U Power Limited (UCAR): Well-Positioned to Leverage China’s EV Market Growth – Analyst Research Report

Date: June 2023

U Power Limited (UCAR) is a China-based company that specializes in sourcing vehicles and providing related services with the goal to become a major player in the EV market, focusing on its proprietary battery-swapping technology, the UOTTA technology. This intelligent modular battery-swapping technology is designed to offer a comprehensive battery power solution for electric vehicles.

Since its inception in 2013, U Power Limited has established an extensive vehicle-sourcing network in lower-tier cities throughout China. The company has already been granted 14 patents and has 24 patent applications pending for the UOTTA technology.

Additionally, the company has developed two types of battery-swapping stations that are compatible with EVs and operates a manufacturing factory in Zibo City, Shandong Province, China. With EVs becoming increasingly popular, U Power seems well-positioned to grow in the next decade.

Business Model and Milestones

U Power Limited started business as a company providing vehicle sourcing services acting as a broker between automobile wholesalers and buyers, including small and medium-sized dealers and individual customers primarily located in lower-tier cities in China.

The company provides sourcing services through partnerships with automobile wholesalers on the supply side and SME dealers and individual customers on the demand side. The company charges a commission based on the purchase price of each purchase order and recognizes the commission upon delivery of vehicles to customers.

The customers are required to make full payment for the total selling price before the company delivers the purchased vehicles to them. In the six months ended June 30, 2022, the company generated $194,000 in revenue from vehicle sourcing services.

For the first half of 2022, the company had 11 customers, of which 9 were SME dealers and 2 were individual customers. For the fiscal years 2021 and 2020, the company had 165 and 22 customers, respectively, of which 61 and 3 were SME dealers, and 104 and 19 were individual customers.

Four customers accounted for more than 10% of its total sourcing revenues in the first half of 2022. One customer accounted for more than 10% of its total sourcing revenues for each of the fiscal years 2021 and 2020.

On the supplier side, for the first half of 2022 and fiscal years 2021 and 2020, the company sourced cars from 8, 102, and 11 suppliers, respectively. One supplier accounted for more than 10% of the total sourcing amount for the first half of 2022 and each of the fiscal years 2021 and 2020.

In the first half of 2022, the company sold cars to its SME customers with higher unit prices resulting in higher gross merchandise volume (GMV) compared to the same period of fiscal year 2021. The total GMV and units sold in the fiscal year 2021 increased mainly due to the increase in the number of customers in sourcing networks and the recovery of China’s macroeconomic environment, especially the automobile industry, from the COVID-19 pandemic in 2020.

U Power plans to continue expanding its sourcing network to provide customers with access to vehicles at reasonable price points. As of April 19, the sourcing network comprised approximately 30 SME dealers and 100 wholesalers.

Starting in 2020, U Power Limited shifted its focus to developing proprietary battery-swapping technology, known as UOTTA technology. This technology aims to provide a comprehensive EV battery power solution.

The UOTTA technology includes vehicle-mounted supervisory control units that monitor the real-time status of an EV’s battery packs, customized vehicle control units that upload real-time data of the electric vehicle to the company’s data platform, and a data management platform that collects and synchronizes real-time information on EVs, including their battery status, real-time location, and safety status.

The data management platform also provides information on the availability and locations of compatible UOTTA battery-swapping stations, assisting drivers in locating the nearest compatible UOTTA battery-swapping station(s) available when the EV’s battery is low.

The company has also started cooperating with major Chinese automobile manufacturers to jointly develop commercial-use UOTTA-powered EVs, such as ride-hailing passenger EVs, small logistics EVs, and light electric trucks. As of April 19, the company has signed agreements with two major auto manufacturers to develop UOTTA-powered EVs.

Developing UOTTA Battery-Swapping Stations based on the UOTTA technology is the third area of focus for the company. The battery-swapping stations come in two models:

The Titan model which is intended for electric heavy trucks with base prices ranging from RMB2,500,000 to 3,500,000 per unit. The typical size of a Titan station is approximately 6 to 8 parking spaces or 60 square meters.
The Chipbox model which is intended for ride-hailing passenger EVs, light electric trucks, and small logistics vehicles with a base price ranging from RMB2,200,000 to 3,000,000 per unit. The typical size of a Chipbox station is approximately 8-10 parking spaces or 90 square meters.

The company’s battery-swapping stations’ prospective buyers\operators are the existing oil\gas station owners\operators and transportation business owners including ride-hailing service providers and logistics companies.

Further, the company has established two battery-swapping station factories. First, in Zibo City, the construction of which was completed in August 2021 and production began in January 2022. The second is in Wuhu City, Anhui province with production expected to commence in 2023.

U Power is also developing a data management platform that can connect UOTTA-powered EVs and stations and assist UOTTA-powered EV drivers in locating the closest compatible UOTTA swapping stations on their routes.

For the six months ended June 30, 2022, the company generated RMB 2,634,000 in revenue from the sale of two battery-swapping stations in Huzhou City, Zhejiang Province. In the fiscal year 2021, the company realized sales of two stations in Quanzhou City, Fujian Province, and one station in Xuzhou City, Jiangsu Province, generating RMB6,616,106 in revenue.

