Entering 2024, the Hong Kong stock IPO market is still hot. Recently, Botai Vehicle Networking Technology (Shanghai) Co., Ltd. submitted a listing application to the main board of the Hong Kong Stock Exchange. According to the prospectus, after completing Series D financing in the first half of 2024, the company's latest valuation is about 8.572 billion yuan.

Despite popular labels such as “connected cars” and “intelligent connected cars,” the company has been in a deep loss trend for the past three years, which may become one of the factors affecting market confidence. However, if we take a close look at its fundamentals, issues such as high raw material costs and major customer dependency cannot be ignored.

The addiction of major customers who lost more than 1.1 billion dollars in three years is difficult to solve

According to public information, Botai Auto Network is a supplier that provides smart cockpits and intelligent connectivity solutions. Formerly known as Shanghai Botai Yuezhen Electronic Equipment Manufacturing Co., Ltd. In 2010, the company launched the first 3G vehicle networking system in China, becoming one of the first companies to enter China's intelligent connectivity market.

According to the Zhitong Finance App, between 2021 and 2023, the company's revenue was 864 million yuan, 1,218 million yuan and 1,496 million yuan respectively, of which 2022 and 2023 increased by 41% and 22.8% year-on-year respectively; net losses corresponded to 372 million yuan, 452 million yuan, and 284 million yuan respectively, with a cumulative net loss of over 1.1 billion yuan over three years.

At the business level, the company's main business is divided into two major segments: smart cockpit solutions and intelligent connectivity solutions. From 2021 to 2023, smart cockpit solution revenue accounted for 85.7%, 88.6%, and 90.4% of its total revenue, respectively.

During the track record period, the company sold a total of about 2.6 million smart cockpits, with a compound annual growth rate of 55.2% from 2021 to 2023; in the first five months of 2024, the company delivered about 6.1 million smart cockpit units, an increase of 140% over the previous year; during the same period, its smart cockpit solutions received 17 fixed points from seven OEMs.

It is worth mentioning that the company has problems where major customers and suppliers overlap and are more dependent on large customers. During the track record period, three of the company's top five customers were also suppliers, and one of them was one of the top five suppliers in 2023.

For the year ended December 31, 2021, 2022, and 2023, the company's total revenue from the five major customers accounted for 86.5%, 83.6% and 64.6% of total revenue, respectively, with revenue from the largest customers accounting for 29.1%, 33.2%, and 28.6%, respectively. At the same time, the company also purchases raw materials and components such as screens, host hardware, Internet of Things (IoT), software, and host hardware from such major customers.

As of December 31, 2023, Botai Auto Network has passed the qualification review of smart cockpit suppliers by 22 automotive OEMs (original equipment manufacturers), including 15 Chinese OEMs, 5 joint venture OEMs, and 2 international OEMs. As of March 31, 2024, the company has provided services for more than 200 models of more than 40 car brands.

Botai Auto Network stated in its prospectus that the capital raised in this IPO will be mainly used to expand product portfolios and solutions and enhance technology, further strengthen full-stack internal capabilities covering software, hardware and cloud services; improve manufacturing, testing and verification capabilities; expand sales and service networks to increase brand awareness; further integrate strategic acquisitions of industry resources; and use them for working capital and general corporate purposes.

The price of automotive-grade chips is rising, and the cost of raw materials remains high

According to the Zhitong Finance App, the main raw materials and components purchased by Botai to manufacture smart cockpits include automotive-grade chips, integrated circuits and structural components. However, since the pandemic caused a shortage of global chip supply, the average price of global automotive-grade chips has risen sharply, causing Botai's raw material costs to “skyrocket.”

According to Insight Consulting, in 2021, 2022 and 2023, the average price of mainstream automotive grade chips for smart cockpit solutions for passenger cars was 731.2 yuan per piece (the unit is RMB, same below), 791.1 yuan per piece, and 684.5 yuan per chip, respectively. Although chip prices have declined somewhat in recent years, the overall level is still high.

