Centro Electric Group Limited (NASDAQ: CENN) is a reputable design and manufacturing entity focused on global light and medium electric CVs (ECVs) with a presence in over 26 countries, across North America, Asia and Europe. The company only went public on on December 31, 2021, through a merger with Naked Brand Group.
What market does Cenntro Electric serve?
Commercial vehicles are inescapable cogs in the vast global business ecosystem, and that’s unlikely to change anytime soon. These vehicles help facilitate last mile delivery and other commercial applications. In the CV space, conditions appear to be tilting in favor of EVs due to factors such as more stringent regulatory requirements/emission standards, the superior cost effectiveness of EVs, and the financial incentives of owning EVs. Global trade is rapidly becoming a fierce arena (if it hasn’t already), and the enablers of this space will cling to transport infrastructure that will not only be profitable, but also sustainable.
From a currently unremarkable industry sales figure, Wood Mackenzie believes that global sales of commercial electric vehicles could soar to 3 million by 2025, then triple even more to 9 million by 2030! It looks like a market poised for exponential growth, and it’s worth exposure to entities like CENN who are at the forefront of the ECV movement.
What should investors know about Cenntro Electric’s business model?
I believe that CENN has an advantage over its peers on several fronts. Investor interest in commercial electric vehicles may only have started in the last few years, but consider that CENN has been laying the groundwork for some time now (since 2013), and we are already seeing the benefits. translate to first- engine advantages in some key global markets (maybe it’s not a mind-boggling number, but as things stand, with over 3300 units, no other entity has delivered more than ECV than CENN).
Also note that CENN is gaining acceptance in key markets ahead of its peers. For example, it recently became the first foreign ECV manufacturer in Japan to receive the Kei car homologation approval (by the way, the approval was granted even before other local Japanese names, which gives you an idea of how good the company’s technology is, in the global ECV space). Japan is a market rife with opportunities for something like a CENN, as you have a rapidly aging society, which makes the prospects for door-to-door delivery particularly promising. The country also has quite ambitious emissions targets to achieve by 2030, which would require 90% of its automotive portfolio that year to be battery electric vehicles. Overall, the Japan ECV market is expected to be one of the fastest growing global regions to 23.1% CAGR through 2026.
Why is the market gravitating towards CENN? Over the past few years, the company has been able to set up a solid IP infrastructure which has earned it more than 238 patents! This innate IP capital also serves as the foundation on which the company has been able to make waves in artificial intelligence and autonomous driving. Consider the utilitarian effects of something like their SOC (System On Chip) technology which is an integrated single chip that instills hardware, software, and driving control in one place. The SOC allows the vehicle to be controlled by a smartphone app where users can monitor the vehicle in real time and gain insight into driving performance, speed control, replacement schedules, etc. Also note that Cenntro itself develops and owns this chip, rather than outsourcing it; that would give it an edge when the industry faces supply chain-related chip issues.
Then you also have something known as iChassis which could be a game-changer in the commercial autonomous driving market; here, different business apps can be loaded for different self-driving applications, whether it’s urban sanitation, mobile vending, urban delivery, etc., and you can see how useful it could be for business entities. Production of this is expected to go live in 2023 and one would think this would open up a potentially stable monetization path via a subscription model which I don’t think the market has yet fully considered when evaluating of the potential of the CENN share.
Currently, CENN also appears well positioned to expand its operations and the automotive industry is replete with examples of how a much broader product portfolio has helped boost a brand’s prospects. For a very long time, CENN had relied primarily on sales of its lightweight urban ECV – Subway but since late 2021 and early 2022 the product portfolio has been strengthened with the introduction of four new vehicles- a) Logstar 400 – a last mile vehicle specialized in mobile sales, b) Logstar 200 – a last mile vehicle for general urban use in Europe, c) Neibor 200 – a neighborhood delivery service vehicle and d) Terramack ORV – an off-road utility vehicle used primarily for agricultural purposes.
Are there any events surrounding Cenntro Electric that investors should watch?