In January 2022, the company began operating a battery-swapping station in Quanzhou City, under a cooperation agreement with Quanzhou Xinao, a local gas station operator. In the first six months of the fiscal year 2022, the company generated revenue of RMB 343,000 from battery-swapping services, including fees charged to users who entered into subscription agreements to use the company’s battery-swapping services, as well as a station system upgrade fee of RMB 204,000 for the three battery-swapping stations sold in the fiscal year 2021.

Additionally, the company plans to use its existing sourcing network to promote UOTTA-powered EVs and battery-swapping stations. U Power Limited has in-house capabilities to innovate EV battery-swapping technology and has a research and development team committed to technological innovation. As of March 2023, they had 14 issued patents and 24 pending patent applications in China.

EV Industry Outlook

The electric vehicle market in China has experienced significant growth in recent years, with EVs accounting for around 26% of new car sales in 2022, almost double the number from 2021. Fully electric vehicles make up nearly three-quarters of total EV sales in China, and the trend toward electrification is expected to continue. However, the cost of owning an EV is still higher than that of owning a combustion engine vehicle, although prices are expected to decrease as the market matures.

The growth of the EV market in China has been driven by government subsidies, which were offered to consumers and corporate drivers between 2020 and 2022, with around two million vehicles eligible for subsidies each year.

However, subsidies were reduced by 10%, 20%, and 30% in 2020, 2021, and 2022 respectively, and no new budget has been allocated for 2023. Without further cash subsidies from the government, EV sales are expected to slow in the short term, although discounts offered by EV producers could help to sustain sales in 2023.

In the long run, the Chinese government has committed to achieving carbon neutrality by 2060 and has previously set a target of 50% EVs (PHEV + BEV) by 2035. This ambition already seems easily achievable, as it is projected that the share of EVs in the passenger car market will exceed 50% and surpass traditional energy cars before 2030.

One of the biggest challenges to the further adoption of electrification is the lack of charging infrastructure, particularly in densely populated urban areas where many Chinese car-driving households live. While China has more public chargers installed than anywhere else in the world, there are still issues with the number of available chargers relative to the number of EVs, which could slow electrification.

Battery swapping is a practical solution to the problem of limited charging infrastructure as it brings the wait time from 1-10 hours per charge down to less than 5 minutes on average per swapping. This would be attractive to consumers because they can avoid detours and waiting times.

The China EV market is already using this battery-swapping model, and the hope is to eventually have a standard battery for all brands. The battery-swapping solution market for EVs for commercial use in China was worth approximately RMB2,183.3 million in 2020, and it is expected to increase to RMB176,615.1 million in 2026. This is due to an increase in the number of EVs for commercial use and the expanding battery-swapping infrastructure network.

The market size of the battery-swapping solution applied in electric ride-hailing vehicles is forecast to have the highest growth at a CAGR of 88.1% from 2021 to 2026, followed by electric trucks at a compounded annual growth rate of 85.1%, and other EVs at CAGR of 69.6% and electric taxis at a CAGR of 64.6%.

As of December 31, 2020, there were 555 installed battery-swapping stations for EVs in China, but this number is expected to increase to approximately 69,357 units by 2026. This is because of support from the Chinese government and the establishment of industry standards.

The increasingly extensive battery-swapping infrastructure network will lay the foundation for the development of the battery-swapping model in passenger EVs and commercial EVs.

The Chinese government has set policies and regulations to promote the development of battery-swapping solutions for commercial electric vehicles, in line with its goal to achieve carbon neutrality by 2060. The lack of standards in the battery-swapping solution industry has been addressed with the issuance of national standards for the safety requirements, test methods, and inspection rules for EV battery-swapping solutions. These policies have provided ongoing support for the growth of the EV battery-swapping solution industry in China.

U Power Limited is well-positioned to benefit from the growth of the EV market in China. The company has developed a battery-swapping station system that replaces the battery of an EV within a few minutes, allowing drivers to travel long distances without range anxiety. The company’s battery-swapping stations can accommodate a range of different EV models, making them a convenient option for EV drivers.

While the growth of the EV market in China is expected to slow without further government subsidies, the trend toward electrification is expected to continue, with EVs projected to surpass conventional cars before 2030.

The lack of charging infrastructure remains a key challenge to the further adoption of electrification, but companies like U Power Limited are well-positioned to provide practical and convenient solutions to this problem. Battery swapping is an efficient and convenient solution for EV owners and has the potential to revolutionize the EV industry.

Conclusion

U Power Limited is a company that is strategically positioned to benefit from the growth of the EV market in China. The company has a growing customer base, primarily composed of SME dealers and individual customers in lower-tier cities in China, and it aims to expand and diversify its network in the future.

U Power Limited recently completed its initial public offering, raising approximately $14.5 million in gross proceeds, which will be used to develop and market UOTTA-powered EVs and battery-swapping stations, upgrade UOTTA technologies, and for working capital purposes. With a long runway for growth, U Power seems an attractive company for growth investors.

Disclosures

The author does not have any shares in any of the securities mentioned in this article and is not planning to initiate an investment in any of the mentioned securities within the next 72 hours.