Horizon and NANFANG BLACK SESAME, who has more potential to become the "number one smart driving chip stock"?

Amidst the trend of NOA (Navigation on Autopilot) sweeping the entire industry, autonomous driving chip manufacturers are once again in the spotlight. Horizon Robotics and NANFANG BLACK SESAME INTELLIGENCE, both of which have already conducted hearings on the Hong Kong Stock Exchange, are the market participants standing in the forefront this time.

With the crucial moment approaching for Tesla's FSD to enter the Chinese market, both Horizon Robotics and NANFANG BLACK SESAME INTELLIGENCE plan to go public in the second half of this year.

For both companies, vying for the title of "leading smart driving chip stock" is crucial. For investors, it is even more important to consider which company has higher certainty and investment value.

I. Affordability is Key

Autonomous driving is an industry with great development prospects. In the long run, the market size of the autonomous driving machine market, including automobiles, is estimated to be a $300 billion opportunity. By 2030, the total value of automotive ADAS and infotainment systems is expected to exceed $100 billion.

Mobileye is the world's leading ADAS chip supplier. Since its acquisition in 2017, Mobileye has been Intel's ace in the smart driving chip field.

Unfortunately, Mobileye has inherited Intel's old problem of squeezing technology and insisting on the integrated matching of "chips + algorithms", with a closed architecture that makes it difficult to ensure data security and makes it difficult for customers to customize development. This does not align with the development trend of the new energy vehicle industry, where automakers emphasize customized services and countries emphasize data security.

As the industry matures, market competition has intensified significantly. Mobileye, unable to keep up with customer demands, has lost a considerable market share, while domestic enterprises have seized the opportunity to compete for market share.

In 2022, in the global high-computing power (computing power greater than 50Tops) autonomous driving SoC field, NVIDIA, Horizon Robotics, NANFANG BLACK SESAME INTELLIGENCE, Huawei HiSilicon, and Qualcomm, these giants occupy 94.7% of the global market share.

Being a well-known domestic chip design company does not necessarily mean being in a practical competitive relationship with NVIDIA. It's just that NVIDIA's chips are too expensive, and domestically produced chips with the advantage of good quality and low price need to emerge.

Taking Horizon Robotics as an example, the unit price of its Journey chip is less than $50 per piece, lower than Mobileye and far lower than NVIDIA Orin priced at $250. NANFANG BLACK SESAME's Huashan series is even as low as $15 per chip.

The biggest advantage of domestic chips is affordability, which is very attractive to new energy vehicle companies that focus on BOM costs Horizon has successfully partnered with Li Auto ONE and L9, as well as collaborating with SAIC, Volkswagen, and BYD. NANFANG BLACK SESAME provides the automatic driving computing chip for XPeng's P5, and has signed orders with Geely, FAW, and Dongfeng. With the continuous increase in sales of new energy vehicles, Horizon and NANFANG BLACK SESAME have also entered the forefront of the market.

The revenue growth of both companies is closely related to the sales volume of new energy vehicles, with high year-on-year growth in the first three years.

In the early stage, the key to the development of Horizon and NANFANG BLACK SESAME lies in the popular models with price advantages. However, in terms of later development space, Horizon has more advantages.

2. Horizon has more highlights

In terms of functionality, NOA is the most watched feature in the intelligent driving field. In 2023, the adoption rate of high-speed NOA function in new energy passenger vehicles reached 20.45%, and the urban NOA function adoption rate was 6.51%.

From ADAS to NOA, greater computing power is needed for technical implementation; early realization of mass production and landing is also required, along with better adaptation to vehicle manufacturers and strengthening deep cooperation.

In the field of NOA, Horizon is the only domestic autonomous driving startup company that has achieved mass production. In April of this year, Horizon released Horizon 6, with a maximum computing power of 560 TOPS. Mass-produced models equipped with Horizon 6 have started delivery within 2024, including SAIC MARVEL R, Volkswagen ID.3, BYD Han, etc.

