The rapid expansion of China’s new energy vehicle (NEV) industry has led to the emergence of numerous standout companies, with Leap Motor, a unique player in the automotive field, making headlines after its long-awaited debut on the Hong Kong Stock Exchange. After eight years of development, the company finally gained access to public capital, an achievement celebrated by many. However, this milestone celebration soon turned somber as its stock debuted poorly, leading many investors to question the company’s long-term sustainability and market position.

On the listing day, September 29, 2022, Leap Motor’s shares fell below the issue price of HK$48, initiating a downward trend that investors had not anticipated. Over the subsequent 33 trading days, Leap Motor’s stock plummeted by around 57%, wiping out over HK$31 billion (approximately ¥27.8 billion) of market capitalization on the secondary market. By November 15, 2022, the stock was trading at HK$20.6, and the company’s total valuation sat at HK$23.54 billion. This disappointing performance occurred even with significant backing from renowned venture capital firms like Sequoia Capital China, and prominent investors such as Wang Xiaoan and Ge Weidong, adding to the perplexity regarding the company’s reception by the market.

The question on everyone’s mind was: why were investors showing such reluctance? Several key factors contributed to this wary attitude. First, the company’s sales primarily relied on its budget-friendly T03 model, which accounted for more than 90% of its total sales in 2021. Sales figures for that year reached just over 43,000 vehicles, signaling a significant gap when compared to competitors like NIO, Li Auto, and Xpeng, whose combined sales totaled over 90,000 units. The sluggishness in Leap Motor's expansion into mid- to high-end markets posed another roadblock to broadening its customer base and sales revenue.

As the 2022 fiscal year progressed, Leap Motor faced mounting pressure. By October, competitors within the second-tier NEV companies, such as Neta, began to surpass them, with Neta reporting over 129,000 units sold and Leap Motor trailing behind with around 94,600 units, placing them in the fourth position in the burgeoning NEV sector. In order to hit their target delivery of 120,000 units for the year, Leap Motor needed to average sales of over 25,000 vehicles in November and December alone.

Despite the astonishing popularity of the T03 model, which sold over 54,000 units by October 2022, the question remains: can this single budget model sustain the company’s future? To break into the mid- to high-end category, Leap Motor attempted to launch new models. In September of the previous year, they introduced the C11 SUV, priced between ¥179,800 and ¥229,800, followed by an electric sedan, the C01, with a preorder price range of ¥180,000 to ¥270,000. However, they found themselves entering a fiercely competitive market where established brands like BYD, Tesla's Model 3, and Xpeng's P7 had secured their footholds long before Leap Motor's arrival.

Amidst all these challenges, something crucial weighed heavily on the company’s future—financial health. The automotive industry is notoriously capital-intensive, and any firm capable of reaching profitability may well find itself emerging as a formidable competitor. Unfortunately, like many companies in the new energy market, Leap Motor found itself grappling with persistent losses. Between 2010 and mid-2022, cumulative losses amounted to over ¥6.3 billion. Their peers, including NIO and Xpeng, recorded even higher losses exceeding ¥10 billion. Li Auto, in contrast, incurred far lower losses, close to ¥1.8 billion.

The financial strain within the NEV industry typically stems from two main areas: research and development expenses and sales expenditures. In the first half of 2022 alone, Leap Motor's sales expenses clocked in at just under ¥399 million, significantly lower than NIO's ¥4.297 billion and Li Auto's ¥2.528 billion. When examining the percentage of sales costs compared to revenue, Leap’s spending dropped year-on-year, ultimately weakening its competitive edge.

Research and development, a critical area for technological advancement, plagued Leap Motor as well. Throughout the same time frame, their research expenses never exceeded ¥800 million annually, while their competitors consistently invested above ¥1 billion, even surpassing ¥2.4 billion in several instances. This lack of investment in innovation raises serious concerns about Leap Motor's future capabilities, especially as they strive to differentiate themselves among rival companies.

Cash reserves serve as a backbone in the competitive landscape of the automotive market; however, Leap Motor's reserves fell significantly short of its rivals. By mid-2022, their cash holdings totaled approximately ¥5.1 billion, whereas NIO, Xpeng, and Li Auto boasted cash reserves of around ¥28.3 billion, ¥51 billion, and ¥70.2 billion respectively, illustrating a disconcerting disparity. For an enterprise striving to compete and grow in this challenging domain, such low cash reserves could hinder Leap Motor's capacity to weather financial storms or seize emerging opportunities.

As the company's reliance on the T03 model continues, the impact of their new products in the mid- to high-end market largely hinges on performance capabilities. The road ahead for Leap Motor remains fraught with challenges, including the critical issue of ongoing financial losses. With lackluster stock performance posing risks to investor confidence, the pressing question remains—can Leap Motor effectively pivot and demonstrate tangible progress in a market already crowded with well-established players?

In light of these developments, industry analysts have pondered the words of Huawei's executive Yu Chengdong, who speculated that China might solidify a landscape with no more than five main automotive players. For Leap Motor, the journey to establish foothold and gain competitiveness in both the domestic and international markets is just beginning. All eyes will be watching to see how this fascinating yet challenging chapter unfolds.