From a long-term perspective, the new energy industry chain is a long-term high-growth racetrack, but in the short term, the boom in the industrial chain has fluctuated greatly. In 2021-2022, prosperity exploded, and the scale of the industry expanded rapidly; state aid was withdrawn at the end of 2022. As a result of these two major factors, the overall inventory level of the industrial chain reached an all-time high at the end of 2022, and entered a long period of de-inventorying. The pressure from the downstream has been transmitted to the upstream. Overall, today's business in the mid-term report sector is not very impressive.
However, there are also individual manufacturers that have shown high growth through the cycle: in the first half of 2023,Yingheng Technology (01760.HK)Revenue from the new energy business increased by nearly 60% year-on-year; the company's overall gross margin remained stable.
Yingheng Technology's performance is largely due to the fact that the automotive supply chain is being rapidly reshaped and has been in the reshaping range for a long time. This extremely long industrial chain structural boom cycle has helped Yingheng Technology withstand the impact of a decline in short-term terminal demand.
The automotive supply chain is in a period of rapid reshaping
In fact, vertical integration of supply chains has become the main theme of car companies' development in recent years.
As disruptors of the traditional automobile supply chain, Tesla and BYD have already begun vertical integration of the supply chain. Other new forces are following suit. In February of this year, Li Xiang, CEO of Ideal Auto, revealed that Ideal Auto also has plans to vertically integrate the supply chain. In April, in an interview with the media, Chery executives said that without vertical integration, it is impossible for a company to achieve disruptive transcendence.
In addition to new forces, traditional car companies have also revealed plans to transform their supply chain. In the second half of 2022, Volkswagen and STMicroelectronics (STMicroelectronics) said the two companies are collaborating to develop new chips. This is the first time that Volkswagen has directly established a relationship with a tier 2 or 3 semiconductor supplier, going beyond the original supply chain level.
Related trends will lead to a reshaping of the supply chain and a major reshuffle of the industry. To understand the value behind this trend, we first need to understand the original automotive supply chain system.
In the traditional automobile industry, the “zero” relationship (the relationship between the parts supplier and the automaker) usually appears as a “tier2-tier1-OEM” model. The automotive manufacturer (OEM), as the top level, cooperates with Tier 1 suppliers, and Tier 1 suppliers then works with Tier 2 suppliers. This tower-like vertical structure means that there is a clear division of labor and partnership between each level. Higher level suppliers in the automotive industry chain control the manufacture and supply of key components and technologies. Since high-level suppliers usually come from developed countries such as Europe, America, and Japan, the automobile supply chain is industrial clustered. Therefore, the supply chain structure is relatively closed, and even shows a trend of territorial protection to a certain extent. Therefore, in the past, some international manufacturers controlled core technology and parts with high added value, thus obtaining more profit shares; many domestic manufacturers were at a lower level in the supply chain and undertook relatively low value-added jobs such as parts manufacturing, and profit margins were limited.
However, with the rise of technology waves such as new energy, intelligence, and the Internet, automobile manufacturing is gradually shifting from single machine manufacturing to complex software and hardware integration, and OEMs and Tier 1 suppliers are beginning to try more to master core links and technology. This has led to two changing trends:
1. The supply chain has moved from its original vertical structure to a flatter circular structure.In the process, the phenomenon of “circumventing Tier 1/Tier 2” has intensified. The boundaries between component suppliers at different levels have become blurred, and the industrial chain status of some important low-level suppliers will shift from lower levels (such as Tier 2) to higher levels (such as Tier 1), directly cooperate with OEMs, and participate in more important value creation processes.
Tesla and BYD often work directly with the original Tier 2 and Tier 3 suppliers to obtain advanced technology and innovative solutions more quickly. For example, Tesla's electric vehicles use a large amount of battery technology, and the company cooperates with suppliers that directly manufacture battery modules, such as Ningde Times.
2. Strengthen self-research on core components.On the one hand, self-developed core components can reduce costs and improve production efficiency. On the other hand, independent control of core components plays an important role in customized product development and will be a source of competitiveness for OEMs.
However, self-research has brought high R&D costs and production costs, so it is necessary to occupy a large amount of capital and maintain stable component quality. Therefore, selective self-research is the future development trend. In the future, self-research, cooperative self-research, and external procurement will go hand in hand. Take BYD, for example. Since 2017, BYD has gradually opened up its supply chain to improve the quality of some components and reduce costs.
