EquityResearch Report Company / Research / Auto Industry Thematic Report Smart driving: From ADAS to unmanned
driving
28 Jun 2016 OUTPERFORM Investment Highlights (Reiterate)
As technology evolves, we will soon head into an era of “Internet CITICS Research of Things”. Smart driving, which ultimately culminates in pilotless driving, seems the best-fitting theme under the concept of XU Yingbo “Internet of Everything”. Tech companies are accelerating the pace of Tel: 010-60838704 technological advances and product iteration related to smart driving, Email: [email protected] and ADAS (Advanced Driver Assistant Systems) currently stands as the Practicing license:S1010510120041 best point of exposure to the new theme. We take note of increased CHEN Junbin investor attention on smart driving names driven by: 1) Tech companies Tel: 010-60836703
Auto beyond the automotive industry, led by Tesla Motors, Apple Inc., and Email: [email protected] China’s BAT (i.e. Baidu, Alibaba, Tencent) have accelerated Practicing license:S1010512070001
technological advances in the universe of smart driving, and consumer and investor attention have come along with these new developments; GAO Deng 2) Interconnected vehicles on a real-time basis and unmanned driving Tel: 010-60836729 are made possible thanks to 5G communication technologies and Email: [email protected] up-to-date sensor technologies available at a lower cost; and 3) Practicing license:S1010514070004 Conventional auto OEMs are also making efforts toward smart driving CUI Yushuo via R&D or M&A to deal with the competition. Tel: 010-60836750 Smart driving will gear up on evolving technologies, clarity on Email: [email protected] regulation and production vehicle rollouts. We estimate that the Practicing license: S1010516050002
hardware necessary for fully automatic smart vehicles may come into mass production in 2020-2025, while smart driving services integrating Performance relative to the index mobile internet, big data and cloud computing technologies will likely be
available in a decade. Technological progress and product iteration CSI 300 Auto related to smart driving will pace up as tech players and conventional auto OEMs jostle to snatch a slice of the big pie. Tesla Motors added autopilot hardware to its models in mass production at the end of 2015. China-funded tech firms, including NextEv Limited, Future Mobility, LeEco’s automotive arm, may launch mass production of their smart vehicles in 2017-2018. Simultaneously, road tests and regulations will come out to catch up with the progress in smart driving. Source: CITICS Quantitative Investment Listed companies may gain presences in ADAS by acquiring Analysis System
shares of related companies. Despite user-oriented product development and more flexible organizational structure, the tech players still follow in the steps of traditional automakers in the manufacturing process. Vehicles equipped with ADAS modules could become important transitory smart vehicles from their traditional counterparts in the evolution towards self-driving technologies. We estimate a market of c.Rmb200bn for ADAS modules in China by 2020E, where traditional component suppliers will maintain its leadership while start-ups will also cut into the market. With a strategy that combines “imitation and independent innovation”, Chinese ADAS manufacturers will likely develop rapidly. Given the scarcity of
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outstanding ADAS manufacturers, listed companies will likely gain presence in the business by investing in related companies.
ADAS sensors and actuators are also worthy of attention. We expect start-ups to focus on technologies related to bird’s eye view systems based on camera image recognition technologies as well as sensing applications involving automotive radars, such as collision warning. An ADAS module consists of sensors, algorithms, and actuators. We expect ADAS sensors, such as millimeter-wave radars, lidars, cameras, and ultrasonic radars, to represent a market of tens of billions. ADAS actuators, including those used in the braking system, will create a market of a similar size. We also see investment opportunities in smart-driving technologies, such as high resolution maps, Internet of Vehicles, big data and cloud computing.
Potential risks: 1) Most listed companies entered the smart driving segment by way of either equity investment or M&A activities. They need time to prove their operational capabilities and potential to consolidate/integrate the newly-acquired business; 2) Profit contribution from smart driving could be restricted given the limited number of new product offerings in the coming 1-2 years; 3) The high valuation levels of some target companies provide minimal safety margins; and 4) Potential sell-downs by the senior executives of listed companies.
Investment recommendations and sector rating: In our view, unmanned driving represents the ultimate direction of the auto industry, but may only deliver a small profit over the next 1-2 years. We think the smart driving segment will likely maintain high valuation levels driven by thematic opportunities. Therefore, the market position of the target company will become an important valuation benchmark in a potential acquisition deal. We reiterate our OUTPERFORM call on the sector, and advise investors to watch the following names: Zhejiang Vie Science & Technology (002590), Tuopu Group (601689), Asia-Pacific Mechanical & Electronic (002284), Xingyu Automotive Lighting Systems (601799), Joyson Electronic (600699) and Shuanglin Auto Parts (300100).
Earnings forecast, valuation and investment rating of key listed companies EPS (Rmb) PE (x) Company Share price (Rmb) PB (x) Rating 15 16E 17E 18E 15 16E 17E 18E Vie Science & Technology (002590) 28.94 0.19 0.24 0.31 0.37 152 121 93 78 8.5 O/W Ningbo Tuopu Group (601689) 26.54 0.63 0.76 0.88 1.04 42 35 30 26 5.3 O/W Asia-Pacific Mechanical& Electronic (002284) 18.18 0.19 0.25 0.29 0.34 94 73 63 53 5.3 O/W Xingyu Automotive Lighting Systems (601799) 45.59 1.22 1.46 1.69 1.95 90 46 27 23 6.6 O/W Joyson Electronic (600699) 36.73 0.41 0.79 1.34 1.60 70 48 39 33 7.8 O/W Shuanglin Auto Parts (300100) 42.57 0.61 0.84 1.00 1.18 70 51 43 36 7.8 O/W Source: Wind, CITICS Research forecast Note: Closing price as of 14 Jun 2016
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Contents
Smart driving: Full speed ahead into a reality ...... 1 Smart driving gives rise to fresh opportunities ...... 2 Dual paths of technology evolution: Tech firms vs. traditional OEMs ...... 3 ADAS: The first module to be commercialized ...... 8 Auto safety regulations help accelerate ADAS growth ...... 8 ADAS will likely be the first to be commercialized ...... 10 First-movers are likely to be the ultimate winners ...... 11 Components: Domestic companies will likely be able to produce sensor/map modules in the future ...... 15 Sensor modules: integration of multiple sensors ...... 15 Sensor modules: Millimeter wave radar ...... 16 Sensor modules: lidar (light detection and ranging) ...... 18 Sensor modules: camera ...... 21 Sensor modules - infrared night vision: Huge growth potential; focus on domestic leaders ...... 23 High resolution maps: The oligopoly competitive landscape will likely continue ...... 24 Actuators ...... 25 Intelligent electronics system ...... 25 The Internet of Vehicles (IoV) ...... 26 Potential risks ...... 27 Investment strategy and recommendations ...... 27 Key companies ...... 28
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Figs
Fig. 1: Levels of driving automation according to SAE and NHTSA ...... 1 Fig. 2: The roadmap for evolution of smart driving ...... 2 Fig. 3: Future competitive landscape of smart driving ...... 3 Fig. 4: More than 80mn vehicles were sold worldwide in 2015 ...... 3 Fig. 5: Tech firms are making inroads into smart driving ...... 5 Fig. 6: The self-driving concept car from Mercedes-Benz ...... 7 Fig. 7: Driverless cars will hit the road in 2020, according to Nissan’s plan ...... 7 Fig. 8: Changan Automobile’s driverless cars cruised all the way to Beijing from Chongqing ...... 8 Fig. 9: A driverless model from BAIC BJEV ...... 8 Fig. 10: Key active and passive safety technologies ...... 9 Fig. 11: Key ADAS technologies ...... 10 Fig. 12: Major ADAS system integrators and respective market share in 2013...... 12 Fig. 13: Mobileye’s OEM-embedded operations grew quickly ...... 13 Fig. 14: Mobileye’s operating revenue and net profit (US$mn) ...... 13 Fig. 15: ADAS components ...... 15 Fig. 16: Millimeter wave radar ...... 16 Fig. 17: Global market size of millimeter wave radar ...... 17 Fig. 18: Global landscape of millimeter wave radar industry in 2015 ...... 17 Fig. 19: Lidar’s 3D point cloud ...... 19 Fig. 20: Rotating lidar vs. fixed lidar ...... 20 Fig. 21: China’s vehicle camera capacity in 2011-2015 ...... 22 Fig. 22: China’s vehicle camera market size (Rmb100mn) ...... 22 Fig. 23: Global market share of camera lens in 2014 ...... 23 Fig. 24: Working principle of Infrared Night Vision System ...... 24 Fig. 25: Shipment of OEM-embedded navigation systems continued to grow in 2015 .... 25 Fig. 26: OEM-embedded navigation system market share in 2015 ...... 25
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Tables
Table 1: Former senior auto executives that are now working for tech firms ...... 5 Table 2: The self-driving agenda of mainstream OEMs ...... 7 Table 3: The self-driving agenda of Chinese local OEMs ...... 8 Table 4: ADAS technology is included into auto safety rules ...... 9 Table 5: ADAS technologies and major functions ...... 10 Table 6: Total available market (TAM) of ADAS in China by 2020E ...... 11 Table 7: World leading ADAS system integrators ...... 12 Table 8: ADAS start-ups in China ...... 13 Table 9: Equity investment in ADAS by listed companies ...... 14 Table 10: The target proportion of domestically-produced key components of vehicles, according to the Made in China 2025 plan ...... 15 Table 11: Performance of vehicle sensors ...... 15 Table 12: Frequencies for millimeter wave radar ...... 17 Table 13: Major domestic providers of millimeter wave radars ...... 18 Table 14: Rotating lidar products ...... 19 Table 15: Fixed lidar vs. hybrid fixed lidar ...... 20 Table 16: Estimated lidar market size in 2020E ...... 20 Table 17: Domestic companies related to lidar business ...... 20 Table 18: Applications of cameras ...... 22 Table 19: Recommended actuator manufacturers ...... 25 Table 20: Recommended vehicle-mounted intelligent electronics system vendors ...... 25 Table 21: Recommended IoV names ...... 26 Table 22: Earnings forecast ...... 27 Table 23: Earnings forecast and valuation ...... 29 Table 24: Earnings forecast and valuation ...... 31 Table 25: Earnings forecast and valuation ...... 33 Table 26: Earnings forecast and valuation ...... 35 Table 27: Earnings forecast and valuation ...... 37 Table 28: Earnings forecast and valuation ...... 39
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As technology evolves, we will soon head into an era of “Internet of Things”. Smart driving, which ultimately culminates in pilotless driving, seems the best-fitting theme under the concept of “Internet of Everything”. Tech companies are accelerating the pace of technological advances and product iteration related to smart driving, and ADAS (Advanced Driver Assistant Systems) currently stands as the best point of exposure to the new theme. In addition, ADAS sensors (such as millimeter-wave radars, lidars, and cameras) and actuators (mainly brake actuators) also merit attention.
Smart driving: Full speed ahead into a reality
Automotive hardware required for fully automatic driving may come into mass production in 2020-2025 as “unmanned driving” gears up. We take note of increased investor attention over smart driving names driven by: 1) Tech companies beyond the automotive industry, led by Tesla Motors, Apple Inc., and China’s BAT (i.e. Baidu, Alibaba, Tencent) have accelerated technological advances in the universe of smart driving, and consumer and investor attention have increased along with these new developments; 2) Interconnected vehicles on a real-time basis and unmanned driving are made possible thanks to 5G communication technologies and up-to-date sensor technologies available at a lower cost; and 3) Conventional auto OEMs are also making efforts toward smart driving via R&D or M&A to cope with the competition. We estimate that mass production of automotive hardware necessary for fully automatic smart vehicles may start in 2020-2025, while smart driving services enabled by mobile internet, big data and cloud computing technologies will be made available in a decade and incrementally popular thereafter.
Driving automation can be classified into different levels depending on the driver’s control over the vehicle and the attribution of associated safety liabilities. Organizations adopt varied criteria in their classification. The Germany Federal Highway Research Institute (BASt), the US National Highway Traffic Safety Administration (NHTSA) and SAE International (SAE) follow largely similar criteria, though classifications slightly differ. SAE scales driving automation technologies into Level 0-5, i.e. driver only (Level 0), assisted driving, partial automation, conditional automation, high automation, and full automation (Level 5). NHTSA, however, does not differentiate high automation from full automation, and tags both as Level 4. Concisely, the human driver monitors the driving environment in scenarios of Level 0-2, while automated driving system monitors in scenarios of Level 3 and beyond.
