The landscape of the Chinese capital markets is on the verge of a significant transformation, with the recent application for an Initial Public Offering (IPO) from Suzhou Huichuan United Power Systems Co., Ltd(referred to as "United Power"). This step marks a monumental moment not just for the company, but also for the burgeoning electric vehicle (EV) industry in China, as it seeks to raise approximately 4.857 billion yuan (about $684 million).

Founded in 2016, United Power is the sole operator responsible for electric drive systems and power supply systems within the Huichuan Technology framework, a prominent player in the industrial automation sectorThe inception of United Power was a strategic move; in April 2021, Huichuan Technology orchestrated a transfer of its EV-related assets, liabilities, workforce, technology, and contracts to create a dedicated entity aimed at pursuing the rapidly evolving automotive sector.

The decision to spin off United Power into an independent entity listed on the growth enterprise market comes after over two years of meticulous preparation

This marks a strategic extension of the Huichuan brand, which has been in operation for over two decades, expanding its presence into new territories of equity financingBased on United Power’s fundraising target and a maximum share issuance of 25%, the minimum market valuation for the company stands at around 19.428 billion yuan.

United Power is laser-focused on the research and development of electric drive systems and power systems for electric vehiclesThe company is rapidly gaining traction in the market, positioning itself competitively alongside industry giants like BYD, and outperformance against the likes of Tesla, solidifying its status as one of the largest suppliers of electric drive systems in the industry.

An interesting point of note is that the much-anticipated Xiaomi SU7 and Xiaomi YU7 electric vehicles feature significant contributions from United Power, which supplies the motor systems essential for these innovative vehicles.

However, the rapid growth of United Power also raises questions about the intentions behind Huichuan Technology's decision to split the company from its core operations, with some industry experts speculating that the move may be a strategic ploy to shed less profitable segments while capitalizing on the lucrative EV market dynamic.

The electric vehicle industry is often referred to as comprising the "big three" components: electric control, motor, and battery

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These play a parallel role to essential components in traditional internal combustion engine vehicles, including the engine and transmissionThe electric drive system, which consists of the motor, control electronics, and reducer, serves as the core component in EVs, facilitating the conversion of electrical energy into kinetic energy and effectively controlling power output.

According to their prospectus, United Power's primary product line encompasses electric drive systems and power systems, which include on-board chargers, DC/DC converters, and various integrated power assembliesThey have also achieved significant milestones in the independent development and production of components such as reducers, high-voltage distribution units, and electrical assemblies, thus demonstrating their robust technological capabilities.

Despite the technical sophistication of their products, for years, United Power operated under the radar as a less-known entity in the public eye

However, as the electric vehicle market gains momentum, recent disclosures have brought the company into the spotlightA notable event occurred during the 2024 launch of the Xiaomi SU7, when co-founder Lei Jun touted their self-developed super motor technology, only for the company to clarify that the Xiaomi Super Motor V6s was collaboratively developed with Huichuan Technology, enhancing visibility for both entities.

Founded in 2003 with a founding team notably comprised of former Huawei employees, Huichuan Technology has often been referred to as "the little Huawei" of the electrical engineering sectorThe company marked its significant foray into the automotive space in 2016, after reaching a market capitalization of 30 billion yuan.

As of now, Huichuan Technology maintains a direct ownership stake of 94.51% in United Power, with the remaining shares distributed among 26 employee stock ownership plans, free from external financing

Throughout its growth phases, United Power has relied heavily on financial backing from Huichuan Technology, which has ostensibly placed short-term pressure on the latter's overall performanceNevertheless, Huichuan Technology remains resolute in its automotive ambitionsAt the company's annual meeting in 2019, founder Zhu Xingming emphasized his commitment by stating that the automotive segment would continue as long as Huichuan Technology retained its listing status.

