Yet another "unicorn" is set to hit the market.
Recently, Horizon officially filed its IPO prospectus with the Hong Kong Stock Exchange, with Goldman Sachs, Morgan Stanley, and CITIC CLSA serving as joint sponsors. That evening, Horizon's founder and CEO, Yu Kai, posted on his social media, "This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."
When it comes to Horizon, many immediately think of autonomous driving chips. However, it's essentially a fusion of software and chips, hence it's been joked about as the "software company wearing a chip coat." Established in 2015, according to the IPO prospectus, Horizon describes itself as a "provider of advanced driver assistance systems (ADAS) and high-level autonomous driving (AD) solutions for passenger cars," boasting proprietary software and hardware technology.
Over the past few years, Horizon has been on the verge of the limelight, but it has indeed made significant breakthroughs. Data shows that in 2023, Horizon ranked second in both the high-end and low-end smart driving markets in China, with market shares of 35.5% and 21.3%, respectively. The top spot in the high-end smart driving market belongs to NVIDIA, with a market share of 49%. Mobileye leads the low-end smart driving market with a market share of 26.6%.
The Horizon's "Report Card" | Image Source: Horizon IPO Prospectus
What deserves closer attention are Horizon's staggering 70% gross profit margin and ample cash reserves, which stand out as particularly valuable in the fierce price wars. From 2021 to 2023, Horizon's gross profit margins were 70.9%, 69.3%, and 70.5% respectively; by the end of 2023, Horizon's cash and cash equivalents reached ¥11.36 billion.
However, the chip industry is a high-investment, long-cycle industry. Can Horizon continue its first-mover advantage? Where exactly lies its competitive edge? And where is it heading in the future? Perhaps the answers to these questions can be found in its IPO prospectus.
A Software Company Cloaked in Chip Apparel
From the prospectus, Horizon's business appears highly focused, mainly divided into two parts: automotive solutions and non-automotive solutions. Among these, the core automotive solutions contribute the vast majority of revenue. From 2021 to 2023, revenue from this segment continued to grow, reaching ¥410 million, ¥801 million, and ¥1.47 billion respectively. During the same period, the revenue proportion also showed an increasing trend, reaching 87.9%, 88.5%, and 94.8% respectively.
The automotive industry is a high-barrier business, where trust is paramount. Currently, Horizon's solutions have been adopted by 24 OEMs (31 brands), deployed in over 230 models, and partnered with China's top ten OEMs. In 2023, Horizon even secured design wins for over 100 new vehicle models.
Horizon's Revenue Breakdown Over the Past Three Years | Image Source: Horizon IPO Prospectus
Diving deeper into automotive solutions, they can be divided into two main segments: "Product Solutions" and "Licensing and Services." Product Solutions primarily involve selling integrated hardware and software products, including Horizon Mono for Level 2 active safety features, the high-speed NOA solution Horizon Pilot, and the advanced intelligent driving solution Horizon SuperDrive. Over the past three years, the revenue from this segment accounted for 44.6%, 35.3%, and 32.7% of the total revenue, respectively. Despite a slight decrease in proportion, it remains one of Horizon's primary revenue sources.
Licensing and services involve providing licenses for algorithms, software, and development toolchains, along with related technical services. From 2021 to 2023, the proportion of revenue from this segment was 43.3%, 53.2%, and 62.1%, respectively. The continuous growth in this revenue share demonstrates Horizon's increasing market position in technology licensing and services.
Horizon's rapid development in the automotive sector is closely related to the booming growth of intelligent driving in the passenger car market. Especially in the first half of 2020, the start of production at Tesla's Shanghai factory led to a skyrocketing increase in Tesla's market value from tens of billions to hundreds of billions of dollars, which also brought new opportunities for companies like Horizon. In 2019, Horizon introduced Journey 2, a chip compliant with automotive standards, making it the only domestically prepared company.
According to industry data, in 2022, approximately 7 million new intelligent connected passenger cars equipped with advanced driver assistance systems were sold in China, with a market penetration rate of 34.9%. By 2023, both the global and Chinese penetration rates for advanced driver assistance exceeded 50%. During this period, Horizon became the largest provider of pre-installed ADAS and AD systems in China.
In Horizon's automotive business, the "marriage" with Volkswagen is particularly noteworthy. According to the IPO prospectus, in 2023, approximately 68.8% of Horizon's total revenue (1.55 billion RMB) came from the top five customers, with the joint venture Cool Journey, co-founded with Volkswagen's software company CARIAD, becoming Horizon's top customer.
Data shows that in 2023, Cool Journey brought in revenue of 630 million RMB for Horizon, accounting for 40.4% of Horizon's total revenue for that year. Without this revenue, Horizon's revenue in 2023 would have remained almost flat compared to 2022. It can be said that Cool Journey's contribution played a crucial role in Horizon's financial condition.
Established in November 2023, Cool Journey is jointly owned by Volkswagen and Horizon, with 60% and 40% equity respectively. This is significant for Horizon for several reasons: first, the financial return; second, the increase in internationalization; and third, the expansion of Horizon's business from Chinese to international automakers.