Fig. 1: Levels of driving automation according to SAE and NHTSA
Source: EPoSS, collated by CITICS Research
Starting from Level 1-2 driving automation at present, we expect fully automatic vehicles to come into mass production in 2020-2025. Vehicles that can achieve Level
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1-2 driving automation are already in mass production. Specifically, vehicles can come with functions enabling Level-1 warning prompts, including LDW (lane departure warning), FCW (forward collision warning), BSD (blind spot detection), and TSR (traffic sign recognition), as well as Level-2 interventional driving assists, including ACC (adaptive cruise control), LKA (lane keeping assist), AEB (automatic emergency braking), IHC (intelligent headlight control), and AP (automatic parking). Available technologies are also sufficient to facilitate Level-3 driving automation, such as Toyota's Automated Highway Driving Assistant, Tesla Motors’ Autopilot, and General Motors’ Super Cruise. Mass production can be possible in 2018-2020. Automakers have worked out development mules to test high automation technologies, and such vehicles could be ready for mass production in 2020. The ultimate smart vehicle capable of fully automated driving may come into reality in 2025.
Smart driving will gear up on evolving technologies, clarity on regulation and production vehicle rollouts. Technological progress and product iteration related to smart driving will pace up as tech players and conventional auto OEMs jostle to snatch a slice of the big pie. Tesla Motors added autopilot hardware to its models in mass production at the end of 2015. China-funded tech firms, including NextEv Limited, Future Mobility, LeEco’s automotive arm, may launch mass production of their smart vehicles in 2017-2018. Simultaneously, road tests and regulations will come out to catch up with the progress in smart driving. Fu Yuwu, president of the Society of Automotive Engineers of China, said in early June that China may publish the country’s first-ever standards for unmanned driving within two months at the opening ceremony of National Intelligent Connected Vehicle (Shanghai) Pilot Zone.
Fig. 2: The roadmap for evolution of smart driving
ADAS + Internet of Vehicles + High Resolution Map Comprehensive Assists utomation Automated Highway Driving Assist (AHDA) Traffic Jam Assist (TJA)
Level of A Levelof Interventional Assists Adaptive Cruise Control (ACC) Lane Keeping Assist (LKA) Full Automation Automatic Emergency Braking (AEB) High Warning Prompts Automation Lane Departure Warning Conditional (LDW) Automation Forward Collision Warning (FCW) Blind Spot Detection Partial (BSD) Automation
Assisted Driving Time
Source: Collated by CITICS Research
Smart driving gives rise to fresh opportunities
The value chain of smart driving may be shaped into a pyramid structure of three levels: 1) Auto OEMs and tech firms: Traditional OEMs will maintain their core competitiveness in automotive manufacturing and integrated control while tech players will grab a share of the market leveraging their strength in artificial intelligence and human-computer interaction; 2) ADAS suppliers, which will provide ADAS solutions to both OEMs and tech firms given their strength in recognition algorithm than can enable perception; and 3) Auto parts suppliers of radars, cameras, chips, and EBS (electronic
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braking system). Capital/technology barriers come in a descending order from 1) to 3), and so does the market concentration.
Fig. 3: Future competitive landscape of smart driving
Tradit ional Tech OEM Firms
s
Decision
Execution
Perception
Wire)
-
by
-
SBW
EBS
Chips
Chips
Radars
Decision
Algorithm
Cameras Algorithm
Computing
Recognition Recognition
ESC(Electronic StabilityControl) (Steering Source: Collated by CITICS Research
Companies with a presence in smart driving will compete for a pie of trillion yuan. Despite slower growth of auto sales globally, more than 80mn vehicles were sold worldwide in 2015. In China alone, 24.60mn were sold, representing a value chain worth Rmb2.5trn. Auto OEMs have acquired sufficient technologies, such as those for engines and gearboxes, to satisfy most customer needs in terms of vehicle dynamics and control over the past century. Going forward, services may serve as the main differentiator among automobile players. Therefore, smart driving and associated human-vehicle interactive services may reshape the industry.
Fig. 4: More than 80mn vehicles were sold worldwide in 2015
Sales outside China 中国销量（万辆）Sales in China 其他地区销量（万辆） (0,000 Units) (0,000 Units)
10,000
000
’
0
Units 万辆
1 8,000
6,000 6,055 6,185 6,272 5,374 5,662 6,005 4,000 5,671 5,378 4,797 5,022 5,187 5,277 2,000 1,851 1,931 2,198 2,349 2,460 938 1,364 1,806 - 507 576 722 879 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Marklines, collated by CITICS Research
Dual paths of technology evolution: Tech firms vs. traditional OEMs
We expect tech players to gain a 40% market share by 2025, with traditional OEMs keeping the remaining 60%, given: 1) Tech firms have gained a head start leveraging their strength in algorithm, a core competence to enable smart driving; and 2) Traditional
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OEMs will continue to outperform across the value chain in terms of product safety and reliability due to the high barrier to automotive manufacturing. In addition, tech firms are unlikely to make auto OEMs obsolete as consumers have high recognition of traditional auto brands given the long replacement cycle of vehicles.
Tech companies grew apace on zero legacy burdens + advantage in data by starting with the highest level of driving automation. Tech players like Tesla Motors, Google and Baidu have ventured into unmanned driving, a step ahead of traditional OEMs. We attribute tech firms’ faster pace in exploring the possibility of driverless cars to the following factors: 1) As new entrants of the automotive industry, tech players can seek leapfrog development by starting with the highest level of driving automation as they are not obliged by burdens of producing existing models; 2) Tech firms excel in technologies for data integration, high resolution maps and others; and 3) Tech companies have the vision to turn vehicles into the next access gateway under the driverless scenario.
Tech firms made surprisingly speedy progress in smart driving. In 2014, Tesla Motors began to offer Autopilot on models equipped with a forward-looking camera, a forward radar and ultrasonic sensors, which can enable self-driving under certain road conditions and support over-the-air software updates. Google unveiled the prototype of its first driverless car in 2014, followed by road tests in California in January 2015 and US authorities granting a driver’s license in February 2016. Mass production is expected in 2020. Baidu announced successful road tests in Beijing for its driverless car, jointly developed with BMW, in December 2015, creating an unmanned driving division the same month. Partial commercialization of highly automated driving is expected in 2018, and mass production will be ready in 2020. LeEco set up its auto division in July 2015 and announced later in December that it will work with Aston Martin to manufacture the first-generation LeEco super car LeSEE. It announced the partnership with Faraday Future, a US electric car manufacturer, in January 2016, and unveiled the super electric concept car, FFZero1, the same month. The Chinese tech firm held the groundbreaking ceremony for its US$1bn electric car plant in Las Vegas in April 2016. Future Mobility, established in June 2015, obtained necessary qualifications of an auto OEM by acquiring Green Field Motor the same month. It will operate with two brands of “Aidisheng (爱迪生)” and “iCar”, with mass production expected in 2018. NextEv Limited was incorporated in end-2014 and its TCR team won the first driver’s title in the Formula E championship in June 2015; it entered into a strategic cooperation agreement of Rmb10bn with JAC Motors in April 2016.
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Fig. 5: Tech firms are making inroads into smart driving Google obtained a driver’s license for Baidu completed road tests for its Tesla Model 3 supports Autopilot its driverless car from US authorities driverless car
LeEco unveiled its autonomous EV China Harmony Auto + Foxconn + NextEv sponsored the FIA Formula E concept LeSEE Tencent = Future Mobility Championship
Source: Relevant company websites, collated by CITICS Research
Tech firms hired senior executives of traditional OEMs to compete with the latter. Parallel to the brisk progress in smart driving, tech firms welcomed a large number of senior executives from traditional OEMs to steer their automotive ambitions. Statistics show that LeEco’s auto division, Future Mobility, NextEV gathered a pool of 20-plus former auto executives. We think the rationale could be: 1) Tech firms put more value on high-level talents and senior executives have better prospects of making a difference during the early stage of tech firms’ automotive endeavors; and 2) Tech companies are well funded and can offer these executives much better compensation than traditional OEMs. In addition, the large number of auto hires also indicates that tech firms are getting closer to the stage of mass production, and commercial production could be possible in the next few years to actually compete with auto OEMs.
Table 1: Former senior auto executives that are now working for tech firms Senior Tech Firms Previous Titles Current Positions Executives Vice President, SAIC Motor; General Global Vice President & Executive DING Lei Manager, former Shanghai General Director, LeEco’s auto division Motors ZHANG Hailiang Vice President, SAIC Motor President, LeEco’s auto division General Manager, Infiniti China & Asia Vice President, LeEco’s auto LV Zhengyu LeEco’s auto Pacific division division Chief Engineer of Electric Car R&D, SAIC Vice President, LeEco’s auto FU Zhenxing Motor division Vice President, LeEco’s auto GAO Jingshen Vice General Manager, GAC Toyota division Manufacturing Director, Senior Director of Manufacturing, Frank Sterzer FAW-Volkswagen LeEco’s auto division COO (Chief Operation Officer), Daniel Kirchert Managing Director, Dongfeng Infiniti Future Mobility Vice President of BMW, Project Manager CEO (Chief Executive Officer), Carsten Breitfeld of i8 Future Mobility Future Benoit Jacob Vice President of Design, BMW -- Mobility Henrik Wenders Vice President of Marketing, BMW -- Vice President of Software & Dirk Abendroth -- Connectivity, BMW Lead Designer of Alphabet Inc.’s (i.e. Wolfram Luchner -- Google’s) self-driving project
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Senior Tech Firms Previous Titles Current Positions Executives Director of Autonomous Driving, Luca Delgrossi Mercedes-Benz Research & -- Development North America CEO, Zhejiang Aiche Internet FU Qiang CEO, Volvo China Sales Intelligent Electric Vehicle CEO, Maserati Global; President, Ford Martin Leach Europe; Managing Director, Mazda Co-President, NextEv Global Deputy General Manager of Sales, Chery QIN Lihong Co-Founder, NextEv Automobile ZHENG Xiancong Chairman & President, Fiat China Co-Founder, NextEv NextEv HUANG Deputy General Manager of New Energy Vice President, NextEv Chendong Vehicle, SAIC Motor Executive Director of Purchasing, Human Vice President of Business Mark Zhou Resources & Government Affairs, Qoros Development, NextEv Auto Executive Director of Vehicle Integration, Vice President of Vehicle Roger Malkusson Qoros Auto Engineering, NextEv Source: Auto.163.com, Auto.qq.com, collated by CITICS Research
Traditional OEMs will steer towards driverless solutions in a stepwise approach. We expect auto OEMs to incrementally aim higher towards ultimate driverless solutions by starting with Level 1-2 driving automation. Our call is backed by: 1) Traditional OEMs seem unlikely to seek leapfrog upgrades under pressure from earnings in light of their legacy burdens to produce a massive number of existing models; 2) Traditional OEMs have already enabled some of their models with assisted driving functions as they have the technologies required for semi-autonomous driving; and 3) Regulatory and ethical considerations will hamper the adoption of driverless solutions by traditional OEMs.
Auto OEMs are targeting Level-4 high automation technologies in the next step towards smart driving, with mass-production models potentially available for sale in 2020. Traditional automotive manufacturers can currently provide models capable of Level 1-2 driving automation, and have acquired sufficient technologies to facilitate Level-3 driving automation, such as Toyota's Automated Highway Driving Assistant, Tesla Motors’ Autopilot, and General Motors’ Super Cruise. They are now working on the commercial production of vehicles enabling Level-4 automation. At the 2015 Consumer Electronics Show, Mercedes-Benz revealed its self-driving concept car, F015 Luxury in Motion, which came along with connected services, a pedestrian detection system and an automatic emergency braking system. Japanese carmaker Nissan will have self-driving cars hit the road in 2020, but will retain the driver’s control over such models. Mass production of highly automated models could be possible around 2020.
