Electric car makers have not yet proven that there is a real market for their products. This was the thesis of my article titled: Is the Electric Car Market for Real? 2/22/2019. The company that is the latest company to be listed on the TSX Venture Exchange (TSXV) is XPeng Energy.
We are seeing a number of companies that are using the public markets to rapidly grow their revenue and boost their valuation to enormous valuations. Some are good, some are not. XPeng Energy is a good company. The problem is that many market observers are assuming it is a great company. They are getting a slightly wrong point, but not as wrong as they would have it. Let’s get into that in more detail.
The company is not making tons of money and it seems it is going to take some time to turn that around. Let’s take a look at the company’s table, first.
Table by Author from XPeng Energy Financial Summary:
The reason XPeng Energy has not made a lot of money in the past is because it is the latest company to go public. As I mentioned in the beginning of this article, I think private equity might need to step in. The company filed its S-1, the SEC required form to go public, on June 1, 2019. XPeng Energy has been around for longer than 100 years, it has grown from a little company to a larger one that is growing in two main areas, lithium and mineral sands. Its lithium business includes Brominated Flame Retardant (BFR), lithium hydroxide, lithium carbonate and lithium batteries.
Of course, if you see the table above, the growth in lithium is an enormous strength. In 2018, the company’s lithium production increased from 16,000 tons in 2017 to a total of 81,000 tons for the full year. This more than doubled their lithium production during the year. The lithium business also shows an incredible pipeline of new product lines that have the potential to make them extremely rich and fast growing company in the future.
Those products, when fully commercialized, will be the company’s growth engine. Of course, once they have a product to sell, or a pipeline of products to sell, there is no reason they should not continue to make a profit. Most management teams can’t foresee how to commercialize their product long-term and in the short term they usually have to do very well to sustain themselves financially.
As you can see from the table above, the company’s lithium sales more than doubled in 2018 and they increased the number of new products to sell from 62 to an astounding 171. The company claims the lithium carbonate is traded around $22,000 per ton today. The company estimates that if it kept production flat for this long, the company would have a premium price of over $180,000 per ton for lithium carbonate. When the company finally comes to market with a fully commercialized product, the value of the product should grow rapidly and the company will quickly become a very successful lithium producer.
This is also the reason that their mineral sands business can become very valuable very quickly. The company produces agricultural and construction minerals such as sand, aggregate, salt, salt brine, gravel, fly ash, lime and other gypsum solutions. The company’s sand mining and aggregate operations provide it with a high growth business with minimal capital investment. It is very easy to mine for these commodities and the company doesn’t have to acquire any other assets to build it up. The company expects to produce $110 million in revenue this year with more than a 99% gross margin. This is primarily what drove the valuation of the company in the first place, the growth potential.
On an absolute dollar basis, the company is a very small production company. Now you might say, “That’s why I don’t buy small companies in the first place.” I say that is pretty stupid logic. If the price of the company’s stock continues to head higher after it goes public, it should eventually trade at $4, $6 or even $8 per share. It also has a couple other interesting projects that could help to provide a lot of value. The company has a patent for a technology that can turn rechargeable batteries into liquid metal. This opens up a whole new business opportunity that could be worth hundreds of millions of dollars. The company recently sold a large amount of mining technology to local governments that are going to be using the technology to mine gold, silver and copper in Africa. XPeng Energy does not have to build any of this, it already has strong relationships that will ensure that it is in a position to provide just what its investors need.