The electric vehicle (EV) market in 2024 has become a significant player in the automotive industry, akin to the "hot fried chicken" dish that everyone cravesAs this trillion-dollar market continues to thrive, ancillary industries such as battery recycling are witnessing explosive growthRecently, on December 20, 2024, Jinsheng New Energy, the world's second-largest lithium battery recycling company, filed its prospectus with the Hong Kong Stock Exchange, with CICC and CMBI acting as joint underwriters.

Jinsheng New Energy is no stranger to initial public offerings (IPOs). The company previously attempted to list on the A-share market in 2022 but later ended its advisory agreement in August 2024 after a lengthy processThe question remains whether shifting its strategy to Hong Kong, with relatively lower entry thresholds, will ensure a successful listingWhat is the company's capacity for growth, and how solid is its foundation?

One of the primary concerns focuses on underutilization of production capacity

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The company’s cash flow has been negative, raising doubts about its expansion plansAccording to the prospectus, the funds raised through this listing are earmarked for developing a lithium iron phosphate (LFP) battery base in Ganzhou City, Jiangxi ProvinceJinsheng plans to establish 200 recycling service outlets over the next three years and enhance its research and development capabilities, additionally bolstering its working capitalThey have set ambitious goals to gradually increase production capacity, targeting a processing of 280,000 tons of retired ternary lithium batteries annually by 2025.

However, as of October 31, 2024, the company's cash and cash equivalents stood at just 62.28 million yuan, a figure insufficient to meet the operational cash flow requirements of the yearFrom 2021 to 2023, Jinsheng reported negative operating cash flows of -217 million, -830 million, and -1.018 billion yuan respectively, reflecting a continuous net cash outflow

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Despite the enticing vision of growth, securing financing remains a critical hurdle.

Moreover, the company has accumulated substantial external debts, with bank and other loan balances skyrocketing from 343 million yuan in 2021 to 1.479 billion yuan by October 31, 2024. This surge in borrowing has led to increased interest burdens, where interest on loans grew from 15.235 million yuan in 2021 to 64.59 million yuan in 2023. As of October 31, 2024, the recoverable accounts receivable were a mere 113 million yuanThe reality is unmistakably grim; as much as the company's aspirations are high, it faces substantial immediate challenges.

The focus on planned capacity expansion coincides with a noted downturn in actual utilization ratesReports indicate a drop in utilization rates for its primary products—lithium carbonate, nickel sulfate, and cobalt sulfate—falling below 80% in the first half of 2024. Industry analyst Wang Yanbo suggests that while expanding capacity is necessary considering the lifespan of EV batteries and the carbon neutrality agenda, there is an impending threat from intense competition and rapid market evolution

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If supply oversaturates or market conditions change abruptly, previously aggressive expansions could lead to significant underutilization of resources, exacerbated by financial pressures and insufficient internal revenue generation.

In addition to operational difficulties, Jinsheng New Energy has also faced a concerning decline in revenue, shifting from profitable to loss-making territoryOnce considered a sought-after investment target with cumulative financing achievements capturing attention from notable investors like Fosun and GAC, the company’s fiscal health paints a stark contrastRevenue jumped from 1.133 billion yuan in 2021 to 2.905 billion yuan in 2022, only to plummet to 2.891 billion yuan in 2023, and further decline to 995 million yuan in the first half of 2024, marking a 35% year-on-year drop.

During this same period, net profits oscillated from a modest gain of 69 million yuan in 2021 to losses such as 473 million and 147 million yuan in subsequent years, totaling losses exceeding 600 million yuan over the past year and a half

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Analysts attribute this downturn primarily to plummeting prices of lithium carbonate, which saw a stunning decline from nearly 600,000 yuan per ton in 2022 to 80,000 yuan by 2024. The "rollercoaster" price fluctuations have undeniably impacted creativeness within the market, grounding the once elated unicorn, Jinsheng New Energy, into tough realities.

As the company leverages its recycling projects, it is worth noting that 70% of their revenues come from lithium and other mineral product salesAverage sales prices fell sharply from 396,300 yuan per ton in 2022 for lithium carbonate to just 85,800 yuan in the second quarter of 2024. Nickel and cobalt prices also faced declinesJinsheng's business narrative reveals a substantial vulnerability to the volatile nature of market prices.

Despite the current state of affairs signaling challenges, the market for lithium battery recycling remains promising, bolstered by forecasts from firms like Frost & Sullivan, predicting a steep growth trend stemming from the rapidly rising sales of EVs and the accelerating turnover of consumer electronics products

Projections suggest a substantial increase in retired lithium batteries from 366,100 tons in 2023 to approximately 3.4 million tons by 2030, with a compound annual growth rate of 37.5%. The industry's burgeoning demands reveal a gap for quality recycling and sustainable utilization of retired batteries.

Yet, entering this space, Jinsheng not only faces external competition from established leaders like CATL and Gotion High-tech but also has its own internal challenges regarding governanceThe company's ownership structure is notably familial, with the original Jinsheng Metals established by the Li family comprising five brothersThis family-driven ethos brings both strength in shared vision and potential vulnerabilities in market flexibility.

Future evaluations must critically look at the performance of Jinsheng New Energy and the role of its stockholder structureInevitably, while the urgent need for enhanced battery recycling technologies signifies potential growth, the reality of market competition and unpredictable fluctuations roil beneath the surface.

To bolster its growth strategy, Jinsheng has initiated plans to expand its production line, including the planned market introduction of lithium iron phosphate battery materials