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Fig. 6: The self-driving concept car from Fig. 7: Driverless cars will hit the road in 2020, Mercedes-Benz according to Nissan’s plan
Source: Auto.sina.com.cn Source: Auto.qq.com
Table 2: The self-driving agenda of mainstream OEMs Commercialization Date of OEMs of Self-Driving Details Announcement Cars Toyota Jan. 2015 2020 To have self-driving models ready for sale around 2020 To launch multiple models enabled by commercially Nissan 2013 2020 viable autonomous driving technologies that are available in mass production by 2020 To release an electric Phaeton with up-to-date driverless Volkswagen Nov. 2015 2020 technology BMW signed an agreement with Baidu in Sept. 2014 to collaborate in the research of highly automated driving technology in China. Both sides have the confidence to BMW April 2015 2017-20 present highly autonomous BMW models able to run on urban roads in China at the end of the three-year collaboration. Road tests of self-driving S500 already underway; Mercedes-Benz Jan. 2015 2020 Highway Pilot for trucks released. Commercialization should be expected around 2020. To unveil its first self-driving model Cadillac SRX before General Motors Sept. 2013 2020 2020 Self-driving models will be put into commercial use by Hyundai May 2015 2020 2020. Kia Motors introduced a new “Drive Wise” sub-brand for assisted driving and semi autonomous driving technologies. It will focus on ADAS in 2016 for Kia Motors Jan. 2016 2020 improvement in safety and convenience, and aims to achieve partially/highly/fully autonomous driving by 2020/2025/2030. Has released the Intellisafe autopilot project, and aims to Volvo Car Nov. 2015 2020 make highly autonomous driving a reality by 2020. Ford Motor said its Mondeo models available for sale in Europe have been equipped with Pre-Collision Assist with Pedestrian Detection, and such models will be Ford Motor June 2015 2019 released in the U.S. the next year. It also expects to make multiple self-driving technologies, including Pre-Collision Assist, available on models on sale globally by 2019. Source: DBScar and other websites, collated by CITICS Research
Local brands may outpace JV OEMs in smart driving commercialization by kicking off mass production of Level-3 automated models in 2017, as: 1) Chinese local OEMs can be more efficient in the iteration of underlying algorithm, the core competence of smart driving, as they have more discretionary power over such decisions than JV OEMs; and 2) Local OEMs are more eager to outbid their foreign peers with quicker progress in smart
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driving amid increasingly fiercer competition. SAIC Motor and Alibaba revealed a connected smart car at the Beijing Auto Show in April. Changan Automobile displayed its technology of conditional driving automation (Level-3) after its driverless cars made a highway journey of more than 1,000 miles from its base in Chongqing to Beijing for the show. BAIC BJEV also presented a driverless model. We believe local OEMs may bring Level-3 smart cars into mass production in 2017 at the earliest considering their strength in relevant technologies.
Fig. 8: Changan Automobile’s driverless cars Fig. 9: A driverless model from BAIC BJEV cruised all the way to Beijing from Chongqing
Source: Changan Automobile Source: www.d1ev.com
Table 3: The self-driving agenda of Chinese local OEMs Commercialization of OEMs Details Self-Driving Cars Has released its connected smart car model SUV CS95 and completed Changan 2018 road tests for 2,000-km self-driving; targets to put self-driving cars into Automobile mass production by 2018. Has released its connected smart car model SUV RX5 and the MG iGS SAIC 2020 intelligent-drive vehicle; plans to launch self-driving cars capable of Motor cruising on structural roads. BAIC Working on self-driving electric cars, welcoming test rides by the general 2017 Motor public; commercialization expected at the end of the year at the earliest. Mass production of self-driving Volvo cars; its Emgrand GT will come with Geely 2018 ADAS modules; self-driving models will be released in the next 2-3 years. Great Wall Has demonstrated its assisted driving technologies, and will launch 2020 Motor high-speed fully self-driving cars by 2020. FAW Has demonstrated its autonomous driving technologies, and will enable 2025 Group highly autonomous driving for 50% of its models by 2025. Source: DBScar and other websites, collated by CITICS Research
ADAS: The first module to be commercialized
Auto safety regulations help accelerate ADAS growth
China will probably follow the example of the US, Europe and Japan to include ADAS into its automotive safety regulations. The National Highway Traffic Safety Administration (NHTSA) included forward collision warning (FCW) into its vehicle safety rating program in 2011 and stipulated that automatic emergency braking (AEB) must be made a standard feature on all 5-star rated vehicles starting from 2018. In March 2016, the top 20 automakers, collectively taking up 99% of the US auto market (including GM, Ford, Fiat Chrysler, Toyota, Honda, Nissan, Mazda, Mitsubishi, Fuji Heavy Industries, Hyundai,
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Kia Motors, Audi, BMW, Daimler, Volkswagen, Porsche, Volvo, Maserati, Jaguar Land Rover and Tesla) agreed to make AEB a standard feature on all new passenger vehicles starting from 2022. Toyota promised to equip all new cars sold in the US with AEB starting from 2017. The European New Car Assessment Program (NCAP) also included AEB and adaptive cruise control (ACC) in its safety rating. The Ministry of Land, Infrastructure, Transport and Tourism of Japan (MLIT) included AEB in its safety-rating program in 2014. We expect China to follow the example of advanced economies and incorporate ADAS technology in its safety regulations starting from 2018.
Table 4: ADAS technology is included into auto safety rules Region Institution Release date Description 2011 Adding FCW as a metric in vehicle safety rating 5-star rated vehicles must be equipped with the AEB feature starting from 2015 2018 US NHTSA The top 20 automakers agreed (combined market share >99%) to make AEB a standard feature on passenger vehicles and light trucks with gross 2016 vehicle weight (GVW) below 3856kg starting from Sep 1, 2022 and on trucks between 3856kg and 4536kg starting from Sep 1, 2025 2013 AEB is a required feature on all large-sized commercial vehicles Europe NCAP To obtain a 5-star rating, passenger vehicles must be equipped with at 2014 least one active safety technology, such as AEB, ACC, LDW (lane departure warning) and LKA (lane keeping assistant) Japan MLIT 2014 Adding AEB as a metric in vehicle safety rating 2018 Adding FCW, AEB, LDW and PDS (pedestrian detection system) into the China C-NCAP (expected) safety assessment system Source: NHTSA, NCAP, MLIT, Collated by CITICS Research
The NHTSA has clearly requested ADAS technology being included in its 5-star safety rating program. According to the NHTSA, as high as 94% auto accidents are associated with man-made errors and automakers are strongly recommended to install in-vehicle ADAS active safety systems including FCW, LDW and RVS (rear view safety) systems. Other safety systems including pedestrian detection system (PDS), AEB and blind spot detection (BSD) are also recommended.
Fig. 10: Key active and passive safety technologies
Source: NHTSA
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ADAS will likely be the first to be commercialized
ADAS, as an entry-level product for smart driving, will likely become the first technology to be widely commercialized. Judging from the technology level and industrialization progress, we are currently transitioning from the stage of aided driving to partial automation. Vehicles equipped with ADAS modules will become the first to be popularized as a transitional product, and major ADAS technologies include ACC, LDW, LKA, FCW, AEB, BSD and AP (automatic parking).
Fig. 11: Key ADAS technologies
Source: ACTOM
Table 5: ADAS technologies and major functions ADAS Key features Sensing Actuating ACC Controlling distance when there are Distance sensors Accelerator, (Adaptive Cruise vehicles around and otherwise (millimeter-wave radars, lidars gear, braking Control) controlling speed and cameras) Display system LDW Lane line sensors (Cameras, Alerting drivers when they are drifting (console, (Lane Departure stereo cameras, infrared ray and out of the lane navigation Warning) lidars) display, HUDs) LKA Steering the driver back into lane Lane line sensors (Cameras, (Lane Keeping when the vehicle begins to leave the stereo cameras, infrared ray and Steering Assistant) detected lane lidars) Display system Alerting drivers of an impending Distance sensors FCW (Forward (console, collision when the distance from (millimeter-wave radar, lidars Collision Warning) navigation another car is too small and Cameras) display, HUDs) AEB Distance sensors Preventing an impending crash (Automatic (millimeter-wave radar, lidars Braking through emergency braking Emergency Braking) and Cameras) Display system TSR Identifying traffic signs and giving (console, (Traffic Sign Cameras drivers corresponding alerts navigation Recognition) display, HUDs) Automatically switching between high IHC (Intelligent and low beam based on the road and Cameras Headlight Headlight Control) lighting conditions Automatically detecting surroundings Range sensors (ultrasonic radar, Accelerator, AP (Automatic and parking the car in the designated millimeter-wave radar, lidars and braking, Parking) space Cameras) steering Braking, display Detecting pedestrians in front of the system PDS (Pedestrian vehicle, giving alerts or automatically Cameras (console, Detection System) braking when necessary navigation display, HUDs)
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ADAS Key features Sensing Actuating Display system Range sensors (ultrasonic radar, BSD Monitoring drivers’ blind spots and (console, millimeter-wave radar, lidars and (Blind Spot Detection) giving corresponding alerts navigation Cameras) display, HUDs) Display system NVS Using active or passive infrared ray to (console, (Night Visions help drivers gain a clearer vision in Infrared sensors navigation System) dim light display, HUDs) Assessing drivers’ behavior and Display system DSM facial/eye movements to judge (console, (Driver State whether the drivers are in a fatigue Infrared sensors and Cameras navigation Monitoring) state and giving alerts when display, HUDs) necessary Display system SVC (Surround View Using multiple cameras to help (console, Cameras Cameras) drivers park the car navigation display, HUDs) Source: Collated by CITICS Research
With rising penetration, the ADAS technology will likely create a market of Rmb200bn by 2020E. The penetration ratio of ADAS modules in the OEM-embedded market could reach 30% while aftermarket penetration ratio could be lifted to 5% on multiple catalysts including: 1) rules and regulations are now encouraging traditional OEMs to install safety systems before vehicles are shipped out of factory; 2) the slowdown in global volume growth requires parts suppliers to improve their product competitiveness; 3) new internet-backed entrants force existing OEMs to upgrade their offerings; and 4) consumers are requiring upgraded interactive experience.
Table 6: Total available market (TAM) of ADAS in China by 2020E 2015 market 2020E Unit price 2015 2020E ADAS modules size market size (Rmb) penetration penetration (Rmb100mn) (Rmb100mn) Pedestrian Detection 1,500 3% 30% 10 135 System (PDS) Blind Spot Monitoring 1,500 4% 30% 14 135 (BSM) Lane Departure 1,500 2% 30% 6 135 Warning (LDW) Adaptive Cruise Control 2,000 1% 30% 7 180 (ACC) Forward Collision 1,000 1% 30% 3 90 Warning (FCW) Night Visions System 2,500 1% 5% 6 38 (NVS) Automatic Emergency 1,200 5% 50% 15 180 Braking (AEB) Traffic Sign Recognition 1,200 1% 15% 3 54 (TSR) Automatic Parking (AP) 1,200 3% 30% 8 108 Surround View 4,000 1% 30% 10 360 Cameras (SVC) Adaptive Forward 1,000 1% 30% 3 90 Lighting (AFL) Driver Monitoring 1,200 0% 10% 0 36 System (DMS) Aftermarket ADAS 2,500 0% 5.0% 10 375 systems Total 94 1916
Source: CITICS Research estimates First-movers are likely to be the ultimate winners
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Traditional tier-1 suppliers continue to dominate in the ADAS segment. In 2013 the top five suppliers – Continental Corporation, Delphi, Denso, Autoliv and Bosch took market share of 17.5%, 13.5%, 12.9%, 11.3% and 10.1% respectively, or more than 65% collectively, in the ADAS market for passenger vehicles. The rest of the market was shared among Valeo, TRW Automotive, Magna and Hella.
Fig. 12: Major ADAS system integrators and respective market share in 2013
Contin Autoliv ental Delphi Denso Bosch Others
Source: auto.qq.com, CITICS Research
Table 7: World leading ADAS system integrators Company Country Industry position Key offerings Key customers One of Germany’s largest FCW, LDW, LKA, AEB, ACC, TSR, Benz, BMW, Audi, Volvo, Citroen, BAIC Bosch Germany industrial companies and IHC, PDS, BSD, AP, BMS Motor, JAC Motors, Geely world’s largest auto supplier A Germany-based transport Benz, BMW, GM, Toyota, Honda, Continental Germany sector manufacturer and one of LDW, ACC, BSD, AEB, IHC, TSR Renault, Porsche, SAIC Motor the world’s top 5 auto suppliers A world leading auto electronics LDW, FCW, LKA, AEB, ACC, AP, BMW, Audi, Volvo, Ford, FAW Group, Delphi US technology supplier SVC SAIC Motor A top-tier auto parts and LDW, FCW, LKA, AEB, ACC, DSM, Denso Japan Toyota systems provider PDS Global leading auto electronics LDW, FCW, BSD, LKA, AEB, ACC, GM, Ford, Nissan, Hyundai, Autoliv Sweden safety system supplier PDS, NVS Volkswagen, Benz, BMW, Honda Source: Collated by CITICS Research
Start-ups with core technologies could embrace exponential growth. We suggest investors keep close tabs on tech start-ups with a strong technology pipeline. Reasons include: 1) The ADAS technology and the industry are still premature, with traditional OEMs, tech companies and parts manufacturers all on the same starting line. The gap between different companies is smaller compared with traditional segments; 2) The core competitiveness in ADAS depends on iterative algorithm and massive tests on vehicle models. Enterprises with proven technologies enjoy an unmatched competitive edge. Take Mobileye for example. The company was established in 1999 but signed its first production agreement with GM only in 2007. There was an 8-year gap and it made no profit in between. After more than one decade’s of research and development, Mobileye gained an unrivaled position in the single-camera ADAS segment around the world. As of Jan 2016, its products were widely applied on 237 vehicle models of 20 automakers including GM, BMW, Volvo and Tesla. The company’s operating revenue has been growing rapidly ever since.
