After years of ambitious targets and bold promises, HikRobot is growing impatient with the pace of listing, announcing its plan to go public with an initial public offering (IPO) on the Shenzhen Stock Exchange's Growth Enterprise Market on March 7th.
In this article, we will examine the key points of the prospectus that HikRobot recently released and provide an in-depth analysis of its financial performance, four business challenges, and future outlook.
Background
Founded in 2016, HikRobot is a Chinese company specializing in robotics technology. The Company is a subsidiary of Hikvision, which is one of the world's largest providers of video surveillance equipment. It is worth noting that Hikvision is currently the largest shareholder in HikRobot, holding 60% of the Company's shares.
With efforts in industrial vision sensing application and hardware technology, Hikrobot provides customers with machine vision products and mobile robots. The machine vision products cover the industrial camera, 3D camera, lens, vision box, vision controller, industrial smart camera, software platform and related accessories, applicable across industrial automation sectors such as consumer electronics, semiconductors and logistics. HikRobot has launched 4 series of mobile robots: Latent Mobile Robot (LMR), Conveyer Mobile Robot (CMR), Forklift Mobile Robot (FMR) and Heavy-duty Mobile Robot (HMR). These products can be applied in e-commerce, automobile, medical care, lithium battery, photovoltaic and 3C manufacturing processes.
HikRobot's mission is to "be a global provider of mobile robots and machine vision products" This mission statement reflects the company's focus on providing value to its customers by leveraging its expertise in robotics to develop innovative solutions.
Details of the Prospectus
HikRobot plans to issue up to 240 million shares on the Growth Enterprise Market, and the expected initial public offering price per share remains unknown. The Company aims to raise CNY 60 billion through the IPO and use the funds raised for several purposes, including:
R&D activities: HikRobot plans to invest in research and development to enhance its existing AI software, mobile robots and machine vision products and develop new ones, meeting the needs of its customers and staying ahead of its competitors.
Production Capacity: HikRobot plans to use the capital to construct its manufacturing base in Tonglu and product industrialization base construction project to increase its production capacity and efficiency to meet the growing demand for its products.
Improve Cash Flow: HikRobot may use some funds to improve its worrying cash flow status.
HikRobot's financial performance has been impressive over the past few years. In the first 9 months of 2022, the Company generated revenue of CNY 27.86 billion. In 2021, the Company generated revenue of CNY 27.4 billion, an increase of 82.18% compared to the previous year.
The Company's net profit also increased significantly, from CNY 0.65 billion in 2020 to CNY 4.82 billion in 2021, representing a growth of 641.54%. After the completion of the move, the Company's shareholding structure will not change. It will maintain its controlling stake in Hikrobot.
Four Business Challenges Faced by HikRobot
Despite the excellent financial performance and ambitious company vision, HikRobot faces the following 4 business challenges:
(1) "Boring" Product Portfolio
HikRobot's main business revenue mainly comes from machine vision and mobile robot businesses. For each reporting period, the two types of business accounted for 98.07%, 96.36%, 92.93% and 89.05% of the primary business revenue, and the proportion has been increasing year by year. The following section only discusses HikRobot's mobile robot business sector.
HikRobot has invested heavily in building its R&D team. During the reporting period, the R&D expenses of HikRobot were CNY 321 million, CNY 383 million, CNY 450 million and CNY 479 million, accounting for 34.11%, 25.09%, 16.27% and 17.04% of the total operating revenue, respectively. Compared with listed companies in the same industry, the Company's overall R&D expense ratio is significantly higher. Additionally, HikRobot is staffed by 1496 researchers and engineers, accounting for 43.87% of the Company's workforce. Under such circumstances, the market should expect the most innovative products from HikRobot that address the evolving needs of its customers.
However, its mobile robots' product portfolio is quite "boring," and 100% of its products could be considered as warehouse robots. The international warehouse robot market was largely pioneered by companies such as Kiva Systems, ABB Robotics and Foxconn Technology.
In addition, warehouse robots have relatively low-profit margins. "Robots, particularly those in warehouses, have made advances in recent years, though challenges remain to making them into profitable businesses." said Robert Playter, chief executive of Boston Dynamics. In addition to these established players, a range of emerging domestic companies are looking to disrupt the warehouse robot market. Many also invest heavily in research and development to improve their products and services.
Besides the fierce competition, one of the main technical limitations that HikRobot has faced is the integration of its robots with existing manufacturing systems. Many manufacturing plants use legacy equipment and processes incompatible with modern robotics, making it difficult for HikRobot to penetrate these markets.
Lastly, the product quality of HikRobot may not be as good as it claimed, even though the company holds several certifications. One notable example is its experience with the HRSS-5P robot, designed for the semiconductor industry. The robot suffered from technical problems, which led to several customers returning their units. Another example is the HRSS-CO robot, designed for collaborative use with human workers. The robot faced criticism from some customers who felt it was too expensive and needed to be more flexible.
