Foresight Auto — Well placed for China’s coming ADAS revolution

Foresight has leveraged on the know-how of its parent company Magna BSP, to develop algorithms for forward stereo and quadric (four) camera systems in vehicles to achieve near 100% object detection in all weather and light conditions. Following recent successful pilot trials in China, we see good prospects for FRSX to build market share in both the Advanced Driver-Assistance Systems (ADAS) and Fully Autonomous (FA) vehicle markets, for which all-weather performance is a key requirement. The company will then follow it up with Sensor fusion/V2V software in 2020. We also see Foresight’s 24.8% stake in Rail Vision (RV) as an investment with significant potential. RV’s system has a 1.5km object detection range for night/day/all-weather use using far infrared and CCD/CMOS cameras. In addition to systems sales, RV plans to generate ongoing revenues from data collected by sensors on the trains. RV’s technology has already undergone significant testing by Israel Railways and Deutsche Bahn (DB).

Our forecasts are based on ongoing milestone achievements (see Exhibit 2), penetration of the new car market by forward cameras rising from an estimated c 10% in 2016 to 74% (previously 73%) in 2025 and FRSX achieving 2025 market shares of 8% in China (up from a previous 6%) and 2% in the rest of the world. During H117, the company experienced average quarterly cash burn of $1.4m, treble the H216 level on expansion of marketing and sales activities. We expect the group to reach free cash flow break-even in H220. Helped by subsequent warrant conversions raising $5.7m, cash reserves at 30 June of $18.3m are expected to last until H219, leaving an estimated further $8-10m external funding requirement. Nevertheless, with the potential to raise up to $39m from conversions of warrants with exercise prices of NIS4.0 and lower, we believe that the group is in a good position to remain self-funding until it reaches free cash flow breakeven.

As FRSX is a pre-revenue, development-stage company, we have valued it using a DCF analysis applying a 15% WACC. With FRSX having successfully completed its proof of concept and piloted its ADAS stereo system in China, we have increased our 2025 target market share in China from 6% to 8%, which together with new product revenues (see Exhibit 13) leads to a DCF value of NIS5.15/share. Assuming further successful pilot trials in Europe and the US, this valuation may rise to NIS6.26 on an increase in our 2025 rest-of-world target market share from 2.0% to 3.0%.

FRSX is a development-stage business with potentially disruptive technology moving towards commercialisation. As such there are significant risks, uncertainties and potential. Even with the completion of the proof of concept of its key stereo software, there is no guarantee that targeted object detection rates and lower accident rates will be achieved. FRSX may struggle to gain targeted prices for its system in a highly competitive market and may experience delays or struggle to gain regulatory approval for its products. We forecast the company to require $8-10m in funding before it becomes cash flow break-even in H220. Longer than expected time to convert pilot trials to volume sales or faster than expected price erosion could increase this shortfall. Systems sales are typically denominated in US dollars, but the bulk of FRSX’s costs are in Israeli shekels. Sales in China could be significantly higher if the country achieves its plan to meet Euro NCAP standards by 2018. EBITDA margins at RV could be higher than we model if it retains market leader position and generates significant big data revenues. We see potential for sector consolidation.

Foresight was created in 2015 to develop unique ADAS algorithms, leveraging its parent company Magna BSP’s know-how and technology of its 3D multi-camera based intruder detection system. Magna BSP’s technology is deployed around the world in sensitive facilities such as airports, nuclear reactors and prisons. Its success is based on a claimed 99.9% detection rate in every terrain and climate using image and infrared (IR) camera surveillance systems. Magna BSP invested $2m into Foresight’s R&D and has transferred the rights to Foresight to use its video motion detection and object tracking know-how in the auto industry without charge. After reversing into a listed shell, FRSX listed on the Tel Aviv Stock Exchange on 5 January 2016 and completed proof of concept of its first ADAS software with a targeted near 100% object detection probability in daylight in Q117. Foresight also has a 24.8% stake in Rail Vision, an Israeli company that uses systems based on ADAS technology to prevent rail accidents and generate big data from on-train sensors. RV plans to start selling its first systems in Q318.