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Fig. 13: Mobileye’s OEM-embedded Fig. 14: Mobileye’s operating revenue and net operations grew quickly profit (US$mn)
No. of vehicle No. of chips/ Operating Net Revenue models in 10k sets revenue profit growth
Source: Company annual reports, Collated by CITICS Source: Company annual reports, Collated by CITICS Research Research
Innovators and imitators are both on the stage, but only those fully committed to innovations will become the ultimate winner. Many start-ups in China have mastered the core identification algorithms and are moving into the ADAS integration segment. Some are improving their product performance and user experience through technological innovations and localizations based on independent R&D. Others simply imitate foreign companies in order to gain a head start and take advantage of higher selling prices. We believe the concentration ratio of the smarting driving segment will rise rapidly going forward and only those companies which focus on building their local competitiveness stand a chance to be the ultimate winner.
Table 8: ADAS start-ups in China Company Business description Customers Realization approach GAC Group, BAIC Motor, INVO Driver assistance systems (LDW/FCW/BSD/PDS/NVS/TSR) Changan Automobile, Geely, Automotive Cameras /3D parking systems SAIC Motor, Yutong Bus and Electronics King Long Forward ADAS systems (Cameras +core chips +ADAS algorithms Aftermarket Cameras Innovation LDW/FCW/DSM/PDS/TSR/NVS/SVC) Shenzhen ADAS systems (FCW/LDW/PDS/BSD/SVC) OEM-embedded/Aftermarket Cameras Vastfly Tech Zongmu Tech Surround review ADAS (LDW/BSD/SVC) Aftermarket Cameras SmarterEye ADAS systems (FCW/LDW) Aftermarket Binocular cameras Cameras/ laser sensors AIDRIVING Collision warning /Night Visions System/AIDriving App Aftermarket /millimeter-wave radars MaxiEye ADAS systems (ACC/FCW/AEB/IHC/LKA/PSD/TSR) OEM-embedded/Aftermarket Cameras Minieye ADAS systems (FCW/LDW/BSD/PDS) Aftermarket Cameras Mplanet Intelligent driving video recorder (IoV) Aftermarket Cameras Hangzhou Aftermarket + insurance Nicigo (ADAS: FCW, LDW+UBI) Cameras Nicigo companies Carpro HUD (driving video recorder/Gesture sensing CarPro Aftermarket /navigation/on-board diagnostic (OBD)) Tsingtech Driver fatigue monitoring/ remote monitoring/ integrated fleet Aftermarket Cameras Microvision monitoring Carstar IoV / remote monitoring (anti-theft) Aftermarket
Hirain Forward Active Safety Cameras/ surround view parking Aftermarket Cameras Technologies (based on Mobileye EyeQ3 chips) Whetron LDW, Smart Keyless System, Around View Monitoring Aftermarket Cameras Electronics System Henan Escort Emergency braking system and collision avoidance warning OEM-embedded Radars Industrial system Tencent DVR ADAS / driving video recorder Aftermarket Cameras DeepGlint Behavior analysis / vehicle identification (traffic safety and Aftermarket Cameras
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Company Business description Customers Realization approach logistics monitoring) Jimu ADAS OEM-embedded Cameras Technology Roadefend Vision ADAS Aftermarket Mobile phone cameras Technology Source: Collated by CITICS Research
Listed companies are making equity investments along the ADAS industry chain. Vie Science & Technology (002590) has built a presence in the internet of vehicles (IoV) segment by acquiring Soda Mobility and FutureMove, established a joint venture with the Sweden-based Haldex to venture into the intelligent electronic braking system, and acquired a stake in Evatran to tap into inductive charging for electric vehicles. Asia-Pacific Mechanical& Electronic (002284), as an industry leader in braking systems, invested in Forward Innovation, Tima Networks, Intibeam, and Suzhou Anzhi Auto Parts to build a presence along the smart driving and IoV industry chain. It also bought a stake in Elaphe (an in-wheel electric motor manufacturer) to tap into the new energy vehicle segment. Zhejiang Jingu (002488) built a presence in the IoV and ADAS segments via equity investments in Mirrtalk Automotive and INVO Automotive Electronics. ZYNP Corporation (002448) made an equity investment in Shenzhen Vastfly Tech to access the driving assistant system market. Taiwan-based TungThih Electronic, the largest backup sensor manufacturer, possesses 50% market share in mainland China as well as multiple ADAS technologies, including automatic parking (AP), surround view cameras (SVC), bind spot detection (BSD) and lane departure warning (LDW). Meanwhile, the company is also in the process of developing other applications including automatic emergency braking (AEB), traffic sign recognition (TSR) and pedestrian detection system (PDS).
Table 9: Equity investment in ADAS by listed companies Key products of the Company Date Target Investment Approach target company Evatran Wireless charging Jun 2015 US$1.60mn Acquired a 7.3% stake Group system Vie Science Oct 2015 Soda Mobility Rmb5.128mn Acquired a 22% stake IoV & Technology Nov 2015 FutureMove Rmb45mn Acquired a 22% stake IoV (002590) Established a JV named Auto electro-mechanical May 2016 Haldex VIE with Haldex brake (EMB) system Forward Jun 2015 Rmb29mn Acquired a 20% stake ADAS Innovation Tima Jun 2015 Rmb82mn Acquired an 11.9% stake IoV Networks Asia-Pacific Millimeter-wave collision Mechanical& Dec 2015 Intibeam Rmb7mn Acquired a 10% stake avoidance radar system Electronic Acquired a 20% stake and (002284) Dec 2015 Elaphe Eur10mn established a JV in China In-wheel electric motors with a 51%+ stake Suzhou Jan 2016 Rmb5mn Acquired a 10% stake ACC, AEB etc. Anzhi Mirrtalk Acquired a 12.5% through Free voice-based IoV Nov 2014 Rmb25mn Zhejiang Automotive capital injection hardware and services Jingu INVO (002488) May 2015 Automotive Rmb40mn Acquired a 20% stake ADAS Electronics ZYNP Shenzhen 3-dimensional driving Corporation Nov 2015 Rmb38.34mn Acquired a 15.34% stake Vastfly Tech assistant system (002448) Source: Collated by CITICS Research
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Components: Domestic companies will likely be able to produce sensor/map modules in the future
Among smart-driving components, domestic companies will likely be able to produce sensor and map modules in the future. In contrast, due to its higher technological barrier, auto OEMs and global leading component producers will continue to be the sole manufacturers of decision-making modules.
Fig. 15: ADAS components
Sensor Internet of Vehicles Actuator
Recognition Decision-making Acceleration Sensors on vehicle Turning Brake Single camera Road Acceleration Dual-camera Traffic sign Turning Panoramic Pedestrian Brake camera Central control Ultrasonic radar system Millimeter-wave 3D high-resolution map Navigation radar HMI Laser radar HUD
Infrared detector
Source: Compiled by CITICS Research
According to the Made in China 2025 plan, the proportion of domestically-produced sensors (mostly cameras and radars) and high-resolution map systems should rise rapidly in the next five years.
Table 10: The target proportion of domestically-produced key components of vehicles, according to the Made in China 2025 plan Component Target Optical system Above 80% by 2020 Radar system Above 40% by 2025 High-resolution Above 60% by 2025 positioning system Integrated control Core controller: 50%; key chips for controllers: 30% by 2025 system Source: Made in China 2025, compiled by CITICS Research Sensor modules: integration of multiple sensors
Mainstream vehicle sensors include ultrasonic radars, lidar (light detection and ranging), millimeter-wave radars, cameras, and infrared detectors. Considering measurement capability and adaptability, we expect radars and cameras to be the most popular sensors in the future, with integration of multiple sensors.
Table 11: Performance of vehicle sensors Ultrasonic Millimeter Infrared lidar Camera radar wave radar detector Long distance measurement × √ √ √ o Resolution × o √ √ × False alarm rate × o √ o × Temperature tolerance × √ √ √ o Darkness tolerance √ √ √ × √
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Ultrasonic Millimeter Infrared lidar Camera radar wave radar detector Weather adaptability × × √ × × Dust/humidity tolerance o × √ × × Low-cost hardware √ o √ × √ Low-cost signal processing √ √ √ × √
Source: IEEE, compiled by CITICS Research √: Excellent; o: Good ×: Fair Sensor modules: Millimeter wave radar
Millimeter wave radar emits millimeter length electromagnetic waves and determines distance of obstacles by calculating the arrival time of reflected waves. Moreover, millimeter wave radar can also determine relative speed of obstacles by calculating changes in the frequency of the reflected waves. Compared with infrared detector, lidar, and cameras, millimeter wave radar can work well in nearly all weather and environmental conditions (foggy, smoky, and dusty environments, but not under heavy rain). However, millimeter wave radar cannot recognize colors, and is not sensitive to reflected waves of pedestrians. In addition, due to relatively narrow angle of view, millimeter wave radar has to be used in a group. Millimeter wave radar is widely used to measure distance between vehicles (autonomous cruise control, collision alarm, and blind zone detection).
Fig. 16: Millimeter wave radar
Source: Compiled by CITICS Research
Among the applicable frequencies (24GHz, 60GHz, 77GHz, and 79GHz), the mainstream frequencies for millimeter wave radar are 24GHz and 77GHz, which are used to measure medium/short and long/medium distance, respectively. The higher the frequency, the higher the precision of distance and speed detection is. As a result, 77GHz is becoming increasingly popular. 1) EU: In 1997, European Telecommunications Standards Institute (ETSI) assigned 76-77GHz to be the special frequency for collision avoidance radars. 2) US: 24GHz and 77GHz. 3) Japan: on the transition from 60GHz to 77GHz. 4) On World Radiocommunication Conference (WRC) 2015 held in Geneva, the frequency range of 77.5-78.0GHz was assigned to radio positioning business, in a bid to facilitate development of short-distance high-resolution vehicle radars. 5) In 2005, the Ministry of Information Industry (now a part of the Ministry of Industry and Information Technology) assigned 77GHz to distance measurement radars for vehicles. In 2012, the Ministry of Industry and Information Technology assigned 24GHz to short-distance vehicle radars.
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Table 12: Frequencies for millimeter wave radar Scope of distance measu Frequency Applications rement Medium/short distance: 5-7 24GHz BSD,LDW,LKA,LCA,PA 0 meter Long/medium distance: 100 77GHz ACC,FCW,AEB -250 meter Source: Compiled by CITICS Research
Shipment of millimeter wave radar chips will rise rapidly as ADAS develops. The global shipment of millimeter wave radar chips will likely reach 72mn by 2020E. Assuming a 30% penetration rate of ADAS in China, and each ADAS requires four short-distance millimeter wave radars and one long-distance millimeter wave radar, the shipment will likely reach 45mn in China, with a market size of over Rmb20bn.
Fig. 17: Global market size of millimeter wave radar
Global shipment YoY (10,000)
Source: Plunkett Research
Major suppliers of millimeter wave radars are leading traditional car electronics producers, such as Bosch and Continental. As of 2015, Bosch and Continental had combined global market share of 22%, followed by Hella, Fujitsu Ten, Denso, TRW Automotive, Delphi Automotive, Autoliv, and Valeo.
