ZEEKR Intelligent Technology Holding Limited

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

ZEEKR is a premium electric vehicle (EV) manufacturer based in China, known for its innovative technology, intelligent driving solutions, and high-performance vehicles.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

ZEEKR Intelligent Technology Holding Limited is a relatively new player in the competitive EV market, primarily focusing on the premium segment. Here’s a breakdown of their business model:

Revenues:

  • Vehicle Sales: The bulk of ZEEKR’s revenue comes from the sale of its premium electric vehicles. These vehicles are marketed as high-performance and technologically advanced. ZEEKR’s vehicle model includes a variety of BEV models, and the volume for each of these models was approximately 7,000-8,000 in Q2 2022.
  • Sales of Parts and Components: ZEEKR also generates revenue from the sale of parts and components, though this is a smaller portion of its overall revenue.
  • Research and Development and related services: R&D revenue is related to the development and design of electric vehicle and intelligent technology solutions, as well as providing services in these areas.
  • Other revenue: Revenue from other service.

Industry Trends:

  • Growth of the EV market: The global electric vehicle market is experiencing rapid growth, fueled by increasing environmental awareness, government incentives, and technological advancements. China is currently the largest and fastest growing EV market. The average growth in the global market is around 30 percent annually.
  • Increased Competitiveness: The EV market is becoming increasingly competitive, with established automakers and new entrants vying for market share. The competition is especially heightened in the Chinese EV market, with the country accounting for 60 percent of global EV sales.
  • Focus on Premiumization: In the automotive industry, premium offerings are increasingly important to distinguish products, as many other lower end models have caught up. ZEEKR targets this segment with features like high-performance, high-quality manufacturing and intelligent tech and aims to be an innovator in the premium vehicle market.
  • Technological Innovation: Rapid innovation in battery technology, autonomous driving, and infotainment systems are driving differentiation within the EV market.
  • Shift towards Autonomy and Connectivity: Consumers are increasingly demanding vehicles to have advanced autonomous and connectivity technology.

Competitive Landscape:

  • Global Competition: ZEEKR faces stiff competition from global EV leaders such as Tesla and BYD, particularly in the Chinese market. It also faces competition from other luxury-electric automakers such as Audi, BMW, and Mercedes-Benz. All of these players are trying to capture market share in the global EV market.
  • Local Competition: ZEEKR competes with other Chinese EV makers including Li Auto and Nio. All of these companies face intense competition. This is largely driven by the government push for electric vehicles, and is very important to be able to build market share in the growing EV segment.
    • Chinese automakers have an advantage in navigating the local legal, regulatory, and cultural environment and can establish supply relationships more efficiently. This allows them to have more flexibility in their operations and pricing.
  • Established Automakers: Legacy automakers such as Toyota, Ford, and General Motors are also transitioning to electric vehicles and have the distribution and brand advantage to help them sell vehicles.

What makes ZEEKR different?

  • Premium Focus: ZEEKR aims to position itself in the premium EV segment by offering vehicles with high-performance and sophisticated technology. The intention behind this is to attract customers who value a blend of performance, luxury, and technology.
  • Technological Prowess: ZEEKR emphasizes its innovative approaches to electric vehicle technology, battery systems, and intelligent driving solutions. The company focuses heavily on its R&D, aiming to create industry leading solutions to their vehicles, and further improve the customer experience.
  • Direct Sales Model: The company is a new company, as such it uses primarily the direct-to-consumer model. This avoids the costs and control issues of a traditional dealership structure and gives the company more control of its brand and image.
  • Partnership with Geely: ZEEKR is a subsidiary of Geely group, which is a well-established company that has significant expertise in the automotive space. This will give ZEEKR a financial advantage and make scaling easier. It also provides ZEEKR with an established supply chain and production capabilities that they would have otherwise struggled to establish.
  • Advanced R&D facilities: ZEEKR has invested heavily in establishing global R&D facilities, and this will allow ZEEKR to develop innovative and high quality technology for their cars, which can be a strong competitive advantage if executed correctly.

Financials

  • Revenue: In the six months ended June 30th, 2022, Zeekr posted revenue of 12.86B yuan. The company is rapidly expanding its sales volume, and revenues may follow as deliveries to consumers ramp up. The vehicles are sold with a premium price point, and ZEEKR is seeking to position itself as the premier brand, with higher prices and better performance compared to other companies.
  • Net Loss: In the six months ended June 30th, 2022, Zeekr posted a net loss of 759.6 million yuan and a net loss in 2021 of 4,472.7 million. The company is expected to continue to have negative earnings until revenues ramp up significantly as it establishes its brand.
  • Cash: ZEEKR has reported a very strong cash balance of 2,978.6 million in cash and cash equivalents, as of June 30, 2022.
  • Share Based Compensation: The company spends a good amount on equity-based compensation for its employees, with 188 million RMB being recognized for the six months ended June 30, 2022.
  • Debt: The company has a large amount of total liabilities of 19.836 billion in the 6 months ended June 30, 2022. The company has total equity of 4.325 billion in the same period.

