NEV startup CHJ Automotive plans VIE structure for capital pressure relief

Shanghai (Gasgoo)- Leo Group, one of shareholders of China's NEV startup Beijing CHJ Information Technology Co.,Ltd (CHJ), announced on June 17 that the Beijing-based startup plans to build a VIE (Variable Interest Entity) architecture and carry out relevant equity restructuring.

Once the restructuring completes, CHJ's shareholder will indirectly own the equity interest in CHJ and its affiliated companies by holding the stake in Leading Ideal Inc. (hereinafter referred to as Cayman Company), a company registered in Cayman Islands. The Cayman Company will control CHJ through agreements, making the latter become the achievable profit provider of Cayman Company, according to the latest announcement.

Based on the announcement, Leo Group has invested in CHJ twice. The group subscribed RMB350 million and RMB100 million of CHJ’s newly-added registered capitals on April 29, 2016 and September 5, 2017 respectively. Its total subscribed capital of RMB450 million accounts for 7.499% of stake in CHJ.

（Photo source: https://www.lixiang.com/)

In a bid to assist CHJ with the restructuring, Leo Group will enable its wholly-owned subsidiary Zhejiang Leo (Hongkong) Co.,Ltd (hereinafter referred to as Leo HK) to subscribe and hold the equity interest in Cayman Company, which will issue 68,632,479 shares to Leo HK at a consideration of RMB 0/share. After the issuance finishes, Leo HK will own 68,632,479 shares in Leading Ideal Inc., which is in line with the volume Leo Group holds in CHJ prior to the restructuring.

Meanwhile, Leo Group will sign a series of agreements with Leading Ideal's subsidiaries in China, while the stake it directly hold in CHJ remains same in terms of industrial and commercial registration.

Leo Group said CHJ is dedicated to researching, developing and producing new energy vehicles (NEVs) and is demanding a huge amount of investment. If the Cayman Company successfully goes public, the subsequent investment pressure for shareholders will be somewhat relieved. Besides, the group restructures its equity in CHJ into the stake in Cayman Company for the stake of ensuring the interest it controls in CHJ and lowering the group's risk.

In April, CHJ's first production model, the LEADING IDEAL ONE, officially hit the market with an after-subsidy price of RMB328,000 and is scheduled to be handed over to consumers from the fourth quarter of 2019.

Variable interest entities (VIEs) are commonly used structures for Chinese companies to get listed in overseas stock exchange markets. The founders usually set up an offshore company that will get listed in overseas stock markets. In order to overcome foreign investment restrictions, this offshore company may establish a Hong Kong company that can set up a Chinese company as a wholly foreign-owned enterprise. In recent years, more than one hundred Chinese companies have adopted the VIE structure for their offshore listings, including internet companies such as Alibaba, Tencent, Baidu, Sina and NIO, etc.