The fierce competition in the smart driving industry, how does ZhiXing Auto seize the opportunity to go public?

ZhiXing Auto Technology (Suzhou) Co., Ltd. (referred to as "ZhiXing Auto") may still need to "take it slow" to become the first intelligent driving stock in Hong Kong.

On October 5th, due to the 6-month interval since the first submission, ZhiXing Auto re-submitted its prospectus on the Hong Kong Stock Exchange website.

However, as early as September this year, ZhiXing Auto had already passed the hearing, but it did not choose to start the roadshow and listing process immediately. Instead, it chose to delay the re-submission until now, indicating a planned listing.

ZhiXing Auto's founder and CEO, Song Yang, has a strong background in the automotive supply chain and has served as the founder of Bosch China's Intelligent Driving R&D Department and the former General Manager of KSS Active Safety China. Co-founder Luo Hong and CTO Lu Yukun are experts in hardware development and autonomous driving systems, respectively.

Since its establishment in 2016, ZhiXing Technology has successively received nine rounds of financing from investors such as Mingse Capital, Ideal Car, and CICC International, with a post-investment valuation of 3.3 billion yuan in the last round. Before the IPO, the National Mixed Reform Fund held 9% of its shares, making it the largest external shareholder.

In fact, in the increasingly "turbulent" intelligent driving industry, there are many Tier 1 suppliers like ZhiXing Auto.

A person in the Beijing intelligent driving supply chain industry frankly told Xinfeng (ID: TradeWind01) that the current competition in the intelligent driving supply chain market is chaotic, with too many types and numbers of Tier 1 suppliers, and there is no standard rule or system.

"It will take a few years of reshuffling to understand."

For small-scale local Tier 1 suppliers like ZhiXing Auto, which rely heavily on major customers and external suppliers, raising more money in the secondary market is one of the necessary conditions to "take it slow" because there are not only international giants and internet technology companies in the industry, but also strong automakers who do not hide their ambitions for full-stack self-development.

Only by staying at the table can ZhiXing Auto have the opportunity to demonstrate its indispensability and barriers as an intelligent driving solution provider.

Involved in the supplier melee

With the support of major customer Geely, ZhiXing Auto has grown into the second-largest domestic Tier 1 autonomous driving controller, with a market share of about 26.2%. However, its highly concentrated supplier and customer structure also brings corresponding risks.

From 2020 to 2022, ZhiXing Auto's revenue reached 47.655 million yuan, 178 million yuan, and 1.326 billion yuan, respectively, mainly contributed by the sales of autonomous driving domain controllers. In 2022, the revenue proportion reached as high as 94.3%.

In terms of revenue sources, more than 90% of ZhiXing Auto's revenue comes from Geely Group's subsidiary, JiKe. The latter mainly purchases the SuperVision autonomous driving controller solution from ZhiXing Auto. This product is mainly developed based on the technology of Mobileye, a chip manufacturer under Intel.

This also leads to a high concentration of ZhiXing Auto's suppliers. In 2022, its procurement from Mobileye accounted for 69.2% of the total procurement amount for the period, and increased to 90.3% in the first half of this year. The bargaining power of ZhiXing Auto is very weak, as it is constrained by large suppliers in the upstream and a single major customer in the downstream.

Despite achieving a tenfold increase in revenue scale in 2022, its profitability remains weak.

From 2020 to 2022, ZhiXing Auto incurred losses of 54 million yuan, 464 million yuan, and 342 million yuan respectively. In 2022, ZhiXing Auto's gross profit margin experienced a sharp decline from 20.63% to 8.34%, and economies of scale were not reflected.

In comparison, the gross profit margin of local industry leader Desay SV Automotive (002920.SZ) has remained stable at around 20%. Even in 2022, when chip prices rose, its intelligent driving product still had a gross profit margin of 21.52%.

From the perspective of business stability, ZhiXing Auto's hidden concerns go beyond the simple "neck constraint" faced by both upstream and downstream, but also include the risk of being "backstabbed" by major customers.

For example, Geely has supported ZhiXing Auto as a local Tier 1 for Jike, but also incubated Yikatong as a Tier 0.5 due to the need for full-stack self-development. The proximity and distance between the two differ, and the future increase in order space for ZhiXing Auto still needs to be verified.

