Monthly production and sales increased by nearly 600% YoY in the first half. After acquiring the 'AITO' and other brand assets from Huawei, Seres still operates in Huawei's shadow.

After the first half of 2024, news spread online about Seres' soaring sales in the first half and July. According to Yicai Global, Seres' new energy vehicle sales in July increased by over 508% YoY, and monthly production and sales increased by nearly 600% YoY in the first half.

However, upon closer inspection, there is anxiety behind Seres' impressive sales figures. Dividing the situation into two parts, Seres' positive achievements include turning a profit YoY in the first half and making significant progress in strategic partnerships such as investment attraction. However, the challenges it faces include significant short-term debt pressure and the need to further improve core performance indicators such as net profit.

More critically, as Huawei continues to sell its brand intangible assets such as 'AITO,' 'Intelligent World,' and 'Enjoy World' to automakers, severing its own path to directly manufacturing cars, it also places Seres, which has acquired the 'AITO' brand, in an awkward position.

Since then, Seres is no longer Huawei's exclusive partner. Without Huawei's brand endorsement, AITO automobiles and Seres stand alone, leaving uncertainty about their future prospects.

Part.1

High asset-liability ratio compared to peers, profitability sustainability faces challenges

Sustainable corporate development relies on healthy financial conditions. Seres' first challenge is that as its asset base expands, so does its debt level.

According to Eastmoney.com data, as of the end of the first quarter this year, the company's total assets and liabilities reached 55.5 billion yuan, with an asset-liability ratio of 88%, exceeding that of its peers. For comparison, the asset-liability ratios of NIO, XPeng, and Lixiang Auto in the same industry were only 76%, 56%, and 59%, respectively.

Image source: Commercial Wealth Circle

Analysis suggests that Seres' higher debt ratio compared to peers is primarily due to its low product gross margin, which makes it difficult to cover operating costs such as R&D, sales, and human resources. In fact, Seres' gross margin performance was decent in its early years.

According to data from platforms like iFinD, its gross margins were 22.18%, 23.86%, and 17.3% during 2017-2019, respectively. However, by 2020 and 2021, its gross margin plummeted, even falling below 10%.

Due to the decline in gross margin, Seres fell into a loss trap. According to Seres' financial reports over the years, the company accumulated losses exceeding 9 billion yuan from 2020 to 2023. Fortunately, since announcing its partnership with Huawei in March 2021, AITO became a 'savior' for Seres' gross margin, even helping it recover to over 10% in 2022-2023.

Seres' gross margin improvement is indeed due to the AITO brand's endorsement. This can also be verified from Seres' financial reports.

According to Seres' past financial reports, Seres was formerly known as Xiaokang Stock before 2022. After the name change, its financial data separately disclosed the gross margins of new energy vehicles and fuel vehicles. In 2022, the gross margin for new energy vehicles was 13.14%, while that for fuel vehicles was 3.58%.

The same was true in 2023. Although the gross margin of Seres' new energy vehicles declined slightly, it was still significantly higher than that of fuel vehicles. This means that AITO automobile sales have become the company's primary source of profit.

It is worth mentioning that, after gross margin recovery, Seres ranked among the top four in the automotive industry in terms of gross margin in 2023, which is remarkable. However, there is still a gap compared to leading brands like BYD, Great Wall, and Changan, whose gross margins exceed 18%.

In terms of profitability, Seres has mixed fortunes. The good news is that according to Seres' 2024 interim performance pre-announcement, it is expected to achieve operating revenue of 63.9 billion to 66 billion yuan in the first half, an increase of 479% to 498% YoY; and a net profit of 1.39 billion to 1.7 billion yuan, turning a profit compared to the same period last year.

The concern is that as the new energy vehicle industry gradually matures and competition intensifies, Seres faces considerable competitive pressure. In particular, as the government's subsidy policies for purchasing new energy vehicles gradually phase out, it remains uncertain whether Seres' future profitability will be sustainable.

