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The9 Signs JV Agreement With Faraday Future - Valuation Update

|About: The9 Limited (NCTY)

The9 will be a 50% partner in the joint venture with control over business operations by investing up to US$600 million into the JV. Previous round valuation of Faraday Future.

Target share price - US$26 to US$48.

Pre-market share price of The9 was up by 56% at 5:50am.

The Chinese internet company The9 Limited (Ticker NCTY) (“The9”) has finally hopped on the bandwagon, in this case, it is an ultra-fast and ultra-luxurious electric vehicle. The9 made an announcement yesterday on its signing of a joint venture agreement with Faraday Future (“FF”). A not so surprising strategy as companies from heavyweight traditional car makers to technology giants are all betting on this USD200 billion market.

According to PR Newswire, The9 will be a 50% partner in the joint venture with control over business operations. FF will contribute the use right in a piece of land in China for electric cars manufacturing and will grant the joint venture an exclusive license to manufacture, market, distribute and sell FF’s new brand V9 model and other potential selected car models in China, with The9 providing financing up to US$600 million to the JV. The JV will manufacture, market and distribute the sales of V9 model, a flagship luxury EV based on the technology and design concepts of the FF 91.

The9 was one of the earliest Chinese internet company who got listed on the US stock market since 2004 and despite its recent lacklustre share price performance, it appears to remain as a stock that is actively followed by the investor community. During the past few years, the company has demonstrated persistent endeavour venturing into other technology related spaces outside of online games. And this JV with FF sounds like just the right project for the company to excel again.

FF is a California based EV manufacturer and has allegedly recruited talent from Apple, Tesla SpaceX and other well-known automakers. It has nearly 400 patents and more than 2,000 pending. The all-electric and autonomous-ready FF91 model which the V9 is based on, is the first production vehicle and flagship model of FF. FF’s website highlighted the performance of FF91 - 3 electric motors, 0-60 MPH in 2.39 seconds and 1,050 horsepower. The pre-production of FF91 was finished in August 2018.

FF’s latest round of funding came from a Hong Kong listed company Evergrande Health (“EH”). According to the announcement on the HK exchange made by EH back in June 2018, EH acquired 45% equity interest in FF for US$2B, thereby giving FF an implied valuation of US$4.4B. During the two-month period after its announcement of investing into FF, the stock price of EH went up by 278% from HKD4.6 to its peak price at HKD17.4, representing an increase in market cap of EH by a staggering amount of US$14B!

What is more interesting is that, while this JV is expected to account for most of FF’s value, the pre-money valuation that The9 is paying for this JV is only USD600M, representing a steep discount to FF’s previous round valuation. So, what is the catch?

It appears that Jia Yueting, the ultimate shareholder of FF, has not returned to China since the LeTV incident in 2017 and this has made life difficult for FF to set foot in China. Now with The9 controlling the business operation of the JV, it is expected that The9 will take lead on the JV’s business development in China. Current CEO and major shareholder of The9, Zhu Jun (“Zhu”) ranks among the first generation of Chinese Internet tycoons. Zhu is well respected within the business community and maintains good relationships with the government, especially those in the Yangtze River Delta where the JV operates.

As to how this deal would affect The9’s share price – what we know is that FF’s last round valuation paid by EH was USD4.4B and the share price of EH suggested that FF’s valuation should be even higher. Whilst at this moment we might not have as much information as we would like to deduce an exact valuation of the JV based on FF’s valuation, I incline to think that the 50% JV stake that The9 holds will likely be worth north of USD1B. This will translate into an increase of The9’s share price by at least USD24.0 per share.

However, it would make more sense to look at the market implied valuation of FF of around USD8.9B based on a one-month average share price of EH since its investment into FF. This market approach give rise to a JV’s valuation of USD4.4B on a pre-money basis and USD5.0B on a post-money basis. Accordingly, The9’s 50% stake of the JV should worth USD2.5B on a post-money basis and therefore USD1.9B on a pre-money basis. This will translate into an astonishing USD46.1 additional equity value per share!

Share price of EH