BofA maintains Buy on Hesai with target price of HKD211; new business OPEX weighs on near-term earnings but contribution is set to emerge

Overview

This report is BofA's earnings review of Hesai. The core conclusion is that the company maintained YoY revenue growth in 1Q26, with the core LiDAR business remaining profitable, but upfront investment in the strategic growth initiative (SGI) pressured near-term core earnings. The report also emphasizes that new business revenue is expected to start contributing from 2Q26, while the upgraded Mercedes-Benz L3 partnership and multiple OEM order wins strengthen visibility for the company's medium- to long-term growth.

Core views

BofA maintains its Buy rating on Hesai and believes the key share price drivers are SGI progress, LiDAR shipment growth, and higher ADAS penetration. Although SGI recorded an RMB50mn loss in 1Q26 with no revenue yet, and related FY26 OPEX may exceed RMB200mn, management expects SGI revenue to reach RMB100mn/RMB500mn in 2026/2027 respectively. The report believes initial SGI ASP and margins may not be representative, but as products mature and scale rises, future margins could exceed those of the LiDAR business.

Analysis framework

The report uses earnings review, segment profit breakdown, tracking of orders and customer progress, fine-tuning of earnings forecasts, and cross-validation using DCF and EV/Sales valuation. The analysis focuses on 1Q26 revenue, gross margin, operating profit, net profit, SGI expense investment, 2Q26 revenue guidance, FY26 shipment targets, and changes in customer orders.

Methodology notes

• Valuation methodDCF

  Discounted cash flow valuation

  BofA derives a fair value of USD27 using DCF, with key assumptions including medium-term sales growth, profitability, free cash flow improvement, a 3.5% perpetual FCF growth rate, and 11.8% WACC.

• Valuation methodEV/Sales

  Enterprise value-to-sales multiple

  BofA assigns Hesai a 6x EV/Sales multiple on 2026E sales, about 30% above the roughly 4.6x level for LiDAR and auto-tech peers, justified by the company's industry-leading position, stronger profitability and cash flow performance, and better balance sheet management.

• Research frameworkBofA iQmethod

  Framework for business performance, earnings quality, and validation indicators

  The report appendix explains that BofA's iQmethod uses standardized metrics to assess business performance, earnings quality, and valuation validation, including ROCE, ROE, operating margin, earnings growth, free cash flow, EV/Sales, and EV/EBITDA.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Hesai / 2525.HK / HSAI.US

  Core covered name in the report

  Strengths

  Industry-leading LiDAR position, expansion of ADAS orders, upgraded Mercedes-Benz L3 partnership, maintained FY26 shipment target, and SGI new businesses with potential for incremental revenue.

  Weaknesses

  SGI currently has no revenue and high OPEX, dragging 1Q26 core earnings, while gross margin declined both YoY and QoQ.

  Comparison

  BofA assigns a target EV/Sales multiple of 6x, above the roughly 4.6x for LiDAR and auto-tech peers, due to better market share, order wins, profitability, and cash flow performance.

  Risks

  Customer concentration, ASP decline, gross margin pressure, intensifying LiDAR competition, and slower EV and intelligent vehicle growth.

• LiDAR business

  Core earnings and shipment foundation

  Strengths

  Reported RMB42mn in operating profit in 1Q26, maintained FY26 shipment target of 3-3.5mn units, and is supported by ADAS penetration and the evolution of L3 regulations.

  Weaknesses

  Ongoing ASP decline and competition could erode gross margin.

  Comparison

  Compared with the early-stage SGI business, the core LiDAR business already contributes revenue and profit.

  Risks

  Intense industry competition, volatility in customer project timing, and price declines outpacing cost reductions.

• SGI new business

  Future incremental growth driver

  Strengths

  Management guides 2026/2027 revenue at RMB100mn/RMB500mn and believes margins could eventually exceed those of the LiDAR business once mature.

  Weaknesses

  Recorded an RMB50mn loss in 1Q26 with no revenue contribution, and FY26 OPEX may exceed RMB200mn.

  Comparison

  A short-term drag on profits but viewed as a key driver of future share price performance.

  Risks

  Slower-than-expected product maturity and ramp-up, with unstable early-stage ASP and gross margin.

Key data

• 1Q26 revenueRMB681mnUp 30% YoY and down 32% QoQ.
• 1Q26 gross margin39.1%Down 2.6ppt YoY and 1.9ppt QoQ.
• 1Q26 operating lossRMB9mnNarrowed from an RMB33mn loss in 1Q25.
• 1Q26 net profitRMB18mnMainly supported by non-operating gains, above BofA's prior forecast of RMB9mn.
• LiDAR segment operating profitRMB42mnThe company began providing more detailed disclosure from this quarter.
• SGI segment lossRMB50mnReflects OPEX only, with current revenue contribution at zero.
• SGI revenue guidanceRMB100mn in 2026; RMB500mn in 2027Revenue contribution is expected to begin in 2Q26.
• FY26 SGI OPEXMay exceed RMB200mnRMB50mn was already incurred in 1Q26.
• 2Q26 revenue guidanceRMB850-900mnAbout 20%-27% YoY growth.
• FY26 LiDAR shipment target3-3.5mn unitsManagement maintained the target unchanged.
• 2026E revenue growth forecast38%The main body of the report notes that BofA expects 2026E revenue growth of 38%.

Impact & implications

In the short term, SGI's upfront investment will depress core earnings and lead to a cut in 2027E earnings forecasts; in the medium term, if SGI ramps up as guided by management, together with the upgraded Mercedes-Benz L3 partnership, Xiaomi overseas models, Japanese OEMs, and orders from the Geely ecosystem, it could lift the revenue growth trajectory and improve the market's view of Hesai's business ceiling. On valuation, BofA maintains an EV/Sales multiple above peers, reflecting its recognition of the company's industry position and earnings quality.

Risks

• Intensifying competition in the LiDAR industry.
• ASP declines faster than expected, eroding gross margin.
• Customer concentration risk.
• Slowing EV and intelligent vehicle growth.
• SGI new business revenue materializes more slowly than management guidance.
• Higher-than-expected SGI OPEX leads to further downward revisions to earnings forecasts.
• Support to net profit from non-operating gains is not sustainable.

What to watch

• Whether 2Q26 revenue reaches the guided range of RMB850-900mn.
• Whether SGI begins contributing revenue from 2Q26 and the pace of achieving the RMB100mn target for 2026.
• Whether FY26 SGI OPEX is kept within a range acceptable to the market.
• The covered models, production ramp timeline, and LiDAR shipment realization for the Mercedes-Benz L3 partnership.
• SOP progress for orders from Xiaomi overseas models, GAC Toyota bZ3X, and brands under Geely.
• Whether the FY26 LiDAR shipment target of 3-3.5mn units is maintained and achieved.
• Whether gross margin can remain stable amid ASP declines.