary scenario,” said a ECM banker. “The EV sector is supported by government policies so investors are still willing to bet on the market leaders as they should be able to stand on their own feet even without the subsidies. But it will be challenging for smaller players.”

An analyst at data and analytics company GlobalData echoed this view.

“Subsidies resulted in high level of market fragmentation, overcapacity and low-quality products. This will now be controlled as small players and new start-ups will be impacted with lower funding and investments amid degraded market sentiments,” said Bakar Sadik Agwan, senior automotive consulting analyst at GlobalData.

KB Securities and Morgan Stanley were joint lead bookrunners for the LGES IPO. Bank of America, Citigroup, Daishin, Goldman Sachs and Shinhan Bank were joint bookrunners.

Citic Securities and BNP Paribas were joint sponsors for JL Mag. The two banks were also joint global coordinators and joint bookrunners with DBS.

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