Hesai Group 1Q26 call takeaways: short-term confidence still needs validation, long-term growth optionality remains

Overview

This report is a summary of the key takeaways from Morgan Stanley's 1Q26 call with Hesai Group (HSAI.US). The report's core view is that first-quarter results were broadly in line with expectations, but the stock reaction was markedly negative; the analyst finds this response puzzling and potentially excessive. The company maintained its full-year delivery guidance, and revenue is expected to improve as the quarters progress; meanwhile, new businesses such as SGI, Kosmo, and robotic actuation modules provide long-term growth optionality.

Core views

The core views are: first, investors are concerned that progress in the first half of the year is slow, but the full-year delivery target of 3.0 million to 3.5 million units remains intact; second, 2Q26 delivery and revenue guidance indicate that the business is still ramping, and the decline in ASP mainly reflects a higher mix of ADAS and ATX; third, gross margin remains stable at just below 40%, and 2Q net profit is expected to be about RMB 100 million; fourth, ETX mass production and SGI ramp-up are key to restoring market confidence; fifth, although SGI is posting wider near-term losses, management expects margins to improve as scale builds, and Kosmo's recurring revenue model could support long-term margins above the company average.

Analysis framework

The report mainly analyzes management guidance from the company's 1Q26 call, delivery targets, revenue and profit forecasts, product mass-production timing, SGI business plans, and Morgan Stanley's existing valuation framework, while also using the rating and target-price history to judge whether the market reaction was excessive.

Methodology notes

• Valuation MethodologyDiscounted Cash Flow (DCF)

  Base-case DCF valuation

  The report states that the base case uses a discounted cash flow valuation, with key assumptions including an 11.2% WACC and a 3% perpetual growth rate.

• Rating SystemMorgan Stanley relative rating framework

  Overweight / Equal-weight / Underweight

  Morgan Stanley uses a relative rating system, and Overweight means the analyst expects risk-adjusted total return over the next 12 to 18 months to be above the average of the covered industry universe.

• Scenario RiskUpside and downside risk framework

  Assessing risks around market share, LiDAR adoption, ASP, and technology substitution

  The report attributes upside risk to market share gains versus global peers, faster-than-expected LiDAR adoption by legacy OEMs, and pricing power from product and manufacturing advantages; downside risks include slower LiDAR adoption, faster ASP declines, emerging substitute technologies, and technology standards drifting away from the company's current specifications.

Asset mapping & comparison

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

• HSAI.US

  Core coverage asset

  Strengths

  The company maintained its 2026 delivery target of 3.0 million to 3.5 million units, 2Q26 revenue is expected to keep improving, and the core LiDAR and ADAS businesses still have meaningful scale-up potential.

  Weaknesses

  Slower-than-expected progress in the first half has raised investor concerns, ADAS and ATX mix shifts are driving a more than 30% YoY decline in ASP, and SGI is still loss-making in the near term.

  Comparison

  The upside case depends on gaining market share relative to global peers and on traditional OEMs adopting LiDAR faster than expected.

  Risks

  Slower LiDAR adoption, faster ASP declines due to OEM cost cuts, substitute technology threats, and a shift in LiDAR technical standards that is unfavorable to the company's current specifications.

• Strategic Growth Initiatives

  Long-term growth business

  Strengths

  Revenue targets for 2026 and 2027 are RMB 100 million and RMB 500 million, respectively, and management believes the business could reach a scale comparable to the core LiDAR business by 2030.

  Weaknesses

  The 1Q26 operating loss was RMB 51 million, the full-year operating loss is expected to be about RMB 200 million, and the segment still drags on profits in the near term.

  Comparison

  Compared with the core LiDAR business, SGI is currently much smaller but has greater potential growth elasticity.

  Risks

  Ramp-up may be slower than expected, margin improvement may lag expectations, and the commercialization validation cycle may be longer.

• Kosmo

  SGI-related growth avenue

  Strengths

  Management believes the recurring revenue model could support long-term margins above the company average.

  Weaknesses

  The business is still at a stage where its commercialization and scaling capabilities need to be proven.

  Comparison

  Compared with one-time hardware sales, a recurring revenue model could improve revenue quality and long-term margins.

  Risks

  Customer adoption speed, renewal capability, scaling costs, and product competitiveness still need to be validated.

Key data

• Report Date2026-05-19The report time is May 19, 2026 07:35 PM GMT.
• 2026 delivery target3.0 million to 3.5 million unitsThe company reaffirmed its full-year delivery target after the call.
• 2Q26 delivery target650,000 unitsManagement's delivery target for 2Q26.
• 2Q26 revenue targetRMB 850 million to RMB 900 millionManagement guidance indicates continued sequential revenue improvement.
• 2Q26 net profit expectationAbout RMB 100 millionThe report expects this to be broadly in line with market consensus.
• ASP trendDown more than 30% YoYMainly reflects higher ADAS sales, especially the increasing share of ATX.
• Gross margin trendStable at just below 40%Gross margin remains stable despite the decline in ASP.
• ETX mass-production timing4Q26The 4,320-channel ETX (powered by Picasso) is scheduled to begin mass production in 4Q26.
• SGI 2026 revenue targetRMB 100 millionSGI is expected to start ramping in 2Q26.
• SGI 2027 revenue targetRMB 500 millionManagement believes SGI could potentially reach a scale comparable to the core LiDAR business by 2030.
• SGI 1Q26 operating lossRMB 51 millionThe segment is still in an investment phase in the near term.
• SGI full-year operating loss expectationAbout RMB 200 millionManagement expects margins to improve as scale expands.
• Valuation assumptionsWACC 11.2%; perpetual growth rate 3%Used for the base-case DCF valuation.
• Target price history2026-03-26: US$30The latest item in the target-price history is US$30.

Impact & implications

In terms of investment implications, the report argues that the near-term debate around HSAI centers on the pace of first-half ramp-up, ASP pressure, and whether SGI losses will be accepted by the market; however, if the company keeps its delivery target, delivers on the 2Q26 revenue and profit guidance, and gradually executes on ETX and SGI, the negative share-price reaction to first-quarter results may prove excessive. Over the medium to long term, scale-up in the core LiDAR business, ADAS penetration, Kosmo's recurring revenue, and robotic actuation modules could together support a re-rating of the company's valuation.

Risks

• Traditional OEMs adopt LiDAR more slowly than expected.
• Automakers' cost-cutting and price competition drive a faster-than-expected decline in ASP.
• Emerging substitute technologies pose a replacement threat to LiDAR.
• A shift in LiDAR technical standards works against Hesai's current product specifications.
• SGI business losses widen in the near term, and revenue and margin improvement is slower than management expects.
• Product ramp-up is not strong enough to convince investors to re-rate the company's financial and valuation upside.

What to watch

• Whether 2Q26 delivers 650,000 units and RMB 850 million to RMB 900 million of revenue.
• Whether 2Q26 net profit comes in near RMB 100 million.
• Whether the full-year delivery target of 3.0 million to 3.5 million units remains unchanged.
• The combined impact of ADAS and ATX ramp-up on ASP and gross margin.
• The progress of mass production for the 4,320-channel ETX in 4Q26.
• The pace of SGI revenue ramp-up starting in 2Q26 and whether the 2026 RMB 100 million revenue target is achieved.
• Whether Kosmo's recurring revenue model can validate long-term margins above the company average.
• Whether the market gradually repairs its view of the stock after the earlier sharp reaction.