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metamorworks A Quick Take On Hesai Group Hesai Group (HSAI) has filed to raise an undisclosed amount in an IPO of its American Depositary Shares representing underlying Class B ordinary shares, according to an F-1 registration statement. The firm develops and sells LiDAR solutions for a range of applications. HSAI has grown revenue but generates steep and growing operating losses, a negative in a rising cost of capital environment. I’ll provide an update when we learn more IPO details from management. Hesai Overview Shanghai, China-based Hesai Group was founded to develop three-dimensional light detection and ranging (LiDAR) systems for vehicle and robotic environments. Management is headed by co-founder and CEO Yifan Li, who has been with the firm since its inception and was previously principal engineer at Western Digital. The company’s primary offerings by application area include: Passenger & commercial vehicle systems Autonomous vehicle fleets Robotics. As of September 30, 2022, Hesai has booked fair market value investment of $842 million from investors, including ALBJ Limited, Fermat Star, Galbadia Limited, Lightspeed Opportunity, Lightspeed China Partners, Baidu Holdings, Bosch, Xiaomi and Yuanzhan. The company also generates a small percentage of revenue from gas detection products. Hesai Group – Customer Acquisition According to a Frost & Sullivan report commissioned by the company, Hesai had a 60% market share for the autonomous mobility application market in 2021. Its top customers include Baidu, Aurora,, AutoX, WeRide, Nuro, Meituan, Neolix and OEMs. Sales and Marketing expenses as a percentage of total revenue have dropped as revenues have increased, as the figures below indicate: Sales and Marketing Expenses vs. Revenue Period Percentage Nine Mos. Ended September 30, 2022 8.0% 2021 9.6% 2020 12.0% Click to enlarge (Source – SEC.) The Sales and Marketing efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, rose to 5.2x in the most recent reporting period, as shown in the table below: Sales and Marketing Efficiency Rate Period Multiple Nine Mos. Ended September 30, 2022 5.2 2021 4.4 Click to enlarge (Source – SEC.) Hesai’s Market & Competition According to a 2022 market research report by Grand View Research, the global market for LiDAR products was an estimated $1.8 billion in 2021, and is forecast to reach $4.2 billion by 2030. This represents a forecast CAGR of 9.8% from 2022 to 2030. The main drivers for this expected growth are continued innovation in resolution and other performance aspects and a growing demand for 3D imagery across numerous application areas. Also, the chart below shows the breakdown of the global LiDAR market by application market share in 2021: Global LiDAR Market (Grand View Research) Major competitive or other industry participants include: Velodyne Luminar Ouster Faro Technologies Leica Geosystem Holdings AG Teledyne Optech Incorporated (A part of Teledyne Technologies) Trimble Navigation Limited RIEGL USA Quantum Spatial Sick AG YellowScan GeoDigital. Hesai Group Financial Performance The company’s recent financial results can be summarized as follows: Growing topline revenue Increasing gross profit but decreasing gross margin Higher operating losses Growing cash used in operations, Below are relevant financial results derived from the firm’s registration statement: Total Revenue Period Total Revenue % Variance vs. Prior Nine Mos. Ended September 30, 2022 $ 111,546,000 72.4% 2021 $ 101,324,000 73.1% 2020 $ 58,523,099 Gross Profit (Loss) Period Gross Profit (Loss) % Variance vs. Prior Nine Mos. Ended September 30, 2022 $ 49,082,000 42.4% 2021 $ 53,672,000 59.5% 2020 $ 33,649,859 Gross Margin Period Gross Margin Nine Mos. Ended September 30, 2022 44.00% 2021 52.97% 2020 57.50% Operating Profit (Loss) Period Operating Profit (Loss) Operating Margin Nine Mos. Ended September 30, 2022 $ (33,476,000) -30.0% 2021 $ (37,294,000) -36.8% 2020 $ (14,339,718) -24.5% Net Income (Loss) Period Net Income (Loss) Net Margin Nine Mos. Ended September 30, 2022 $ (85,965,000) -77.1% 2021 $ (345,281,000) -309.5% 2020 $ (15,100,845) -13.5% Cash Flow From Operations Period Cash Flow From Operations Nine Mos. Ended September 30, 2022 $ (71,086,000) 2021 $ (32,104,000) 2020 $ (49,579,577) (Glossary Of Terms,) Click to enlarge (Source – SEC,) As of September 30, 2022, Hesai had $105.5 million in cash and $120 million in total liabilities. Free cash flow during the twelve months ended September 30, 2022, was negative ($129 million). Hesai Group IPO Details Hesai Group intends to raise an undisclosed amount in gross proceeds from an IPO of its American Depositary Shares representing underlying