Zongmu joins autonomous driving queue at Hong Kong IPO tollgate

The maker of autonomous parking solutions is unlikely to impress investors with its big losses and anemic 6% revenue growth last year

Key Takeaways:

• Zongmu Technology has filed to list in Hong Kong, though its revenue growth remains modest with substantial losses as it invests heavily in R&D
• The autonomous driving technology company could attract investor interest if it can accelerate commercialization of its ADAS driving solutions

By Hugh Chen

Autonomous driving has cruised back into the spotlight over the past year, as technologies that were once hyped – and then subsequently forgotten – finally start to mature. Global visionaries like Tesla founder Elon Musk have made bold claims and set out ambitious timelines for rolling out fully autonomous cars. In China, the inclusion of autonomous driving technology has become a strong selling point for a new generation of electric vehicles (EVs) as they compete for attention in the crowded market.

Zongmu Technology (Shanghai) Co. hopes such renewed optimism will draw investors to its application to list on the Hong Kong Stock Exchange filed late last month. In a revised filing last week, the company said it had added CLSA to its original underwriting pair of Huatai International and BNP Paribas, giving it a relatively solid trio of tier-two backers for the listing attempt, its third to date.

Zongmu listed as early as 2017 on the NEEQ, a thinly traded over-the-counter market in China for small and medium-sized enterprises. But it terminated that listing within a year. In 2022 it applied to list on the Nasdaq-style STAR Market in Shanghai but ultimately withdrew that application voluntarily.

Founded by Tang Rui in 2013, Zongmu primarily provides autonomous driving technology solutions, with a strong focus on software. This sets the company apart from a wide range of others in the industry, such as Pony.ai, which is aiming to build its own self-driving fleet, and Hesai (HSAI.US), which focuses on autonomous vehicle sensors.

Zongmu has soaked up 2.2 billion yuan ($304 million) in nine funding rounds since its founding, according to its prospectus. One of its most prominent backers is Xiaomi (1810.HK), which is a strong supporter of autonomous driving technology and just last month launched its own new energy vehicle (NEV). Zongmu’s latest funding round took place in March 2022, when it raised nearly 1 billion yuan. That valued it at over 9 billion yuan, putting it into the “unicorn” club that applies to startups valued at $1 billion or more.

Whether it can retain such a high valuation if and when it completes its IPO is another matter, as stock market investors have been far less generous in valuing new tech listings lately. A case in point is Hesai, which was valued at around $2.5 billion at the time of its IPO in February last year, but whose post-listing valuation has sunk since then to about $550 million.

Zongmu bills itself as a purveyor of full-stack autonomous driving technologies, but its primary focus has been on autonomous parking, a specialized autonomous driving application typically used in tightly controlled, enclosed environments like parking lots or garages.

In the Chinese market for autonomous parking solutions (APS) for passenger vehicles, Zongmu ranked fifth among suppliers in terms of sales in 2022. According to third-party research cited in the company’s listing document, the overall market for APS in China reached 8.1 billion yuan in 2022, with Zongmu capturing 4.9% of that.

The company also emphasizes its leading position among domestic peers in a subsegment of the APS market, which it refers to as automatic parking assist (APA), with 5.6% of that market.

Unimpressive growth

Within the overall advanced driver assistance systems (ADAS) market, which includes both parking and driving solutions, Zongmu holds a modest 1% market share. The ADAS market in China has experienced significant growth, increasing from 9.3 billion yuan in 2018 to 41.3 billion yuan in 2022.

Zongmu generated 400 million yuan from the sale of parking solutions in 2022, accounting for more than 85% of its 469.5 million yuan in total revenue for the year. Its driving solutions business contributed the remaining 70 million yuan, suggesting that part of the business is still in the very early development stages. Still, Zongmu’s allocation of a significant portion of its R&D expenses to driving solutions appears to show it has big hopes for that part of its business as a future growth engine.

Zongmu’s modest revenue growth of just 6% to 498.4 million yuan last year raises questions about its ability to effectively commercialize its technologies and scale its business, especially considering its more than decade-long history in the industry.

While its slow growth may raise some investor concerns, even more worrisome is the company’s steep losses due to its heavy R&D spending. Zongmu reported cumulative losses of more than 1.5 billion yuan in the three years through 2023, including a 564 million yuan loss last year. Over the same three-year period, its R&D spending totaled nearly 1 billion yuan.

Another significant risk that investors should be aware of is Zongmu’s heavy dependence on a few key clients. In 2021 its revenue from its top five customers accounted for 72.5% of its total, and the figure had grown to 93% by last year. Its largest customer’s share of the company’s revenue grew from 28.5% to 43.8% over that period.

While many companies face this kind of reliance on a handful of clients, such risk could be especially noteworthy in China’s rapidly changing NEV sector, where today’s superstar could be driven out of business tomorrow.

Despite such risks, Zongmu does have its strengths. One is its close working relationship with its business partners, which allows it to constantly improve its offerings. The company said it had business tie-ups with all of China’s top-10 original equipment manufacturers (OEMs) in 2022, which accounted for 72.1% of the country’s total passenger vehicle sales.

Whether investors will buy into Zongmu’s IPO could depend on its ability to accelerate its pace of commercialization, particularly for its ADAS driving solutions, especially since the company says it has no hopes of becoming profitable anytime soon.

A similar principle may also apply to a growing string of other autonomous driving firms in the process of trying to list in Hong Kong, including Horizon Robotics and Black Sesame. How these companies fare will show if investors see accelerating growth for this group in the near future, or if they believe their technology is still too early-stage to generate much excitement.

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