In the short term, the most important event to watch would be the results of the exercise which should be announced this month (no specific date has been chosen). CENN is not covered by the sell-side analyst community, so there will be no consensus estimates to watch, but investors may consider seeking clarification in the following areas:
Is there a slowdown in the EMEA market and how is their competitive positioning changing following the majority acquisition of Tropos Motors Europe GmbH (TME)? As per the TME deal, is this theme of buying stakes in its existing customers likely to reoccur (TME has been one of CENN’s largest customers since 2019) What has been the reception to the products introduced at T4-21/T1-22? Are there any other new products in the anvil? How did CENN handle nickel price volatility in the first quarter and are there any downside risks to its cost estimates for the year? Considering that CENN is about to significantly increase its production targets, what will CENN’s liquidity position look like over the next 12-18 months, and will it look to raise additional funds during this period ? The cash figure at the end of FY21 was $250 million, which was considered sufficient to meet investments in Dusseldorf and Jacksonville. Over the next two years, the company is expected to expand production in different regions ranging from Japan to Seattle; Is the company on track to meet these deadlines, as shown in the image below, or will there be delays?
Final Thoughts – Is CENN Stock a Buy, Sell or Hold?
Existing CENN stock owners can be forgiven for feeling disappointed with the stock as it lost around 60% on a YTD basis. The Russian-Ukrainian fiasco has upended supply and demand dynamics in the electric vehicle sector merchandise space, and investors are also somewhat apprehensive about the company’s current drive towards European markets, especially given the current vulnerable conditions (the majority interest for TME, valued at approximately $17 million, including the absorption of corporate debt, should not be financially crippling for CENN, as it ended FY21 with $250 million in cash). I’ve also seen reviews regarding the specs of some of VENN’s product portfolios. Opponents have questioned the limited range of CENN vehicles, but when you consider something like last mile delivery (which CENN vehicles can be widely used for), I don’t think the range potential should be an obstacle.
Regardless, I think most of the risks in CENN are relatively transitory in nature and, at a current market capitalization of around $600 millionthe risk-reward for going long in the CENN narrative should not be discounted.
It’s not just about picking up rubbish at very low prices. Rather, I think the Cenntro Electric Group is about to enter a rather exciting phase where production and sales figures could potentially explode over the next couple of years. Between FY22 and FY23, they plan to produce a total of over 96000 units in total, which is expected to translate to sales of over $2,100 million for FY23. As previously reported, we have also recently seen evidence of how CENN has been able to exceed its previous targets of production and sales growth (compared to an initial target of 1,563 electric HP units, they ended up reaching 1,623 units for all of 2021). Given the proposed sales potential (incidentally the highest among all commercial electric vehicle manufacturers), I think the market grossly undervalues CENN stock.
To reiterate my case, I compared Cenntro Electric’s expected FY23 sales figure to seven other peers in this space. Given the highest sales in its category, a forward price to multiple sales of just 0.27x seems criminally low (note for example, while CENN will likely deliver close to 75,000 units by FY23, something like Lordstown Motors will probably only deliver 2500 units of the Endurance over this period, yet this is a company that trades at a multiple of 4.5x).
Also consider that Cenntro Electric is a company with a compelling IP infrastructure that exceeds industry gross margins (GM’s 25% vs. the overall auto industry average of just 19.25%), a pipeline of new products and a first-mover advantage in certain key markets like Japan (where last-mile delivery in commerce is of great value, even though the population there is aging).
Then if I switch to the CENN standalone chart, I think things look up. After faltering at the start of the year, the CENN stock went into a bottom formation from February to mid-March. After forming a long base during this period, we saw bullish momentum visiting this counter in late March, and currently the stock appears to be making indentations in the form of a bullish pennant pattern. Also note that the MACD recently crossed the zero line, which is usually a sign of new bullish momentum.
To conclude, CENN’s outlook for the next two years looks promising, valuations are very cheap at this price level and the technicals also seem to have turned a corner; the CENN stock is a BUY.