Fig. 18: Global landscape of millimeter wave radar industry in 2015
Bosch Contine Hella Fujitsu Ten Denso TRW Delphi Autoliv Valeo Others ntal
Source: Okokok.com.cn, compiled by CITICS Research
Going forward, millimeter wave radars will be produced domestically, as some domestic companies have already achieved major technological breakthroughs. However, currently, the only mature products are 24GHz medium/short-distance radars manufactured by Nano Radar and IM Semi, while the production of 77GHz radars is only at the beginning stage. We recommend Zhejiang Asia-Pacific Mechanical& Electronic (002284), Anhui Sun-Create Electronics (600990) and Glarun Technology (600562).
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Table 13: Major domestic providers of millimeter wave radars Company Frequency Extent of commercialization Huayu 24GHz 24GHz radars are about to be put on the market Automotive Nano Radar 24GHz 24GHz medium/short-distance radars are on the market 24GHz radars are on the market; 77GHz radars are expected to IM Semi 24GHz/77GHz be put on the market in 2016 IntiBeam 24GHz/77GHz Prototypes for 24GHz radars; 77GHz radars in laboratory Technology Low-volume production of 24GHz radars; Prototypes for 77GHz Sensortech 24GHz/77GHz radars ATS Electronics 77GHz RCC radars exhibited on China International Automotive 77GHz Tech Aftermarket Industry and Tuning Trade Fair Shenyang 77GHz radar has experienced indoor testing, and outdoor testing 77GHz Cheng-Tech is scheduled for September Nanjing E Hawk 77GHz Prototypes for 77GHz radars to be released in 2H16E Eye Beijing Autoroad 77GHz 77GHz radars exhibited on Beijing Auto Show Tech Source: Compiled by CITICS Research
Zhejiang Asia-Pacific Mechanical& Electronic (002284) acquired a 10% stake of IntiBeam Technology with a consideration of Rmb7mn, in a bid to gain a presence in the millimeter wave radar business. Anhui Sun-Create Electronics (600990) controlled by East China Research Institute of Electronic Engineering, produces millimeter wave radars for anti-aircraft warfare and weather monitoring. With high-quality assets from the 14th research institute of China Electronics Technology Group Corporation, Glarun Technology (600562) produces military airborne radar and weather radar. Located in Taiwan, Wistron NeWeb Corporation provides 24GHz and 77GHz devices for ADAS applications. Sensor modules: lidar (light detection and ranging)
Lidar emits laser beam to detect location and speed of objects. With multiple laser emitters and receivers, vehicle lidar can generate wide-scope high-precision three-dimensional cloud points. However, lidar has poor performance in rainy, snowy, and foggy environments. In addition, it is very costly, and generates overly large data.
Currently, lidars are used in testing self-driving cars: 1) Velodyne 64-line lidars are used in Google and Baidu’s testing self-driving cars; 2) Velodyne 32-line lidars are used in Ford Mondeo Hybrid, while the third-generation self-driving car Fusion Hybrid is equipped with two Velodyne Solid-State Hybrid Ultra PUCK Auto lidars; 3) Nissan LEAF is equipped with six lbeo 4-line lidars; 4) Audi A7 Piloted Driving is equipped with Scala Solid-State Hybrid lidars; 5) Delphi’s self-driving car is equipped with four Quanergy solid-state lidars.
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Fig. 19: Lidar’s 3D point cloud
Source: Niuche.com
Lidar (with rotating parts) is a mature technology. Velodyne and Ibeo are mainstream overseas manufacturers. Velodyne produces 16/32/64-line lidars with rotating laser emitters and receivers. Ibeo produces 4/8-line lidars with a fixed laser emitter. Beijing OuBaiTuo Information Technology is Ibeo’s agent in China.
Table 14: Rotating lidar products Frequency of Manufacturer Product Price (USD) Number of lines Dimension Range of measurement Resolution Precision rotation Horizontal: 85° Horizontal: Lux 4 2.5D 12.5/25/50Hz Vertical: 3.2° 0.125° 10cm Range:200 meter Vertical: 0.8° Ibeo Horizontal: 110° Horizontal: Lux 8L 8 2.5D 6.25/12.5/25Hz Vertical: 6.4° 0.125° 4cm Range:200 meter Vertical: 0.8° Horizontal: 360° Horizontal: VLP-16 7,999 16 3D 5-20Hz Vertical: 30° 0.1-0.4° 3cm Range:100 meter Vertical: 2° Horizontal: 360° Horizontal: Velodyne HDL-32E 20,000 32 3D 5-20Hz Vertical: 40° 0.1-0.4° 2cm Range:100 meter Vertical: 1.33° Horizontal: 360° Horizontal: 0.08° HDL-64E 70,000 64 3D 5-20Hz Vertical: 26.8° ＜2cm Vertical: 0.4° Range:120 meter Source: OuBaiTuo’s official website, Velodyne’s official website, compiled by CITICS Research
With small size and low cost, fixed lidar is the future. Without rotating parts, fixed lidar is smaller, and thus can be embedded in vehicles, leading to higher reliability and much lower cost. Quanergy, a start-up, has developed a fixed lidar in cooperation with Delphi, and plans to launch mass production by the end of 2017E. With phased array technology, the fixed lidar does not have any rotating parts. Velodyne and Ibeo also introduced hybrid fixed lidars, which have rotating parts inside, rather than outside.
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Fig. 20: Rotating lidar vs. fixed lidar
Source: Autohome, compiled by CITICS Research
In 2015, Scala Solid-State Hybrid lidars (developed by Ibeo and Valeo) were equipped on Audi A7 Piloted Driving. Scala is also equipped on a Volkswagen semi self-driving car. Embedded in bumper bars, Scala replaces millimeter wave radar as distance measurement modules. Two fixed/hybrid fixed lidars were exhibited on CES2016: 1) Quanergy’s business-card-box-sized fixed lidar S3, with preliminary price of US$250, which can be reduced to US$100 after mass production; 2) Hybrid fixed lidar Ultra Puck Auto, introduced by Velodyne and Ford, whose price may reach US$500 after mass production by 2020E and lower than US$200 by 2025E.
Table 15: Fixed lidar vs. hybrid fixed lidar Company Partner Product Price Line Quanergy Delphi Solid S3 US$250; US$100 for mass production 8 Ibeo Valeo Hybrid solid Scala 4
Velodyne Ford Hybrid solid Ultra Puck Auto US$500 for mass production, US200 by 2025E 32 Source: Autohome, Cheyun.com, compiled by CITICS Research
We expect lidar market size at more than Rmb10bn by 2020E. Driven by technological improvement and capacity growth, we estimate the lidar cost at c.Rmb400 by 2020E, implying a cost of Rmb800-1,600 for each vehicle (assuming 2-4 lidars to be installed on a vehicle). Assuming 25% vehicles are equipped with lidars before being sold and 5% after sold, China’s Lidar market size will likely reach Rmb20bn in 2020E.
Table 16: Estimated lidar market size in 2020E Number p Penetratio Number of vehicles (1 Market size (Rmb100 Price (Rmb) er vehicle n rate 00mn) mn) Before sale 400 4 25% 0.3 120 After-sale 400 1 5.0% 3 60 Total 180
Source: CITICS Research estimates
Several domestic companies are involved in development and production of lidars used in air pollution detection, 3D measurement, and vehicles. We recommend Hangzhou Great Star Industrial (002444).
Table 17: Domestic companies related to lidar business Company Founded in Products Usage
Founded by Focused Photonics Monitoring of Wuxi CAS (300203), Institute of Optics and Lidar, and sonic combined air 2011 Photoelectric Precision Mechanics of CAS, and radar pollution (dust, CAS IOT haze) Tec Dawn 2009 Integration of lidar Surveying and
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Company Founded in Products Usage
system mapping by vehicles or drones Escort Lidar system for 2014 Vehicle Industrial vehicles Four single-line 2D lidar products LeiShen have been released and a 16-line 3D Lidar system for Intelligent 2015 Vehicle lidar will likely be introduced by the vehicles System end of 2016E Self positioning and navigational Shanghai algorithms for robots, laser sensor Lidar system for 2013 Vehicle Slamtec and robot system, with two vehicles generations of 2D lidar products A 51% stake held by Beijing 3D surveying and Stonex 2011 UnistrongScience & Technology Lidar mapping (002383) 3D and road Affiliated to Chinese Academy of Lidar and remote Geo Vision 1989 surveying and Surveying & Mapping sensing systems mapping Lidar, aerial Surveying and Green Valley 2012 A round financing in 2015 imaging platforms mapping by drones for drones Beike Lidar and laser Surveying and 2005 Technology scanner mapping by drones Huada Kejie Laser measuring A 65% stake held by Hangzhou Opto-Electro 1992 devices and laser Engineering Great Star Industrial (002444) Instrument projector Source: Compiled by CITICS Research
In 2015, Hangzhou Great Star Industrial acquired a 65% stake of Huada Kejie Opto-Electro Instrumen, which is focusing on improvement of laser application technologies (such as service robots and mobile smart equipment, including self-driving cars, AGV forklift, and inspection robot). In March 2016, Hangzhou Great Star founded a subsidiary to develop lidar and smart equipment. Sensor modules: camera
How vehicle camera works: 1) Converting images into 2D data; 2) Recognizing vehicles, pedestrians, lane markings and traffic signs by matching images; 3) Estimating relative distance and speed between objects and the vehicle. Compared with other sensors, cameras work in a way most similar to how human eye acquire information. Cameras boast the following advantages: 1) Mature technology with low costs; 2) Acquiring most complete information by processing a relatively small amount of data. However, cameras also have drawbacks: 1) Subject to light and weather conditions; 2) Requiring a large training sample and a long training process to recognize objects, and having trouble in recognizing non-standard objects; 3) Low precision in distance measurement, due to marginal distortion of wide angle lens.
Applications: 1) Single camera: usually installed on front windshield to detect the environment in front of the vehicle by recognizing road, vehicles, and pedestrians, widely used in adaptive cruise control (ACC), lane departure warning (LDW), forward collision warning (FCW), and pedestrian monitoring; 2) Rear-view camera: usually installed on the rear to detect the environment in back of the vehicle, used in rearview systems; 3) Dual-camera, with higher resolution and longer detection range; 4) Surround view cameras: usually consist of four cameras, installed in the front, rear, left side, and right side of the vehicle, used in automatic parking (AP) and surround view parking assistance.
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Table 18: Applications of cameras Applications Difficulty
ACC,LDW,LKA (lane-keeping assist),FCW,AEB (automatic emergency braking),TSR (traffic safety Machine learning, model Single camera rejection),AP,PDS (precision drive system),DMS recognition (driver monitoring system) Poor performance under bad Rear-view camera AP environment Dual-camera ACC, LDW, LKA, FCW, AEB, TSR, AP, PDS, DMS Dual-camera positioning Surround view AP, SVC Marginal distortion camera Source: Compiled by CITICS Research
As the penetration rate of ADAS rises, the camera market will likely grow rapidly. According to IHS Automotive, the annual global shipment of vehicle camera system will likely reach 74mn units in 2021E (vs. c.15mn units in 2014). China’s camera lens producers are leading in the global market. According to Zhiyan.org, China’s vehicle camera industry logged output of c.8.62mn, 60% of which are exported. Under a conservative scenario, assuming an ADAS system uses four cameras (actually 1-10 cameras can be used in an ADAS system), China’s annual shipment of vehicle camera will likely reach 100mn units by 2020E, implying a market size of over Rmb12bn and CAGR of over 70%.
Fig. 21: China’s vehicle camera capacity in Fig. 22: China’s vehicle camera market size 2011-2015 (Rmb100mn)
Capacity产能（万个） (10,000) Market市场规模（亿元） size (Rmb100mn) 2000 1,880 140 122 120 1500 1,200 100 80 1000 860 575 60 400 40 500 20 3 0 0 2015 2020 2011 年 2012 年 2013 2013 年 2014 2014年 2015 2015年 2015年E 2020年E
Source: Zhiyan.org, compiled by CITICS Research Source: CITICS Research forecasts
Camera module: China’s camera lens producers are leading in the global market. Optical lens are widely used in cell phone, vehicle cameras, and cameras. As the growth of cell phone and other digital products decelerates, camera lens producers are increasingly focusing on vehicle cameras. China’s camera lens producers are leading in the global market. For example, Sunny Optical Technology boasts the largest global shipment of vehicle rear-view cameras, with a market share of c. 30% and in cooperation with major auto manufacturers such as BMW, Benz, and Audi. In our view, the vehicle camera business will likely boost earnings of leading domestic camera lens producers. We recommend Shenzhen O-Film Tech (002456), Sunny Optical (2382.HK) and Kingpak Technology.
