Has Horizon Robotics, with a 145% increase in valuation over seven years and about to go public, worth looking forward to? | Zhike

Author | Ding Mao

Editor | Zheng Huaizhou

After missing the title of "the first domestic autonomous driving chip stock", Horizon Robotics finally reaches its IPO moment.

On October 8, after Horizon Robotics passed the hearing of the Hong Kong Stock Exchange, the market enthusiasm remains high. According to the latest announced progress, from October 16 to 21, Horizon Robotics officially started the IPO process, planning to issue 1.355 billion shares, with the offering price ranging from HK$3.73 to HK$3.99 per share, and 600 shares per lot. The fundraising amount is not more than HK$5.41 billion (approximately RMB 5 billion), and it is planned to officially list on the Stock Exchange of Hong Kong on October 24.

It is reported that after the completion of the global offering, the maximum listed market value of Horizon Robotics will reach HK$52 billion, becoming one of the largest Hong Kong stock IPOs in terms of market value this year. At the same time, four entities, Alisoft China (a subsidiary of Alibaba Group), Baidu, PARTICIPATIONS 1, and Ningbo Yongning Gaoxin SP (a Ningbo municipal government fund), will jointly subscribe for the company's US$220 million worth of shares as cornerstone investors, which undoubtedly adds more stabilizers to the company's market performance after listing.

So, as a super unicorn in the intelligent driving field, is Horizon Robotics worth looking forward to after landing on the secondary market?

Annual growth rate exceeds 80%, with considerable growth potential

Horizon Robotics positions itself as a Tier 2 intelligent driving supplier, mainly providing advanced assisted driving and high-level autonomous driving solutions integrated with software and hardware to automotive Tier 1 suppliers and OEMs. Its products include related algorithms, processing hardware, and a complete set of development tools.

From 2021 to the first half of 2024, the company's revenues were RMB 467 million, RMB 906 million, RMB 1.552 billion, and RMB 935 million, with year-on-year growth rates of 94.1%, 71.3%, and 151.6%, respectively. The compound annual growth rate from 2021 to 2023 was 82%, and the overall business is in a stage of rapid expansion.

Figure: Horizon Robotics' revenue performance    Data source: Prospectus, 36Kr

From a business segmentation perspective, the company's main business can be divided into two categories: automotive solutions business and non-automotive solutions business. Among them, the automotive solutions revenue accounted for nearly 98% in the first half of 2024, which is the main source of income for the company, and it can be further divided into product solutions and licensing and services.

Specifically, the product solutions mainly refer to selling advanced assisted driving and high-level autonomous driving solutions with Journey processors to Tier 1 suppliers and OEMs. The current main products include Horizon Mono (equipped with Journey 2 and 3 processors), Horizon Pilot (equipped with Journey 3 and 5 processors), and Horizon SuperDrive (equipped with Journey 6 processors); while the licensing and services business refers to licensing algorithms and software to customers, and providing relevant code and design manuals to collect licensing fees, while also providing design and technical services to customers to collect service fees.

Figure: Horizon Robotics' business model    Data source: Prospectus, 36Kr

In recent years, with the rapid penetration of smart cars and the improvement of the company's market recognition, the number of fixed-point vehicle models for its solutions has been continuously expanding, from 44 models in 2021 to 275 models in the first half of 2024. In 2023 alone, the number of newly added fixed-point vehicle models exceeded 100. As of the latest practicable date, the company's integrated software and hardware solutions have been adopted by 27 OEMs and installed in more than 285 vehicle models, covering different price ranges from RMB 80,000 to RMB 430,000.

Benefiting from the increase in the number of solutions, both the company's product solutions and licensing services businesses have achieved rapid growth, but overall, there is a trend of a continuous increase in the proportion of licensing and services business revenue. Specifically, the revenue of the product solutions business expanded from RMB 208 million in 2021 to RMB 506 million in 2023, and recorded RMB 222 million in the first half of 2024, with the revenue proportion decreasing from 44.6% to 23.8% in the first half of 2024; while during the same period, the revenue of the licensing and services business expanded from RMB 202 million in 2021 to RMB 964 million in 2023, and further increased to RMB 691 million in the first half of 2024, with the proportion increasing from 43.3% to 73.9% in the first half of 2024.

Compared to the product solutions, the licensing services, which are mainly paid for intellectual property, are a typical asset-light business with a higher gross profit margin. At the same time, considering the general trend of cost reduction in the intelligent driving industry in recent years, the trend of exchanging volume for price in hardware and solutions is obvious, and the overall gross profit margin of the hardware industry shows a downward trend. According to the prospectus data, the gross profit margin of Horizon Robotics' product solutions business decreased from 68.5% in 2021 to 41.7% in the first half of 2024; while the gross profit margin of the licensing and services business slightly increased from 92% in 2021 to 93% in the first half of 2024.

Figure: Horizon Robotics' gross profit and gross profit margin performance    Data source: Prospectus, 36Kr

Under the favorable situation of the continuous increase in the proportion of the licensing and services business, the company's overall gross profit margin shows an upward trend. At the same time, the relatively flexible business model and open technology platform make the company's gross profit performance more competitive compared to its peers. From 2021 to the first half of 2024, the company's overall gross profit margins were 70.9%, 69.3%, 70.5%, and 79.0%, respectively.

Dependence on major customers

Although the company's revenue is expanding rapidly, providing investors with considerable growth space, at the same time, the company also has a significant risk of dependence on major customers. From 2021 to the first half of 2024, the proportion of the company's top 5 customers increased from 60.7% to 77.9%, and the proportion of the largest customer increased from 24.7% to 37.6%. That is to say, nearly 40% of the company's current income comes from the Core Journey authorization with the joint venture of Volkswagen.