This unwavering focus on the automotive sector has allowed United Power to become a leading force in Huichuan’s electric vehicle endeavorsThe financial indicators outlined in their prospectus reveal a trajectory of growth: in 2021, 2022, 2023, and the first half of 2024, United Power recorded revenues of 2.903 billion yuan, 5.027 billion yuan, 9.365 billion yuan, and 6.055 billion yuan, respectively, demonstrating a significant turnaround from earlier losses to profitable growth in 2023.

In terms of revenue composition, the electric drive systems accounted for the majority of their earnings

In 2021, 2022, and 2023, and the first half of 2024, revenues from this business segment were 2.796 billion yuan, 4.676 billion yuan, 7.746 billion yuan, and 5.141 billion yuan—representing market shares of 96.45%, 93.21%, 83.01%, and 85.29%, respectivelyIn 2024, United Power secured approximately 11% of the Chinese electric control product market, leading among third-party suppliers.

The company has forged deep collaborations with emerging auto manufacturers such as ideal car makers and Xiaomi, along with traditional automotive giants such as Volvo, Stellantis, and several domestic brands, including Geely and Great Wall MotorsUnited Power provides drive system solutions to over 40 vehicle manufacturers, with production volumes surpassing 1.7 million units in just the first half of 2024.

In a strategic partnership established in July 2021, Li Auto joined hands with United Power to create Changzhou Huixiang New Energy Automotive Components Co., Ltd., ensuring a long-lasting supply agreement

Notably, Li Auto remains United Power's largest customer, underscoring the company’s pivotal role in the EV landscape.

Funding raised from the upcoming IPO will be directed toward core projects tied to their main business, including new energy vehicle component manufacturing, research and development infrastructure, digital system advancements, and working capital replenishment.

The spinoff of United Power is not merely an example of market realignment but represents a significant milestone for both Huichuan Technology and the broader electric vehicle landscapeThis IPO, set to be the largest currently under review, stands poised to redefine industry standards and provide a much-needed boost to the capital markets.

As the company approaches the public offering phase, the emphasis on business independence becomes crucial, particularly as spinoff ventures often face scrutiny regarding their operational autonomy

Interestingly, while United Power's main source of revenue stems from sales to joint ventures such as Changzhou Huixiang, the business’s far-reaching scope is grounded in its singular focus on the electric drive system and power solutions.

Despite Huichuan Technology holding a significant share, the operational exchange between the two entities operates on a tightly controlled basis, minimizing dependency issuesThis pointed emphasis on independence is sure to appease market anxieties concerning corporate governance and operational clarity as the spinoff unfolds.

United Power captures the potential to centrally position itself within Huichuan’s most promising growth area: the electric vehicle sectorThe separation has spurred conversations about the enduring growth potential of both companiesFinancial metrics reveal that while Huichuan Technology has seen total revenues of 23.008 billion yuan, 30.420 billion yuan, and 16.183 billion yuan for 2022, 2023, and the first half of 2024, respectively, United Power has grown at a faster rate, highlighting the effectiveness of Huichuan’s strategic move.

Huichuan Technology's management insists that this strategic split into independent entities will not only streamline operations but elevate financing flexibility for United Power, paving the way for future expansions and investments

This restructuring should also enable a more dedicated approach towards the electric vehicle systems sector, releasing United Power's valuation potential while expanding Huichuan Technology's footprint in market capitalizations.

Celebrating over twenty years in the market, Huichuan Technology, with its current valuation surpassing 150 billion yuan, has developed a robust positioning in the industrial automation realmThe founder, Zhu Xingming, has meticulously constructed an expansive commercial network and competitive edge through strategic foresight and investment.

Having established its joint venture focusing on automotive components back in 2009, Huichuan's commitment to the new energy vehicle sector has only grown stronger with timeThe establishment of United Power as a distinct subsidiary highlights its dedication to advancing capabilities in electric drive systems and other related technologies, determined to thrive in the competitive automotive landscape.

The question looms over the market’s receptivity to another listing among A-share companies; despite challenges posed by previous spinoff companies that faced withdrawals or struggled to establish independence