Recent Concerns and Controversies:

  • Competition: ZEEKR is in an increasingly competitive EV market and faces challenges from established players with more resources and experience in operations and scale. The company has to establish a leading brand in a fiercely competitive market that also includes several smaller players with large funding rounds.
  • Growth: Although the company has ambitious growth targets, whether it can meet those targets within its forecast is unknown. There is a risk that high growth can be hard to sustain, and that growth could slow considerably as the company matures. The company must invest in production capacity to keep up with demand while also growing brand recognition. If one of these areas is lacking, it can have an adverse effect on company performance.
  • Profitability: Given the company’s current losses, there is uncertainty on when the company will become profitable. Whether it can make a positive return on capital is currently questionable, and the management will be working hard to make that happen.
  • Supply chain challenges: The global supply chain has faced several disruptions in recent years. These are largely due to the pandemic and the conflict in Ukraine. ZEEKR’s operations could be affected in the future by supply chain bottlenecks and this could lead to production delays.
  • Regulation: Although China encourages EVs, it still has a complex regulatory structure which poses a challenge to any company seeking to operate there. In the latest filings, the company states “Our operations are subject to frequent changes in governmental policies, standards, regulations, and requirements, including those relating to BEV, and we may not be able to adapt to these changes in a timely manner or be able to continue to comply with them.”

Moat Assessment: 2/5

Based on our analysis, ZEEKR’s moat rating is 2/5. This rating means that it has a narrow moat with potential to gain a competitive advantage. Here’s a breakdown by moat sources:

  • Intangible Assets:
    • Brand: ZEEKR is working to build a premium EV brand, but it’s still a relatively new player, not nearly as established as competitors. Although this is a moat, it is not wide, and is prone to the risk of being eroded through competition.
    • Patents: The company relies on patents to protect its products from competition, and although the company has demonstrated it can innovate, it is uncertain if it can compete against future innovative technology from other companies. As such, this is a narrow moat at this stage.
  • Switching Costs: For its regular customers, switching costs are high. There are costs in time and money to go through the ordering process, configure a car, and also customize it, with no competitors having the exact same level of customization or integration. However, this might not be the case for new customers.
    • Network Effects: ZEEKR’s platform offers no real network advantage as the current stage, they don’t have a large base of customers that would provide network effects to their services. Therefore, the company does not benefit from this aspect.
  • Cost Advantages: The company does benefit from manufacturing scale by utilizing Geely’s infrastructure.
  • Unique Resources: The company does benefit somewhat from its unique position in the chinese EV market, as well as an R&D presence in China, and also a low tax burden in certain Chinese regions, although that might change.

Overall: ZEEKR exhibits some promising signs for long-term profitability, but it must cement its brand and also compete against already established companies. Given the challenges the company faces in establishing operations and maintaining its brand and price premiums, it is likely that competitors will encroach on its business. For this reason, we classify it as having a narrow moat.

Understandability: 3/5

The business model of ZEEKR is relatively easy to grasp. As an EV manufacturer, ZEEKR’s primary activity is to design, manufacture, and sell electric vehicles to customers. Furthermore, the automotive industry is something most people understand, because most people have experience with a car, either as a driver or a passenger. Therefore, most people have an idea about customer preferences in the automotive market and can relate to the services offered by companies in that space. However, what makes ZEEKR different, specifically the technology and long-term impact of the new features that are on the cutting-edge, might be difficult to grasp for the average investor. The valuation also gets difficult as it is hard to quantify the company’s potential and growth trajectory in this stage. The valuation also is affected because it is not yet profitable. For these reasons, the company earns an understandability rating of 3/5.

Balance Sheet Health: 3/5

While the company has a very strong cash balance of 2,978.6 million yuan. However, the level of liabilities at 19.836 billion, as compared to shareholder equity of 4.325 billion, poses a risk. The company will likely require more funding to scale up production and continue operations, as such it may incur more debt or dilute shares further. Given the company’s losses, and the fact that its operations are not yet self sustaining, there is a very important need for positive operating cash flow, or for new funding. Based on this, the balance sheet health rating is 3/5.

Key Risks to the Moat

  • Technological Disruption: The rapid advancement in EV technology poses a risk of ZEEKR’s products being displaced by newer innovations from competitors.
  • Increased Competition: As other major auto companies transition into EVs, and new EV startups emerge, there is always the risk of price wars and loss of competitive advantage.
  • Supply Chain Volatility: The company’s ability to source and manufacture its vehicles has several factors that might affect it, like parts availability, shipping restrictions or a new pandemic.
  • Changes in Regulations: Regulations are constantly changing, whether in China or across the globe, and this might affect the company’s ability to import/export vehicles, or establish its operations.
  • Geopolitical concerns: China, where ZEEKR is focused, is a politically unstable market, and actions by the Chinese government can harm businesses operating there.

Business Resilience

ZEEKR has shown an ability to innovate, and has a backing with Geely, which should help it to stay competitive and to adapt to these challenges. It also has a good cash balance that will allow it to operate for at least a couple of years, and continue its operations and expansion. That said, the business has not been fully stress-tested by a downturn in demand, so the strength of its business model is still not completely proven in the long-term.