Smart Eye: Another Massive Downplayed Contract
Redeye Research Note 2021/01/13
Today’s design win of one car model for a major Chinese OEM has an expected lifetime value of SEK 50m. The press release specifically says the OEM is one of the largest in China. In our view, there are about 4-5 potential, major Chinese OEMs that fit this description, with annual volumes of minimum well over 1 million cars, up to possibly several millions for the largest ones. However, the entire platform is only valued to SEK 350m, equal to 500 000 – 1 000 000 cars per year, by Redeye’s calculations. In our opinion, this is another (of many) conservative estimate from the company. We do not see any signs of lowered prices. We want to once again highlight that we think the consensus view is the opposite (i.e. projections are generally seen as inflated), which could allow for rather pleasant upside surprises. We welcome this cautious approach from Smart Eye.
The early expected start of production in Q1’22 positively surprised us. We believe there could be several important learnings from the market leading position and the existing 12 OEM end customers. These learnings could speed up the processes for new OEMs, and might be an important competitive edge, considering the general sense of urgency in the DMS market.
Moreover, we believe Smart Eye has an important edge in having had its local China office operational prior to the pandemic, in comparison to non-Chinese entrants. The end customer is Smart Eye’s third Chinese OEM, but the company has a strong traction in all markets. Speaking of geographies, we believe the rumors of Smart Eye’s design wins being China-exclusive are complete nonsense. Having separate strategies for different countries does not make much sense, in our view. On the contrary, car OEMs take every chance they get to become more efficient and improve their low margins. Hence the importance of the platform strategies.
The stock is up about 440% from the bottom closing price of SEK 44 on March 18; the day before the design win spree. We not only maintained our valuation of SEK 153 (raised to SEK 160 on March 20) throughout the Corona crisis, but also increased it several times during 2020, as the company’s traction grew stronger and stronger. Today, the stock is trading on levels around our base case of SEK 241.