NAAS - NaaS: Intriguing Opportunity In China's EV Market

2023-08-18 02:21:41 ET

Summary

• Exxon Mobil's growth in the 1970s highlights the potential gains from investing in transformative megatrends.
• The transition to electric vehicles and China's economic growth are prominent megatrends of the 21st century.
• NaaS Technology Inc. is positioned to benefit from these megatrends as a leading EV charging service provider in China, but regulatory challenges and geopolitical tensions pose risks.

Between 1960 and 1970 the Gross Domestic Product in the U.S. doubled from 543 billion to a trillion dollars; from 1970 to 1980 the GDP almost tripled, reaching 2.9 trillion dollars ( source: World Bank ). So, in the early 1970s it was clear that the U.S. were in full growth mode and investing in energy demand was a no-brainer.

In the early 1970s, while already a household name, Exxon Mobil (XOM), then Exxon corp., was still a mid-sized company, with a market cap of about 20 to 30 billion dollars. Purchasing shares of Exxon from 1970 to 1975 would have proven to be an exceptional investment as the company's strategic expansion, innovative technologies and global reach allowed it to capitalize on the growing demand for energy resources, eventually becoming one of the world's largest and most influential energy companies.

Chances are that most of you readers were not involved in stock picking back then and thus missed the chance to invest in one of the megatrends of the 20th century.

21st Century Megatrends

Luckily the markets are always changing and evolving, and every decade offers opportunities to spot and ride the next growth trends; amongst many, two stand out.

In these times of global climate change, droughts, hurricanes, floods and heat waves, governments, industries, and consumers alike are increasingly recognizing the importance of reducing carbon footprints, and the transition from gas-powered automobiles to electric vehicles stands out as one of the most prominent megatrends of the early 21st century, influencing not only transportation but also energy production and consumption patterns; Tesla’s ( TSLA ) success, growing its market cap more than twenty times in the last decade, is emblematic of this major shift.

The second obvious megatrend is the double digit growth of the economies of southeast Asia; in particular, China’s GDP more than tripled in the last decade, reaching 18 trillion dollars in 2022 and, while opinions differ regarding the exact numbers, it is projected to more than double in the next six years, with an expected GDP between 35 to 44 trillion dollars in 2030 ( sources: IMF, World Bank, Lowy Institute ). China's sustained economic expansion, geopolitical influence, and commitment to long-term growth strategies position it as the major contender to the U.S. for the title of the world’s largest economic superpower.

In light of these numbers, is there a company that is positioning itself to profit from these two evident megatrends, just like Exxon in the early 1970s?

Indeed there are many, especially Chinese electric car automakers such as NIO (NIO), Li Auto ( LI ) and XPeng (XPEV), but I am making the case for a little known small cap player that has recently entered the electric mobility revolution.

A Chinese Exxon in the making?

Born in 2019 from the ashes of a defunct education services business, in a fashion similar to many recent SPAC mergers, NaaS Technology Inc. (NAAS) is a Chinese company that is boldly stating that it is “committed to becoming the world’s leading provider of energy services”.

As of March 2023, it claimed it was China's largest and fastest growing EV charging service provider with a network of 575 thousand proprietary charging ports in more than 350 Chinese cities and a 40% market share ( source: NaaS presentation, China Insights Consultancy ); to put things in perspective, ChargePoint (CHPT), founded in 2007 and allegedly the world’s largest EV charging network, in January 2023 reported it had deployed 700 thousand charging ports (including affiliated third-party ports).

China's dedication to the 2060 carbon neutrality initiative, coupled with government incentives, holds a pivotal position in invigorating the adoption of electric vehicles. Anticipated projections solidify China's trajectory towards assuming a dominant role in global EV manufacturing, with estimations suggesting that as 2025 draws to a close, electric vehicles could constitute an impressive 50% of all automobile sales within the nation. ( source: Daxue Consulting )

Despite there being 425 million individuals eligible to drive, the number of cars in circulation on Chinese roads stands at just 287 million. This ratio significantly lags behind the corresponding statistic in the United States and Europe, underscoring the considerable untapped potential within the Chinese automotive market.