All in all, under this trend, the traditional automobile supply chain has ushered in drastic changes, bringing new opportunities — parts manufacturers may gradually rise to become an important part of the value chain, occupy more market share through technological innovation, and achieve higher profits.
However, behind the opportunities, there are also challenges. New technology is changing rapidly, making parts manufacturers need to continuously iterate and innovate. Component manufacturers must face competitors from around the world, and if they fail to achieve technological leadership and scale, they will be eliminated.
Positioned as a “Tier X.5 platform”
It is worth mentioning that the electrification and intelligence characteristics of new energy vehicles have significantly increased the importance of self-research on powertrain systems, electronic and electrical systems, and intelligent driving, making it the field with the highest value.
This is just the basic advantage of Yingheng Technology. In the era of traditional automobiles, Yingheng Technology has become a major player in the core fields of traditional automotive application solutions such as body control, power transmission, and safety. Since 2008, Yingheng Technology has begun to migrate its own technology accumulation and industrial resources to the path of electrification and intelligent technology development, extending from solutions for body, safety, and power systems in traditional competitive advantage fields to electric three-electric control, thermal management electronic control, intelligent domain controller, and hydrogen energy electronic control. Later, the company was very forward-looking and further defined itself as a service platform for the automotive electronics industry. Specifically, by building R&D technology platforms and industrialization platforms, Yingheng Technology has achieved the mission of helping the development of China's automobile industry, and has taken on the role of “Tier X.5” in the new trend. There is no doubt that at a time when the boundaries between suppliers at different levels are becoming increasingly blurred, the “Tier X.5” positioning is more likely to be in line with the trend of industrial chain restructuring, and it is also easier to build a differentiated competitive advantage.
As “Tier X.5,” Yingheng Technology is customer-centered, connects with upstream resources, integrates downstream resources, and provides a combination of software, hardware, and services to improve resource allocation efficiency for customers.
On the one hand, Yingheng Technology has joined forces with leading upstream suppliers, including Infineon, US TI, Eaton, Epson, Panasonic, Horizon, etc., to rapidly iterate on products.
Among them, Yingheng Technology has reached a very in-depth cooperation with domestic chip leader Horizon. Horizon is currently the only domestic enterprise that has achieved mass production of automotive-grade AI chips. It can cover a full range of vehicle smart chip solutions from L2 to L4. In 2020, the two began to jointly develop an L3 level autonomous driving domain controller based on domestic chips; in 2021, Yingheng Technology and Horizon collaborated to develop a journey based on Horizon5-chip platform solution. Previously, the company had efficiently completed two platform solutions, MADC2.0 and MADC2.5; in the first half of 2023, the company developed and completed the development of MADC3.5, an integrated cockpit product compatible with cockpit functions. This product will be delivered to customers for use in the near future. Through a strong partnership with Horizon, Yingheng Technology has built a competitive autonomous driving product line. It is worth mentioning that in addition to this, the company also made many innovative breakthroughs in cockpit solutions and sensor fusion solutions in the first half of the year.
On the other hand, Yingheng Technology has deepened corporate pain points and strengthened partnerships with OEMs and Tier 1 companies. As mentioned above, automakers want to control core technology and links more deeply to better optimize products and enhance competitiveness, yet they have fallen into technical bottlenecks and cost pressure. In this context, many car companies will choose suppliers with a high level of technology and large-scale capabilities. Yingheng Technology has deepened corporate pain points and strengthened cooperative relationships with OEMs.
This is why many automakers and Tier 1 companies choose to cooperate with Yingheng Technology for joint research and development. For example, in the intelligent driving network mass production project, Yingheng Technology has collaborated with automakers and first-class supplier customers on multiple mass production projects, such as ADAS controller development, L1-L2 ADAS controllers, domain controllers for L2+ automation levels, service-oriented gateway controllers, etc. The company is also actively preparing functional safety development for high-level autonomous driving, next-generation autonomous driving domain controller platform development, technical research on smart antenna controllers, and automotive communication control units integrating functions such as vehicle networking (V2X), ultra-wideband (UWB), and 5G communication.
