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Tencent Auto "High Beam"

Author: Guo Yifei Editor: Liu Peng

Nine months ago, when Huawei announced the split of its automotive business unit and sought independent financing, it had already accumulated losses of more than 24 billion yuan. When will it be profitable, asset pricing, business boundaries, who will invest... a series of realistic dilemmas are waiting to be revealed.

At that time, an executive of a car company who had contact with Huawei told Tencent Auto's "High Beam" that if we invest according to the valuation of 200 billion yuan, we will not be able to obtain controlling rights. The price is too high, not to mention that the company is still losing money. It may be more cost-effective to continue to simply purchase Huawei's intelligent driving solutions.

However, five years after entering the automotive business, in the first half of 2024, with the popularity of the "Wenjie AITO" series of products and the arrival of large-scale commercial use of intelligence, the outside world finally got a glimpse of Huawei's powerful capabilities, and the automotive BU joint venture plan also came to an end.

On August 25,Changan AutomobileAfter Avita, Huawei's most proud case of entering the car manufacturing business and transforming car companies is:Seres(601127.SH) officially announced that it will invest 11.5 billion yuan in Shenzhen Yinwang Intelligent Technology Co., Ltd. and hold a 10% stake.

In the past four years, Seres has accumulated losses of 9.835 billion yuan. Although it finally turned losses into profits in 2024 with the "Wenjie" series of products, its net profit in the first half of the year increased to 1.625 billion yuan. However, with its own asset-liability ratio as high as 89%, they still decided to bind Huawei more deeply. Previously, Seres had just spent 2.5 billion yuan to acquire the "Wenjie" brand trademark.

Since this investment constitutes a major asset reorganization, they disclosed more than 30 related announcements with extreme caution. Shenzhen Yinwang, the new carrier after Huawei's automotive BU's independent operation, its financial data, asset valuation and other details were also made public for the first time.

The announcement disclosed that from January to June 2024, Shenzhen Yinwang's operating income was 10.435 billion yuan, its net profit was 2.231 billion yuan, and the company's valuation was as high as 115.256 billion yuan.

Profitable one year ahead of schedule, gross profit in the first half of the year as high as 55%

Shenzhen Yinwang was established in January 2024 and was registered by Huawei with an investment of 1 billion yuan. Its registered address is the office building of Huawei headquarters. It adopts a direct sales model and earns revenue from the sales of smart car parts and accessories, smart driving software and services, covering five major business products: smart driving, smart cockpit, smart car control, smart car cloud, and smart car light.

according toGuolian SecuritiesAccording to estimates, Qiankun Intelligent Driving and Hongmeng Cockpit are the core of its business and contribute the main revenue. The average unit price of the former is 30,000 to 50,000 yuan, and the latter is 10,000 to 20,000 yuan.

Unlike car companies that are caught in price wars and are still mired in losses, Shenzhen Yinwang, as a supplier of intelligent solutions, expects its main business gross profit margin to continue to rise in 2022, 2023 and the first half of 2024, reaching 17.73%, 32.13% and 55.36% respectively.

In terms of revenue structure, it is divided into two major sectors: hardware, software and services. In the past three years, the proportion of hardware revenue has always been higher than that of software revenue. Specifically, the proportions of the two are 68% and 31%; 55% and 44%; and 58% and 41% respectively.

However, thanks to the decline in marginal costs, the gross profit margins of software and service businesses have been significantly higher than those of hardware in the past three years. The gross profit margins of hardware business were 14.47%, 15.85% and 33.41% respectively; while the gross profit margins of software and service businesses were 24.97%, 52.22% and 86.17% respectively during the same period.

Currently, its business models include traditional parts sales model, HI model (Huawei Inside) and smart selection model.

Chi Linchun, vice president of Huawei's automotive business unit, said in an interview in April this year that the three central enterprises (FAW, Dongfeng, and Changan), the three local state-owned enterprises (BAIC, SAIC, and GAC), and the four private enterprises (BYD, Geely, Great Wall, Chery), as well as some new car-making forces, "all use our solutions."

Among them, the smart car selection model upgraded to the Hongmeng Intelligent Driving Alliance can be regarded as the largest customer of Huawei's automotive BU, including SERES, Chery, BAIC and JAC.

The announcement shows that in 2022, 2023 and the first half of 2024, sales revenue to the largest customer accounted for 56.68%, 50.97% and 63.38% of Shenzhen Yinwang's overall revenue respectively. In the first half of 2024, the total sales volume of Hongmeng Intelligent Driving Alliance was 194,200 vehicles, of which the sales volume of Wenjie brand was 185,900 vehicles.

Considering the high sales volume of the world's brands, this "largest customer" should be Seres. In the first half of 2024, the sales revenue from Seres was 6.614 billion yuan. Roughly speaking, for every car sold by Seres in the first half of the year, Huawei took a commission of about 35,600 yuan.

At the investment ceremony on August 23, Zhang Xinghai, chairman of Seres, said ambitiously, "This investment in Yinwang marks the upgrade of Seres and Huawei to a comprehensive cooperation of 'business + equity'. The company strives to achieve the annual production and sales target of one million units in the three-year plan, drive the supply of one million units of Yinwang, and achieve a win-win situation."

