Matters:

Changan Automobile and Huawei signed the Memorandum of Investment Cooperation. Huawei plans to set up a company (hereinafter referred to as the target company) engaged in R&D, design, production, sales and service of automotive intelligent systems and components solutions. Changan and its related parties plan to invest to acquire the equity of the target company (the proportion is not more than 40%) and carry out strategic cooperation.

Peace view:

Huawei’s smart car core technology will operate independently based on the principle of marketization to realize equity diversification.

The business scope of the target company established by Huawei includes intelligent driving solutions for automobiles, intelligent cockpit for automobiles, intelligent digital platform for automobiles, intelligent Che Yun, AR-HUD and intelligent lights, etc. Huawei will inject relevant technologies, assets and personnel dedicated to the business scope of the target company into the target company. The company operates independently based on the principle of marketization, and adopts a market-oriented management system and salary incentive framework.

In principle, the components and solutions within the business scope are provided by the target company for vehicle customers. In principle, Huawei does not engage in businesses that compete with the business scope of the target company. In the future, the target company will gradually open its equity to investors such as existing strategic partner car companies and car companies with strategic value, and become a company with diversified equity. In addition to Changan, Huawei’s existing strategic partner car companies include Cyrus, Chery, Jianghuai and BAIC. From the perspective of business scope, the target company is basically equivalent to the independent operation of Huawei BU Division.

Huawei will operate its loss-making business independently.

Judging from the operating results announced by Huawei in the first half of 2023, the revenue of BU business, as the fifth largest sector, is 1 billion yuan, accounting for about 0.3% of its total revenue, and it is the only sector that Huawei is losing money at present. According to Huawei’s annual report, by the end of 2022, the research and development team of Car BU had reached 7,000 people, with a cumulative investment of 3 billion US dollars. According to the previous plan, Huawei BU will achieve profitability in 2025, but it is difficult to achieve this goal at present. This time, Huawei will operate the smart car business independently and introduce car companies as investors, which will reduce the drag of the smart car business on Huawei’s profitability.

Huawei has not changed its mind, and it is further away from Bosch in the era of smart cars.

Previously, some car companies were in conflict with Huawei’s cooperation model and worried about losing their "soul". This time, Huawei will independently market the smart car business and realize equity diversification, which can alleviate the doubts of car companies to some extent. Huawei’s technological leadership in the field of smart cars is clear, but we don’t think that the completely self-developed intelligent technology by car companies is the best option. Since the second half of 2023, Huawei’s deeply empowered models have been increasing, such as Zhijie M7, Aouita 12, Zhijie S7 (in cooperation with Chery) and Wenjie M9 (in cooperation with Cyrus), and Huawei’s presence in the automobile industry has been increasing. The willingness of other car companies to cooperate with Huawei is stronger than before. We expect that more car companies will dispel the concern of "transferring their souls" in the future and choose to embrace Huawei’s smart car technology.

The target company has great development potential, and its revenue scale will reach 100 billion in the long run.

Relying on Huawei’s leading intelligent solutions, the target company has become an industry leader in automotive intelligent systems and component solutions based in China, facing the world and serving the industry. In the short term, the annual sales volume of supporting models of the target company set up by Huawei is expected to reach about 1 million units.

In the long run, if the passenger car market in China reaches 30 million units, the target company accounts for 25%, and the bicycle supporting price is 20,000 yuan, the corresponding annual operating income will reach 150 billion yuan, and if the net profit rate is 15%-20%, the corresponding net profit will be about 22.5 billion-30 billion yuan. The target company has the potential to grow into a domestic head supplier of smart car software and hardware solutions, and has the business potential of 100 billion yuan revenue scale and 10 billion yuan net profit scale.

Chang ‘an has a good foundation for in-depth cooperation with Huawei, and there is great room for further strong alliance.

Aouita is a high-end brand of Huawei, Contemporary Amperex Technology Co., Limited and Huawei. With the combination of avant-garde styling design and Huawei’s leading intelligent technology, the brand influence has gradually expanded. In addition, Changan Automobile has also announced that its brand will cooperate with Huawei in the field of automobile intelligence, especially in the field of smart driving.

We believe that Changan Automobile has made some mistakes in the investment in smart car technology, and we should pay close attention to the definition of vehicle products, provide flexible smart car solutions for consumers, and rapidly enhance the comprehensive competitiveness of Changan Qiyuan, Deep Blue, Aouita and other brands. In addition, Changan Automobile is the first car company to invest in the target company, and it is expected to enjoy the benefits of the future valuation improvement of the target company to the greatest extent.

The feature of Huawei’s smart car selection is that Huawei is deeply involved in product definition and channel sales, and the target company will serve the entire automobile industry.

Huawei is deeply involved in the product definition and channel marketing of smart car selection, and enjoys relevant benefits. The target company established by Huawei this time will face the whole world and serve the whole automobile industry. We believe that the ultimate success of automobile enterprises depends on the improvement of vehicle production and sales scale and brand premium, so the core competitiveness of automobile enterprises such as product definition, channel efficiency and supply chain stability are indispensable. The comprehensive ability of car companies has a great influence on the effectiveness of future cooperation.

Author of this article:Wang Dean, Wang and Hai, source: Ping An Securities, original title: "Huawei and Changan join forces to create" Bosch "in the era of smart cars"

Wang Dean S1060511010006　

Wang jihai　S1060523080