In 2022 there were 13 million EVs in circulation in China; that number is expected to increase to 145 million by 2030 and by then public charging volume will increase 25 fold ( source: NaaS Investor Presentation).

Impressive growth

According to the company’s statements, it has increased its deployed charging ports by 100% in Q1 2022 over Q1 2021 and by 84% in Q1 2023 over Q1 2022 and, while still unprofitable, it grew its revenue by 150% in Q1 2023 in comparison to Q1 2022, reaching RMB 36.2 million ($5.3 million), but loss also increased to USD 16 million; the company also reaffirms its guidance and expects its full year 2023 revenues to be between RMB 500 million ($73 million) and RMB 600 million ($87 million), representing year-over-year increase by 5 to 6 times.

Management is already looking for opportunities abroad and, as of Q1 2023, it had established a European office in the Netherlands, a team in Singapore and is in discussions with governments in the UAE, Oman, Saudi Arabia and Japan for strategic cooperations in the local markets.

In June 2023 the company announced it had acquired 90% of Sinopower, one of the largest rooftop solar energy developers in Hong Kong.

In August 2023, it announced it had signed a deal with Hyundai, the world's third largest automaker, to develop an efficient charging management service for Hyundai car owners.

Valuation

The market capitalization - as of this writing - is 1.4 billion dollars, qualifying it as a small cap. From a financial standpoint the company is not particularly cheap, trading at a Price-to-Sales value around 17, indeed more expensive when compared to competitors such as EVgo ( EVGO ) and ChargePoint; the Price-to-Book ratio is 30; these ratios may indicate optimism about the company's prospects but raise the question of whether the current market price adequately reflects the company's intrinsic value.

The long-term debt profile of the company appears to be within manageable bounds, currently standing at $70 million.

It has around $80 million in cash, providing the company with a degree of flexibility in navigating market fluctuations and pursuing strategic opportunities.

Risks

Similar to numerous other Chinese stocks traded as American Depositary Shares in the U.S., this company is confronted with a range of risks linked to regulatory clearances for overseas offerings and anti-monopoly regulatory interventions. These concerns are further accentuated by the ongoing tensions between the United States and China, which have sparked an implicit commercial conflict. Notably, the company's business environment is particularly intricate, entailing adherence to dynamic and intricate PRC laws and regulations governing cybersecurity and data privacy.

Being in the nascent stages, the company possesses a constrained operational history and is still unprofitable while shouldering substantial expenses and anticipating persistent losses in the near future. The company is further encumbered by fierce competition, both domestically in China and from various entities within its industry which is marked by rapid evolution, potentially giving rise to unanticipated changes.

Conclusions

History offers valuable lessons about the potential rewards and prudence required when considering investment opportunities. The rapid growth of the U.S. Gross Domestic Product from the 1960s to the 1980s, exemplified by Exxon Mobil's exceptional rise, underscores the potential gains that can be achieved by identifying and investing in transformative megatrends.

The transition from gas-powered vehicles to electric mobility, as evidenced by Tesla's impressive market cap growth, highlights the potential for substantial returns within this evolving landscape. Moreover, China's impressive economic growth and commitment to environmental initiatives position it as a prime candidate for sustained economic dominance.

Amidst this backdrop, NaaS Technology Inc. emerges as a compelling player poised to benefit from these megatrends, much like Exxon did decades ago. As a pure play on EV charging services and considerable growth in China's EV market, NaaS has shown remarkable expansion and has already established international partnerships, such as the collaboration with Hyundai. However, the valuation of the company raises concerns about its current market price and the risks associated with regulatory challenges, geopolitical tensions, and the intricate landscape of Chinese regulations are substantial and must not be overlooked.

NaaS Technology Inc. presents an intriguing opportunity but potential investors must weigh the promise against the associated risks.

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