According to our understanding, material costs are the largest component of Botai's sales costs. In 2021, 2022 and 2023, the company's material costs were 460 million yuan (RMB, same below), 835 million yuan and 903 million yuan respectively, accounting for 53.3%, 68.5% and 60.4% of total revenue, respectively.

Dragged down by the price of raw materials, the gross margin of Botai's smart cockpit business continues to decline. It has dropped from 17.5% to 15.1% between 2021 and 2023, and the gross margin of the smart connectivity business has also declined markedly.

As future chips continue to be upgraded and market demand for higher performance and higher computing power chips continues to increase, it is expected that from 2023 to 2028, the average price of mainstream chips for passenger car smart cockpit solutions in China will rise slightly, with a compound annual growth rate of 1.4%.

Higher raw material costs will inevitably further increase the pressure on the company's profits. According to calculations, if the cost of raw materials increases by 5%, Botai's pre-tax loss will expand to 451 million yuan in 2023; if the cost of raw materials increases by 10%, the loss will further expand to 903 million yuan.

Furthermore, since the company's automotive-grade chips are purchased from suppliers in the US, Taiwan, and mainland China, international geopolitical risks may also cause instability in the company's normal operations.

The wave of intelligence in the automotive industry is on the rise

Under the trend of 5G technology boosting the automotive industry's development in the direction of connectivity and intelligence, the connected car market is rapidly increasing in size and penetration rate. According to the forecast of the China Business Industry Research Institute, the assembly rate of intelligent connected systems in the automobile industry is expected to reach 83% in 2025, and shipments of intelligent connected vehicles will increase to 24.9 million units, with a compound annual growth rate of 16.1%.

According to the latest research report by Guolian Securities, under a neutral forecast scenario, the value of the vehicle-road cloud integrated intelligent connected vehicle industry is expected to increase by 729.5 billion yuan and 2582.5 billion yuan in 2025 and 2030, with a compound annual growth rate of 28.8%. With the implementation of some urban projects, the smart connected vehicle market is expected to reach 100 billion.

As the consumer positioning of automobiles evolves from a passenger car to a third living space, smart cockpits are gradually becoming an important vehicle for the intelligent transformation of the automotive industry, and an integrated platform for many emerging technologies such as communication technology, electronic technology, virtual reality technology, and artificial intelligence technology. As a supplier of intelligent components, Botai Connected Vehicle Technology will also benefit from the wave of intelligence in the automotive industry.

According to Insight Consulting's data, based on revenue from software and hardware integrated smart cockpit solutions in 2023, the company is the second largest independent local supplier of smart cockpit solutions to Chinese OEMs; in 2023, the company became one of the first companies to provide smart cockpit solutions using Qualcomm's fourth-generation Snapdragon 8295 chip in China, and the product structure gradually changed to high-end.

According to the Zhitong Finance App, the current concentration of the Chinese passenger car OEM market is not high. In terms of sales volume, the market share of China's top five OEMs increased from 33.4% to 37.9% between 2021 and 2023. However, if you look closely at the data, you can see that both in terms of revenue size and market share, Botai clearly lags behind the first place, and has no clear advantage over other competitors.

Meanwhile, under the wave of intelligence in the automobile industry, many automobile manufacturers and leading Internet companies have also “ended up” one after another. Recently, Huawei announced that it will cooperate with Great Wall Motor to promote innovation and development in the smart cockpit field, and new cars such as the Zhijie S7 equipped with the Huawei Hongmeng cockpit 4.0 will also be unveiled at the 2023 Guangzhou International Auto Show. As market competition intensifies, it may be necessary to put a question mark on whether Botai can continue to maintain its leading position in the market.

Generally speaking, Botai currently has no clear advantage over its peers in terms of market position, and under pressure from the high price of raw materials for chips, there is also much uncertainty about the company's profitability. For Botai, the top priority is to turn industry benefits into actual results. When the company can turn losses into profits will not only be the focus of market investors' attention, but will also be a key “watershed moment” for future stock prices.