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Fig. 23: Global market share of camera lens in 2014
Largan 大立光电 GSEO玉晶 SekonlxSekonIx KantatsuKantatsu Sunny舜宇光学 Kolen DIOSTECHDIOSTECH SSEMCOEMCO Others其他 Precision
27% 31%
3% 5% 5% 12% 6% 7% 5% Source: Techno Systems Research, compiled by CITICS Research
Shenzhen O-Film Tech is a traditional leading producer of camera modules, with a presence in the supply chain of intelligent vehicles. O-Film Tech not only has the highest shipment of camera modules, but also has a presence in dual-camera modules ahead of its competitors. 1) In June 2015, O-Film Tech established a wholly-owned subsidiary to tap into intelligent drive, intelligent control, “Internet+” hardware, and car electronics businesses; 2) As a tier-one supplier of intelligent control components of BAIC BJEV, O-Film Tech exhibited jointly-developed ADAS vehicles on the CES, and plans to expand its presence along the new energy vehicle supply chain by acquiring shares of BAIC BJEV with a consideration of Rmb200mn; 3) O-Film Tech plans to raise Rmb1.5bn via a private placement for its intelligent vehicle electronics project. Sunny Optical has the largest global shipment in the vehicle camera lens market, with a market share of c.30%. In the market of front cameras for ADAS, which have a higher requirement for safety, Sunny Optical has a market share of over 50%. Sensor modules - infrared night vision: Huge growth potential; focus on domestic leaders
Infrared night vision system has huge growth potential amid growing awareness of auto safety. According to data provided by the USNHTS, although driving at night only accounts for one-fourth of total road traffic, the number of night driving accidents accounts for 50%. Among others, 70% of the accidents were caused by poor view at night. With rising auto safety awareness and growing attention to ADAS, we expect the infrared night vision system to be popularized quickly. In 2015 the penetration ratio of night vision system was only around 1%. Assuming a 5% penetration ratio in the OEM-embedded market by 2020E and selling at a unit price of Rmb2500, we estimate the size of the OEM-embedded market at Rmb3.8bn. We recommend Jiangsu Protruly Vision Technology (600074).
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Fig. 24: Working principle of Infrared Night Vision System
Visual range between 150m Working principle of active safety Night vision systems 400m and 400m
Range of image sensors Night vision 300m Projected area of infrared ray Night vision 200m Night vision Range of lane departure sensor 150m Range of pedestrian detector
High beam 60-80mn
Low beam 30-50m
Range of luminance sensor
Source: Jiangsu Protruly Vision Technology
As a leading night vision system provider, Jiangsu Protruly Vision Technology has been proactive in building its presence in the active safety segment. In September 2015, the company released a private placement proposal to raise up to Rmb1.99bn, of which Rmb840mn will be used to develop smart hardware and active safety systems. Additionally, the company also planned to build an active safety system testing center to cement its technological know-how and market position in the smart driving segment. High resolution maps: The oligopoly competitive landscape will likely continue
Maps are an important part of driverless cars, and industry leaders possess unique competitive advantages. One of the fundamental features of driverless cars is navigation. High resolution maps are a required feature to provide the precise location and driving routes. Compared with conventional vehicles, driverless cars have a higher requirement on maps. GPS should achieve centimeter-level precision (currently beyond 1 meter), and more accurate three-dimensional data are required to deal with complicated driving conditions. Auto suppliers like Mobileye have started to offer tailor-made maps. Conventional OEMs such as Toyota are also launching brand new mapping technology. In our view, leading domestic map data providers will enjoy their monopoly position for a long time to come. Reasons include: 1) surveying and mapping require long-term investment that looks too costly for new entrants; and 2) qualification application is required for companies engaged in the mapping segment. We expect existing industry leaders to maintain their dominant position and embrace fast growth ahead. Our top pick is Navinfo (002405).
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Fig. 25: Shipment of OEM-embedded navigation Fig. 26: OEM-embedded navigation system systems continued to grow in 2015 market share in 2015
Shipment (in 10k QoQ growth (%) Navinfo AutoNavi eMapgo Others units)
Source: Analysys International, Collated by CITICS Source: Analysys International, Collated by CITICS Research Research
Navinfo possesses a leading market share in the OEM-embedded navigation market. The company acquired map data providers Mapbar, SmartAuto and AutoChips in succession and owns a full array of technology ranging from maps to chips, operating system, voice recognition and on-board diagnostics (OBD). Actuators
We suggest investors watch companies engaged in actuators including the electronic brake systems (EBS) and in-wheel electric motors. We recommend Vie Science & Technology (002590), Asia-Pacific Mechanical& Electronic (002284) and Ningbo Tuopu Group (601689).
Table 19: Recommended actuator manufacturers Company Initiatives Products Vie Science & Electro-mechanical brake Established a joint venture with the Sweden-based Haldex AB Technology (EMB) systems (002590) Asia-Pacific Mechanical Acquired a 20% stake in Elaphe and established a China-based In-wheel electric motors & Electronic joint venture with the company (002284) Ningbo Proposed to raise Rmb2.8bn through a private placement to fund Tuopu its Intelligent brake systems (IBS) and electric vacuum pump Intelligent brake systems (IBS) Group projects (601689) Source: Collated by CITICS Research Intelligent electronics system
Watch vehicle-mounted intelligent electronics components such as smart automotive lighting, human-machine interaction (HMI) and head-up displays (HUDs). We recommend Xingyu Automotive Lighting Systems (601799), Dongfeng Electronic Technology (600081), Joyson Electronic (600699) and Crystal-Optech (002273).
Table 20: Recommended vehicle-mounted intelligent electronics system vendors Company Initiatives Products Xingyu Automotive Acquired a 70% stake in neueI&T for Eur4.60mn; and Lighting Systems invested Rmb150mn to establish a smart auto electronics Intelligent lighting (601799) subsidiary Dongfeng Electronic Took a 40% controlling stake in Visteon Shanghai and an HUDs Technology (600081) indirect controlling stake in Johnson Controls
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Company Initiatives Products Joyson Electronic Acquired the German-based Quinta, Vcyber.com, KSS and HMI and active safety (600699) TechniSat systems Crystal-Optech Established a subsidiary specialized in HUDs HUDs (002273) Source: Collated by CITICS Research The Internet of Vehicles (IoV)
As an indispensable link to achieve fully automated driving, the IoV involves vehicle-to-vehicle (V2V) communication, vehicle-to-roadside (V2R) communication and vehicle-to-infrastructure (V2I) communication. We suggest investors keep tabs on first-movers like Vie Science & Technology (002590), Asia-Pacific Mechanical& Electronic (002284), Shuanglin Auto Parts (300100), Joyson Electronic (600699), United Electronics (002642), Xingmin Wheel (002355), VITI Electronics (603023) and Shenglu Telecommunication (002446) on the A-share market, as well as Taiwan-listed companies like Wistron NeWeb Corporation (6285), Alpha Networks Inc. (3380) and Sercomm (5388).
Table 21: Recommended IoV names Company Initiatives Products Vie Science & Technology Acquired Soda Mobility Technologies and FutureMove IoV (002590) Asia-Pacific Mechanical& Acquired Tima Networks IoV Electronic (002284) Shuanglin Auto Parts Established a network technology joint venture with TYD Electr IoV (300100) onic Technology Acquired vcyber, an HMI (human-machine interaction) solutio Joyson Electronic (600699) IoV ns provider Rmb1bn private placement, of which Rmb440mn was invested United Electronics (002642) IoV in the IoV Acquired inTEST, a provider of temperature management prod Xingmin Wheel (002355) IoV ucts The company aims to develop an IoV e-bus system and will li VITI Electronics (603023) kely finish product development and testing by the end of the IoV year Shenglu Telecommunication Acquired two IoV players IoV (002446) Source: Collated by CITICS Research
After reviewing the status quo and market landscape of two product categories (the ADAS system integration and core components), we think:
1) As an elementary product for smart driving, ADAS will be the first to be commercialized. Tech start-ups could be the ultimate winner given their heavy investment in innovations. Listed companies are entering the ADAS industry chain by investing in or acquiring ADAS start-ups;
2) The “Made in China 2025” initiatives could drive the localization of perception recognition (mainly cameras and radars) and high-definition maps. Among others, the millimeter-wave radars are now being commercialized in China. Lidars, which are becoming smaller, cheaper and more solid, will likely become the mainstay products. In terms of cameras, domestic leaders enjoy solid market leadership and may deliver significant growth. We think infrared night vision could have huge growth potential and suggest investors keep close tabs on leading names. Companies with an edge in high-definition maps will continue to enjoy their monopoly position given the high entry barrier and qualification threshold.
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Potential risks
1) Most listed companies entered the smart driving segment via either equity investment or M&A activities. They need time to prove their operational capabilities and potential to consolidate/integrate the newly-acquired business;
2) Profit contribution from smart driving could be restricted given the limited number of new product offerings in the coming 1-2 years;
3) The high valuation levels of some target companies provide minimal safety margins; and
4) Potential sell-downs by the senior executives of listed companies.
Investment strategy and recommendations
In our view, unmanned driving represents the ultimate direction of the auto industry, but may only deliver a small profit over the next 1-2 years due to the lack of new product offerings in the near term. We think the smart driving segment will likely maintain high valuation levels driven by thematic opportunities. Therefore, the market position of the target company will become an important valuation benchmark in a potential acquisition deal. We reiterate our OUTPERFORM call on the sector, and advise investors to watch the following names: Zhejiang Vie Science & Technology (002590), Tuopu Group (601689), Asia-Pacific Mechanical & Electronic (002284), Xingyu Automotive Lighting Systems (601799), Joyson Electronic (600699) and Shuanglin Auto Parts (300100).
Table 22: Earnings forecast Share EPS (Rmb) PE (x) price PB Company Rating (Rmb) 15 16E 17E 18E 15 16E 17E 18E (x)
Vie Science & Technology (002590) 28.94 0.19 0.24 0.31 0.37 152 121 93 78 8.5 O/W
Ningbo Tuopu Group (601689) 26.54 0.63 0.76 0.88 1.04 42 35 30 26 5.3 O/W
Asia-Pacific Mechanical& Electronic (002284) 18.18 0.19 0.25 0.29 0.34 94 73 63 53 5.3 O/W
Xingyu Automotive Lighting Systems (601799) 45.59 1.22 1.46 1.69 1.95 90 46 27 23 6.6 O/W
Joyson Electronic (600699) 36.73 0.41 0.79 1.34 1.60 70 48 39 33 7.8 O/W
Shuanglin Auto Parts (300100) 42.57 0.61 0.84 1.00 1.18 70 51 43 36 7.8 O/W
Source: Wind, CITICS Research forecast Note: Closing price as of 14 Jun 2016
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Key companies Vie Science & Technology (002590): Growing presence in smart driving
A leading automotive brake system supplier in China. The Company’s major products include air/hydraulic brake systems, suspensions and clutch operating systems. Among others, the air brake systems contributed operating revenue and profit of 33.6% and 52.3%, respectively. The Company mainly serves downstream commercial vehicle (CV) and passenger vehicle (PV) manufacturers including FAW Group, Guangzhou Automobile Group, Beiqi Foton Motor, Shaanxi Heavy Duty Truck, Great Wall Motor, Jianghuai Automobile, BYD, Chery Automobile and Geely Auto. It reported operating revenue of Rmb1,700mn (+28.9% YoY) and net profit of Rmb92.86mn (+24.1% YoY) for 2015.
Teaming up with Haldex provides the access to active safety solutions. The Sweden-based Haldex AB is a world-leading supplier of brake systems for commercial vehicles. Its key products include brake adjusters, disc brakes and anti-lock braking systems/electronic braking systems (ABS/EBS). The Company has established a joint venture with Haldex AB to engage in the R&D and production of electro-mechanical braking (EMB) systems. Compared with traditional air brake or hydraulic brake systems, the EMB system is more superior in terms of response time, stopping distance and comfort level. Considering the brake system is an important part of smart driving, we believe the EMB systems could become a key actuator of active safety technologies, including the electronic stability control (ESC) and adaptive cruise control (ACC). As a potential early-mover, the Company will likely benefit from the fast growth of the driverless technology.
