JL Mag Rare-Earth makes sluggish Hong Kong debut

Workers assemble cars at the BYD Auto manufacturing center in Shenzhen, Guangdong, China. BYD Auto's parent company, BYD Co., is a JL Mag Rare-Earth Co. customer. Source: Ryan Pyle/Corbis via Getty Images

Shares in JL Mag Rare-Earth Co. Ltd., a producer of magnetic rare earth materials, fell as much as 17.2% on their first trading day in Hong Kong on Jan. 14 as IPO market sentiment remains lukewarm in the financial hub.

The Jiangxi-based company closed at HK$28.2 on Friday, 16.6% lower than its offer price. That compared to the benchmark Hang Seng Index, which fell 0.19%. JL Mag raised HK$4.1 billion after pricing its Hong Kong float at HK$33.8 apiece, the bottom of its marketed price range. The company expects substantial profits from sales to electric-car makers. The debut performance was mainly driven by market sentiment rather than the fundamentals, Dickie Wong, executive director of Hong Kong-based Kingston Securities, said in an interview.

"Individual investors just don't believe in the IPO market," Wong said.

Thirty-two new companies have gone public on the Hong Kong Stock Exchange since Sep. 1, 2021, but 75% of them were trading below their offer prices Jan. 14, data from financial information provider Aastocks.com showed.

"This is something already a new normal for Hong Kong IPO [market]," Wong said.

Thanks to the surging demand for new energy vehicles, JL Mag projected its 2021 net profit to rise at least 65% to 403.4 million Chinese yuan, according to a Jan. 4 filing to the Shenzhen Stock Exchange. Revenue is expected to grow by more than 60% to 3.87 billion yuan, with revenue from the electric vehicle sector surging about 220%.

JL Mag is already listed in Shenzhen. Its mainland shares slid 1.4% to 37.9 yuan Jan. 14 but were still more than six times higher than IPO prices in September 2018.

Founded in 2008, JL Mag produces permanent magnets from neodymium, iron and boron. It produced 9,612.9 tonnes of high-performance rare earth permanent magnets in 2020, accounting for 14.5% of market share around the world, it said in the prospectus, citing Frost & Sullivan.

China's electric vehicles sales increased 1.6 times, to 3.5 million units in 2021, according to the Ministry of Industry and Information Technology. In the first half of 2021, JL Mag generated 90% of its revenue from China.

JL Mag's products are mainly used for new energy vehicles, permanent magnetic wind turbine generators and inverter air conditioners. Its customers include electric-car makers Tesla Inc., BYD Co. Ltd., SAIC Motor Corp. Ltd., NIO Inc. and Li Auto Inc. and new energy vehicles platforms of Volkswagen AG and General Motors Co.

Fluctuation of rare earth prices will dampen the company's profitability as it may not be able to reach an agreement with customers to adjust the product prices, JL Mag warned. Rare earths accounted for 78.6% of the cost of sales in the first half of 2021.

JL Mag plans to use net proceeds from the IPO to build new production in Ningbo, China, and to repay loans for the construction of production in Baotou, China, as well as research and development.