In recent years, the surge in the sales of electric vehicles in China, coupled with rapid advancements in consumer electronics, has led to a significant increase in retired lithium batteriesThis boom has spurred growth in the downstream sector of battery recycling, which is becoming increasingly vital in the context of sustainability and resource management.

On December 20, the Hong Kong Stock Exchange was abuzz with the news that Guangdong Jingsheng New Energy Co., Ltd(hereinafter referred to as "Jingsheng New Energy"), the largest third-party lithium battery recycling company globally, submitted its prospectus for an Initial Public Offering (IPO). CICC and China Merchants Jinling International are the joint sponsors of this highly anticipated public offering.

Despite having a staggering valuation in the billions, Jingsheng New Energy has been continuously investing in production lines with significant capital expenditures over recent years

As a result, cash flow problems have emerged, exacerbated by considerable borrowing, making the company’s financial status appear a bit precariousWith the fluctuating prices of lithium carbonate, the company reported losses in the recent fiscal year, a grim news amid its ambitious growth strategies.

The downward trend in lithium carbonate prices has particularly hit hard; in 2023 alone, the losses exceeded 400 million yuanAccording to the prospectus, Jingsheng New Energy was founded in 2010 by the five Li brothers — Li Sen, Li Xin, Li Yan, Li Wang, and Li Yao — focusing specifically on the recycling and regenerative utilization of lithium batteriesTheir product offerings include lithium carbonate, nickel sulfate, cobalt sulfate, and graphite, which are essential materials for a wide array of industries.

According to a report by Frost & Sullivan, Jingsheng New Energy has positioned itself as the second largest lithium battery recycling and regeneration enterprise globally, and the largest of its kind as a third-party provider, commanding roughly 3.8% of the market

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The lithium battery recycling market is considerably fragmented, indicating ample room for competition and innovation.

Jingsheng New Energy's operations revolve around collecting used power and energy storage batteries, dismantling them, and recovering valuable materials like lithium carbonate and nickel sulfate, which are then sold to downstream customersThus, the company's financial performance is closely linked to the market prices of these key materials.

In recent years, significant price volatility in the lithium carbonate market has been notedFrost & Sullivan's data reveals that average prices from 2021 to 2023 have fluctuated dramatically — for instance, the average price per ton reached 106,000 yuan in 2021, skyrocketed to 426,900 yuan in 2022, and then fell back to 241,000 yuan in 2023. Similar trends were observed for nickel sulfate and cobalt sulfate, confirming a volatile landscape in the battery materials market.

As of 2023, sharp declines in the prices of lithium carbonate, nickel sulfate, and cobalt sulfate significantly impacted Jingsheng New Energy's financial results, contributing to substantial fluctuations in performance

The company's core products faced considerable price drops throughout 2023 and into the first half of 2024, culminating in losses for the company.

The prospectus indicates that from 2021 to mid-2024, Jingsheng New Energy's recorded revenues were 1.133 billion yuan, 2.905 billion yuan, 2.891 billion yuan, and 995 million yuan, respectivelyCorresponding profits were recorded at 69.39 million yuan, 151 million yuan, and losses of 473 million yuan and 147 million yuan for 2023 and the first half of 2024.

The average sales prices for lithium carbonate from 2021 to 2023 also showcase the volatility — with figures standing at 77,700 yuan/ton, 396,300 yuan/ton, and then plummeting to 196,400 yuan/tonNickel sulfate and cobalt sulfate prices followed a similar trajectoryFrost & Sullivan expects that by 2024, further price declines are likely, forecasting an average of 82,900 yuan for lithium carbonate, 25,900 yuan for nickel sulfate, and 27,400 yuan for cobalt sulfate.

In light of these market trends, Jingsheng New Energy has acknowledged that the time lag between purchasing raw materials and selling finished products may adversely affect profit margins during periods of declining product prices

The gross profit margins for the company from 2021 through the first half of 2024 were reported at 16.7%, 14.3%, -5.6%, and -3.1%.

While boasting a unicorn status with a valuation exceeding 10 billion yuan, Jingsheng New Energy wrestles with cash flow constraintsSince its inception, the company has completed four rounds of financing, amassing a total of approximately 1.36 billion yuan from notable investors such as Fosun International, Dachen Venture Capital, and Tongshun CapitalTheir latest financing round in 2022 garnered 320 million yuan, resulting in a post-money valuation of around 12.32 billion yuan.

Despite these financial backing rounds, Jingsheng New Energy continues to face challenges related to expanding production lines, attracting significant capital, and managing current debt levelsAs of mid-2024, the company had cash and cash equivalents amounting to approximately 39.45 million yuan while simultaneously carrying interest-bearing bank and other loans totaling 1.153 billion yuan.

In an attempt to address these challenges, Jingsheng New Energy's operational cash flow for the years 2021 to mid-2024 has been negative: -254 million yuan, -717 million yuan, and -58.41 million yuan, followed by a positive 39.9 million yuan in the recent half-year

The recent uptick was attributed to enhanced efforts in collecting accounts receivable.

However, by mid-2024, the company’s ability to manage cash flow through accounts receivable was limited, with outstanding collectible accounts amounting to around 200 million yuan, indicating considerable liquidity pressureThroughout the reporting period, accounts receivable amounts fluctuated significantly, highlighting the volatility in cash flow management.

Facing significant financial strain, Jingsheng New Energy has set its sights on the capital markets to raise funds through an IPOIn 2022, the company initiated the listing process for A-shares but ultimately withdrew the application in August 2024, shifting its strategy toward listing on the Hong Kong Stock Exchange.

Before the IPO, the company's controlling shareholders comprise the five Li brothers, along with several investment partners, owning approximately 55.05% of the equity