Increased presence in electrification and smart driving underpins sustainable growth. The Company has ventured into the new energy vehicles and smart driving segments through a series of equity investments, including US$3.2mn for an 11.72% stake in Evatran, a US-based wireless charging solutions provider, Rmb20mn for a 22% stake in FutureMove, an OEM-embedded telematics supplier, and Rmb16.92mn for a 22% stake in Soda Mobility Technologies. Additionally, it plans to raise Rmb850mn at Rmb12.6 per share in a private placement to replenish working capital and fund its EBS project, a modular chassis production base, and a R&D center for the internet of vehicles (IoV), wireless charging and ADAS solutions. After reaching their designed capacity, the EBS and chassis projects will add incremental output of 200k units of ABS, 50k units of EBS and 500k units of PV chassis modules and contribute additional operating revenue of Rmb1.2bn and net profit of Rmb100mn. This will significantly boost the Company’s earnings.
EBS and chassis operations to create new earnings drivers. The Company has achieved mass production for its proprietary ABS products. Other value-added offerings including EBS, ESC and electric park brakes (EPB) will also be launched in succession. Given the gradual mass production of new offerings and China’s tougher commercial vehicle safety regulations, (light trucks must be equipped with ABS starting from July 1 this year), we expect the Company’s traditional brake system to maintain 25% growth over the next three years. Additionally, as automakers are increasingly outsourcing their chassis production, the Company’s chassis segment maintained fast growth in the past few years (2015 top-line growth at 143% YoY) and will likely continue to grow at 30% over the next three years.
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Potential risks: 1) Disappointing new product promotion; 2) Slower-than-expected progress with new projects funded by the private placement; and 3) Inorganic growth missing expectations.
Earnings forecast and investment recommendation: OVERWEIGHT reiterated. We maintain our 2016/17/18E EPS estimates at Rmb0.24/0.31/0.37 (vs. Rmb0.19 in 2015), implying three-year PEs of 121x/93x/78x based on its current share price of Rmb28.94. We are upbeat about the Company’s long-term growth prospects considering its solid traditional operations, impressive performance of the EBS and chassis segments, aggressive expansion into electrification and smart driving, and potential accretive M&A deals.
Table 23: Earnings forecast and valuation Item/year 2014 2015 2016E 2017E 2018E Turnover (Rmb mn) 1,322 1,690 2,127 2,508 2,964 Growth YoY % 3.05 27.84 25.84 17.91 18.17 Net profit (Rmb mn) 74 92 116 148 177 Growth YoY % 112.28 23.24 26.23 27.71 19.79 Gross margin % 25.32 22.58 22.56 22.63 22.59 EPS (Rmb) 0.16 0.19 0.24 0.31 0.37 BVPS (Rmb) 1.5 1.7 1.9 2.1 2.3 PE (x) 181 152 121 93 78 PB (x) 19.3 17.0 15.2 13.8 12.6 Source: CITIC Quantitative Investment Analysis System Note: Closing price as of June 14, 2016.
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Ningbo Tuopu Group (601689): Focusing on actuators for driverless cars
A leading NVH (noise, vibration and harness) solutions provider. The Company is mainly engaged in the production of rubber shock absorbers and insulation products in the NVH segment. By sales volume, its rubber shock absorbers are a national best-seller while insulation products are ranked No. 6 in China. Domestic customers include SAIC General Motors, SGMW, Geely Auto and Changan Ford. Overseas customers include Chrysler, GM, Audi and BMW. The Company reported revenue of Rmb3.01bn (+9.9% YoY) and net profit of Rmb410mn (+2.4% YoY) for 2015. Among others, shock absorbers contributed 53% of total revenue and 64% gross profit, whilst interior accessories contributed 38% and 27% respectively. Additionally, the Company plans to raise up to Rmb2.8bn to invest in its intelligent brake system (IBS) and electric vacuum pump project.
New businesses including lightweight suspensions and IBS fared well amid solid performance of main operations. The Company has outstanding synchronous R&D and system integration capabilities. Currently its synchronous R&D orders account for c.80% of total orders. The Company signed an Rmb1bn 8-year NVH hydraulic shock absorber supply contract with GM, indicating its strong technological capabilities. Additionally, it is extending into new operations along the industry chain, including auto lightweighting solutions and auto electronics. In 2015, its lightweight suspensions and electric vacuum pumps delivered revenue growth of 33% and 77%, respectively. Given the global trend of energy-saving and smart driving, we expect the Company to maintain fast growth for its new businesses.
The smart driving initiatives funded by the Rmb2.8bn private placement should drive a valuation re-rating. The Company plans to raise up to Rmb2.8bn at no less than Rmb21.47 per share through a private placement to support its initiatives in the smart driving segment. Specifically: 1) Rmb2.2bn will be used to fund the IBS project with annual designed capacity of 1.50mn units. IBS is a key actuator for active safety technologies like automatic emergency braking (AEB) systems, electronic stability control (ESC) systems and adaptive cruise control (ACC) systems. An international comparable product is Bosch's iBooster launched in 2013. The Company followed the international giant closely and gained first-mover advantage in this segment. 2) Rmb600mn will be invested into the electric vacuum pump project with designed annual capacity of 2.6mn units. Electric vacuum pumps are mainly used onto turbochargers and medium to high-end vehicle models. The product is also a standard component for new energy vehicles (NEVs) and has been used by local and JV car brands including Geely, Zotye, SAIC and GM. The project will take two years to complete and contribute net profit of Rmb770mn once reaching its designed capacity. This will significantly boost the Company’s earnings.
The Company has established an investment unit to strengthen its presence along the industry chain. The Company is well-capitalized, with liability-to-asset ratio only at 21%. Cash and cash equivalents amount to Rmb580mn. In 2015 the Company established an investment company to engage in industrial and equity investment. This will likely help it to expand market share and extend presence along the industry chain. Considering the development path of comparable companies like Zhongding Sealing Parts (000887) and Zhuzhou Times New Material Technology (600458), we expect the Company to deliver extraordinary growth through inorganic expansion.
Potential risks: 1) Disappointing new product promotion; 2) Slower-than-expected progress with new projects funded by the private placement; and 3) Inorganic growth missing expectations.
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Earnings forecast, valuation and rating: We estimate the Company’s 2016/17/18E EPS at Rmb0.76/0.88/1.04 (vs. Rmb0.63 in 2015). Its current share price of Rmb26.54 implies three-year PEs of 35x/30x/26x. We are upbeat on the Company’s long-term growth prospects and believe a 40x 2016E PE is fair for the Company based on the average valuation level of the industry. We initiate our coverage of the Company with an OVERWEIGHT rating and a target price of Rmb31.
Table 24: Earnings forecast and valuation Item/year 2014 2015 2016E 2017E 2018E Turnover (Rmb mn) 2,737 3,007 3,472 4,023 4,723 Growth YoY % 18.54 9.88 15.45 15.86 17.41 Net profit (Rmb mn) 399 409 491 572 675 Growth YoY % 17.53 2.39 20.07 16.68 17.93 Gross margin % 29.51 28.81 29.83 29.91 30.13 EPS (Rmb) 0.61 0.63 0.76 0.88 1.04 BVPS (Rmb) 2.3 4.9 5.4 6.0 6.7 PE (x) 44 42 35 30 26 PB (x) 11.7 5.5 4.9 4.4 3.9 Source: Company announcements, CITICS Research estimates. Note: Closing price as of June 14, 2016.
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Asia-Pacific Mechanical & Electronic (002284): Market leadership cemented by a full presence along the driverless industry chain
A full presence along the driverless industry chain following a series of equity investments. Target companies include Forward Innovation, Tima Networks and Intibeam Technology. Forward Innovation provides a complete set of in-vehicle ADAS products and a full package of safety solutions. As its aftermarket products are doing well, the target company is now steadily pushing ahead with its OEM-embedded ADAS solutions. Tima Networks positions itself as a vehicle-mounted mobile internet carrier capable of offering the Internet of Vehicles (IoV) solutions and operation outsourcing services by leveraging advanced big data cloud-computing platforms and multiple smart terminal products. Intibeam Technology is mainly engaged in the production of millimeter-wave collision avoidance radar systems. Through these equity investments, the Company has cemented its technological foothold in terms of environmental perception, active safety control and interconnection for driverless cars. Such a strong pipeline of technology should create enormous growth potential for the Company in the future. Meanwhile, the Company’s existing operations, including anti-lock brake systems (ABS) and electronic stability control (ESC), both of which serve as the ultimate actuators of driverless cars, could form a complete closed-loop ecosystem with its acquired businesses, i.e. the sensor systems (of Forward Innovation and Intibeam Technology) and the IoV solutions (Tima Networks).
A 20% stake in Elaphe adds to the Company’s driverless strength. The Company plans to acquire a 20% stake in Elaphe (In-wheel electric motor) for Eur10mn via capital injection. Elaphe is a world leading researcher and developer specializing in electric motors for electric and other types of vehicles. We believe the latest investment, plus earlier equity investment initiatives, could help solidify the Company’s strengths in the driverless segment.
Domestic market expansion through JVs. As a core component to new energy vehicles, in-wheel electric motors could consolidate the power units, transmission gears and brake systems all into the wheel, rather than leaving transmission parts like the clutches, gearboxes, transmission shafts, differential gears and transfer cases scattered. Apart from a streamlined structure, vehicles fitted with in-wheel electric motors present better space utilization and transmission efficiency. The Company also plans to establish a joint venture with Elaphe in China to localize production of in-wheel electric motors and expand the domestic market. The JV will be created with funds from the Company and core technological expertise from Elaphe. We expect the Company to have more than 51% stake of the JV.
Auto electronics products to become the new growth drivers. The Company has acquired the necessary qualification to provide electric park brakes (EPB) to major automakers including Jiangling Motors (000550), Faw Car (000800) and SAIC Motor Commercial Vehicle, and supply electronic stability control (ESC) systems to Dongfeng Automobile’s M19 project. Its EPB and EABS products were put into production in 2015. Production of ESC systems will commence in 2016 and will likely contribute to stable earnings growth.
Potential risks: 1) New business (e.g. driverless cars) expansion missing expectations; 2) Macroeconomic slowdown resulting in weak downstream demand; and 3) Lower market share of major downstream customers leading to lower demand.
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Earnings forecast and investment recommendation: We maintain our 2016/17/18E EPS estimates at Rmb0.25/0.29/0.34. The Company’s current share price of Rmb18.18 implies three-year PEs of 73x/63x/53x. As a leading brake system provider in China, the Company is overtaking its foreign peers gradually and maintains solid growth for its main operations. Its auto electronics operations are becoming new growth drivers. We see enormous growth potential for the Company as it deepens its presence along the smart driving industry chain. OVERWEIGHT reiterated.
Table 25: Earnings forecast and valuation Item/year 2014 2015 2016E 2017E 2018E Turnover (Rmb mn) 3,279 3,059 4,700 5,500 6,383 Growth YoY % 20.61 -6.69 53.62 17.02 16.05 Net profit (Rmb mn) 176 142 184 214 251 Growth YoY % 28.11 -19.17 29.94 16.00 17.24 Gross margin % 16.70 16.61 16.89 16.94 16.98 EPS (Rmb) 0.24 0.19 0.25 0.29 0.34 BVPS (Rmb) 3.36 3.50 3.55 3.61 3.68 PE (x) 76 94 73 63 53 PB (x) 5.4 5.2 5.1 5.0 4.9 Source: CITIC Quantitative Investment Analysis System Note: Closing price as of June 14, 2016.
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Xingyu Automotive Lighting Systems (601799): Private placement secures safety margin
New AFS (adaptive front-lighting system) and ADB (adaptive driving beam) offerings will be launched soon. As driverless technology advances, intelligent lighting systems including the AFS, ADB, RGB (red, green, blue) lights and bus-based rear light control systems will become an important part of smart driving. The Company launched an AFS product at the end of last year and achieved mass production for GAC Group’s high-end sport utility vehicle (SUV) model – the Trumpchi GS4. In addition, the Company will likely launch a prototype of an ADB product around the middle of the year, reflecting its strong technological capability in the intelligent lighting segment. We believe the Company will arise as a scarce name among peers as it expands.
Transitioning from a specialized automotive lighting supplier towards an integrated lighting solutions provider. The Company plans to raise up to Rmb1.5bn via a private placement at no less than Rmb22.84 per share. Among others, Rmb700mn will be used to fund its “auto electronics and lighting R&D center” project. The R&D center will focus on automotive lighting and electronics products, smart driving, vehicle-mounted wireless chargers, head-up displays (HUDs), sensor technology and intelligent production lines. In our view, the establishment of the R&D center indicates the Company’s resolution in transforming towards an integrated intelligent lighting solutions provider to capture the smart driving trend.