Geely's approach is not uncommon in the industry. Great Wall Motors also has Nobo Technology and Haomo Zhixing, while SAIC has Lianchuang Automotive Electronics.

An industry insider from a smart driving supply chain in Beijing told Xinfeng (ID: TradeWind01) that these Tier 0.5 companies can be understood as Tier 1 companies that cannot do business with other companies. There are too many suppliers in the market, resulting in a general price "race to the bottom". This can also explain the significant decline in profit margin for ZhiXing Auto in 2022 despite a substantial increase in order volume.

"If you don't go global, you can calculate how many Tier 1 companies China's automotive market can support, and if you can go global, you can calculate how many companies the global market can support." The above-mentioned person described the current market situation in this way.

Barriers to competition remain to be seen

In the increasingly blurred field of autonomous driving, the relationship between Tier 1 suppliers, core component manufacturers, and vehicle manufacturers is delicate and complex.

In the game of interests among multiple parties, as a major system integrator, ZhiXing Auto not only needs to guard against "backstabbing" and further bind itself to major customers, but also needs to find more solid barriers to competition.

According to the research report by Cheng Bing, an analyst at Zheshang Securities, the major players in the field of autonomous driving can be divided into four categories:

The first category includes traditional foreign Tier 1 suppliers such as Bosch, the second category includes local Tier 1 suppliers such as Desay SV Automotive and ZhiXing Auto, the third category includes internet technology and software companies such as Huawei and Baidu (BIDU.NASDAQ), and the fourth category includes vehicle manufacturers such as Tesla (TSLA.NASDAQ) and Xiaopeng Motors (XPEV.NYSE).

Traditional foreign Tier 1 suppliers have industry-leading hardware manufacturing capabilities, while Huawei, Baidu, and others have advantages in software algorithms and other technical capabilities.

In comparison, core components rely on procurement, and software applications rely on ZhiXing Auto's advantage of providing "tailor-made services" to better meet the customized needs of vehicle manufacturers. The prospectus shows that in the cooperation between ZhiXing Auto and JiKe, the former purchased the basic version of SuperVision from Mobileye and customized and enhanced the system architecture for different vehicle models according to the latter's needs.

ZhiXing Auto is not responsible for assembly and manufacturing, but only for vehicle integration, testing, and validation of SuperVision before mass production, as well as OTA upgrades and functional testing after mass production.

However, the openness of SuperVision provided by Mobileye is not high. The slow progress of ZhiJia's flagship model, ZhiJia 001, in autonomous driving after its launch is widely attributed to the "black box" mode of Mobileye's software and hardware integration, which fails to meet the needs of the automaker.

Once JiKe changes chip suppliers or begins to rely mainly on self-developed chips, ZhiXing Auto will inevitably suffer. From an equity perspective, ZhiXing Auto, which has not received investment from Geely, is not stable. JiKe's management publicly stated earlier this year that it will adopt NVIDIA's computing chip. Meanwhile, LiXiang has long abandoned Mobileye and instead established a deep partnership with domestic chip manufacturer Horizon Robotics.

In the prospectus, ZhiXing Auto also stated the risk of direct cooperation between Mobileye and Geely or the two parties' cooperation with other Tier 1 suppliers. At the software development level, Geely can also choose to develop its own autonomous driving system, as this is the "soul" of the automaker.

Before the barrier of scale advantage is built, ZhiXing Auto will still face the risk of being replaced.

It is obvious that a large number of complete vehicle manufacturers have started to bypass Tier 1 suppliers and directly cooperate with core component manufacturers.

For example, in the field of autonomous driving chips, Volkswagen Group has established a joint venture with Horizon Robotics to jointly develop a full-stack advanced driver assistance system and autonomous driving solutions. In the field of LiDAR, industry leader Hesai Technology (HSAI.O) has formed a partnership with LiXiang.

Industry insiders in the intelligent driving supply chain mentioned above also told Xin Feng (ID: TradeWind01) that the competitive barrier of chip manufacturers is higher than that of integrated solution providers, and the corresponding bargaining power is also higher.

Therefore, Black Sesame Intelligence, which is also queuing for listing on the Hong Kong Stock Exchange and focuses on automotive-grade chips, has a gross margin of more than 20%, while SureStar, which focuses on LiDAR, has a gross margin of more than 40%. In contrast, ZhiXing Auto, as a system integrator, only has a single-digit gross margin.