(2) Low Operating Cash Flow Ratio
HikRobot has a low operating cash flow ratio. Net cash flows from operating activities were negative for all periods except 2020. For the first nine months of 2019, 2021 and 2022, the Company's net cash flows from operating activities were -$138 million, -$325 million and -$398 million, respectively, which indicates that the Company is unable to generate enough cash from its operations to cover its expenses.
Low operating cash flow can significantly impact a company's financial health and long-term viability for businesses of all sizes and industries. The most immediate problem that poor operating cash flow can cause is difficulty paying bills on time. This can lead to late fees, interest charges, and damage to the company's credit rating, making it more difficult to obtain financing in the future.
Another problem that poor operating cash flow can cause is a reduced ability to invest in growth opportunities. When a company struggles to generate enough cash from its operations to cover its day-to-day expenses, it may not have the financial resources to invest in new products, marketing campaigns, or other growth initiatives. This can limit the Company's ability to expand its customer base, increase revenue, and ultimately, grow the business.
Additionally, poor operating cash flow can lead to increased reliance on debt financing. Suppose a company is unable to generate enough cash from its operations to cover its expenses and invest in growth opportunities. In that case, it may rely on debt financing to stay afloat. This can lead to a vicious cycle of borrowing and interest payments that can be difficult to break. Moreover, suppose a company's credit rating is damaged due to late payments or other financial difficulties. In that case, obtaining favorable terms on loans or lines of credit may be more difficult, further exacerbating the problem.
The robotics industry is highly competitive, with many players vying for market share. As a result, there is an ongoing price war among companies as they seek to offer the most competitive prices to their customers. The gross profit margin of the machine vision business remains almost constant during the reporting period. However, the gross profit margin of the mobile robot business was 49.45%, 42.89%, 38.61% and 34.63%, respectively, which showed a gradual downward trend during the reporting period. It is easy to expect that the ongoing price war can further damage HikRobot's profitability if competitors can offer similar products at lower prices. By then, HikRobot may struggle to maintain its already worrisome cash flow.
(3) Growing Political Tensions and the Homogeneous Customer Base
Another challenge of HikRobot is its heavy reliance on the Chinese market. To be more specific, HikRobot's customer base is not diverse enough. During the reporting period, the company's primary business revenue mainly came from the domestic market, accounting for 90.14%, 92.51%, 90.24% and 89.48% for each period, respectively, which makes the company vulnerable to any economic or political instability in China. According to the Major Contracts (contracts amounting to CNY 20 million) section of the prospectus, which includes both completed and ongoing contracts of HikRobot, at least 17 out of 18 buyers are from China. This section indicates no progress was made in the international market. The overly homogeneous customer base could impact the company's growth and profitability in the future.
On the other hand, the ongoing political tensions between the United States and China have further impacted HikRobot's long-term growth prospects, particularly if the tensions continue to escalate. The US government has placed restrictions on the sale of technology and software to Chinese companies, including HikRobot, citing concerns about national security and intellectual property theft. These restrictions have limited HikRobot's access to key technologies and markets. For example, the Company has faced challenges accessing advanced computing technologies, such as high-performance computing systems and graphics processing units (GPUs), which are critical for AI and machine learning applications. Such restriction would also prevent HikRobot from tapping into other international markets as well, considering the political influence of the US.
(4) The Nature of the Robotics Industry
The last challenge stems from the rapidly evolving nature of the robotics industry, which is constantly being disrupted by new and innovative technologies. HikRobot will need to remain agile and adaptable to keep up with these changes and continue developing products that meet the changing needs of customers and industries. Looking to the future, several trends could shape the robotics industry and impact HikRobot's prospects. One of the most significant trends is the increasing integration of robotics with other technologies like artificial intelligence, machine learning, and the Internet of Things. As these technologies evolve and mature, companies that fail to develop new applications and use cases for robotics may lose their market share.
To navigate these challenges and capitalize on emerging opportunities, HikRobot must expand its customer base, focus on innovation, enhance brand awareness, and build strong relationships with customers and stakeholders.
Looking Forward
Overall, HikRobot is a company that has made significant contributions to the field of robotics and AI, particularly in machine vision technology. The Company's expertise and products have helped it to establish a strong market position in China.
However, like any investment, there are risks involved with investing in HikRobot's IPO. The robotics industry is highly competitive, and there is no guarantee that HikRobot will be able to compete successfully with other companies in the future, especially considering the business risks mentioned above may pose significant challenges to the company's long-term growth prospects. HikRobot's vision is to become a leading global provider of intelligent robotics solutions and stay ahead of the curve, which will require careful navigation and some strategic decision changes.
The COVID-19 pandemic has accelerated the adoption of robotics in various industries as businesses seek to reduce human contact and increase efficiency. Looking ahead, only a company that is well-equipped to capitalize on the growing demand for robotics and anticipate emerging trends and challenges can position itself as a leader.