Foresight is looking to bring about a step change in object detection rates in vehicle forward vision systems using innovative algorithms to achieve object detection rates of near 100% in all-weather/light conditions. The timing is good. Tests by German auto association ADAC in August 2016 showed surprisingly poor results by the automatic emergency braking (AEB) systems of six major marques (including the BMW 3 series, Volvo V60 and Mercedes C Class) in avoiding collisions, particularly with smaller road users such as cyclists and children. With regulators and OEMs currently promoting ADAS with a view to safety and product differentiation, before all else detection matters now. One of the most pressing problems of OEMs developing FA vehicles is the need to build consumer confidence in self-driving cars in the face of recent high-profile accidents. Given this, we expect products offering significant safety advances to benefit from both market share gains and participation in the fast-growing market for vehicle automation.

Strategic objectives: Automotive (ADAS & FA vehicles), system-on-a-chip, global scope

Rail Vision: A complete solution, software and hardware; initially European/US focused

In Exhibit 2 we summarise the key industry and company milestones to track out to 2020.

Foresight aims to achieve a significant advance in the reliability of forward cameras with the launch of its proof of concept for a stereo ADAS system in 2017 (for a comparison of stereo and mono-camera systems and their relative advantages, see our note from September 2016, Driving the autonomous revolution).

Using software to process stereo camera images, the stereo ADAS system aims for object detection of near 100%. It also aims for zero false positives to avoid unnecessary braking and swerving. Recent tests by the German auto association ADAC appears to show significant potential for improvement in AEB object detection systems in the market. Rating performance on a scale of 0 to 100% (100% being an untouched dummy, 0% a run-over dummy), all but one of the six vehicles tested (the Audi A4) scored 25% or less in encounters with a cyclist at 4 0km/hour, and the same vehicles scored 54% or less testing for a partly obscured child at 50km/hour. Subaru’s stereo system was best in class at night and with adult pedestrians.

We summarise FRSX’s advantages/key advances as follows:

In H218, Foresight plans to launch an aftermarket driver alert system, as part of its “Eyes-On” brand, which includes a stereo vision camera system with software. The group is looking to make its first sales of the system in 2018. FRSX intends to provide Eyes-On driver alert users with lane departure warning (LDW), all obstacle detection warning (AODW). In the near future, it plans to add more functions such as traffic sign recognition (TSR) and predictive collision warning (PCW).

We expect Mobileye to be FRSX’s chief competitor, given its estimated 80% market share in ADAS products (Gartner 2017), particularly with Israeli vehicle importers. With sales to fleets, we see mainstream telematics companies as another key source of competition. Mobileye grew aftermarket sales by 38% in 2015, generating revenues of $82m from customers including Coca-Cola Hellenic, UPS, DHL, ICEE and Abbott Pharmaceuticals. It brands its aftermarket system for fleets as Advanced Driver Assistance, the features of which include LDW, FCW, PCW and CDW as well as headway monitoring warning (HMW), which alerts drivers to unsafe distances from the vehicle in front. FRSX will be offering All Obstacle Detection Warning (which encompasses vehicle, pedestrian and cyclist as well as other object detection and warnings), and LDW. In the near future, Foresight plans to add more functions such as traffic sign recognition (TSR) and predictive collision warning (PCW). Other key features offered by Mobileye are speed limit indicators, turn-signal reminders and intelligent high beam control. Similar to Foresight its product is easy to install and integrate with telematics.

A competitive advantage versus telematics operators is that the Foresight (and Mobileye) products are priced as a one-off payment rather than as ongoing charges, which are the norm with telematics companies. Helped by this, Foresight will target smaller fleets, where fewer features are required than in the large fleet segment, typically serviced by telematics firms.

Over the next few years, the aftermarket appears to have significant growth potential. MiX Telematics research from 2017 indicates that only one in 10 fleet vehicles in the UK, which is highly advanced for telematics, contain behaviour monitoring systems. Applying this to the 12.3m total commercial vehicles and trucks in fleets in the US of as of 2015 according to US Bureau of Transportation Statistics data, gives rise to a potential market in the US alone of 11.1m vehicles.

In the longer term, we expect the take-up of driver behaviour systems to migrate from aftermarket installations to telematics suppliers and OEM-installations as standard. We expect Foresight to derive early revenues streams from the aftermarket product, complementary to its core software revenue streams.

