UBS Rates ECARX A "Buy"; Sees Partnerships Driving Growth

The maker of digital cockpits used in smartcars reported its revenue rose 4% in the fourth quarter, as one of its main profit metrics turned positive for the first time

Key Takeaways:

• A new partnership between ECARX and ‘a well-known European OEM' could bring the digital cockpit maker up to 10 billion yuan in revenue, according to UBS
• ECARX reported its first-ever adjusted EBTIDA profit in the fourth quarter and indicated confidence at maintaining that profitability, as its quarterly net loss narrowed sharply

Global mobility technology provider ECARX Holdings Inc. (ECX.US) reached a major milestone in the fourth quarter, as one of its profit metrics turned positive for the first time in its drive to sustainability. It disclosed that achievement on Monday in its latest quarterly report, as it logged another big milestone by signing a major new partnership with European auto giant Volkswagen.

ECARX counts Geely, one of China's largest private automakers, as the biggest buyer of its digital cockpits. It hopes the new Volkswagen partnership will mark the acceleration of its drive toward a more diversified customer base for its digital cockpits and advanced driver assistance systems (ADAS) that are its two main product lines.

At the same time, the company is facing a global car market where competition is intensifying as overall growth remains sluggish – a reality that showed up in slowing revenue growth in ECARX's latest quarterly report, as well as margins that remain under pressure.

Analysts expect the Volkswagen partnership to jumpstart that growth as early as 2027, and for a more mature partnership with China's FAW to provide a lift starting this year. Meantime, a recently announced campaign by Geely to streamline its supply chains could also play to ECARX's advantage as it emerges as a preferred supplier to a large family of car brands that includes not only Geely, but also names like Zeekr, Volvo and Lotus.

The prize could be huge for companies that make it to the finish line and can tap into a huge global market for the digital technologies that will power the smartcars of the future. But a shakeout in the crowded field of technology suppliers is also inevitable. ECARX's chances should be higher than many due to its Geely ties. And to make sure it has the cash it needs, the company may soon look to capital markets to fatten up its coffers.

Shen Ziyu, who co-founded ECARX with Geely founder Li Shufu in 2017 and currently serves as its CEO, described the current global automative market as "challenging" due to its slow pace of growth with many companies fighting for market share.

"As growth slows and remains uneven globally, it becomes ever more important for companies to stand out from competition and define themselves," he said on ECARX's earnings call. "We are capitalizing on this growing demand and helping automakers distinguish themselves with our innovative product portfolio, diverse customer base, and strategic global partnerships."

ECARX's biggest news came four days before its latest quarterly report, when it disclosed a new agreement to provide its digital hardware and software to Volkswagen for use in its Volkswagen and Skoda brands. It said the partnership will eventually produce a "significant number of cars" using ECARX technology, with initial launches planned in Brazil and India.

Such partnerships are important for companies like ECARX, though they typically require at least two to three years to translate into significant sales. Carmakers typically design new models that incorporate the supplier's technology and then go through various development phases before mass production can begin.

10 billion yuan value

UBS said it expects ECARX to start generating revenue from "a well-known European OEM" in 2026, with a lifetime value of the partnership expected at 10 billion yuan ($1.38 billion). That reference appears to refer to the Volkswagen partnership, though UBS wasn't that explicit in its research note that initiated its coverage on the company.

UBS said it expects business from the new European OEM and FAW partnerships to charge up ECARX's revenue growth in the years ahead. It added that ECARX looks "well positioned to benefit" from Geely's effort to consolidate its supply chain announced in last year's third quarter, with the potential to ultimately supply 68% of Geely's digital cockpits in 2026, up from 50% last year.

UBS began covering ECARX in February and gave it a "buy" rating. The investment community is like-minded in that regard, with all six analysts polled by Yahoo Finance rating the company a similar "buy." But even after a 33% rally for its stock this year, ECARX shares still trade at a low price-to-sales (P/S) ratio of just 1.25, well behind the 3.58 for domestic peer iMotion (1274.HK) and 7.63 for global leader Mobileye (MBLY.US).

ECARX shares fell 6.7% after the release of its latest report amid recent broader market weakness that has seen the S&P 500 drop nearly 4% over the last week.

That company's latest report showed its revenue rose 4% in the fourth quarter to 1.94 billion yuan, as 16% growth for its core digital cockpits was offset by declines in its smaller software licensing and service revenue. The company shipped 718,000 units during the quarter, more than a third of its record 2 million units shipped for the year. It said its technology is now used in 8.1 million vehicles on the road worldwide, and it sells to 18 automakers across 28 brands.

ECARX is also developing a new product called Skyland Pro, which is a next-generation ADAS platform already adopted by a couple of Geely cars in a step that CFO Peter Cirino described as "crucial to driving the long-term sustainable development of our business and the global automotive industry."

The company exercised cost controls that helped reduce its overall operating expenses by 32% during the fourth quarter year-on-year. Still, the intense competition drove down its gross margin to 21.2% from 23% a year earlier, as it blamed a "penetration pricing strategy adopted to drive automotive computing platform revenue growth."

Its bottom line was still in the red, though its net loss of 39.5 million yuan marked a sharp improvement from the 326.7 million yuan loss a year earlier. And as we previously noted, CEO Shen said ECARX hit breakeven on an earnings before interest, taxes, depreciation and amortization (EBTIDA) basis in the fourth quarter, leading him to predict the company should be profitable on the same basis for all of 2025.

ECARX needs to be mindful of its losses, as its cash fell to 367 million yuan at the end of last year from 588 million yuan a year earlier. But it noted on its call that the company has made the necessary filings to raise more money when the time is right, suggesting it could do some fundraising soon to take advantage of recent positive investor sentiment. The filing it referenced showed the company could raise up to $300 million by issuing more of its shares.