On the other hand, the latest A2000 chip from NANFANG BLACK SESAME has a maximum computing power of only 250+ TOPS, and it has only secured orders from WM Motor, IM Motors, XPeng, and GAC, without achieving mass production delivery yet.

This "hardware-first" advantage has a positive effect on both customers and companies. By achieving mass production delivery earlier, over time, the compatibility between hardware and corresponding algorithms will increase, deepening cooperation with customers. For vehicle manufacturers, it also enables them to bring autonomous driving functions to the market faster, ultimately capturing user mindshare earlier.

Horizon, with the advantage of "hardware-first," has taken the lead in the development trend of NOA.

Furthermore, learning from the lessons of Mobileye's decline in market share due to lack of openness, both Horizon and NANFANG BLACK SESAME have achieved architectural openness, leading to the generation of licensing revenue From the scale and proportion of this income, Horizon is still leading.

In general, car companies will conduct secondary development based on the architecture of intelligent chips and develop their own software algorithms. In Horizon's cooperation model, it even allows car companies to use their own architecture and toolchain to design and develop chips.

For car companies without self-developed capabilities, this is like having food delivered to their mouths, and the food is quite delicious.

Horizon laid out the intelligent driving technology three years earlier than Black Sesame, and also provided products and services for consumer electronics such as robotic vacuum cleaners (non-automotive solutions); in terms of research and development, its investment is four times that of Black Sesame. Therefore, its overall algorithm strength is stronger, and customers prefer it more.

Horizon's licensing revenue is increasing along with the volume of chip shipments, accounting for an increasing proportion of total revenue.

As Tier-2 companies, Horizon and Black Sesame have self-developed capabilities and data from multiple car manufacturers, with mature models that can provide customized products and services to meet the needs of various car manufacturers.

However, customization is very resource-intensive. For example, the differences between models with and without LiDAR are significant, requiring separate solutions for each. As the number of models increases, the company's cost investment also needs to continuously increase, making profitability difficult.

Licensing, on the other hand, is earning money from patents, which is zero-cost income. The higher this part of the income, the more it can dilute costs, which is crucial for Tier-2 companies struggling to be profitable.

Thanks to the increasing proportion of licensing revenue, Horizon can maintain a stable gross profit margin of 70% while growing revenue, which is very helpful for the company to maintain a price advantage.

In contrast, Black Sesame is increasing revenue without increasing profitability, facing obvious challenges in technology commercialization.

First of all, the difference in income scale between the two is like night and day, with Black Sesame lacking economies of scale. Without scale, its resource volume is insufficient to support a large customer base with differentiated solutions. Secondly, in addition to the late layout time, the lack of economies of scale further leads to weaker algorithm strength for Black Sesame. Therefore, despite the increasing licensing revenue (based on algorithm solutions), the proportion has not increased. Black Sesame, unable to dilute costs, will only sell more at a loss.

Furthermore, in addition to intelligent driving, Black Sesame also has intelligent cockpit business. In 2023, its intelligent cockpit business revenue was 28 million, accounting for 9% of total revenue. Although the proportion is not high, the functions and technologies involved in intelligent cockpit are more complex, requiring larger investments, which further increases costs and lowers gross profit, leading to a decrease in the company's gross profit margin from 36.1% in 21 to 24.7% in 23.

Looking only at total revenue, both are growing, but upon closer inspection, it can be found that Horizon, with its strong economies of scale and algorithmic capabilities, has a better business model than NANFANG BLACK SESAME, making it easier to make money. From technology to costs, Horizon is leading, but when it comes to creating new value, there are still many considerations.

3. Horizon has higher certainty

NANFANG BLACK SESAME has already completed 10 rounds of financing, with a total financing amount exceeding 5 billion RMB, but off-site blood transfusions have not been able to curb the company's losses. In 2023, NANFANG BLACK SESAME's net loss was 4.85 billion RMB, a year-on-year increase of 76%, several times the revenue for the period.

