Chinese LiDAR developer Hesai Group (HSAI) has released pricing details about its upcoming IPO. According to MarketWatch, “it plans to sell 9 million American depositary shares in an initial public offering, with each ADS representing a single Class B ordinary share.” The offering is expected to price at between $17 and $19 per ADS. With 9 million shares offered, Hesai will raise $162 million at the midpoint price and achieve a market cap of $2.24 billion.
Hesai will be among the first Chinese technology companies to go public since a landmark agreement between the US and China on auditing Chinese companies was signed last year. Consequently, its IPO could be a precedent for the future state of Chinese investment.
There are strong points in Hesai’s favor such as the growing importance of the LiDAR industry. For many investors, there may be concerns about the Chinese market as well as certain financial numbers, but this is, nevertheless, a company which they should strongly consider given its growth potential.
The Chinese Problem
First, investors need to understand how Chinese IPOs have changed over the past few years amid rising tensions.
In July 2021, the SEC declared that Chinese companies could not raise money in the United States without further disclosure about their ties to Beijing. The result was that Chinese companies almost completely abandoned the US stock market. After further negotiations between the US and China, Quartz reported that the SEC “finally secured complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong” in December 2022.
This change, combined with an end to China’s zero-COVID strategy, means that we can expect a sudden, massive increase in Chinese IPOs this year. Investors may be more confident that a Chinese company’s IPO financial statements are more accurate.
But that does not mean that there are no concerns with investing in Chinese companies. China’s Securities Regulatory Commission has not yet published its rule for Chinese companies listing offshore according to Reuters. China may also impose restrictions on Hesai’s business. Hesai may even be delisted on the US market should it fail to follow SEC regulations. While the market for Chinese IPOs has reopened, investors should still be cautious of these companies.
Understanding Hesai
With the concerns about Chinese companies out of the way, let us examine Hesai. In its prospectus, Hesai states that “Hesai Technology is the global leader in three-dimensional light detection and ranging (LiDAR) solutions.”
LiDAR is primarily used for various robots and artificial intelligence applications. It is most well-known for being a crucial part of some autonomous vehicles. These vehicles use LiDAR to detect their surroundings, regardless of the outside weather or conditions. With the notable exception of Tesla (TSLA), every car company which is investing in autonomous cars is using LiDAR.
This means that the company has immense growth potential. Hesai argues that the global LiDAR market will be over $100 billion in 2030, compared to less than $1 billion in 2021. Other analyses like from Global Market Insights give less extravagant figures, though they do predict immense growth over the coming decade.
Unlike other tech IPOs which face competition from much larger firms in their market, Hesai is one of the largest LiDAR companies. Its $2.24 billion market cap would make it only a close second to Luminar Technologies (LAZR). Furthermore, Hesai states that it generated the highest revenue of all LiDAR companies in 2021.
Financial Numbers
Hesai demonstrates the LiDAR market’s potential with its high growth rate. The company reported a revenue of over $111 million (RMB 793 million) in the nine months ending September 30, 2022. This represents a 72.4% growth compared to the previous period. This is all the more impressive given that its growth rate from 2020 to 2021 was practically the same at 73.1%. This shows that Hesai has able to grow despite COVID restrictions.
It also has a healthy balance sheet. With $105 million cash up against $120 million in total liabilities and a net loss of $23 million in 2022, it can keep operating for years without issue.
But Hesai’s other financial numbers ring some alarm bells. First, Hesai’s gross margins fell drastically to 44% in 2022. While its revenue in the nine months ending September 30, 2022 were higher than its revenue for all of 2021, its gross profit was not. Furthermore, its cash flow loss from operating activities is also increasing. Cash flow loss rose from $32 million in 2021 to $71 million in the nine months ending September 30, 2022.
These numbers should spark concern about Hesai’s ability to become profitable and could see it needed loans from a company like ABC Finance, While the LiDAR market is increasing, it will also become more competitive. There is also the possibility that larger firms such as Ford (NYSE:F) could directly enter the market. Competition will drive down prices, making it more difficult to become profitable.
Valuation and Final Thoughts
Is Hesai a good investment at $2.24 billion? With $105 million cash and $120 million in total liabilities, its enterprise value is about $2.1 billion. Extrapolating its 2022 revenue to the entire year gives a figure of $148.7 million and an EV/revenue ratio of 14.1. By comparison, Luminar Technologies had an EV/revenue ratio of over 68, with a revenue of $41 million in 2022.
If Hesai was an American company, there would be a strong case to go for this company even after any post-IPO bump. There are positives and negatives in its financial numbers, but it looks to be in a prime position to take advantage of the growing LiDAR market in the years to come.
That case is weakened by the fact that it is a Chinese company. There could be further disputes between the US and Chinese governments. The LiDAR market, in addition to a field of immense potential, also carries major national security implications. Both the United States and China want to be leaders in autonomous vehicles. As a result, they will be loath to give away any of their technology. Further restrictions and regulations could dampen Hesai’s potential.
But given the low valuation and its growth potential, investors should look to go for this company, even after any post-IPO boom. Hesai’s good numbers and growth potential speak well for the potential of Chinese companies.
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