For example, according to the latest policy, vehicles registered after December 31, 2022, will no longer receive subsidies. Furthermore, according to a joint announcement by the Ministry of Finance and two other ministries on June 21, 2023, new energy passenger vehicles purchased between 2024 and 2025 will be tax-exempt up to 30,000 yuan per vehicle; while for 2026-2027, the tax reduction will not exceed 15,000 yuan.

This means that consumers will need to bear the tax obligation for amounts exceeding the tax exemption and reduction limits. In other words, under the industry's 'new policies,' the burden on consumers when purchasing vehicles will increase, potentially affecting Seres' sales and the sustainability of its performance growth.

Part.2

With an ambiguous relationship with Huawei, how should Seres position itself?

In recent years, Seres and Huawei have collaborated closely in business, successfully launching multiple AITO series models, including the AITO M5, M7, and M9. Recently, the 400,000th AITO vehicle rolled off the production line, signaling the successful creation of a valuable new energy vehicle brand by the two parties.

However, these brand 'assets' were not originally owned by Seres, and the relevant intellectual property rights are primarily held by Huawei. According to the Popular Securities News, on the evening of July 2, Seres (601127) announced that its controlled subsidiary, Seres Automotive, intended to invest 2.5 billion yuan to acquire 919 AITO-related word and graphic trademarks and 44 related design patents from Huawei and its affiliates. This means that the 'AITO' brand will be transferred to Seres.

Image source: Trendy Technology Style

In fact, AITO is not the only brand that Huawei has sold. As early as April and June 2024, Huawei had already transferred its 'Enjoy World' and 'Intelligent World' trademarks to its partner automakers BAIC and Chery, respectively.

Therefore, Seres' acquisition of AITO has raised concerns in the industry. With multiple automakers now owning the right to use Huawei's automotive brands, Seres is no longer Huawei's exclusive technology partner, and related cooperation resources are no longer exclusive to Seres and AITO. Consequently, the relationship between Seres and Huawei will become more delicate.

However, on the positive side, Huawei's 'de-emphasis' of Seres' significance to Huawei is not all bad news. Seres has been in Huawei's shadow due to the trademark rights issue surrounding AITO, limiting its brand influence. Therefore, this is an unprecedented opportunity for Seres to shed Huawei's 'shadow.'

As some netizens joke, the embarrassment for Seres is that most people today likely only recognize 'HUAWEI' and 'AITO' but not 'Seres.' Therefore, Seres' acquisition of the AITO brand from Huawei poses another challenge: it will take time to change consumers' ingrained perceptions of the AITO brand.

It is worth noting that Huawei's sale of AITO and other brand assets serves not only to further clarify its core strategy of 'not manufacturing cars directly' but also serves its own interests.

On the one hand, this move can reduce domestic automakers' 'defensiveness' towards Huawei, facilitating the establishment of a smart car ecosystem based on HarmonyOS.

On the other hand, as the AITO brand has already entered international markets, if it belonged to Huawei and grew significantly, expanding into European and American markets would likely expose it to risks such as sanctions from countries like the United States, potentially repeating the fate of Honor being forced to sell.

Precisely because of this opportunity, Seres' acquisition of AITO gives it a chance to compete with Huawei for industry influence and potentially achieve parity in its partnership. Clearly, to seize this opportunity, Seres needs to strengthen its technological research and development, enhance its technical capabilities, and continuously improve its brand influence and overall competitiveness through external cooperation.

Seres has spared no effort in this regard. For example, on July 29, 2024, Seres issued an 'Announcement on Planning External Investment,' mentioning its intention to invest in Shenzhen Yinwang Intelligent Technology Co., Ltd. (hereinafter referred to as 'Yinwang'). The specific investment amount, transaction method, and price will be subject to the final transaction documents signed by both parties.