In addition to automotive solutions, Horizon also provides non-automotive solutions, mainly offering intelligent solutions for equipment manufacturers such as lawn mowers and robotic vacuum cleaners. It is understood that Horizon is not only China's largest supplier of autonomous driving chips but also the largest supplier of chips for home service robots, including products such as Roborock robotic vacuum cleaners, Hisense fitness smart screens, and Xiaodu TianTian smart fitness mirrors.
However, despite the promising outlook for non-automotive solutions, they are not the strategic focus of Horizon. The IPO prospectus shows that the revenue from this segment was 57 million RMB, 105 million RMB, and 81 million RMB from 2021 to 2023, respectively, with the proportion of revenue declining each year to 12.1%, 11.5%, and 5.2%.
Behind this business structure lies Horizon's flexibility and strategic foresight in the face of uncertainty. When founded in 2015, Kai Yu's goal for Horizon was to create the "brain chips for the era of robots." Initially, Horizon believed that automotive and IoT were the most likely application scenarios, thus simultaneously entering the AIoT and automotive sectors.
However, as development progressed, Horizon found that the business scenarios for AIoT were too fragmented, resulting in many small businesses with limited value. Therefore, in 2019, Horizon decided to scale back its AIoT business and focus primarily on the field of autonomous driving, trimming all non-automotive businesses.
Horizon's automotive-grade chip "Journey" has now reached its third generation, with shipments mainly comprising Journey 2 and Journey 3, while Journey 5 remains relatively small. The latest generation Journey 6 chip is set to be released in the first half of 2024. These adjustments aim to allow Horizon to focus more on its core business, enhance competitiveness, and lay a solid foundation for future development.
Three-Year Losses Close to $4.7 Billion
With the increasing penetration rate of smart cars, Horizon has encountered its own "upswing" but also suffers from the "three highs": high growth, high R&D, and high losses.
In terms of revenue, Horizon has achieved rapid growth over the past three years. From 2021 to 2023, Horizon's revenues were 466 million CNY, 905 million CNY, and 1.551 billion CNY respectively, with a staggering compound annual growth rate of 82.3%.
Although its size is only one-tenth of the industry leader Mobileye, Horizon's growth rate far surpasses the latter. Data shows that Mobileye's full-year revenue in 2023 was $2.079 billion (approximately 15 billion CNY), with a year-on-year growth of 11.23%.
It is worth noting that Horizon's business scale continues to expand. According to the prospectus, Horizon has accumulated a large number of orders for unreleased car models. As of the end of 2023, unreleased models accounted for more than 50% of all models with secured orders, indicating that Horizon is expected to further expand its market share in the future.
However, despite the rapid revenue growth, Horizon also faces the challenge of high losses. From 2021 to 2023, Horizon's net losses were 2.064 billion CNY, 8.72 billion CNY, and 6.739 billion CNY respectively. Adjusted net losses were 1.103 billion CNY, 1.891 billion CNY, and 1.635 billion CNY, totaling nearly 4.7 billion CNY over the past three years. However, the trend shows that although the losses have not yet been reversed, the loss rate of Horizon has been declining with the growth in scale.
In comparison, Mobileye's net losses significantly decreased in 2023 to only $27 million, while the financial performance of the recently listed Heizhima Intelligent has been mediocre, with its losses continuously expanding. The prospectus shows that Heizhima Intelligent had adjusted net losses of 614 million CNY, 700 million CNY, and 1.254 billion CNY over the past three years, totaling 2.568 billion CNY in losses.
Regarding the losses, Horizon explained that they are mainly due to the substantial R&D expenses incurred to enhance key core technologies, as well as the fair value changes of preferred shares and other financial liabilities.
Data shows that in 2023, Horizon's total expenditure reached 3.14 billion CNY, with R&D expenses accounting for the largest proportion at 2.37 billion CNY, equivalent to 153% of operating income. As of the end of 2023, Horizon had 1,478 full-time R&D personnel, accounting for 71.5% of the total number of employees.
Additionally, Horizon's sales expenses were 330 million CNY, and general and administrative expenses were 440 million CNY. Although the combined revenue ratio of these three expenses has decreased from 258.7% in 2021 to 202.2% in 2023, it remains relatively high.
Horizon's Gross Profit and Gross Margin Over the Past Three Years | Image Source: Horizon IPO Prospectus
Despite the high expenditure, it's worth noting that Horizon's gross margin remains significant. From 2021 to 2023, Horizon's gross profits were ¥331 million, ¥627 million, and ¥1.094 billion respectively, with corresponding gross margins of 70.9%, 69.3%, and 70.5%, closely resembling Nvidia's 76% in 2023.
In comparison, rival Mobileye had a gross profit of $1.047 billion and a gross margin of 50.4% in 2023, while Black Sesame was at 24.7%.
However, Horizon's founder, Yu Kai, believes excessively high gross margins are unrealistic and toxic. He suggests that the gross margins of leading chip companies worldwide will eventually converge to around 60%, including Nvidia and Mobileye.