We believe that FRSX is in a good position to drive early sales into the Israeli aftermarket helped by its strong relationships with Israel’s car importers, six of whom have shareholdings in Foresight and combined imports of over 35% of the total imports market of 287,000 units. With subsidies based on the number of features offered and structured such that they are likely to cover the bulk of the purchase and installation cost of the units, importers are given a strong financial incentive to reject the OEM’s own ADAS offerings and to install aftermarket products. Helped by this we assume at its peak that Foresight’s aftermarket reaches 13% penetration of vehicles imported into Israel in 2021.

For modelling purposes, we have assumed a price per unit of $350 and that demand for FRSX’s standalone aftermarket product will peak in 2021 in Europe and the US. Nevertheless, we expect demand from markets such as China to continue to grow, reflecting the expected continued lag in ADAS implementation in its OEM market, as well as less competition relative to developed markets from telematics providers (see Exhibit 9).

ADAS is one of the fastest growing markets in the auto industry, with regulation being a key driver of active systems such as AEB which drive demand for forward camera systems. ABI Research forecasts total spending in the ADAS market to grow at a 29% CAGR over the next decade, with sales of vulnerable user (cyclists/pedestrians) detection systems, which are principally reliant on forward camera systems, forecast to achieve a 49% CAGR during this period. From 2020, the growth of FA vehicle production should further boost demand for forward camera systems. Key market drivers, therefore, are:

Europe and in particular Germany lead the way in ADAS. As early as 2014, 20% of new German cars were fitted with AEB and 21% with lane keeping assist (LKA) functions (source: Bosch). In the US, in 2016 AEB was available in 51% of all vehicle models, but standard in only 6% of new cars (vs 7% in the UK). Volvo and Tesla were the only OEMs to offer it across their entire ranges in that year (source: Jato Dynamics Ltd).

In June 2016, research company Research In China estimated global automotive forward camera shipments to have been 9.1m units in 2015. This implies global AEB penetration of c 5-7% of new vehicles based on an average 1.5-2.0 front cameras per car. Based on regional estimates, we estimate global penetration of AEBs in new cars to have been c 11% in 2016, and boosted by Chinese regulatory pressure, forecast 41% in 2020 and 77% in 2025.

China is the world’s largest vehicle producer, with sales of 28m vehicles in 2016, representing 30% of global output. Vehicle demand is being driven by low current levels of car ownership, increasing urbanisation and rapid growth in the proportion of middle-income earners, while ADAS demand should be driven by much greater focus on ADAS installation in vehicle testing by C-NCAP (see ADAS market discussion above). With very few local tier ones selling ADAS products in China, the market also has lower barriers to entry for new players than is the case in the US and Europe.

From a very cautious approach to AEB features following some high profile product recalls in the West, in coming years China looks set to become a leader in regulatory driven ADAS implementation. From 1 January 2019 the C-NCAP safety rating process for 5-star vehicles (which form 76% of new vehicle models and so are not the preserve of the premium segment) will give 26% weighting for AEB, including pedestrians and vehicles collision avoidance features, rising to 38% in 2019 and 55% in 2020. With 76% of rated new car models in China currently attracting 5-star ratings and C-NCAP guidelines showing that testing should be widespread (it is to be mandatory testing of all models with over 3k unit sales), we see the 55% weighting leading to all 5-star cars requiring AEB installations by 2020. Bearing in mind that new lower-rated mass market models are likely to have higher production runs than 5-star models, this has led us to increase our 2020 forecast for AEB installations in new vehicles in China from 20% to 40% of new cars, and from 60% to 70% in 2025 (see Exhibit 10).

After regulation, we see affordability as the key factor governing stereo camera ADAS take-up in the Chinese market. The country has a very high output of budget class cars; in 2015, 29% were priced at $12k or less. Nevertheless, many car owners are young professionals, for whom safety is a significant consideration, who have already bought entry-level cars and are looking to upgrade to larger vehicles. In 2015, 31% of cars sold were in the $22,500 or higher price category and McKinsey forecasts this to grow to 33% by 2020. Helped by falling hardware costs and rising economies of scale, we see this as the key addressable market for well-priced ADAS stereo camera systems, on a five- to 10-year view, taking into account the $26k starting price of stereo-camera-as-standard Subaru cars in the US.

