BYD-backed Haiwei Electronic Files For Hong Kong IPO

The capacitor film manufacturer attracted China's leading electric vehicle maker with its technological edge, but its falling gross margin is a cause for concern

Key Takeaways:

• Haiwei has filed for a Hong Kong IPO, after taking on electric vehicle leader BYD as both a backer and its largest client in 2023
• The capacitor film maker's gross margin fell from 44.9% in 2022 to 32.4% in the first three quarters of 2024

Hengshui, a city in North China's Hebei province, is famous as home to Hengshui High School, a sort of local West Point known for its military-style discipline. Such discipline may have also rubbed off on one of the city's lesser-known corporate residents, Hebei Haiwei Electronic New Material Technology Co. Ltd., which is China's top maker of capacitor film, a key component in film capacitors used to regulate power in electric vehicles (EVs) and other products.

Now, this niche EV supplier is seeking a higher profile with its application late last month to list in Hong Kong, showing it generates more than 300 million yuan ($41 million) in annual revenue and has become a supplier to leading EV maker BYD (1211.HK; 002594.SZ).

The company's main product is capacitor base film, a dielectric material made of polymers that facilitate electric insulation and energy storage. Such products account for nearly 40% of the production cost of film capacitors that are widely used in NEVs, as well as new energy systems, industrial equipment and home appliances.

China's capacitor film market isn't huge, but the competition is quite fierce nonetheless. According to Haiwei's application document, the five top companies, which includes Haiwei, account for nearly 60% of the market, with further consolidation expected. According to third-party market data in the listing document, Haiwei was China's largest producer in terms of sales in 2023 with 13.6% of the market.

30-year history

Haiwei's history dates back to the founding of Heibei Haiwei Transportation Facilities Group in 1992 by Song Junqing, a young entrepreneur who decided to strike out on his own after leaving the local Supply and Marketing Cooperatives, a state-owned organization. The company developed seamless joint paving technology in its early days and modified bitumen in 1998. It later expanded its business to include many other products such as packaging films, capacitor film and polypropylene.

Hebei Haiwei Electronic New Material Technology was founded in 2006 focusing on capacitor film manufacturing. The company graduated to the big leagues with its successful mass production of ultra-thin capacitor film with thickness of less than 3 micrometers, freeing China from reliance on foreign technologies in that area.

The capacitor film category includes capacitor base film and metallized film. Capacitor base film is used in the insulation layer for film capacitors, determining their performance, and represents Haiwei's main revenue source. Revenue from the capacitor base film business accounted for 91.9% of the company's total in 2022, dropping to 71.8% in 2023 before rising back to 76.3% in the first nine months of last year.

Metallized films are created by coating a metal layer onto capacitor base films, which then act as the electrodes for film capacitors. They are mainly produced by Anhui Ningguo Haiwei Electronics, which was acquired by Haiwei in 2022.

The company is also the only capacitor film maker with its own proprietary capabilities for the self-design and development of production lines. Those capabilities are its biggest advantage over its peers, allowing it to shorten its average production cycle to just eight months, far faster than the industry average of three to five years. Haiwei's average cost of just 120 million yuan for new production lines is also much lower than the industry average.

The company's business has grown slowly but steadily in step with development of new energy products. Its revenue rose slightly from 327 million yuan in 2022 to 330 million yuan in 2023, while its profit over that period fell from 102 million yuan to 70 million yuan. It posted stronger growth last year, generating 282 million yuan in revenue in the first nine months of 2024, up around 30% from 218 million yuan the previous year. Its profit over that same period increased 21% year-on-year to 57 million yuan.

Winning over BYD

One of the company's biggest selling points is its relationship with BYD, which became a fan after seeing Haiwei's technological superiority. Haiwei completed three financing in 2023, taking on BYD as a new investor, alongside others like Sungrow Power Supply (300274.SZ), at that time. That same year, BYD became Haiwei's largest client and has remained so ever since.

More precisely, Shenzhen BYD Supply Chain Management Co. contributed 40 million yuan to Haiwei's sales in 2023, accounting for 12.2% of its revenue that year. The share declined slightly to 11.9% in the first three quarters of 2024, with its top-client status remaining intact.

Still, Haiwei's bottom line has yet to feel major positive impact from the BYD relationship. The company's profit actually declined 31.5% year-on-year in 2023. More worrisome is a downward trajectory for its gross margin, which fell from 44.9% in 2022 to 31.2% in 2023, before rebounding slightly to 32.4% in the first three quarters of last year.

The company blamed the margin erosion on falling prices for capacitor base film and lower gross margins for metallized film. Additionally, retrofits of old production lines between March 2023 and June 2024 caused the company's output to fall, contributing to the lower gross margin by compromising its scale.

Despite that checkered performance, it's important to remember that China's capacitor market has strong growth potential, expected to more than double in value from 2.9 billion yuan in 2023 to 7.9 billion yuan in 2029, equal to 17.8% annual growth, according to Haiwei's listing document. The market's rapid growth should be more than enough to support this company that itself is also still in a growth stage.

However, everything hinges on Haiwei's ability to maintain its early-mover advantage and keep boosting its economies of scale through continued expansion. In that regard, the company plans to scale up its capacity substantially, aiming to add four capacitor base film production lines with 16,000 tons of new capacity by 2027, more than doubling its capacity of 14,967 in 2024.

Its weakening margins will undoubtedly raise some doubts about its market value as the company gears up for the Hong Kong listing. But the stock's ability to find an audience will ultimately depend on the company's technological edges and capacity expansion efforts. Haiwei will need to show it can make the most of its size to outperform its rivals, while also using that advantage to defend its margins in the face of stiff competition.