Horizon's high gross margins primarily stem from its unique revenue structure and delivery model, particularly its licensing and service business. This segment involves licensing algorithms, software, and development toolchains to clients, assisting them in developing custom applications and providing design and services, integrating solutions into their vehicles. This low-cost, high-premium business model enables it to achieve higher gross margins. In 2023, Horizon's gross margin for licensing and services reached 89%.
In contrast, Mobileye's business mainly revolves around selling standardized chips. The EyeQ series SoCs accounted for 89% of its revenue, with the remainder mainly attributed to SuperVision?.
In this IPO prospectus, another prominent figure is Horizon's cash position. As of the end of 2023, Horizon's cash and cash equivalents amounted to ¥113.6 billion, surpassing Mobileye's $85.8 billion and Black Sesame's ¥1.3 billion.
Furthermore, as of the end of January 2024, Horizon had untapped bank financing of ¥700 million. Such ample cash reserves were particularly rare in the underperforming year of 2023 for the smart driving industry, providing substantial financial support for Horizon's future development.
It is understood that Horizon's high cash and cash equivalents mainly come from financing activities. In 2023, its net cash flow from operating activities was -¥1.745 billion, net cash flow from investing activities was -¥667 million, while net cash flow from financing activities reached ¥7.219 billion. This indicates that Horizon successfully raised a considerable amount of funds through financing activities, providing a solid financial foundation for its future R&D, expansion, and market development.
Just the Beginning
Horizon is a company founded by scientists and is one of the very few in China's autonomous driving and chip entrepreneurship fields to truly achieve a commercial closed loop.
Horizon was co-founded by Yu Kai and a group of scientists and entrepreneurs. In terms of equity structure, the top three individual shareholders are Yu Kai, Huang Chang, and Tao Feiwen.
Among them, founder Yu Kai holds 17% of Horizon's shares and has 56% of the voting rights, making him the company's main shareholder and controller. CTO Huang Chang and COO Tao Feiwen hold 3.8% and 1.7% of Horizon's shares respectively, corresponding to 12.6% and 5.5% of the voting rights. The combined holdings of these three management members reach 22.6%, representing 74% of the voting rights, ensuring that the founding team still has full control over the company.
Throughout Horizon's development, its financing journey has indeed been unique. Its financing frequency is unusually high, exceeding the traditional rounds of Series A and Series B financing, and even experiencing multiple rounds of financing in a single year.
To date, Horizon has conducted more than a dozen rounds of financing, with a total financing amount of $2.36 billion (approximately ¥17 billion), and the post-investment valuation after the last round of financing reached $8.71 billion (approximately ¥63 billion). Particularly noteworthy is the bet and optimism from industry chain companies, including top-tier car manufacturers and suppliers such as SAIC, Volkswagen Software Company CARIAD, CATL, FAW, BYD, GAC, and Great Wall Motors.
What deserves special attention is Horizon's Series C financing that began in 2020, which completed 12 rounds of financing totaling billions of dollars, but the company's valuation did not increase. Yu Kai stated that the strategy at the time was to raise more funds during the capital frenzy period, rather than focusing too much on the growth of valuation. He prioritized the overall development strategy over short-term equity interests, which also made him more composed during negotiations with Volkswagen Group in 2022.
After nine years of exploration, Horizon has successfully made the leap from zero to one, earning its ticket into the industry. However, even with this achievement, Horizon still faces its own challenges.
As a supplier, Horizon faces the challenge of balancing standardized products with the individual needs of customers. While offering standardized products is more profitable, the diversity of customer demands requires Horizon to engage in extensive custom development, posing a challenge to its business model.
Horizon's Ideal Project Portfolio | Image Source: Horizon
To meet customer demands, Horizon dispatches its R&D teams to client sites for every chip production, collaborating to construct prototype rooms. Journeys 3 and 5 both mobilized teams of over a hundred individuals when going into mass production for Ideal Automobiles. However, this customized development model comes with steep costs.
In response to the increasing number of projects and clients, Horizon has proposed an ecosystem strategy, positioning itself as a secondary supplier, offering standardized chips and underlying software to ecosystem partners, who are responsible for delivery and services to automotive companies.
Currently, Horizon is starting to see the effects of its ecosystem strategy but still needs to invest heavily in creating "prototype rooms." Particularly, "urban autonomous driving is a much greater technical challenge for the entire industry. If we don't create 'prototype rooms,' algorithm partners will encounter many pitfalls on their own chip platforms."
Moreover, automotive companies are increasingly developing their own AI chips for vehicle-grade use, accelerating market competition. Currently, companies venturing into self-developed chips include not only new forces in the automotive industry like NIO, Ideal, XPeng, and Lixiang, but also traditional automakers such as BYD, Dongfeng, Great Wall, Geely, SAIC, GAC, and BAIC. This adds some pressure on Horizon as a supplier.
Looking to the future, Yu Kai hopes that Horizon can become a company like Microsoft, Intel, or NVIDIA. To become a great company, one must endure countless challenges; it remains to be seen who can weather the darkest times before dawn. Horizon seems prepared, with Yu Kai emphasizing the importance of slow development—not falling too far behind but also not being overly ahead. Synchronization with the times is crucial.