According to public information from Qichacha and other sources, Yinwang is a wholly-owned subsidiary of Huawei Technologies Co., Ltd., engaged in the research, design, production, sales, and service of automotive intelligent systems and components solutions, including automotive intelligent driving solutions, intelligent cockpits, intelligent vehicle control, and intelligent vehicle clouds.

Furthermore, Seres has continuously launched new models in recent years, such as the AITO M5, M7, and M9, all of which have performed well in the market, demonstrating Seres' move towards premiumization and intelligentization. Therefore, the industry generally believes that when Seres properly manages its partnership with Huawei and exclusively owns the AITO brand, it is expected to gain a larger share in the mid-to-high-end new energy vehicle market.

Part.3

After sales growth, how can Seres regain investor confidence?

Although Seres' performance and sales increased in the first half, investors do not seem convinced. According to Baidu Stock Connect data, Seres' share price has been declining since June 2024, falling from over 100 yuan to around 77 yuan.

Image source: Baidu Stock Connect

The decline in Seres' share price is primarily due to negative industry news, a challenge faced by new energy automakers in general.

Firstly, with numerous new energy vehicle brands, Seres faces significant market competition as major brands engage in price wars by cutting prices. For example, NIO, positioned in the mid-to-high-end segment, has repeatedly been reported to reduce prices by 30,000 to 50,000 yuan since 2024.

Although AITO, backed by Huawei and Seres, initially gained market share with several popular models, Huawei gracefully 'exited' before AITO could achieve economies of scale, leaving the pressure of sales growth on Seres.

From an investor's perspective, the future of 'AITO' without Huawei's brand endorsement is uncertain, leading many conservative investors to opt for safety.

On the other hand, extended-range electric vehicles (EREVs), represented by Lixiang Auto's brand, have long been controversial regarding their environmental friendliness. Moreover, rumors that EREVs cannot obtain green license plates for new energy vehicles have caused many investors and even investment institutions to panic-sell.

It is essential to note that Seres' core models, AITO M7 and M9, are EREVs. If they cannot obtain green license plates, their performance will be directly impacted.

In fact, multiple sources such as Autohome have confirmed that EREVs are considered new energy vehicles and are eligible for green license plates, rendering these rumors unfounded. However, for unaware consumers, such rumors can influence their purchasing decisions and potentially affect Seres' sales.

The impact of various negative news means that Seres will face capital-level challenges ahead. Whether it can regain investor confidence will likely depend on whether its sales growth momentum can be sustained.

Seres' relationship with Huawei is both competitive and collaborative, delicate and contradictory. In the past, Seres' rapid development benefited from Huawei's and HarmonyOS' intelligent driving technology, leading to rapid growth in AITO's brand power and sales, and subsequently boosting Seres' share price.

However, Seres' future development will also be constrained by its over-reliance on Huawei. Therefore, as Huawei distances itself from directly manufacturing cars, and Seres takes the helm of the emerging AITO brand, the landscape of the new energy vehicle industry will change. For Seres, this presents both opportunities and challenges.

Nevertheless, it is foreseeable that as Seres continuously strengthens its technological 'foundation,' its comprehensive strength will continue to grow. With increasing sales of its automotive products and more frequent external collaborations, Seres will gain more influence in the industry. Furthermore, the promising AITO brand is expected to bring new surprises to the market under the new industry landscape.

References:

2. "Seres' Leap: Can Performance Reversal Alleviate Financial Pressure?" Investor Network

4. "First-Quarter Asset-Liability Ratio Reaches 88%; Seres to Invest 2.5 Billion Yuan to Acquire 'AITO'", Popular Securities News

5. "Seres' Future Development: Opportunities and Challenges Coexist; Can It Become a Top 10 Global Luxury Brand?", Small Investors' Market Watch

6, "Thalys: "Climbing the Dragon and Attaching to the Phoenix" Backfires?", Auto K-Line

7, "The "White Horse Stock" Thalys Plunges to Limit Down, Huawei's Car Making Has Another Problem", Financial Afternoon Tea