We expect FRSX to position its products as:

FRSX originally intended to focus its attention on tier one suppliers to reach OEMs, but in China it has gained direct access to OEMs, having completed three pilot trials with major OEMs. The next step is typically introduction to the OEM’s favoured tier one supplier, and the supply of its software on a System on Chip (SOC).

As can be seen in Exhibit 5, a number of tier ones already have significant engagement with stereo, so there is considerable potential competition in the market from external and in-house software developers. Nevertheless, we still see them as part, if not a key part, of FRSX’s addressable market. As mentioned earlier, the key challenge for FRSX will be to demonstrate that its solutions represent a substantial step forward in safety terms, which it is working to do via extensive pilot test driving. If it does this, then tier ones already supplying OEMs with stereo rigs in their models are likely to be a receptive audience in their quest to retain these OEMs as customers.

Tier one Autoliv and OEM Subaru both claim a similar c 100m stereo camera range to FRSX, so the company does face direct competition in longer-range stereo. While it is not possible to exclude the possibility that other tier ones are aiming for similar improvements in object detection rates to those targeted by FRSX, we believe FRSX has the advantage of access to Magna BSP’s 16 years’ know-how in stereo camera object detection for better interpretation of the infrared and image (CMOS) camera output.

Rail Vision is a development-stage company working on a collision avoidance system using thermal camera imaging and military technology. The aim is to detect objects in the path of trains and apply autonomous braking systems, if necessary. In addition, it will incorporate sensors and cameras into the on-board system to collect and sell a range of data from the trains’ surroundings including weather metrics, network mapping, infrastructure conditions, etc, to generate recurring revenues.

The business was founded in 2014 by four scientists: Elen Katz, CEO, who has a robotics background with Homeland Security; Shahar Hania (VP, master’s physics/electro optics) and Dr Yuval Isbi (PhD physics/electro optics), both with backgrounds at defence contractor Elbit Systems; and Noam Taich (COO), who has extensive experience in complex stills and videos in defence. RV was incorporated in May 2016 and FRSX acquired a 13.5% stake in August 2016 for NIS2.3m ($0.6m). In August 2016 FRSX increased its stake to 32.0% by exercising warrants, but this year has been diluted back to 24.8% by not taking part in two capital issues totalling $6.0m in August and October 2017. Foresight has warrants to increase its stake to 38.7% for an outlay of $11.4m.

RV was founded to apply ADAS solutions to rail systems, and in particular the problems arising from the extreme high speeds of modern trains vs slow reaction times of humans. At 300-400km per hour, two seconds can see a train move 200m along the track before the brakes are applied. According to the company, many attempts to solve the problem with video cameras have failed because they do not work at night time or in low visibility. RV employs thermal (far infrared) and CCD (image) cameras mounted on top of a driving unit to enable the system to “see” up to 1.5km ahead (in clear line of sight) and autonomously apply brakes while alerting the driver and central controllers of a dangerous object ahead. While the CCD camera provides rich data in the daytime, the infrared camera picks up the different thermal signatures of objects, including “cold” concrete, which has a heat factor 50 times that of rails. This enables the system to operate at night time and in poor light and in a range of severe weather including fog, sand, dust and snow.

RV is currently approaching the leading European and North American railway operators with the aim of selling complete systems (hardware and integrated software) directly to them. Management believes that it has first-mover advantage in long-range detection based on its discussions with leading European rail companies. RV’s system has successfully completed six trials with Israel Railways and in late 2016 undertook a pilot trial with the Italian national rail operator, FS Italiane, for safety and network mapping services. In February 2017, RV also completed a successful demonstration of its system with Deutsche Bahn, after being selected to take part in DB’s Start-up accelerator programme.

The company plans to release its prototype for its collision avoidance system in Q218 and hopes to achieve sales of several units shortly thereafter to a major European or Israeli railway. It intends to demonstrate the following KPIs in its prototype:

To date camera and sensor technology has only been located at key points on the rail networks (eg level crossings) and under track monitoring equipment. Siemens is currently developing a system placing sensors along rail lines to sense objects in the track area and halt trains in the area, if needed. We can see considerable utility for the system in smaller EU rail networks, but believe that capital costs could act as a barrier to widespread application in larger and poorer countries.

