Key Takeaways:

Black Sesame's revenue rose about 52% last year, though the growth rate slowed from the first half to the second half

The company's gross margin improved notably in the first half of last year as its products were included in two mass-produced vehicles

By Doug Young

In the race for investor favor among a group of recently listed smart driving tech stocks, Black Sesame International Holding Ltd. (2533.HK) is shaping up as a dark horse. Six months after its trading debut last August, the stock was down about 10% from its IPO price as of Monday, as investors worried about the relatively small size of its customer pool.

Those same investors appeared to receive some encouragement from a company profit alert issued late Monday, sending Black Sesame's shares up 3.5% in Tuesday morning trade. Among other things, the announcement showed the company continued to post strong double-digit revenue growth in the second half of last year, though at a slower rate than the first half.

And even after the rally, the stock is still down from its IPO price by about 6%. That makes the company the odd horse out in a field of newly listed smart driving technology companies whose shares have nearly all risen since their recent listings. Shares of Horizon Robotics (9660.HK) are up around 80% since their debut in late October, while Minieye (2431.HK) is up nearly 60% from its IPO price last December.

In the U.S., recently listed robotaxi operator WeRide ( WRD ) leads the pack with its stock nearly doubling since its debut last October, while Pony AI is up by nearly 30%.

So, why is Black Sesame a relative laggard in this group, and is that status really deserved? We'll explore that question in more detail shortly, after reviewing the latest profit alert that was breathing some new life into the stock.

Black Sesame said it expects to report revenue of between 450 million yuan ($62 million) and 500 million yuan for all 2024, representing about 52% growth from last year's 313 million yuan at the midpoint of that range. Subtracting previously announced data for the first half of the year shows the company expects to report roughly 43% revenue growth in the final six months of 2024, which is strong but represents a slowdown from 69% growth in the first half.

The company said it also expects to report a net profit of about 100 million yuan for the full year, reversing a loss of 4.86 billion yuan a year earlier. Backing out the first-half data shows the company lost about 1 billion yuan in the second half of the year. But much of the loss appears related to non-cash items, and the company didn't give a forecast excluding those items.

The reasons for the revenue growth are fairly standard, mostly attributed to growing sales of its smart driving products, including automotive chips and systems-on-a-chip (SoC). It also cited increased sales in emerging areas like chips for vehicle-road-cloud integration, noting such sales were being helped by government policies.

Frankly speaking, the revenue gains look quite ordinary, and Black Sesame even calls them "expected." So, the jump in the share price could reflect investor confidence that the company is continuing to grow, and perhaps some acknowledgement that its shares are undervalued.

Rising adoption

Having reviewed this not-so-unusual profit alert, we'll spend the second half of our review looking at why Black Sesame has earned its status as relative laggard post-IPO. Here, we should start by pointing out that even after its post-IPO slump, the stock still trades at a high price-to-sales (P/S) ratio of 32. That's behind the even higher 41 for Horizon Robotics, but is quite a bit higher than Minieye's 18.

Still, it seems fair to say that investors are less impressed with Black Sesame than some of its peers. A major reason for the hesitation seems to lie in the company's relatively late arrival to the smart driving scene, with the result that its products are a bit behind its rivals in terms of adoption into mass-produced vehicles.

The company's mid-year report released in August showed its products had been incorporated into at least two mass-produced models, including one from Lynk & Co., a high-end carmaker owned by auto giant Geely; and one from state-owned giant Dongfeng. The company said it had 23 design wins with 16 car makers and tier-one suppliers at the middle of last year, though such wins are typically for cars in development whose potential for mass-production is still far from certain.

Horizon Robotics' IPO prospectus doesn't say how many mass-produced cars have incorporated its products. But it points out those products are being used by 27 car makers in over 285 models - far higher than Black Sesame's total design wins. Minieye looks the strongest based on this metric, with 94 mass-produced vehicles using its smart driving and smart cockpit solutions at the middle of last year.

The other key area for comparison is gross margins, which typically indicate how unique and high-tech a company's products are. Horizon leads the group with an enviable gross margin of 79% in the first half of last year. Minieye is last among these three companies, with a figure of just 14%.

Black Sesame was in the middle of the pack with a gross margin of 50% in the first half of 2024. But that figure was quite notable for its big jump, after the figure fell steadily from 36.1% in 2021 to 24.7% in 2023. The company attributed the big rise to the start of mass production for the Lynk & Co. and Dongfeng cars using its products. The gross margin could continue to improve in the second half of the year as more mass orders roll in from those two customers, and possibly from some other newly mass-produced models.

At the end of the day, Black Sesame's dark horse status appears to be mostly due to its relatively late arrival to the smart driving game, with the result that it's still trying to sell customers on its products. The latest profit alert shows its revenue continues to grow at a steady clip, even though the rate slowed in the second half of last year from the first half. That means investors will be looking for signs of a return to accelerating growth when the company reports its final 2024 results next month, and could reward the stock if Black Sesame can show its products are gaining traction among car makers.