According to the prospectus disclosure, in 2023 and the first half of 2024, the company's licensing and services business revenue was RMB 963 million and RMB 691 million, respectively. Among them, the Core Journey revenue was RMB 627 million and RMB 352 million, accounting for 65% and 51%, respectively. In other words, the related business of Core Journey has a very significant impact on the company's licensing and services. After deducting the Core Journey business revenue, the company's total revenue in 2023 and the first half of 2024 was RMB 923 million and RMB 583 million, respectively, and the year-on-year growth rate dropped to 1.8% and 56.7%. Excluding key customers, the company's growth potential is greatly reduced.

The extremely high customer concentration, especially the dependence on a single customer, undoubtedly brings more risks to the sustainability of the company's high revenue growth in the future. This risk is reflected in the following two aspects: First, the performance fluctuations of major customers have a crucial impact on the company. If the development of Core Journey is not as expected in the later stage, it will undoubtedly bring challenges to the stability and sustainability of the company's performance; Second, whether the company can continuously expand key customers similar to Core Journey to maintain the rapid expansion of performance, and this expansion attempt means higher marketing, R & D expenses, which may further weaken the profit performance in the short term.

Strong R & D-driven innovation, with short-term losses continuing

Unlike the outstanding performance on the revenue side, in terms of profitability, the company has been in a loss-making state for a long time.

According to the prospectus disclosure, from 2021 to the first half of 2024, the company's net losses were RMB 2.064 billion, RMB 8.720 billion, RMB 6.739 billion, and RMB 5.098 billion, and the adjusted net loss (Non-GAAP) for the same period was RMB 1.103 billion, RMB 1.891 billion, RMB 1.635 billion, and RMB 804 million, respectively.

Behind the huge losses, on the one hand, the autonomous driving is still in the early stage, the industry technology route is not yet stable, and the update and iteration speed is extremely fast. According to public data, the update cycle of intelligent driving chips is usually about 18 months. This also means that in the face of the rapid development of the industry, suppliers must keep up with the innovation rhythm and continuously launch new products that meet the market demand in order not to be eliminated by the market. Behind this is the extremely high requirement for technical reserves, innovation ability, and R & D speed, as well as the test of capital reserves.

Under the typical innovation-driven characteristics, Horizon Robotics, as a leading enterprise, naturally needs to continuously develop, upgrade, and launch new algorithms and software to the market to maintain its leading position, which leads to its facing a large-scale continuous investment. In the first half of 2024, the company's operating expenses were RMB 1.861 billion, almost twice the concurrent revenue, of which the most important R & D expenditure was RMB 1.42 billion, 1.5 times the revenue.

Figure: Horizon Robotics' R & D expenditure    Data source: Prospectus, 36Kr

In addition to the large-scale upfront investment, another reason for the company's continuous losses is that it is still in the volume expansion stage, and the sales scale temporarily cannot achieve economies of scale. Although the company's fixed-point vehicle models and installed capacity have continued to increase in recent years, and the market share of the company's advanced assisted driving solutions for Chinese OEMs increased from 3.7% to 21.3% in 2023, as mentioned earlier, the percentage of the company's operating expenses to revenue is still around 200%, although it has dropped significantly from 358% in 2021, it is still significantly higher than that of mature industries. The lack of economies of scale makes the company unable to amortize the rapid growth of expenses, thereby continuously weakening the profit performance.

Figure: Horizon Robotics' operating expenses performance    Data source: Prospectus, 36Kr

Looking forward to the future, considering that the current intelligent driving industry is still in a stage of rapid development, especially in the past two years, the preference of car manufacturers for high-level intelligent driving has driven the industry to slow down the demand for advanced assisted driving and increase the innovation investment in high-level intelligent driving. Under this background, in order to adapt to the changes in market demand, it is expected that suppliers represented by Horizon Robotics will enter a new stage of high investment in the short term. From the financial data, the company's current main revenue is concentrated in advanced assisted driving and high-speed NOA solutions, and the higher-level intelligent driving solutions have not yet generated revenue. This also means that before the high R & D investment achieves economic effects, it is expected that Horizon Robotics will still remain in a stage of continuous losses.

The long-term lack of self-hematopoietic ability forces the company's normal operation to rely heavily on financing. Although the company currently holds more than RMB 10 billion in cash and is not short of money in the short term, considering that the probability of the company's short-term profitability is extremely low and it faces more than RMB 3 billion in operating expenses each year, after going through more than 10 rounds of primary market financing in 7 years, it is extremely necessary to land on the secondary market to obtain more low-cost financing.

Is the 50 billion valuation high or not?

According to the prospectus disclosure, after the completion of the global offering, the listed market value of Horizon Robotics will be between HK$48.6 billion and HK$52 billion, which is slightly lower than the post-investment valuation of US$8.71 billion (equivalent to nearly RMB 62 billion) after the Series D financing in 2022. If calculated simply based on the revenue scale of RMB 1.55 billion in 2023, the price-to-sales ratio (PS) of Horizon Robotics after this listing is between 29 times and 31 times.

We selected four similar companies, namely Black Sesame Technologies, Zhixing Auto Technology, Mobileye, and NavInfo, as comparable benchmarks. After calculation, as of October 18, the average price-to-sales ratio (PS) of the four companies is 12 times, among which Black Sesame Technologies, which has a more similar business type and market position, has a corresponding price-to-sales ratio of 30 times.

Figure: Horizon Robotics' valuation comparison    Data source: Prospectus, 36Kr

Overall, compared to the average