RV expects the greatest initial demand to come from highly safety-oriented Europe and the US. Looking at the case for the EU, based on an estimated notional initial $80-100k installed unit cost, we estimate that the system would cost $6.6-8.2bn to install across the EU fleet of 82k locomotives and railcars/ multiple units. According to the European Railway Agency, significant rail accidents cost €2.5bn ($2.8bn) in 2011. In over 85% of cases, the accidents were caused by collisions with objects, not other trains. On this basis, a 25-50% reduction in these collisions would give rise to an attractive 9-21% ROI.

In the US, regulators have introduced a requirement for lines carrying heavy passenger traffic or dangerous cargos to implement positive train control (PTC) systems, originally by end 2015 but extended out to 2020 in the face of poor compliance by railways, some of which threatened to close rather than implement the investments. PTC systems require on-board computers on trains, track-side sensors and a central control radio station, which enable the system to stop trains in the face of a potential collision. Implementation requires complete mapping of the system, and considerable infrastructure investment.

We believe taking cost and distances involved, that there is not a good case for such systems to be deployed in large-scale networks in Russia, China, India and Brazil. Unguarded crossing points and signalling problems pose significant dangers of accidents and derailments, while the large scale of the networks makes trackside infrastructure less economic. On this basis, we expect initial orders for RV’s train-mounted systems from Europe to be followed reasonably swiftly by demand from Russia and Asia.

We see sales of data as being a key part of the business model. With many rail networks crossing remote areas, sensors on trains have applications including weather monitoring, track assessment and mapping of infrastructure. RV intends to actively pursue revenue streams from this area.

We have modelled Rail Vision’s revenues based on an estimate of the proportion of the existing global PRU fleet that will adopt ADAS systems. We assume that RV will complete its prototype in Q218 and commence sales of its product in the next quarter, with the sale of five units. We assume a gradual increase in the percentage of the global rail fleet to have ADAS systems installed, reaching 1% in 2020 and 5% by 2025. At present, we are not aware of other operators with similarly advanced ADAS systems for rail networks. Nevertheless, given the potential for other small players to emerge in coming years, we have adopted conservative market share assumptions starting at c 40% in 2018-20 and falling to below 20% by 2023.

We have also forecast big data revenues per ADAS-installed PRU at $1,000 per annum, reflecting the wide range of data which will potentially attract buyers, including data on the state of the rail network, surrounding terrain/crops, and weather etc. Based on the above we derive an equity valuation of the company of $79.3m, equivalent to NIS0.0.65 per diluted FRSX share.

Visibility with Rail Vision is very poor as it is unlisted and makes few financial disclosures. Nevertheless, based on our assumption of $1.1m cash at end-2016 and the addition of $6.0m in equity financing during this year ($1.7m in August and $4.3m in October), we apply estimated adjusted cash resources of c $7.1m in Exhibit 12.

Assuming that RV’s products live up to their promise, we expect further funding to come from warrants held by existing shareholders. FRSX has warrants to increase its stake further to 47% by February 2019 for an additional $11.3m.

We have undertaken a valuation of Rail Vision applying EV/revenue multiples of 4.2x. With no real direct listed competitors, we have derived this number from the average current multiples of three companies representing different facets of the Rail Vision business: Tesla (TSLA), which is involved in cutting edge driverless auto technology (trading on an EV/revenue 3.5x), BII Railway (HKG:1522) transportation technology, active in global railway traffic management systems (EV/revenue 4.7x) and Nvidia (NVDA), engaged globally in Interactive 3D graphics with numerous applications including autonomous driving (EV/revenue 4.4x). While Tesla is at a more advanced stage in its development than Rail Vision, we believe that the strong potential upside of both businesses if their autonomous driving products are successful and their focus on selling hardware rather than software provide useful parallels.

