Key Takeaways:
- Saimo Tech has applied for a Hong Kong IPO, but its erratic profit performance may worry investors
- The company has partnered with Huawei to develop a cloud-based platform for intelligent vehicles, gaining investment funds from the telecom giant along the way
By Fai Pui
An era of autonomous driving is dawning, as technology increasingly supplants humans at the wheel. But before intelligent cars can take to the open road, they must be proven to be safe.
And that requires a mass of programming data as well as sophisticated driving simulations to put the vehicles through their paces, away from the risks of real traffic.
A Chinese provider of these testing services, Beijing Saimo Technology Co., Ltd., has applied to raise money in a Hong Kong IPO to stay in the fast lane of the self-driving support industry.
Saimo Tech supplies testing solutions, analysis tools and safety certification services for manufacturers of intelligent connected vehicles (ICVs), according to its preliminary prospectus.
Founded in 2014, Saimo Tech initially focused on detecting flaws in mobile app networks but started to develop algorithms and simulation systems for ICVs from 2017. The following year it launched an ICV testing business, with a self-developed “Sim Pro” tool for simulation testing and safety evaluation.
It was later appointed by the Hangzhou Municipal Government as a testing agency for intelligent vehicles. And the company went on to qualify with the Beijing Municipal Government to provide ICV testing and services.
In revenue terms, Saimo Tech is the fourth biggest player in China’s market for ICV simulation testing tools and platforms, behind three foreign firms, according to data from research firm Frost & Sullivan cited in the prospectus.
Co-operating to create a cloud platform
As a local innovator in simulation services, Saimo Tech sealed a cooperation deal two years ago with Huawei, China’s leading provider of telecoms equipment. The partners jointly launched China’s first functional cloud platform for autonomous driving, touted as boosting testing efficiency from safety analysis to simulation testing.
Huawei also joined the ranks of Saimo Tech’s investors. Since March 2020, the company has raised 287 million yuan ($42.36 million) in three rounds of financing. These included a Series A round of 150 million yuan in July 2021 from investors such as Huawei’s Hubble Technology Investment, CITIC Investment and Beijing Cornerstone Capital, generating a valuation of about 1 billion yuan at the time. A year later, another 132 million yuan in funds came from Gongqingcheng Junhe Investment and Beijing Centergate Technologies (Holding) Co., Ltd.(000931.SZ). The company’s valuation doubled to more than 2.33 billion yuan, close to the market value of autonomous trucking firm TuSimple Holdings Inc. TSP at $360 million (2.45 billion yuan). However, investors might have reservations about the higher valuation if they take a look at the company’s inconsistent profit performance.
In the financial years from 2019 through 2021, the company’s revenue jumped from 8.07 million yuan to 107 million yuan, but profits did not keep pace. The company made 5.59 million yuan in profit in 2019, rising nine-fold to 51.58 million yuan the following year, but profits fell 27% to 37.57 million yuan in 2021. In the first half of last year, Saimo Tech logged a net loss of 25.79 million on just 6.4 million yuan in revenue, hit by high costs of marketing and R&D.
Decline in gross margin
Meanwhile, the company’s gross margin keeps falling, from 96.9% in 2019 to 59.9% in 2021, with a gross loss ratio of 18.3% in the first half of last year. The company explained that it used mainly self-developed software to generate business in 2019, limiting direct costs and boosting gross margin. Since then, margins have been squeezed by the need to buy hardware, servers and parts to meet client needs, as well as the hiring of more staff to provide customized solutions.
Saimo Tech also noted in the prospectus that its highly concentrated customer base was a risk factor. In the three and a half years to mid-2022, revenue derived from its five largest customers accounted for between 88.5% and 100% of the total. During that time, the single largest customer contributed between 31.6% and 58.7% of revenue. That means the loss of any big customer would inflict a heavy business toll.
As an innovator in simulation services, Saimo Tech must burn through R&D cash to keep refining its ICV testing. In 2021, such expenditure surged 240% to 27.10 million yuan from the previous year. The investment bore fruit in the form of the company’s Sim Pro testing and verification tool, which was certified as reaching the internationally recognized standard of ASIL D (Automotive Safety Integration Level D) in June of that year. But the pressure to keep innovating continues. Last year R&D expenditure, instead of falling, surged 62% to 19.23 million yuan in the first half alone.
In addition, Saimo Tech operates a closed-field testing site covering about 182,000 square meters in Beijing’s Shunyi District. Business at the ICV test facility was hit by Covid outbreaks in the first half of the year, and site operating rights are due to expire in August next year, when the company is set to incur renewal costs.
As of the end of October last year, Saimo Tech had only 164 million yuan of cash and cash equivalents, nearly 80 million yuan less than at the end of June. It is hardly surprising that the company is eager to raise capital through a Hong Kong IPO. It needs deep pockets to compete with foreign rivals for the burgeoning business around autonomous driving.
China’s demand for ICV testing and certification is still developing, and the market for ICV simulation tools and platforms is becoming highly concentrated, with the top five players, including Saimo Tech, accounting for nearly 37% of the total. As the Chinese authorities increasingly focus on data security, Saimo Tech could enjoy a competitive edge over foreign firms as a purely Chinese-funded company. But the company is still at the growth stage, and investors may take some convincing about its potential, unless managers can improve the erratic profit performance.