Public glare falls on EV battery supplier behind Taixing factory blaze

By YIN Jingfei

Explosions shook the Southeastern city of Taixing on Saturday as a factory in an industrial park went up in a blaze. GEM, China’s largest battery recycling company and an EV battery material supplier, is the owner of the Jiangsu KLK factory that went up in toxic smoke.

GEM said on Sunday that the fire had been put out with no deaths or injuries reported. The fire will only have a limited impact, though the damage is still being estimated.

New batteries or old?

GEM shares opened 3 percent lower on Monday, closing at 7.6 yuan per share, a long way down from the 2021 high of 13.6 yuan, but the market cap is still close to 40 billion yuan (US$5.9 billion).

Jiangsu KLK makes cobalt products and generated 20 percent of GEM’s revenue and profits in the first half of 2022 with 3.6 billion yuan in sales, versus GEM’s 13.9 billion. KLK is likely to become even more important as GEM pivots from recycling batteries to making them.

In 2021, GEM unveiled a plan to make intermediary material for EV batteries at the Taixing campus and started a major refit. Production soared, Jiangsu KLK made 2021’s full-year revenue in the first six months of 2022.

GEM, founded in 2001, started making EV battery components only in 2016. Revenue has more than doubled since, which is not surprising given China’s EV industry. Materials production has completely overshadowed recycling. In 2021, materials brought in more than twice as much as recycling (13.7 billion yuan vs 5.6 billion yuan). The recycling business has actually shrunk by nearly a quarter since 2016, a fact even more remarkable considering the amount of money being poured into battery recycling elsewhere.

By the end of 2022, GEM’s battery precursor capacity reached 250,000 tons a year, one of the largest in the world. A new facility in Fujian, which was completed last June, is now being calibrated.

Money on fire

Some shareholders have questioned the wisdom of betting so heavily on EVs at the expense of recycling. In a shareholder meeting last November, one investor asked whether there is a plan for recycling in case of an EV peak. Some suggested a name change to “GEM New Energy Materials” to reflect the true makeup of the company.

Margins have slipped from 2017’s 19.9 percent to the latest 14.4 percent. This is before depreciation, but new factories, at least for now, go into “construction work-in-progress,” which doesn’t depreciate on paper. Construction work-in-progress has ballooned to 5.5 billion yuan from 2017’s 933 million.

GEM has been burning money in construction while 24 percent of its sales was in “receivables.” It had 6.2 billion yuan in cash as of Q3, but total debt amounted to 23.4 billion yuan, 78 percent interest bearing and 7.5 billion due within one year, hence the 1.2-billion-yuan bond issuance last November to cover the shortfall. Although GEM raised US$346 billion (about 2.35 billion yuan) in GDR last July, it was for overseas projects only and cannot be used to pay off debt.

Cost of expansion

A shareholder asked why GEM kept building new factories even when it was bringing in far less cash. The response was that the cash flow situation was a reasonable outcome of quick expansion. New factories mean new sales, hence the higher receivables.

GEM has raised 10 billion yuan on the stock market, including an IPO and five private placements – the most recent 2.38 billion in 2020 – US$346 million worth of GDR and 1.2 billion in bonds. It now occupies about 10 percent of China’s battery recycling market.