The management team at FRSX is headed by Haim Siboni, the founder and CEO of both Foresight and parent company Magna BSP. Since its foundation in 2001, Mr Siboni has led Magna BSP to successfully develop stereo camera technology to achieve 99.5% object detection accuracy and built a leading position in global facilities and border security. COO and Co-CEO Ariel Dor has more than 10 years’ experience in technology management, including telematics firm Galooli Ltd, and defence technology firm Elbit Systems Ltd. CTO Levy Zruya joined Magna BSP (where he continues as CTO) at its inception and is an engineer with 30 years’ experience in high-tech industries, including the Israel Defense Forces and Israel Aircraft Industries. He is an expert in real-time software development, image processing and sensors. CFO Eli Yoresh has over 15 years’ financial experience and an automotive background, having formerly been CEO of Tomcar Global Holdings, an international manufacturer of off-road vehicles. VP R&D Dror Elbaz brings 12 years’ experience in multidisciplinary electro-optical systems, image processing and 3D reconstructions from a global B2B environment as well as further technology experience from the Israeli Navy. VP Operations Oren Bar-on has extensive international supply procurement experience via Lumenis while VP Business Development Doron Cohadier has extensive international management experience in strategic business development.

Our forecasts and valuation are affected by the following sensitivities:

During H117 FRSX reported EBITDA losses of $4.1m (H216: $1.8m), which were boosted by $1.6m in ESOP share payments. Normalised loss before tax (stripping our ESOP payments) reached $2.2m up from $1.7m, on rising operating costs related to the intense marketing and pilot trial activity. Our forecasts for FRSX depend on it reaching a number of key milestones as shown in Exhibit 2, and discussed in Exhibit 3 and 4, above. The most important events for our model are first sales from the aftermarket product and ADAS software and timing for the POC and first pilot trials for fusion and V2V software in 2019. We forecast FRSX to become profitable at the EBITDA level and to start generating free cash flow in H220, which is later than management, which is looking for positive PBT by end 2019, reflecting our more conservative sales ramp assumptions.

Our key revenue and earnings assumptions are shown in Exhibit 13. We assume:

Foresight no longer publishes interim cash flow statements. Working from the balance sheet, adjusting for $16.3m in new equity funds during H117, arising from a private placement raising a net $10.7m and warrant conversions raising $5.6m, indicates a potential total cash burn (operating and investing cash flows) in H117 of c $2.9m. This compares with $2.3m in 2016, excluding equity investments in Rail Vision, reflecting increased product launch activity. We forecast cash burn at $6.2m this year made up of $5.8m in operating cash outflows and $0.4m in capex. We expect cash outflows to increase in 2018 and 2019 to $11.6 and $11.7m as more of the group’s products move to pilot trial stage and marketing and selling costs continue to grow.

Following $10.7m in cash raised from private placements and a further $5.6m from warrant conversions, Foresight finished H117 with $18.3m in cash reserves and no financial debt. With the addition of a further $5.7m to cash from warrant conversions since the mid-year point, we estimate that the company has sufficient funding to take it through to H219, and later if there are further warrant conversions during this period. We estimate a further funding requirement in H219 and H120 of $8-10m before the company becomes self-funding in H220. We expect warrant conversions to fund a significant proportion if not all of this potential gap, based on the $39.3m potential funds inflow from conversion of warrants with exercise prices of up to NIS4.0 per share (see Exhibit 14).

We have utilised a DCF to value Foresight based on its current pre-revenue state. Helped by an increase in our market share assumption in China and the addition of aftermarket product sales, we have increased our valuation from NIS3.45 to NIS5.15 per share or $7.30 per ADR (see Exhibit 15). The key factors driving the valuation increase are (a) the addition of new revenue streams from the anticipated launch of the aftermarket driver assistance product which has added NIS0.98 per share to the valuation; (b) Faster growth expectations for the Chinese active driver assistance market arising from new C-NCAP regulations discussed above adding NIS0.35 per share; and (c) an increase in forecast market share in 2025 in China from 6% to 8%, which adds NIS0.37 per share to the valuation. Our key assumptions are:

Moving our 2025 rest of the world (ROW) market share assumption up to 3.0% gives rise to a valuation of NIS6.26 per share. Our optimum case of 2025 market shares of 10% in China and 3.0% in the ROW gives rise to a valuation of NIS6.63 per share. The sensitivity of the valuation to 2025 market share assumptions is shown in Exhibit 16.