1Q results beat; expecting SGI revenue to ramp up at a rapid pace

1Q resultsbeat;expecting SGI revenue toramp up at a rapid pace Target PriceUS$29.30Up/Downside46.3%Current PriceUS$20.03 Hesai Group (Hesai) released (19May)1Q26financial results:total revenuereachedRMB680.6mn, up30% YoY,inline with our forecast but 2% ahead ofBloomberg consensus. Non-GAAPNPcame in at RMB47.7mn, ahead of bothour forecast and Bloomberg consensus (RMB38mn/RMB13mn), supported bymoreoptimized-than-expected operating expense control.Managementexpects strategic growth initiatives (SGI), which include new AI algorithmintegrated spatial intelligence device Kosmo and robotic actuation, to generateRMB100mn revenue in 2026E, contribute RMB500mn revenue in 2027E, andgrow to a scale that is comparable to core LiDARbusinesswithin 5 years.Management expects part of Kosmo to evolve toward a recurring ARR modelthrough software and platform services, which should improveprofitabilityas theinstalled base expands.We maintainboth2026E revenue forecast of RMB4.4bnandtarget price of US$29.3 based on7.5x 2026E P/Sunchanged.We arepositive that the increase in adoption of L3 vehicles, as well as ramp up inrevenue from new products should support avaluationrerating. Maintain BUY. China Software & IT Services Saiyi HE, CFA(852) 3916 1739hesaiyi@cmbi.com.hk Ye TAO, CFA(852) 3850 5226franktao@cmbi.com.hk Wentao LU, CFAluwentao@cmbi.com.hk Shuyin GUO(852) 39163716guoshuyin@cmbi.com.hk Our 2026E LiDAR shipment forecast staysunchanged.Total LiDARshipmentsfor Hesaireached471.7k in1Q26, up141% YoY and9% aboveconsensus. Among these, ADAS LiDAR shipments were353.4k (+142%YoY), while robotics LiDAR shipments were118.3k (+138% YoY). ASPdeclined to RMB1.4k in1Q26(4Q25: RMB1.6k)which we attribute to therevenue mix shift toward lower-ASP ATX and JT series products.For2026E,our total LiDAR shipment forecast of 3.25mn units remainsunchanged,whichiscomposedof2.75mnunitsofADASLiDARand500kunitsofroboticsLiDAR. Stock Data Sustained cost discipline while investing for long-term growthopportunity.GPM reached 39.1% in 1Q26(consensus: 39.9%), down2.6ppts YoY which we attributed tochangein product revenue mix andfierce industry competition.Operating expenses (S&M, G&A, and R&D)increased by4% YoY in1Q26. As a percentage of revenue, S&M/G&A/R&Dexpenses were6.1/7.8/30.1% in1Q26,improvedfrom9.6/10.3/34.9% in1Q25, and operating marginimprovedto-1.3% in1Q26(1Q25:-6.4%).Management highlighted that it has maintained a disciplined approach whilecontinuing to invest strategicallyforlong-term growth. Excluding investmentin SGI, operating expenses for LiDAR business declined YoY aided byoperating efficiency gains and cost discipline. TP of US$29.3based on7.5x 2026E P/S.Our target price of US$29.3 isbased on 7.5x 2026E P/S (unchanged).Key catalysts include:1) faster-than-expected adoption of L3 vehicles, which could increase LiDAR unitsper vehicle and drive higher dollar content per car;2) ramp-up in SGIrevenue and increasing contribution from international ADAS expansion. Source: FactSet Risks 1)Potential product defects, and other routes of technology proven to be more effectivethan that of LiDAR (such as camera-based system), which may both lead toreducedmarket adoption of LiDAR solutions;2)Lower-than-expected pace of penetration of LiDAR/ADAS;3)Rising competition from other companies developing LiDAR products, as well asapotential price war in LiDAR industry weighingontheblended ASP of HSAI’sproducts;4)Higher-than-expected operating expenses leading to slower-than-expected marginexpansion. Disclosures& Disclaimers Analyst CertificationThe research analyst who is primary responsible for the content of this research report, in whole or in part, certifies thatwith respect to the securities or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflecthis or her personal views about the subject securities or issuer; and (2)no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report.Besides, the analyst confirmsthat neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to thedate of issue of this report; (2) willdeal in or trade in the stock(s) covered in this research report 3 business days after the date of issue of this report; (3)serve as an officer of any of the HongKong listed companies covered in this report; and (4)have any financial interests in the Hong Kong listed companies covered in this report. CMBIGM RatingsBUY : Stock with potential return of over 15% over next 12 monthsHOLD: Stock with potential return of +15% to-10% over next 12 monthsSELL: Stock with potential loss of over 10% over next 12 monthsNOT RATED: Stock is not rated byCMBIGM :Industry expected to outperform the relevant broad market benchmark