HSAI.US
Hesai sues Defense Department

The autonomous driving technology company has filed a motion to throw out the DoD’s determination that Hesai has ties with the Chinese military

Key Takeaways:

  • Hesai’s Nasdaq-listed shares have fallen by 42% since the U.S. Department of Defense added it to a watch list of “military-civil fusion contributors” in January
  • The autonomous driving technology company is suing to be removed from the list, as its CEO said its reliance on the U.S. market will fall sharply this year

  

By Edith Terry

When Hesai Group (HSAI.US) raised $190 million in a Nasdaq IPO in early 2023, it was one of the largest U.S. listings by a Chinese firm in nearly two years, leading some to predict a renaissance in such IPOs. The company was also one of the first Chinese makers of autonomous driving technology to list overseas, commanding an estimated 47% of the global market for light detection and ranging (LiDAR) technology. Its shares jumped 10.8% on their trading debut, in what looked like a harbinger of good things to come.

Fast forward a year and a half, when the rose has fallen off of Hesai’s early bloom, as it contends with a combination of politics and slower-than-expected development of the autonomous driving market.

The company first fell into political hot water as early as November 2023 when U.S. politicians called on the Commerce and Defense Departments to “stop LiDAR produced by state-backed entities from foreign adversary countries” from entering the U.S. Then the U.S. Defense Department accused it of being a Chinese “military-civil fusion” company in late January, shortly after it registered a firm in Michigan called “American Lidar.”

Hesai has been fighting ever since to be removed from the Defense Department list, most recently filing a motion for a summary judgement against DoD on July 3 in the U.S. District Court for the District of Columbia. Its legal team from the big-name law firm of Akin Gump Strauss Hauer & Feld contended the Defense Department’s determination was “arbitrary, capricious, and contrary to law,” and is asking the designation to be negated.

In the latest and earlier responses, Hesai has said that it makes no contribution to the Chinese defense industry’s industrial base, and makes technology only for passenger and commercial vehicles. Hesai’s inclusion on the Defense Department’s 1260H list doesn’t carry any specific penalties like bans on working with U.S. partners. But it sends a sort of warning signal that might make other companies reluctant to work with it as suppliers, customers or development partners.

When Hesai’s attorneys asked for a copy of a memorandum detailing the Defense Department’s determination, they were told that it was “placed in a … processing queue” behind about 3,178 open requests, with an estimated response time of August 2024. The memorandum was released in May after Hesai complained, showing the legal basis of its inclusion on the list was an affiliation with the Ministry of Industry and Information Technology (MIIT), the regulator overseeing China’s new energy vehicle industry, Hesai said in its latest filing.

In a notable similar case in 2021, smartphone maker Xiaomi (1810.HK) successfully appealed its inclusion on a different Defense Department list also for companies accused of having ties to the Chinese military. In that case, the Defense Department later admitted it made its determination after learning that Xiaomi founder Lei Jun had also been commended by the MIIT as an “outstanding builder of socialism with Chinese characteristics.”

While such tussles may seem like just more data points in the ongoing politicization of U.S.-China business, such matters can mean a lot to individual companies. Hesai shares rose by a sluggish 2% after it filed its latest motion this month. But they have fallen nearly 81% since its IPO, including 48.6% year to date, wiping out more than $500 million in market value this year alone.

Autonomous driving boom

Hesai’s LiDAR technology is riding a global boom with the concurrent rise in autonomous driving, which is being used in everything from robotaxis to high-end electric vehicles (EVs). Other applications include robotrucks, robo sweepers and robo grocery delivery boxes, all using lasers to help them navigate and avoid obstacles in their path. More than 92% of Hesai’s revenues came from LiDAR products last year, with 1.4% from gas detection products and most of the rest from engineering design and development services.

On the company’s first-quarter earnings call in May, CEO Li Yifan blamed misinformation supplied by competitors for the DoD findings. But investors may just see the spat as another step towards the unravelling of Hesai’s U.S. market prospects. Li estimated revenues for this year would be $350 million to $400 million, or $50 million lower than the company’s previous forecast. And while North American sales of 748 million yuan ($102.8 million) represented 40% of Hesai’s sales in 2023, Li said that sales for the region were likely to represent only 20% of total revenue in 2024.

It was not all bad news. On the call, Li projected 500,000 LiDAR unit sales this year, more than double the 222,100 in 2023. In the first quarter of this year, its advanced driver assistance systems (ADAS) for autos rose by 86.1% from 2023, to 52,462 units. Total LiDAR system sales of 59,101 units was also up 69.7% from 2023. In addition to LiDAR, Hesai sells robot gas detection systems, which made up the balance of revenues.

The company’s first-quarter net revenue of 359 million yuan was down by 16.5% year-on-year on soft demand from the robotaxi sector, according to Li, marking a sharp reversal from 37% growth in the previous quarter. Gross margin increased by 1 percentage point to 38.8% from 37.8% a year earlier, as its loss narrowed from 118.9 million yuan in the first quarter of 2023 to 106.9 million yuan in 2024. Li also unveiled recent collaborations with two new global automotive original equipment manufacturers (OEMs), giving Hesai six out of 10 of the top global automotive OEMs as customers.

“As our market share and delivery volumes continue to climb, our production cost per LiDAR will decrease, boosting our competitive edge in terms of value-to-cost and making our value proposition to partners even more attractive,” Li said on the call. “Moreover, our effective cost management endeavors and the flywheel strategy we have implemented brought us closer to achieving profitability.”

Despite broader investor pessimism on Hesai, the analyst community remains largely positive. Seven of the eight analysts surveyed by Yahoo Finance rated the company a “buy” or “strong buy” in June, and estimated it would post 40% revenue growth this year despite the slow first quarter. San Francisco-based rival Ouster (OUST.US), which sued Hesai last year over alleged patent violations, is similarly loss-making, but is more highly valued with a price-to-sales (P/S) ratio of 3.53 compared to Hesai’s 2.43. Of the eight analysts who follow Ouster surveyed by Yahoo Finance, only four call it a “buy” while four view it as a “hold.” That suggests the stronger ratings for Hesai are based partly on the belief the stock is undervalued.

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