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On August 8th, Black Sesame Technologies (02533.HK) was listed on the Hong Kong stock market, becoming the "first domestic intelligent driving chip stock." The company's IPO involved the sale of 37 million shares, with a final offering price of HKD 28 per share. After the market opened in the morning, the stock price of Black Sesame Technologies fell by 31.57%, with the share price dropping to HKD 19.16.

Under the trend of automotive intelligence, the market potential for intelligent driving chips is considerable. However, it is not easy for chip manufacturers to achieve mass production, secure sufficient orders, and cope with fierce market competition. Over the past three years, Black Sesame Technologies has seen an upward trend in revenue, but the losses have also increased, with a total deficit of nearly 10 billion yuan in three years. According to the company's disclosure, it is expected to continue to incur adjusted net losses (non-IFRS measures) and operating losses for the fiscal years ending December 31, 2024, and 2025.

Nearly 10 billion yuan in losses over three years

Black Sesame Technologies is one of the main domestic intelligent driving chip manufacturers. Established in 2016, the company's primary business is autonomous driving products and solutions, including the Huashan series of high-performance SoC (System-on-Chip) and the Wudang series of cross-domain SoC.

The company's list of investors is impressive, including Xiaomi, Tencent, Geely, SAIC Motor, Northern Light Venture Capital, Haisong Capital, and Wuyuefeng Technology Innovation. Cornerstone investors include Qicheng Development under GAC Group and Joyson Electronic USA, a subsidiary of automotive parts supplier Joyson Electronics. The company estimates that after the completion of the global offering, the founder, chairman, and CEO, Dan Jizhang, will control the voting rights of 21.68% of the issued share capital, making him the single largest shareholder.

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Looking at the operating situation, over the past three years, as the level of automotive intelligence has increased, the revenue of Black Sesame Technologies has also gradually increased. From 2021 to 2023, the company's annual revenue was 60.5 million yuan, 165 million yuan, and 312 million yuan, respectively, with a revenue of 27.5 million yuan in the first quarter of this year.

However, at the same time, the company's gross margin is facing a decline, while research and development expenses are high. The gross margin for 2021 to 2023 was 36.1%, 29.4%, and 24.7%, respectively. R&D expenses increased from 595 million yuan in 2021 to 1.362 billion yuan in 2023. The company also plans to use 80% of the proceeds from the global offering for R&D over the next five years.

Compared with the increasing revenue, the losses of Black Sesame Technologies are even greater. From 2021 to 2023, the company's net losses were 2.357 billion yuan, 2.754 billion yuan, and 4.855 billion yuan, with a total deficit of about 9.96 billion yuan over three years. In the first quarter of this year, some data of Black Sesame Technologies showed an improvement, with the gross margin rising to 60.9%. However, the company expects to continue to incur adjusted net losses (non-IFRS measures) and operating losses in 2024, mainly due to substantial R&D.

In terms of cash position, Black Sesame Technologies needs to rely on financing and other methods to obtain cash or achieve self-sustaining operations as soon as possible, otherwise, it will face the risk of running out of cash to a certain extent.

From 2021 to 2023, the net cash used in operating activities of Black Sesame Technologies increased from 639 million yuan in 2021 to 1.058 billion yuan in 2023. The cash obtained from financing activities in the past three years did not increase year by year, with 2.001 billion yuan, 804 million yuan, and 809 million yuan respectively. In the first quarter of this year, the net cash obtained from financing activities of Black Sesame Technologies was 60.746 million yuan, and the net cash used in operating activities was 282 million yuan. Looking at the ending cash and cash equivalents, they were 1.553 billion yuan, 982 million yuan, and 1.298 billion yuan from 2021 to 2023, and 1.054 billion yuan at the end of the first quarter of this year.Black Sesame Technologies has also disclosed that as of the end of May this year, the company has cash and cash equivalents, current financial assets measured at fair value through profit or loss, and unused bank credit amounting to 1.37 billion yuan. Assuming an average cash burn rate of 87.9 million yuan in the future, without a significant increase in the number of employees, no substantial capital investment, and no major acquisition of fixed assets, the company will be able to maintain its financial viability for 15.6 months. After the share offering, if the estimated net proceeds are about 985 million Hong Kong dollars (calculated based on the mid-point of the indicative offer price of 29.15 Hong Kong dollars per share), including the estimated net proceeds from the listing, the company can maintain 25.8 months.

Black Sesame Technologies also faces certain debt repayment pressures. Its total current liabilities have increased from 5.379 billion yuan in 2021 to 12.923 billion yuan in 2023, and its net current liabilities have risen from 3.688 billion yuan in 2021 to 11.282 billion yuan in 2023.

The market is highly competitive. In the smart driving chip market, manufacturers not only have to compete in chip design capabilities but also need to reduce hardware costs by promoting mass production. An insider in the smart driving chip industry told reporters that for chip manufacturers, the list of major players in the market may have been basically determined. In the face of fierce competition, players need to have a certain shipment volume to stand firm.

