Lotus EV unit warns of China risks ahead of Spac listing

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The electric vehicle arm of Lotus has disclosed a $353mn half year loss and warned about risks to its business from the Chinese government, in a filing ahead of its planned $5.5bn stock market listing. 

Chinese carmaker Geely took control of British sports car brand Lotus in 2017, and plans to float shares in a new unit within the company, called Lotus Technology, which makes electric SUVs in China. 

This business is aiming to merge with L Catterton Asia Acquisition Corp, a special purpose acquisition vehicle, or Spac, listed on the Nasdaq exchange and founded by LVMH-backed investment group L Catterton.

Lotus’ UK sports car division, which is based in Hethel in Norfolk, is not part of the listing, which is expected to take place later this year.

The Lotus Spac marks the latest effort by Geely’s owner Eric Li to unlock the value from a collection of auto investments built up over a decade. His deals include an initial public offering of Volvo Cars and floating EV brand Polestar through a Spac.

The listing also points to a bid by Geely to tap into investor appetite for high-end carmakers and the higher valuations afforded to manufacturers solely producing EVs, even if they lose money.

Lotus Technology’s stock market filing, issued this week, laid out extensive risks to the business, as well as previously undisclosed financial details of the new unit, which was set up in 2021.

Lotus Technology lost $353mn during the first six months of this year, on revenues of $130mn. China was its largest market, with $93mn sales, followed by Japan with $16mn and the UK with $7mn. 

During 2022, before it had begun producing vehicles at scale, the business lost $724mn after recording just $10mn in sales. At the end of June 2023, it had $729mn of cash available, $10mn less than at the start of the year. 

The Lotus filing also warned of several risks to the company, including several stemming from its Chinese ownership and location, as it plans to list on the New York Nasdaq exchange. 

One of these is the changing view of US stock market regulator, the Securities and Exchange Commission, towards Chinese auditors. If the SEC cannot verify the audits of Lotus’ accounts for two consecutive years, it is able to prevent the company’s shares from trading.

This is complicated by the SEC’s shifting view of China-based auditors. 

During 2021, the SEC agency responsible for audit checks was “unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong”, the Lotus filing said. Although that changed in 2022, the agency makes an annual assessment. 

The agency “had historically been unable to inspect our auditor in relation to their audit work”, the company added.

If the SEC cannot inspect Lotus’ Chinese auditor — KPMG Huazhen — for two years running, then Lotus’ “securities would be prohibited from being traded on a national securities exchange”.

The filing also said the Chinese government “has significant authority in regulating Lotus Technology’s operations and may influence its operations”.

In addition, “more [Chinese government] oversight and control over offerings” could hit its share price once listed. 

It also flagged that “cash transfers” outside of China are “subject to PRC governmental control on currency conversion,” and that funds “may not be available to fund operations or for other use outside of mainland China”.

The risk factors highlighted by Lotus are in line with the SEC’s guidance for China-based businesses seeking to list in the US.

In addition, the group disclosed the extent of its reliance on its parent company Geely, which it leans on for “research and development, procurement, manufacturing, and engineering”. Lotus Technology said its “supply chain efficiency also relies heavily on Geely”.

The company added: “Our ability to successfully build a luxury lifestyle vehicle brand could also be adversely affected by perceptions about the quality of our strategic partner’s vehicles.”