Currently, the company's customers include not only traditional automakers and new car builders such as BYD, GAC, Geely, Ideal, Zero Run, and Xiaopeng, but also well-known Tier 1 suppliers such as Ningde Times and Xingyu Co., Ltd. The top ten new energy vehicle brands in China are all end customers of Yingheng Technology. To some extent, this shows that Yingheng Technology has become a leading Tier X.5 platform company.
It has both growth potential and certainty
Correct strategic positioning, leading competitiveness and suitable development environment make Yingheng Technology far superior to competitors' growth stability.
In 2022, the company's operating income increased 52% year on year to 4.83 billion yuan, and net profit to parent reached 415 million yuan, doubling year on year. Despite entering the first half of 2023, due to the influence of the general environment, the automobile industry chain often showed a sharp decline in “volume and price”. Yingheng Technology maintained steady growth, as can be seen from three points:
1. During the reporting period, the company achieved revenue of 2.63 billion yuan, an increase of 26.5% over the previous year, bucking the trend and growing rapidly;
This is due to the fact that under the “Tier X.5” strategic positioning, the company's core drive has switched from the original traditional automobile business to the second growth curve of new energy and the third growth curve of intelligent driving connectivity.
Financial data, as post-mortem data, can show from the side how rapidly Yingheng Technology is progressing in the NEV business sector. From 2020 to 2022, the sector's revenue increased from 467 million yuan to 2,067 billion yuan, which doubled 3.4 times within two years; in the first half of 2023, the new energy business continued to maintain strong growth — a year-on-year growth rate of 58.1%. During the reporting period, revenue from the new energy business accounted for 47.7% of overall revenue. It can be seen that this second curve showing exponential growth has become the core engine of the company's growth.
Also, although the smart driving network sector started late, this third curve has already begun to show strong growth. In 2022, the intelligent driving network business achieved revenue of 255 million yuan, an increase of 151% over the previous year; in the first half of the year, this sector's revenue increased by 117.6% year on year, making it the fastest growing sector of Yingheng Technology and the third growth curve of Yingheng Technology. The second and third curves develop collaboratively, and together support Yingheng's continued existence
2. In the context of a price war, price adjustments of new energy vehicle companies will spread through the industrial chain, and new energy OEMs and upstream parts companies are under great pressure to reduce costs; however, Yingheng Technology was able to achieve a gross margin level of 20.6%, which is basically the same as the same period last year; in addition, under the premise of a sharp increase in R&D investment, the company still achieved net profit of 150 million yuan, a steady increase over the previous year.
Yingheng Technology's development policy is to focus on research and development without assets. In the first half of 2023, Yingheng Technology's R&D investment increased sharply by 59.2% year-on-year to 230 million yuan. Notably, the increase in R&D expenditure was used to purchase testing and verification equipment and expand personnel. Looking through the semi-annual report, it can be seen that the company's testing and verification infrastructure is rapidly expanded. The testing and verification infrastructure is fixed capital. Generally, depreciation is calculated on a monthly basis using the linear method — this means that R&D expenses from equipment depreciation in the second half of the year are basically the same; however, the first half of the automobile supply chain is off-season, so R&D expenses in the first half of the year will account for a larger share of overall revenue than in the second half of the year. Below the annual average, R&D expenses should be lower than that of the first half of the year, so there is no need to worry too much.
Higher R&D revenue not only indicates strong downstream demand, but also often suggests that the company's competitiveness is expected to further strengthen in the future. R&D will drive technological innovation and product upgrades, enable the company to maintain a leading position in the market and meet changing market needs. The Xiniu Securities Research Institute pointed out in its latest tracking report that Yingheng Technology is sacrificing short-term interests to pave the way for long-term development.
In addition to Xiniu Securities, after the performance report was released, many major banks were optimistic about Yingheng Technology. BNP Paribas, Dongwu Securities, Open Source Securities, and Guangfa Securities have all given purchase ratings. The Guangfa Securities Research Institute believes that Yingheng Technology benefits from new energy and intelligence for automobiles, and that product upgrades+category expansion drive continued business growth. BNP Paribas gave a target price of HK$6.70, which means there is 93% potential compared to the stock's estimated closing price of HK$3.48 on August 31!
Currently, the competitive landscape of the automobile supply chain is being profoundly changed. In the process of reshuffling the industry, former leaders will fall, and new ones will be born. Yingheng Technology seems to be becoming one of the rising stars.