From the perspective of business progress, Black Sesame Technologies' Huashan series A1000 and A1000L have been mass-produced in 2022, and the A1000 Pro for L3 autonomous driving is expected to be mass-produced this year. The computing power of the three chips at INT8 precision is 58TOPS, 16TOPS, and 106+TOPS, respectively, and all three have generated revenue. As of the end of March 2024, the company's SoC product shipments have exceeded 156,000 units. Black Sesame Technologies also plans to develop the A2000 with a computing power of more than 250 TOPS for L3 and above, and expects to mass-produce it in 2026. The Wudang series C1200 has been taped out and is expected to be mass-produced in 2025.

From the perspective of chip manufacturing, the company entrusts TSMC to manufacture all SoCs, and the processes for Wudang C12000 and Huashan A2000 are both 7nm. Black Sesame Technologies stated that there is a certain risk in relying on TSMC to manufacture all of the company's SoCs.

From the perspective of market competition, Black Sesame is a leading smart driving chip manufacturer in China, but its market share still has a gap compared to manufacturers such as NVIDIA. According to a Frost & Sullivan report, among the top five major autonomous driving chip manufacturers in China in 2023, Black Sesame Technologies ranked fifth with a market share of 2.2%. The top four are Mobileye, NVIDIA, Texas Instruments, and Horizon, with market shares of 27.5%, 23.7%, 4.8%, and 3.6%, respectively. In terms of high computing power SoC delivery volume, Black Sesame Technologies ranked third in the domestic market in 2023, with a market share of 7.2%.

In terms of company customers, Black Sesame Technologies has cooperated with more than 49 car OEMs and first-tier suppliers, such as FAW Group, Dongfeng Group, JAC Group, Hechuang, and Yikatong Technology, and has obtained 23 model intention orders from 16 car OEMs and first-tier suppliers. However, according to the data disclosed by the company, Black Sesame Technologies has a certain concentration of income from top customers, but the customer loyalty is not high.

From 2021 to 2023, the proportion of Black Sesame Technologies' income from the top five customers was 77.7%, 75.4%, and 47.7%, respectively. Specifically, in 2021, the top five customers of Black Sesame Technologies were A, Wingtech Technology Group (hereinafter referred to as Wingtech), B, C, and D. In 2022, they became A, D, Shanghai Baolong Group, E, and Wingtech. In 2023, they became F, D, G, H, and I, and in the first quarter of this year, they became J, F, K, L, and D. The customer retention rate for Black Sesame Technologies' autonomous driving products and solutions from 2021 to 2023 and the first quarter of this year was 18%, 52%, 35%, and 16%, respectively.

Looking at the development path of Black Sesame Technologies, the company is not only engaged in high computing power smart driving chips but also in cross-domain chips, which refer to a single SoC covering core autonomous driving functions and smart cockpit functions. Cross-domain chips can support cockpit integration solutions, and manufacturers may not need to purchase smart driving and smart cockpit chips separately, which could potentially be more cost-effective. However, whether in the field of high computing power or in the field of cross-domain chips, Black Sesame Technologies needs to face many competitors.NVIDIA's Orin-X chip boasts a computing power of 254 TOPS, while the Thor chip's computing power can reach over a thousand TOPS. Horizon Robotics is set to embark on the journey of delivering mass-produced vehicles equipped with its 6th series chips, with the highest computing power reaching up to 560 TOPS. There are also several manufacturers in the market producing cross-domain chips; for instance, NVIDIA has the DRIVE Thor, which is compatible with computing for intelligent driving, parking, and smart cockpits, and Qualcomm has the Snapdragon Ride Flex SoC.

"In terms of cost, mass production of cross-domain chips can indeed save some expenses. The challenge of developing cross-domain chips lies in the integration of cockpit and intelligent driving functions, including the need for proper adaptation of underlying software and ensuring functional safety," said Zhenmu Cheng, an expert in the field of intelligent driving, to our reporter. Currently, the first-tier manufacturers of cross-domain chips are Qualcomm and NVIDIA, with the second tier including Horizon Robotics and Black Sesame Technologies.

Cheng informed our reporter that Black Sesame Technologies' approach does not significantly differ from other industry players. The Wudang C1200 is positioned against Qualcomm's 8775, which is also aimed at cabin and driving integration and targets mid to low-end intelligent driving and cockpit scenarios. In contrast, NVIDIA's Thor series chips offer stronger computing power. "Chips like the Qualcomm 8775 are considered first-generation cabin and driving fusion chips with a higher cost-performance ratio, while the second generation is likely to migrate towards high-computing platforms like NVIDIA's Thor," Cheng stated.

Whether it is developing high-computing power chips or cross-domain chips, Black Sesame Technologies has a journey ahead to face fierce market competition and achieve faster business growth.