Black Sesame Steers Towards $140 Million Hong Kong IPO

Key Takeaways:

• Black Sesame is preparing to raise more than $100 million in a Hong Kong IPO, reporting its loss more than doubled from 2.4 billion yuan in 2021 to 4.9 billion yuan last year
• The company faces stiff competition from Nvidia, HiSilicon, and startups like Horizon Robotics in the autonomous driving chip market

By Hugh Chen

China’s autonomous vehicle sector has recently captured public imagination, charming both ordinary people and investors with visions of streets filled with self-driving private cars, robotaxis and even robo-street sweepers. While actual technology may not fully match the hype, the surge in interest has helped to nurture the sector, leading a growing number of startups to test the capital markets with proposed IPOs.

Against that backdrop, Black Sesame International Holding Ltd., a leading provider of key chips that power autonomous vehicles, looks likely to become one of the first such concept stocks to list in Hong Kong, beating out other names like Zongmu. The company first filed for such a listing more than a year ago, but failed to complete the process before the application expired in January.

But it didn’t give up and reapplied in March. It finally neared the finish line when it passed its listing hearing in June, clearing the way for the IPO. In its updated prospectus filed last week, it announced plans to issue 37 million shares at a price range between HK$28 and HK$30.30 per share.

That could raise up to HK$1.12 billion ($143 million) if the shares price at the top of their range, with the stock set to make its trading debut on Thursday. The deal is significant not only for being one of the first in Hong Kong to make it to market, but also for raising a relatively large amount in the subdued Hong Kong IPO market.

Hong Kong has typically been one of the world’s biggest IPO markets, hosting many of China’s top private companies. The market has been chillier lately, with the biggest new listing so far this year coming from a tea chain whose shares sank on their trading debut. But analysts say the listing pace should pick up later in the year, fueled by the likes of larger listings like Black Sesame’s.

Founded in 2016 by Tsinghua University alumni Shan Jizhang and Liu Weihong, who come from chipmaking and automotive backgrounds, Black Sesame specializes in system-on-chip (SoC) products that integrate key components like CPUs and memory for self-driving vehicles.

The company offers two series of products: Huashan and the recently launched Wudang series of SoCs, serving both automaker suppliers and automakers directly. Black Sesame’s SoCs are primarily used in Advanced Driver Assistance Systems (ADAS), which fall under Level 3 on an autonomous driving scale where Level 0 is no autonomy and Level 5 is completely self-driving. Level 3 still requires a driver to be present and ready to take control.

Deepening Red Ink

Like most autonomous driving IPO candidates, Black Sesame is still hemorrhaging money, including combined losses of 10 billion yuan ($1.4 billion) for the three years through 2023. Its losses have been growing over that time, escalating from 2.4 billion yuan in 2021 to a hefty 4.9 billion yuan last year.

Such growing losses are common in the sector as companies ramp up their development of new products. Costs are especially big for chip developers, with Black Sesame reporting its R&D investment more than doubled from 595 million yuan in 2021 to 1.4 billion yuan last year.

Another factor driving the accelerating losses is the company’s relatively slow pace of commercialization. Black Sesame only started generating revenue in 2020. While its 2023 revenue of 312 million yuan tripled from 2021’s level, that growth may be losing momentum. The company’s revenue in the first quarter of this year reached just 27.5 million yuan, marking a contraction from the 29.3 million yuan a year earlier.

Black Sesame’s emphasis on the ADAS market, rather than fully autonomous driving, reflects a broader industry trend. Many companies have recently shifted to a more pragmatic approach, realizing that focusing on market-ready areas is more likely to generate bigger revenues from mass orders than pursuing fully autonomous vehicles that are still in development.

According to third-party research cited in its prospectus, the global market for automotive driving SoCs for ADAS applications is projected to grow from 27.5 billion yuan in 2023 to 92.5 billion yuan by 2028. China is expected to be a major driver of this growth, with its market share expected to increase from 14.1 billion yuan to 49.6 billion yuan during that time.

Though the market potential is enticing, competition is also fierce. While Black Sesame didn’t reveal its market share in the ADAS applications segment, its share in the broader Chinese autonomous driving SoC market stood at a modest 2.2%.

In the Chinese market, which is currently Black Sesame’s focus, the company faces formidable competition. It’s not only up against international juggernauts like U.S. giant Nvidia NVDA and domestic powerhouse HiSilicon, the chipmaking unit of Huawei, but also a growing list of up-and-coming startups. One such competitor is Horizon Robotics, which earlier this year also filed to list in Hong Kong.

Moreover, an emerging new trend could pose additional challenges for companies like Black Sesame. That trend is seeing automakers increasingly develop their own chips, potentially reducing their reliance on external partners. Three Chinese major automakers – Nio, Li Auto and XPeng – have all recently ramped up their investments in in-house chip development, local tech outlet 36Kr reported, a move that could shrink the market for independent chip suppliers.

Judging from other similar chip startups, Black Sesame looks unlikely to turn a profit anytime soon. A case in point is Cambricon (688256.SH), a Chinese chip designer focused on accelerators for AI systems, which has yet to turn a profit four years after going public.

While Black Sesame is steering to more realistic goals to earn more revenue, it could also hold appeal for investors who believe in its vision of fully autonomous driving in the not-too-distant future. Recent hype surrounding robotaxis in the central Chinese city of Wuhan exemplifies such optimism. Last month, excitement about progress on that front fueled a surge of up to 13% in shares of Baidu BIDU, a leader in autonomous vehicle development and the company behind the Wuhan robotaxis.

Despite that surge, the shares have given back most of the gains since then and returned to multiyear lows. Still, the brief rise demonstrates the potential upside for shares of companies that can find a fast lane for turning autonomous driving technology into big business.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.