Breakingviews - Geely-backed auto SPAC deal revs up too fast - Reuters

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Zhejiang Geely Holding Group's Chairman Li Shufu poses for pictures next to a Xingyue L SUV at Geely headquarters in Hangzhou, Zhejiang province, China July 20, 2021. Picture taken July 20, 2021. REUTERS/Aly Song To match Special Report AUTOS-GEELY/LISHUFU - RC29OO9CAV5E

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HONG KONG, May 31 (Reuters Breakingviews) - Li Shufu is in the fast lane again. Geely’s (0175.HK) founder who is best known for buying Swedish carmaker Volvo (VOLCARb.ST) has signed up for the largest listing of a company hailing from the People's Republic through a special-purpose acquisition company. It’s a bold move with ride-hailing company Didi's experience as a public company in New York still so raw.

Target Ecarx, co-founded by Li in 2017, sells hardware and software for cars’ cockpits. Its products are becoming more important as drivers depend on digital maps and apps. Marques owned by Li’s Geely – including Volvo, Lotus, and Proton – are the company’s biggest customers. The giant holding group sold 2.2 million cars last year.

Yet the valuation looks generous. It gives the unprofitable Ecarx an enterprise value of $3.5 billion after accounting for deal proceeds, roughly 4.2 times estimated sales for 2023. That compares with 1.3 times for U.S.-based industry leader Aptiv (APTV.N), per Refinitiv.

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The forecasts are lofty too. Ecarx expects its top line to more than double to $1.4 billion between 2022 and 2024 as it expands in China and beyond. To reach that figure, the company assumes revenue from non-Geely customers will triple over the same period, increasing their share of overall sales by some 7 percentage points.

While Ecarx sells its wares to Mercedes-Benz (MBGn.DE) and other carmakers, some rivals might hesitate to take on a supplier so intimately linked to a competitor. The absence of a detailed historical breakdown of the company’s sales by end-customer type makes it harder to judge how easy it will be to pivot.

There are other possible potholes. Ecarx specialises in potentially sensitive technology: it collects and uses data, including personal information, and works with digital maps. Beijing’s sensitivities to data are part of the reason Didi plans to delist from the Big Apple and trades at a dramatic discount to its offer price.

Meanwhile, Ecarx’s buyer, Cova Acquisition Corp (COVA.O), may be in a bit too much of a hurry: its own investors have the right to redeem their shares in the SPAC if it isn’t able to close a deal by early 2022. This revved-up deal may struggle to find solid road with new prospective investors.

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CONTEXT NEWS

Ecarx, an auto technology startup backed by Geely Holding's chairman Li Shufu, on May 26 said it would go public through a merger with a blank-cheque firm in a deal that values it at $3.5 billion after factoring in cash proceeds from the deal.

With facilities in China and Europe, Ecarx focuses on tech used in car chips, high-definition maps and smart vehicles. The company was founded by Ziyu Shen, its current chairman and chief executive officer, and Geely’s Li in 2017. Li is the company’s largest shareholder.

The deal would be the largest listing of a company hailing from the People's Republic through a special-purpose acquisition company, according to Dealogic.

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Editing by Una Galani and Thomas Shum

Our Standards: The Thomson Reuters Trust Principles.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

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