Text / Bazhen

The strong rebound in the capital market has become a hot topic recently. With multiple favorable factors and high sentiment for going long, both A-shares and Hong Kong stocks are buzzing with expectations of a bull market.

In this context, if you can choose a stock with superior financial performance, track record, and prospects, the combination of alpha and beta would be akin to "a good wind propelling me to the heavens."

Taking into account various factors, Jiedian Finance believes that Horizon Robotics (Horizon Robotics-W, 9660.HK), the intelligent driving "unicorn" listed in Hong Kong on October 24, is one of the top picks. Its share price surged nearly 40% intraday on its first trading day, and its peak market value exceeded HK$70 billion, essentially confirming it as the largest technology IPO on the Hong Kong Stock Exchange this year.

According to the prospectus, Horizon's cornerstone investors include prominent institutions such as Alibaba, Baidu, DFH Group, and Ningbo State-owned Assets Fund, with a total subscription amount of approximately US$220 million (approximately HK$1.7 billion).

What is the quality and potential of Horizon? Taking advantage of its IPO, let's delve into its fundamentals, driving force, and growth potential.

01 Fundamental Examination: Quantity and Quality Flying Together?

The capital market is never short of star companies, and fundamentals, track length, development prospects, business models, and founding teams are all important factors in judging high-quality stocks.

Among them, fundamentals, which are closely linked to financial performance, can be regarded as the most intuitive "touchstone" for high-quality stocks.

Specifically, for Horizon, from 2021 to 2023, the company's revenue was RMB 467 million, RMB 906 million, and RMB 1.552 billion, respectively, with a compound annual growth rate of 82% during this period. In the first half of 2024, revenue reached RMB 935 million, up 151.6% year-on-year, indicating that the overall business is in a phase of rapid expansion.

Horizon's revenue growth is not simply achieved through aggressive pricing or sacrificing product and service margins, but rather through continuously strengthening its endogenous capabilities.

Data confirms this trend. During the aforementioned reporting periods, Horizon's gross profits were RMB 331 million, RMB 628 million, RMB 1.094 billion, and RMB 739 million, respectively, with corresponding gross margins of 70.9%, 69.3%, 70.5%, and 79.0%, tracing a steady and upward curve.

Notably, in the first half of 2024, Horizon's gross profit increased by 225.99% year-on-year, significantly higher than the growth rate of revenue during the same period.

This shows that as time passes, the company's profitability at the direct production and operation level has further improved, strengthening its bargaining power in the industry chain.

Compared to most peers who gradually decline, fall behind, or even drop out of the competition, Horizon's simultaneous growth in quantity and quality is quite remarkable.

Generally speaking, turning a profit at the direct production and operation level (i.e., achieving a positive gross margin) is significant as it represents a turning point for the company: It not only covers fixed costs but also provides financial support for subsequent expansion and innovation initiatives, marking the first step towards profitability and a key indicator for investors.

For example, companies like NIO, XPeng, Li Auto, and Zero Runner have all viewed achieving a positive gross margin as a milestone achievement, winning significant recognition from the capital market. In this regard, Horizon has been impressive and ahead of the curve.

However, Horizon has not yet achieved final profitability. From 2021 to 2023 and in the first half of 2024, its adjusted net losses were RMB 1.1 billion, RMB 1.89 billion, RMB 1.64 billion, and RMB 800 million, respectively. Nevertheless, compared to previous periods, the "bleeding" situation has significantly improved.

For high-tech companies, it is common to focus on both execution and forward-looking strategic planning. Therefore, we need to look beyond the surface to understand the deeper meaning behind the lack of profitability.

Horizon's losses are primarily due to significant R&D expenditures aimed at enhancing core technologies and fair value changes in preferred shares and other financial liabilities (which we will discuss in detail below).

As an emerging field, intelligent driving requires significant investments in research and development during its early stages. Only in this way can companies fortify their "moats" and build "ladders to the clouds," gaining a competitive edge and shaping their future. Horizon is no exception.

To a large extent, Horizon's temporary losses are actually laying a solid foundation for the company's long-term growth and influence.

02 Driving Force Examination: Is the Combination of Hardware and Software the "Winning Hand"?

As we all know, the automobile is the culmination of a century of industrial civilization and the epitome of advanced technological innovation. Whether in terms of quantity or value, technology is the driving force behind it all. The same is true for intelligent driving, which serves as the central link in the industry chain.

Horizon is one of the earliest startups to enter the intelligent driving industry in China and the first to propose and implement a combined hardware and software technology path. As founder Kai Yu puts it, Horizon is a software company disguised as a chip company.

Simultaneously, Horizon possesses full-stack intelligent driving development capabilities, with self-developed BPU intelligent computing units and cutting-edge intelligent driving algorithms that have repeatedly pushed the boundaries of technology and reshaped the industry landscape. Its Journey family of processors, including Horizon SuperDrive, Horizon Pilot, and Horizon Mono, provide comprehensive intelligent driving solutions for urban, highway, and parking scenarios.

In May this year, Horizon launched Horizon SuperDrive, a next-generation, full-scenario, high-level intelligent driving system. Based on cutting-edge software algorithms and paired with the Journey 6 flagship processor, SuperDrive offers a more human-like driving experience, significantly enhancing the system's perception and human-machine interaction capabilities in complex traffic environments.

