Black Sesame test drives into Hong Kong, coasting on new rules for high-tech hot-shots

The maker of autonomous driving chips has filed for a Hong Kong IPO, hoping to take advantage of new, more lenient requirements for high-growth companies

Key takeaways:

• Black Sesame has applied to list in Hong Kong, becoming the first applicant under newly relaxed rules allowing IPOs for young companies with little or no revenue
• The company was founded in 2016 but only started generating revenue in 2020, which has grown rapidly since then but still totaled just $23 million last year

By Warren Yang

High-tech hot-shot Black Sesame International Holding is testing the road into Hong Kong’s stock market, betting on investors to fuel its drive into the chips expected to power a new generation of self-driving cars of the future.

The company filed its preliminary prospectus for a Hong Kong IPO last week. But what really sets this listing apart is its status as the first in Hong Kong under newly relaxed IPO rules for up-and-coming tech startups hungry for capital to fund their growth.

The Hong Kong Stock exchange operator added a new Chapter 18C to its listing rules earlier this year, easing requirements for “specialist technology companies,” in its latest effort to lure listings from sectors that lack profits but have good growth potential. The important backdrop for this step is strained relations between Washington and Beijing, which may be leading Chinese tech startups to avoid listing in the U.S., currently their preferred offshore destination for IPOs.

A key feature of the new rule is its allowance for “pre-commercial” companies to apply for IPOs even if they have no revenue, as long as their market capitalization is HK$10 billion ($1.3 billion) or larger. The threshold for “commercial” companies, ones with at least HK$250 million in revenue for their most recent fiscal year, is lower at HK$6 billion.

The new rule applies to “high growth potential” businesses that offer innovative technologies like cloud-based services and artificial intelligence (AI), though the Hong Kong bourse doesn’t get too specific about how it quantifies these criteria.

The exchange made a similar move in 2018, also aimed at attracting companies with cutting-edge technologies and big growth potential, when it began allowing early-stage drug startups to list even if they had little or no revenue and were losing money. Before that, most companies had to show strong revenue and sustained profits to list on Hong Kong’s main board.

Founded in 2016, Black Sesame generated 165.4 million yuan ($22.9 million) in revenue last year, which falls short of the new minimum for commercial IPO applicants. But in its preliminary prospectus, it says its technologies meet the definition of specialist products under Chapter 18C.

While that may be true, the company would need to sell its shares at a hefty price-to-sales (P/S) ratio of more than 50 to meet the new HK$10 billion market capitalization requirement. That’s quite ambitious for any company from any sector.

Such a valuation may be justified by the big growth potential for the market for self-driving cars and their components. Reflecting that, the company’s annual revenue more than tripled in the two years to 2022. Considering that Black Sesame only started generating revenue in 2020, such rapid growth shouldn’t come as a surprise. But if the market keeps expanding, and it maintains or improves its competitiveness against its rivals, its revenue could continue to zoom.

Black Sesame derives most of its revenue from systems-on-chips (SoCs) — integrated circuits that combine key electronic components like CPUs and memory — for self-driving cars. It is the third largest provider of automative-grade high-computing power SoCs globally in terms of shipments, according to its preliminary prospectus, citing third-party data. By the end of last year, the company had nearly 90 customers, including a mix of automotive original equipment makers (OEMs) and their suppliers.

The company’s backers include big Chinese tech names like Tencent and Xiaomi.

Distant dream

All this may sound promising — but not so fast. In reality, the whole idea of completely removing humans from the car-driving process remains more a distant dream than something just around the corner. Barring any major breakthroughs, prevalent expectation is that truly self-driving vehicles may still be years or decades away.

The list of obstacles to be overcome is long due to the complexity of driving, especially in less predictable urban settings. In a high-profile admission of such difficulties, Ford and Volkswagen last year called it quits on Argo AI, an autonomous-driving technology startup they backed. Promising autonomous truck startup TuSimple (TSP.US) made a similar shift this year, aiming for more modest driver-assisted technologies over fully autonomous ones.  

Sales projections for self-driving car chips, in fact, are also a bit underwhelming. The global market for automative-grade SoCs is expected to grow at a compound annual rate (CAGR) of 27% from 2022 to 2028, slower than the 31% for 2019-2022, according to market data in the prospectus. Growth for the Chinese market will slow to 29% between 2022 and 2028, from 40% for 2019 to 2022. These are hardly lightning-speed figures for what’s supposed to be one of the hottest technologies around. And there’s always the possibility for more competition.

The reality that’s putting the brakes on self-driving technology may explain why shares of related companies aren’t doing so well. Shares of New York-listed Hesai Group (HSAI.US), a smart car sensor maker, have dropped more than 40% since its IPO early this year and currently trade at a P/S ratio of just about 7.

Like most of its peers, Black Sesame is deeply in the red. Its net losses have piled up each year as it spends heavily on product development. Last year alone, the company spent 4.6 times its revenue on R&D. 

The company doesn’t manufacture chips on its own, instead outsourcing production to global giant TSMC, which helps lower costs. Still, its gross profit margin was less than 30% last year, or less than half the 65% for Nvidia Corp., a much larger chip designer.

Such a wide gap between its revenue and costs means it’s safe to bet that Black Sesame won’t become profitable anytime soon.

There are also political risks as the U.S. has tried to block TSMC from doing business with some Chinese chip developers, most notably telecoms giant Huawei. In its prospectus, Black Sesame acknowledged the danger of relying on the semiconductor manufacturer, saying that business relationship could be “adversely affected by international trade policies, geopolitics and trade protection measures, including imposition of trade restrictions and sanctions.”

Black Sesame should get some kudos for being first out of the gate under Hong Kong’s new listing rule, and could win some extra investor interest for its novelty factor. But the many obstacles still standing in its way could dampen demand, if and when the listing finally makes it to market.

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