Consistent product mix upgrades ensures long-term business growth. The Company has a high-profile customer base and is offering products to major JV automakers of Volkswagen, GM, Nissan, Toyota, Ford and Honda. In 2016, the Company will likely break the blockade of international lighting giants like Hella Technology and Valeo and enter into the supply chain for large family vehicles. This will further boost the Company’s customer base and improve its product mix. Currently the Company is supplying LED automotive lighting (a high value-added product) to a number of vehicle models including the Volkswagen Golf A7, the VW Sagitar and the Dongfeng Nissan Venucia, with a revenue contribution of 15% (up 2-3ppts) in 2015. With the additional LED capacity of 500k units per annum, we expect the LED revenue contribution to approximate 20% and become a solid growth driver.
Long-term incentive mechanism in place to boost morale. The Company has implemented a three-phased employee stock ownership plan (ESOP) from 2015 to 2017. Ms. ZHOU Xiaoping, the controlling shareholder of the Company, will voluntarily vest up to 3.60mn shares to the ESOP scheme in three phases. The remainder part of the scheme will be purchased through secondary market trading. Currently, phase 1 and 2 vestings have been implemented with subscription prices at Rmb26.39 and Rmb27.19 respectively. We think the ESOP scheme shows the Company’s strong conviction in its growth prospects. Such a long-term incentive mechanism should be able to boost morale and facilitate the long-term development of the Company.
Potential risks: 1) Growth in demand from downstream automakers misses expectations; 2) The market position of major customers is undermined; 3) Disappointing LED expansion; and 4) Slower-than-expected inorganic growth.
Earnings forecast, valuation and investment rating: We maintain our 2016/17/18E EPS estimates at Rmb1.46/1.69/1.95. The Company’s current share price of Rmb45.59 implies three-year PEs of 31x/27x/23x. On the one hand, its traditional automotive lighting
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business is growing steadily and high value-added products are being launched continuously. On the other hand, its presence in the intelligent lighting segment makes the Company well-positioned to benefit from the industrial upgrading of the smart driving sector. As such, we reiterate our OVERWEIGHTING rating on the Company.
Table 26: Earnings forecast and valuation Item/year 2014 2015 2016E 2017E 2018E Turnover (Rmb mn) 2,016 2,468 2,926 3,371 3,881 Growth YoY % 23.51 22.40 18.60 15.20 15.12 Net profit (Rmb mn) 273 293 350 405 467 Growth YoY % 25.20 7.62 19.26 15.63 15.31 Gross margin % 24.05 23.46 24.10 24.24 24.37 EPS (Rmb) 1.14 1.22 1.46 1.69 1.95 BVPS (Rmb) 8.29 8.74 9.33 10.00 10.78 PE (x) 40 37 31 27 23 PB (x) 5.5 5.2 4.9 4.6 4.2 Source: CITIC Quantitative Investment Analysis System Note: Closing price as of June 14, 2016.
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Joyson Electronic (600699): M&A strategy to continue
The acquisition of Evana proves a good fit with the Company’s existing industrial robots business. Major customers of the US-based Evana Automation include leading multinationals across the automotive, industrial, medical and health segments, such as TRW Automotive, Magna, Alere and ALCON. Evana reported total revenue of US$23.43mn and EBITDA of US$2.80mn for 2015. Joyson Electronic’s major industrial robotics operations include Preh, IMA Automation (acquired in 2014) and Preh IMA Automation (a China-based subsidiary). Upon the completion of the acquisition, the Company’s geographical footprint in the industrial robotics segment will be extended from Europe and Asia to the North America. Its strength in the medical and health segments will also be further enhanced. As one of the Company’s three pillar products, industrial robots should be a segment to watch in terms of both organic and inorganic growth.
Equity investment in Car Joy cements the Company’s presence in the automotive service segment. Car Joy owns China’s first specialized aftermarket ecommerce platform for 4S store networks – the “lechebang”. Currently it has connected to the online platforms of the BAT (Baidu, Alibaba and Tencent), JD, Dianping, AutoNavi and China’s top 5 state-owned banks and serves as the exclusive 4S store maintenance service provider designated by Baidu Map, Baidu Nuomi and QQAuto. Key investors include Sequoia Capital and Baidu. The Company’s latest equity investment in Car Joy echoes its earlier investment in vcyber.com and Anhui Auto Service, and is aimed at expanding its presence in auto services/aftermarket services. We expect the Company to leverage its software and hardware strength and build an IoV ecosystem that covers every aspect in end-users’ day-to-day use of cars.
A scarce top-performing smart driving name backed by the trends of intelligent cars and intelligent road transportation. The Company proposed to acquire KSS, the world’s fourth largest safety system supplier, for US$920mn to deepen its presence along the smart car industry chain. Recently, KSS said that it had taken a controlling stake in Image Next, Korea’s leading visual system developer. We believe this will further strengthen the Company’s active safety technology. Additionally, the Company proposed to acquire the auto information unit of the German-based auto supplier TechniSat Digital for Eur180mn in a bid to venture into the intelligent road transportation segment. The Company is now the best smart driving player in the A-share market and will likely enjoy a long-term valuation premium as an industry leader.
Well-positioned to benefit from the industry upgrading in the longer run. According to the Company, the two proposed acquisition deals (KSS and the auto information unit of TechniSat) will be funded by a private placement priced at no less than Rmb29.85 per share. Looking ahead, we expect the Company to build a competitive product matrix covering driving control, auto safety, the internet of vehicles (IoV), new energy and industrial robots, paving the way for its transformation from an auto electronics specialist to a tech-driven innovative service provider. We think the Company is well-positioned to benefit from the trend of smart driving, electrification and industry automation in the auto industry.
Potential risks: 1) Margin erosion as a result of foreign exchange rate and overseas market fluctuations; 2) Disappointing progress in acquiring new customers; and 3) New business integration missing expectations.
Earnings forecast, valuation and investment rating: We maintain our 2016/17/18E EPS estimates at Rmb0.79/1.34/1.60. Its current share price of Rmb36.73 implies
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Auto Industry Thematic Report
three-year PEs of 46x/27x/23x. The Company is transforming from an auto electronics specialist into a tech-driven innovative platform service provider. Given the historical valuation levels of the industry and the Company, we think a 30-32x 2017E PE is fair. We like the Company’s long-term growth prospects and reiterate our OVERWEIGHT rating on the Company with a target price of Rmb42.
Table 27: Earnings forecast and valuation Item/year 2014 2015 2016E 2017E 2018E Turnover (Rmb mn) 7,077 8,083 16,960 27,476 32,647 Growth YoY % 15.95 14.21 109.84 62.00 18.82 Net profit (Rmb mn) 347 400 776 1,306 1,566 Growth YoY % 20.03 15.27 94.16 68.18 19.96 Gross margin % 19.57 21.65 21.60 21.60 21.60 EPS (Rmb) 0.35 0.41 0.79 1.34 1.60 BVPS (Rmb) 2.5 3.9 4.4 5.4 6.5 PE (x) 105 90 46 27 23 PB (x) 14.7 9.4 8.3 6.8 5.7 Source: CITIC Quantitative Investment Analysis System Note: Closing price as of June 14, 2016.
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Auto Industry Thematic Report
Shuanglin Auto Parts (300100): Smart driving projects to support growth
Execution of smart driving projects should generate some excitement. After establishing a network technology joint venture with TYD Electronic Technology early last year, the Company is now planning to extend its presence to the automated driving segment. It proposed to invest a total of Rmb100mn cash on hand into a smart driving technology project. Rmb60mn will be invested in the first phase. According to a recent announcement, the Company’s parent company, Shuanglin Group, proposed to sell down no more than 16mn shares in the Company. The proceeds from the sell-down will be used to fund the group’s investment in innovative projects including shared-lease of electric vehicle and the internet of vehicles (IoV). In our view, once these projects turn profitable, the group company may inject them into the listco. Considering the group’s experience in exploring new businesses/models and integrating industry resources, we think the execution of these projects could bring some excitement.
Potential DSI injection (a 90% stake) should be earnings accretive. Currently Shuanglin Group owns a 61% stake in the Australia’s DSI Holdings. Given the prevailing exit mechanism of venture capital investors, we reckon that the 29% stake owned by GSR Ventures (a partner of the group company) could also be transferred to the listco along with the 61% owned by the Group. DSI’s products are widely applied to the GEELY GC9, a popular sedan launched in April 2015 with monthly sales volume now standing at 6,000 units, and will also be fitted to the soon-to-market Geely NL3, an SUV priced at Rmb98.8k-157.8k but actually sold at only Rmb94.8k-151.8k (with purchase tax subsidy by the automaker). The SUV will be equipped with ADAS products including the 3D panorama image, ACC and EPB. The high performance vs. the low price could help boost sales of the new SUV model. Apart from Geely’s vehicle models, we expect the DSI products to cover more customers, including Lifan Group and BAIC Motor. Based on our estimates, the sales volumes of DSI’s automatic gearboxes could reach 150k and 250k sets in 2016 and 2017, respectively, with profit per set at more than Rmb1,000. The asset injection, once realized, could boost the Company’s earnings by a big margin.
Presence in core electric vehicle parts advances the cooperation with automakers. Currently the Company has a 5% stake in the Geely-Xindayang JV, which is focused on the production of new energy vehicles (NEVs). By acquiring a 51% interest in Deyang Electronics Technology (an electric motor supplier of Xindayang’s best-selling vehicle model–the Zhidou series), the Company has ventured into the NEV core parts/components supply chain. The target company is capable of producing 300k sets of electric motors and 300k sets of controlling units per annum and committed net profit contribution of Rmb80mn/Rmb120mn for 2016E/17E. The acquisition could generate synergies with the Company’s earlier moves along the NEV industry chain and will likely strengthen its partnership with Xindayang and Geely by supplying core parts for Geely’s electric vehicles.
Commissioning of the Hangzhou Bay project brings incremental profits. The Company’s HQ saw a revenue decline of nearly 30% in 2015, dragged by the downbeat business climate and the postponement of the car seats project, but will likely resume growth this year. The Hangzhou Bay Project, which commenced production in mid-2015 and mainly focuses on the production of seats and interior/exterior accessories for Geely, Changan Ford and Zotye, may start to deliver net profit this year. In 2015, the Company’s wholly-owned subsidiary Hubei New Torch Science and Technology (a high-tech company focusing on the production of wheels and bearings) contributed net profit of Rmb160mn, far above the committed amount of Rmb110mn. We expect the subsidiary to maintain
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Auto Industry Thematic Report
more than 20% growth in the future with the growing share of the third generation of bearings and wider application on more vehicles models.
Potential risks: 1) Disappointing M&A and integration progress; 2) Acquisition of new customers and new product promotions missing expectations; and 3) Slower-than-expected progress in expanding new businesses.
Earnings forecast and investment recommendation: We maintain our 2016/17/18E EPS estimates at Rmb0.84/1.00/1.18. Its current share price of Rmb42.57 implies three-year PEs of 51x/43x/36x. Pro forma for an 8x 2016E PE of DSI in a potential asset injection deal at Rmb36 per share (assuming 25% of the consideration is funded through fundraising), we estimate its 2016/17E pro forma EPS at Rmb1.08/1.44, implying 37x/28x PE. We are positive about the Company’s long-term growth prospects given its proactive initiatives in the smart driving and NEV segments as well as the consequent earnings accretion following the potential injection of DSI. OVERWEIGHT reiterated.
Table 28: Earnings forecast and valuation Item/year 2014 2015 2016E 2017E 2018E Turnover (Rmb mn) 1,497 2,472 3,514 4,186 4,976 Growth YoY % 24.18 65.12 42.15 19.12 18.86 Net profit (Rmb mn) 133 243 333 395 468 Growth YoY % 29.54 83.03 36.72 18.82 18.51 Gross margin % 26.99 26.88 27.55 27.16 27.22 EPS (Rmb) 0.34 0.61 0.84 1.00 1.18 BVPS (Rmb) 4.8 5.3 5.9 6.6 7.5 PE (x) 125 70 51 43 36 PB (x) 8.9 8.0 7.2 6.5 5.7 Source: CITIC Quantitative Investment Analysis System Note: Closing price as of June 14, 2016.
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