Nio, Xiaomi, and Tencent are all shareholders of NANFANG BLACK SESAME, but none of them have continued to invest since 2022, and neither Xiaomi's SU7 nor any car under Nio uses NANFANG BLACK SESAME's chips. This also indirectly indicates that NANFANG BLACK SESAME's technology is not up to par, and the proportion of total revenue from its top five customers has decreased from 77.7% in 2021 to 47.7% in 2023.

Furthermore, NANFANG BLACK SESAME has a high debt ratio and tight cash flow. As of 2023, its accounts receivable were 165 million RMB, current liabilities were 334 million RMB, cash and cash equivalents were 1.161 billion RMB, and operating cash flow was -1.058 billion RMB. The cash on hand can only sustain 15 months of operation.

Therefore, despite the company having secured intended orders totaling over 10 billion RMB, due to financial constraints, it is difficult to deliver independently. In this IPO, NANFANG BLACK SESAME plans to use a large portion of the funds to fulfill intended orders.

At the time of the last round of financing, NANFANG BLACK SESAME was valued at 16 billion RMB. Based on the 2023 revenue, the PS ratio was as high as 52 times, even higher than NVIDIA's current valuation. This high valuation, coupled with the need for NANFANG BLACK SESAME to borrow money to fulfill orders, further exacerbates investment risks. If financing is unsuccessful, not to mention delivering orders, the future of the company after 15 months is uncertain.

Similar to NANFANG BLACK SESAME, Horizon is also in a loss-making state, but the magnitude is decreasing. From 2021 to 2023, Horizon's adjusted net losses were 1.103 billion RMB, 1.891 billion RMB, and 1.635 billion RMB. As of 2023, the company's cash and cash equivalents reached 11.36 billion RMB, with long-term borrowings of only 110 million RMB. Funds are not tight and are even quite abundant.

Moreover, Horizon has not lost its largest customer and has even discussed new cooperation. CoolRui Cheng, established in November 2023, is a joint venture company between Horizon and CARIAD, a software company under Volkswagen. This joint venture brought Horizon 630 million RMB in revenue in 2023, accounting for 40.4% of the total revenue for that year. Establishing a joint venture with Volkswagen also gives Horizon hope for overseas development, accelerating the internationalization of its business layout. Horizon has completed a total of 11 rounds of financing, with a cumulative amount exceeding 30 billion yuan. Among the investors are top car manufacturers and suppliers such as CATL, FAW, and BYD. By the final round of financing, its valuation reached 63 billion yuan, with a PS ratio of 22.5 based on the revenue of 23 years.

Although Horizon's PS ratio is not low, more than 50% of the models that have not yet achieved mass production have already obtained designated points, and it also has the ability to deliver independently, providing a relatively higher certainty of revenue growth.

Overall, both companies have high valuations before IPO, but Horizon has a higher margin of safety relatively.

The mention of margin of safety is due to the fact that automotive semiconductors belong to a cyclical industry, and it is currently at the bottom of the cycle, making it uncertain when it will rebound.

However, as one of the few chip design companies in China that can compete with NVIDIA, Horizon is still worth continuous attention. As for Black Sesame, its risk level is undoubtedly higher, but if strong catalysts emerge, there are also trading opportunities, such as the previous large-scale re-subscription by star capital.

IV. Conclusion

It is not important who will become the "first stock of smart driving chips", what matters is who has more investment value.

Both Horizon and Black Sesame have grand narratives of domestic substitution, but while Black Sesame's integrated cabin and driving concept is good, it is just empty talk without the ability to realize everything, risking overextension without the support of strength and financial resources.

In comparison, Horizon is more powerful, with integrated development of software and hardware, diversified income, and an accelerated process of turning losses into profits, even with hopes for overseas development.

However, we also need to recognize a reality that Horizon is currently just a substitute for NVIDIA and has not formed absolute competitive strength. For a long time, the chip field will still be dominated by foreign companies, and domestic enterprises will continue to face significant competitive pressure