Class B ordinary shares. American Depositary Shares representing underlying Class B ordinary shares The S&P 500 Index (SP500) no longer admits firms with multiple classes of stock into its index. No existing shareholders have indicated an interest in purchasing shares at the IPO price. Management says it will use the net proceeds from the IPO as follows: approximately 25% for investment in our manufacturing capabilities, including constructing new manufacturing facilities and purchasing new manufacturing and testing equipment; approximately 35% for research and development, including development of our next-generation ASICs and further investment in our software solutions; and approximately 40% for general corporate purposes, which may include potential strategic investments and acquisitions, although we have not identified any specific investments or acquisition opportunities at this time. (Source – SEC.) Management’s presentation of the company roadshow is not available. Regarding outstanding legal proceedings, management says the firm is not currently subject to legal proceedings that would have a material negative effect on its financial condition or operations. In 2020, the firm came to an agreement to pay Velodyne “a one-off settlement fee and an annual royalty fee through 2030,” in addition to completing a global cross-licensing agreement. The listed bookrunners of the IPO are Goldman Sachs, Morgan Stanley, Credit Suisse and Huatai Securities. Commentary About Hesai’s IPO Hesai Group is seeking U.S. public capital market investment to fund growth in its manufacturing and commercial operations efforts. The company’s financials have produced increasing topline revenue, growing gross profit but decreasing gross margin, elevated operating losses and higher cash used in operations. Free cash flow for the twelve months ended September 30, 2022, was negative ($129 million). Sales and Marketing expenses as a percentage of total revenue have dropped as revenue has increased; its Sales and Marketing efficiency multiple rose to 5.2x in the most recent reporting period. The firm currently plans to pay no dividends in the foreseeable future and to retain any future earnings for reinvestment back into the company’s growth initiatives. Hesai Group has spent substantially on capital expenditures despite high operating cash use. The market opportunity for LiDAR products and services is reasonably large and expected to grow at a robust rate through 2030, so the company enjoys strong industry growth dynamics in its favor. Like other firms with Chinese operations seeking to tap U.S. markets, the firm operates within a WFOE structure or Wholly Foreign Owned Entity. U.S. investors would only have an interest in an offshore firm with interests in operating subsidiaries, some of which may be located in the PRC. Additionally, restrictions on the transfer of funds between subsidiaries within China may exist. The recent Chinese government crackdown on IPO company candidates combined with added reporting and disclosure requirements from the U.S. has put a serious damper on Chinese or related IPOs resulting in generally poor post-IPO performance. Also, a potentially significant risk to the company’s outlook is the uncertain future status of Chinese company stocks in relation to the U.S. HFCA act, which requires delisting if the firm’s auditors do not make their working papers available for audit by the PCAOB. Prospective investors would be well advised to consider the potential implications of specific laws regarding earnings repatriation and changing or unpredictable Chinese regulatory rulings that may affect such companies and U.S. stock listings. Additionally, post-IPO communications from the management of smaller Chinese companies that have become public in the U.S. has been spotty and perfunctory, indicating a lack of interest in shareholder communication, only providing the bare minimum required by the SEC and a generally inadequate approach to keeping shareholders up-to-date about management’s priorities. Goldman Sachs is the lead underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 50.1% since their IPO. This is a top-tier performance for all major underwriters during the period. Risks to the company’s outlook as a public company include a wide variety of competitors in global LiDAR markets as well as competing imaging technologies. Additionally, the ongoing pandemic may continue to negatively affect the company’s operations in China and elsewhere. When we learn more information about Hesai Group management’s assumptions on pricing and valuation, I’ll provide an update. Expected IPO Pricing Date: To be announced.

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