In a demonstration video, SuperDrive showcases the relaxed demeanor of an experienced driver: it can navigate different lane changes at intersections with varying curvatures, depending on oncoming or adjacent traffic, and actively avoid pedestrians and two-wheelers by swerving or slowing down.

According to Jiedian Finance, SuperDrive has improved the occlusion accuracy of intelligent driving systems by 70%, increased lane-changing success rates in congested scenarios by 50%, and enhanced intersection throughput by 67%.

To date, SuperDrive has undergone system generalization testing in 12 cities nationwide. In Q2 2024, it secured partnerships with multiple top-tier Tier 1 suppliers and automotive brands, with plans to launch a standard production version in Q4 2024 and deliver the first mass-produced cooperation model in Q3 2025.

As SuperDrive commercializes, it will undoubtedly inject a continuous stream of performance-boosting momentum into Horizon.

In Kai Yu's view, technology companies aim to establish their brands, customer relationships, industry standards, and ecosystems through continuous technological waves and iterations.

According to the prospectus, Horizon has secured production project approvals for 290 models across 27 OEMs (42 OEM brands), including SAIC Motor, Volkswagen Group, BYD, Li Auto, GAC Group, Beijing Automotive Group, and Chery Automobile, with a cumulative total of 152 SOP (Start of Production) models, firmly establishing itself as a leader in its niche segment.

According to Gao Gong Intelligent Automobile, in the first half of 2024, Horizon led the market for front-view integrated computing solutions (L2 ADAS) for self-owned brand passenger vehicles in China with a 33% share.

Furthermore, according to Zhuo Shi Consulting, Horizon ranked second and first in terms of installed capacity for advanced driver assistance systems (ADAS) solutions provided to Chinese domestic automakers in 2023 and the first half of 2024, respectively, with market shares of 21.3% and 35.9%, demonstrating strong growth momentum.

Tracing the causes, intelligent driving is driven by innovation, relying heavily on R&D investments. From 2021 to 2023, Horizon's R&D expenditures totaled nearly RMB 5.4 billion, and in the first half of 2024, R&D expenditures reached RMB 1.42 billion, 1.5 times the revenue for the same period.

While this may weaken corporate profitability in the short term, from a broader perspective, intelligent driving is entering a critical window of opportunity for crossing the chasm. The advantages of integrated hardware and software leaders in intelligent driving are increasingly prominent, positioning them as significant forces driving industry transformation. This aligns with the strategy of companies like Tesla, which have bet on the same path.

By leveraging its first-mover advantage in the combination of hardware and software and its highly sticky customer relationships, Horizon will benefit from economies of scale and expanding market share, effectively reducing R&D, sales, and administrative expenses, thereby boosting profit margins.

03 Growth Potential Examination: Spinning the High-Speed Business "Flywheel"?

A common saying in the capital market is that investment is an art of anticipation, and anticipation essentially translates to growth potential.

Returning to Horizon, let's analyze it from two perspectives: track beta and individual alpha.

Track Beta Perspective:

China has become the world's largest new passenger car market. In 2023, new passenger car sales reached 21.7 million units, of which 12.4 million were smart cars, representing a penetration rate of 57.1%.

According to Zhuo Shi Consulting, smart car sales in China are expected to reach 20.4 million and 29.8 million by 2026 and 2030, respectively, with penetration rates of 81.2% and 99.7%, respectively.

With a vast new car market and an unprecedented wave of intelligent driving, ADAS (Advanced Driver Assistance Systems) and AD (Autonomous Driving) are standing at the forefront: In 2023, the combined market size of ADAS and AD solutions was RMB 24.5 billion, and it is projected to grow at a CAGR of 49.4% to reach RMB 407 billion by 2030.

As the trend solidifies, companies will continue to move forward along their established paths. In other words, whether in the short or medium-long term, Horizon is on a sufficiently long and broad upward trajectory.

Individual Alpha Perspective:

Since we have already discussed Horizon's fundamentals, technical capabilities, and product matrix, we will not repeat them here. Instead, we will focus on the industry landscape in which Horizon operates.

In any industry, the ultimate outcome of competition is often characterized by the "siphon effect" and "Matthew Effect": from numerous players to a few, and eventually to a stable oligopoly. The more fragmented the market, the more conducive it is for leading companies to excel and maneuver.

Why is this the case? Because competition is a brutal process of weeding out weaker players. During this process, the "jungle law" is fully manifested, where companies with advantages in size, technology, branding, resources, and channels can often complement each other's strengths and maximize their potential, ultimately leading to the phenomenon of "the strong get stronger."

To put it simply, the industry landscape resembles a champagne tower where waves of demand flow down from the top, filling up the top players first before reaching those in the middle and lower tiers.

As a leader in intelligent driving, Horizon is likely to reap beta excess returns at the macro level while simultaneously fueling its own alpha, spinning a high-speed business "flywheel."

For such a company, we can undoubtedly have greater expectations.

Conclusion

In a public interview before its IPO, Kai Yu stated, "We are focusing all our resources and efforts on creating a benchmark for intelligent driving globally."

In the vast and promising intelligent driving sector, Horizon boasts strong financial performance, a solid technological foundation, and a leading market position, laying a robust foundation. With access to more resources after its secondary market debut, Horizon will undoubtedly amplify its leverage, driving it forward towards its goals and embarking on a journey towards broader horizons.

*The featured image is generated by AI