In the expanding landscape of the economy, 2024 promises to be a remarkable year, particularly for the burgeoning low-altitude economyThis sector has risen to prominence, with its vibrancy evident in initiatives across more than ten provinces in China establishing funds focused on low-altitude industry, cumulatively exceeding 100 billion yuanThe recent establishment of the Low Altitude Economic Development Division in China underscores this growing priority.

Some recent milestones, like the successful test flight of a 2-ton eVTOL in Qingdao and the breathtaking drones' firework display on New Year's Eve 2024, signal a revolutionary shiftThese developments collectively suggest one critical message: the low-altitude economy is poised for remarkable growth and opportunity.

But how significant is the market potential within this domain? Reports and analyses indicate that the low-altitude economy is in its nascent stage, with the market size valued at approximately 500 billion yuan in 2023. By 2025, forecasts project this figure could swell to 1.5 trillion yuan, and further projections estimate that by 2035, it could reach an imposing 3.5 trillion yuanThis is a multi-trillion dollar industry that rivals sectors like artificial intelligence and renewable energy.

Within this burgeoning sector, which companies are leading the charge? Generally speaking, a company’s “moat” determines its substitutability; the deeper the moat, the higher the barriers to entry, translating into higher profitability and gross marginsCompanies like Guizhou Maotai and Pian Zai Huang exemplify firms with significant barriers to entry and, accordingly, high gross marginsIn examining key players in the low-altitude economy, we find firms like Wan Feng Ao Wei, Wo Long Electric Drive, Zong Shen Power, CITIC Haizhi, and Xin Dong Lian Ke rising prominently in discussions.

Of these, Xin Dong Lian Ke stands out due to its impressive gross margins, typically surpassing 80% over the past five years, setting it apart from others in the low-altitude industry chain

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This begs the question: what exactly does Xin Dong Lian Ke specialize in?

The company is primarily focused on the research and development of high-end MEMS inertial sensors, with key products including gyroscopes and accelerometersIn the first half of 2024, these products constituted over 96% of the company’s total revenueThe combination of accelerometers and gyroscopes forms an indispensable component of aircraft navigation systems known as the Inertial Measurement Unit (IMU), which is a critical element of high-end MEMS technology.

The IMU is crucial as it provides real-time data about the aircraft's posture, orientation, velocity, and locationThis information is essential for accurate operation and control of the aircraftFurthermore, market data suggests that IMU modules represent about 8% of the costs associated with eVTOLs, revealing a vast and significant market potential.

Moreover, the high level of customization in high-end MEMS inertial sensors means that only a few globally-renowned companies, such as Honeywell, ADI, Sensonor, Silicon Sensing, Colibrys, and Xin Dong Lian Ke, have successfully commercialized these products.

As the only domestic player that can effectively compete with international giants, what advantages does Xin Dong Lian Ke possess? First and foremost, the company boasts international-leading product performanceTheir commitment to research and development is exceptional, with R&D expenditure consistently accounting for over 20% of their overall budget, and reaching 30% in the first three quarters of 2024. This sustained investment enables them to maintain product categories, technological paths, and performance levels that closely match those of global leaders like Honeywell and ADI, establishing a solid foundation for domestic substitution.

Specifically, Xin Dong Lian Ke's 35 series accelerometers and 33 series gyroscopes surpass several core performance indicators compared to products from international competitors

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Remarkably, the cost efficiency of Xin Dong Lian Ke's high-end gyroscopes is notable, priced at around $1,100, whereas comparable offerings from Silicon Sensing reach $1,384. Clearly, Xin Dong Lian Ke presents a more compelling value proposition.

Their clientele further cements their market position, with many customers relying exclusively on Xin Dong Lian Ke's productsAnalysis of historical data reveals that many of their downstream clients had previously not purchased similar products from other suppliers prior to integrating Xin Dong Lian Ke's offeringsTypically, clients require a rigorous 3-5 year testing period before fully committing, leading to high client retention and switching costs.

From 2019 to 2023, Xin Dong Lian Ke's revenue surged from 80 million yuan to 317 million yuan—nearly quadruplingTheir net profit also saw an impressive rise from 38 million yuan in 2019 to 165 million yuan in 2023, showcasing robust growth in both revenue and profit.

Nevertheless, stability remains a challenge, especially as external macroeconomic influences have led to slower growth in 2022 and 2023. However, promising signs for 2024 include a net operating cash flow surging to 90 million yuan, an astounding increase of over 1,200%. This growth largely stems from significant cash inflows from product sales during the reporting period.

As Xin Dong Lian Ke continues to broaden its market reach and enhance product penetration, the prospects for sustained growth appear promisingWhy are they so confident? One reason lies in their asset-light operations, promoting high profitabilityHigh gross margins may denote valuable products, but high net profits truly indicate a company's ability to generate earnings.

Xin Dong Lian Ke exemplifies this, boasting net margins exceeding 45% for five consecutive years, with 2023 reaching 52%. It's notable that among all publicly listed companies in China, only 17 have sustained such high net margins over five years.

The company’s success stems from a fabless operational model, distinct from the approaches employed by foreign industry leaders

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Xin Dong Lian Ke focuses solely on chip research and sales, outsourcing manufacturing and packaging to third-party firmsThis strategy has kept their debt levels incredibly low, with a debt-to-assets ratio maintained at just 3% and fixed assets around 30 million yuanWith minimal risk of fixed asset depreciation impacting profits, Xin Dong Lian Ke remains insulated from pitfalls that have plagued other companies.

Additionally, there is significant openness in demand within emerging markets such as humanoid robots and autonomous vehiclesThe anticipated release of the Yu Shu General Humanoid Robot in the first half of 2024 is expected to catalyze further demand for high-end IMU products essential for maintaining balance and motion control.

This market could require as many as four IMUs per humanoid robot, and achieving the precision seen in Tesla's Optimus would necessitate even more advanced sensorsBeyond the humanoid robot sphere, IMUs are vital components in autonomous vehicles tooUnlike traditional fuel vehicles, self-driving cars necessitate additional sensors for positioning and navigation, especially in environments where GNSS signals are unreliable.

With China's rapid advancements in autonomous vehicle technology, the commercialization of these products is likely to accelerateExperts predict that by 2030, the market for automotive IMUs in China could reach approximately 15.494 billion yuan, and could grow at a compound annual growth rate of over 25.55%. This represents significant opportunities for Xin Dong Lian Ke.

In conclusion, as Ren Zhengfei aptly expressed, “When the East is dim, the West shines; when the North darkens, the South glows.” Xin Dong Lian Ke stands at the forefront of high-end MEMS inertial sensor technologyCompeting on par with global powerhouses, the company represents a unique unicorn in the domestic market, rendering it irreplaceable within the low-altitude economic supply chainTheir ventures into low-altitude avenues, humanoid robotics, and autonomous vehicles mark them as a company to watch, with an exciting horizon ahead.

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