According to the plan of Yu Chengdong, chairman of Huawei's Automotive BU, the Automotive BU was originally supposed to achieve profitability in 2025, but now the goal has been achieved one year ahead of schedule.

The announcement shows that Shenzhen Yinwang's revenue in 2022 and 2023 will be 2.098 billion yuan and 4.7 billion yuan respectively, and its net losses in the same period will be 7.587 billion yuan and 5.597 billion yuan respectively. In the first half of 2024, it will turn losses into profits for the first time, with revenue reaching 10.435 billion yuan and net profit of 2.231 billion yuan.

In this regard, SERES commented in its acquisition announcement that "Shenzhen Yinwang's team size, technical level, product maturity, commercial scale, and process system capabilities are leading in the industry, and it has the ability to independently develop and continuously innovate full-stack core technologies. At the same time, Shenzhen Yinwang is also one of the very few automotive intelligent solution companies in the world that has achieved scale revenue and profitability."

Yu Chengdong previously said that cars equipped with Huawei's advanced intelligent driving are actually sold at a loss if they are priced below 300,000 yuan. In comparison, there are currently 5 models on the market under the intelligent selection model, all of which are mid-to-high-end products. The starting prices of the M9 and S9 are both above 400,000 yuan, and only a small number of models of the M5, M7 and S7 are below 300,000 yuan.

It is difficult for the Hongmeng Intelligent Driving Alliance to expand, but the above three business models are expected to coexist.

Guolian Securities believes that in the short term, the scale of the parts model is small, and the sales of models equipped with some Huawei parts are not good; under the smart selection model, similar to the diversified brand layout of the Volkswagen Group, different brand positioning, prices and channels compete with differentiation. "The HI model can be used as an intelligent base, similar to the Android system of mobile phones. Different car companies build their own brands based on the same base to compete, and can accommodate more car brands, covering more channels and price bands. It is expected to become the main growth of the future car BU."

Valuation reached 115.2 billion yuan, with a price-to-earnings ratio lower than similar A-share companies

According to the initial concept, the valuation of Huawei's automotive business unit was as high as 200 billion yuan, but when it was actually implemented, the valuation dropped to 115.2 billion yuan. How to price the company's assets has become the focus of market attention.

The announcement shows that the assets Huawei intends to inject into Shenzhen Yinwang include 6,838 patents, 1,603 trademarks and no less than 5,500 employees. Huawei's 2023 annual report shows that since the establishment of the Automotive BU, the R&D team has reached 7,000 people.

According to the report issued by Zhongjing Minxin (Beijing) Asset Appraisal Company, Shenzhen Yinwang's main assets are inventory, fixed assets and intangible assets. According to the market method, it was finally determined that as of January 2024, the company's assessed value was 115.256 billion yuan, the book net assets were 5.717 billion yuan, and the appreciation rate was 1916.16%.

In comparison with peer companies, domestic companies choseThunderSoft、Desay SV、Montage TechnologyThe average P/E ratio of 6 similar A-share companies is 46.4, while that of foreign companies isTeslaand Mobileye, with price-to-earnings ratios of 78.91 and 112.64 respectively, while Shenzhen Yinwang's is 34.39.

The above-mentioned evaluation report stated that "the price-to-earnings ratio corresponding to the target pricing is lower than the average level of comparable companies in the same industry in the world and A-shares, and is within the comparable range of A-share companies in the same industry, and is much lower than global listed companies that are comparable to the target company in terms of technological advancement, comprehensive solutions, business scale and industry status. The transaction is reasonably priced."

From the perspective of industry trends, according to data from Frost & Sullivan, the market size of China's passenger car intelligent solutions (including intelligent driving, intelligent connected services and intelligent cockpits) will reach 198.8 billion yuan in 2023, accounting for 30.8% of the global market share. It is expected to increase to 474.7 billion yuan in 2028, with a five-year compound annual growth rate of 19%.

It is worth noting that the outside world had previously speculated that Huawei would split the automotive BU but still retain underlying technologies such as chips, cloud, and optical technologies. Whether this would create another automotive BU to compete with Shenzhen Yinwang.

Previously, Changan Automobile Chairman Zhu Huarong revealed that in the agreement between Huawei and Changan Automobile, "Huawei promised not to engage in the whole vehicle business or the business of the new company."

According to the non-compete agreement disclosed by Seres, Huawei promised that within 8 years after the asset handover, or when Huawei's shareholding in Shenzhen Yinwang is less than 5%, Huawei will not develop, produce or sell products, system solutions and services that are identical or substantially similar to those of Shenzhen Yinwang. In addition, it also promised not to engage in non-compete business in disguised forms such as through component suppliers or through OEM, ODM and other models, or by providing technical service consulting, intellectual property licensing, etc.

"Rebuilding a new world" has become a realistic goal for many automakers to choose to cooperate deeply with Huawei, which directly tests the latter's multi-brand operation capabilities. Chery Zhijie and BAIC Xiangjie are still waiting for market testing. Large-scale investment in Shenzhen Yinwang is another choice for automakers.

According to Shenzhen Yinwang's structural concept, the company's board of directors consists of 7 people, with Avita and Seres each holding 1 seat. After Changan Automobile's investment ratio was drastically reduced from 40% to 10%, it is worth continuing to observe which other car companies will enter the market in the future.