HSAI: Global Demand For ADAS Technology Will Drive Long-Term Upside

Key Takeaways

• Expanding global presence and design wins, including with a top European OEM, could significantly diversify and boost revenue streams.
  
• Increasing LiDAR adoption in EVs and robotics could enhance market share and revenue growth, driven by anticipated shifts in demand dynamics.
  
• Heavy reliance on major clients and expansion in emerging markets may strain finances, risking profit margins and revenue growth amidst competitive pricing and CapEx demands.

Catalysts

Through with its subsidiaries, engages in the development, manufacture, and sale of three-dimensional light detection and ranging solutions (LiDAR) in Mainland China, Europe, North America, and internationally.

• The projection of 2025 LiDAR shipments reaching 1.2 million to 1.5 million units, with nearly 200,000 high-margin robotic LiDAR units, is expected to significantly boost revenue.
  
• Anticipated net revenues of RMB 3 billion to RMB 3.5 billion for 2025, driven by strong demand and mass market adoption, indicate potential growth in revenue.
  
• The growth of the ADAS market and LiDAR adoption in EVs is expected to rise from 8% in 2023 to 20% in 2025 and 56% by 2030, potentially increasing future revenue and market share.
  
• Expanding into the global market with new design wins, including a top European OEM, highlights the company's growing international presence and potential revenue diversification.
  
• Continued robotics market penetration, including partnerships for robotic applications and the successful launch of the JT Mini LiDAR, could have a substantial positive impact on earnings.

Hesai Group Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Hesai Group's revenue will grow by 41.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.9% today to 16.3% in 3 years time.
• Analysts expect earnings to reach CN¥1.5 billion (and earnings per share of CN¥5.22) by about August 2029, up from CN¥498.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥2.2 billion in earnings, and the most bearish expecting CN¥957.6 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 31.7x on those 2029 earnings, down from 40.3x today. This future PE is greater than the current PE for the US Auto Components industry at 18.6x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.23%, as per the Simply Wall St company report.

Risks

• The competitive pricing strategy, particularly with the ATX LiDAR being priced at approximately $200, may lead to pressure on profit margins if it becomes difficult to maintain efficiencies or if raw material costs increase, potentially impacting net margins.
  
• Dependency on core clients like BYD, Li Auto, and Leapmotor for substantial revenue could pose risks if these clients shift suppliers or reduce orders due to strategic changes, potentially affecting future revenues.
  
• The expansion into robotic LiDAR applications means tapping into markets that are still emerging, posing a risk of slower-than-anticipated adoption rates, which could delay expected revenue growth in new segments.
  
• Overseas market expansion, particularly in regions like Europe with slower electrification rates, may face unforeseen regulatory or competitive hurdles, which could slow revenue diversification and impact overall earnings.
  
• The ambitious production capacity expansion plan, requiring significant CapEx investments, may strain financial resources if expected demand does not materialize, affecting cash flow and potentially putting pressure on financial growth projections.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $28.97 for Hesai Group based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $36.1, and the most bearish reporting a price target of just $24.93.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be CN¥9.4 billion, earnings will come to CN¥1.5 billion, and it would be trading on a PE ratio of 31.7x, assuming you use a discount rate of 9.2%.
• Given the current share price of $19.1, the analyst price target of $28.97 is 34.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.