Shenwan Hongyuan Group: FSD makes progress in entering the Chinese market, and the domestic smart driving catfish effect will emerge.

Shenwan Hongyuan Group released a research report stating that on February 25th, according to Caixin, Tesla, Inc. (TSLA.US) announced an update to the City Street Autopilot automatic driving assistance, which will be deployed to customers who have paid for the kit for 64,000 yuan. This round is an official gray-scale test that will be deployed in batches and is expected to be gradually expanded to some models, with the prefix FSD (Fully Autonomous Driving) indicating the performance limit of the full version. Previously, Tesla, Inc. had released a product roadmap, expecting to launch FSD in Europe and China in 25Q1, but due to trade disputes and regulatory risks, the market expects the entry of FSD into China to be delayed (later than 25Q1). Progress has been made in the entry of FSD into China, with short-term performance at the L2 level. The main views of Shenwan Hongyuan Group are as follows: Core changes in FSDv13 iteration Massive rollout to AI4 users in December 2024. 1) Code architecture reconstruction. Introducing source code from the SpaceX Falcon rocket engine to reflect first principles. 2) Significant improvement in functionality and performance. FSD can now be started directly in parking lots and supports complex three-point turns, but requires HW4.0 to meet hardware requirements. 3) Embedded business model. Enhanced fleet communication supports dynamic navigation, paving the way for Robotaxi landing. Recent exponential growth in FSD performance 1) FSD may outperform humans in 25Q2. According to Musk's guidance, FSD is confident it will outperform human drivers in 25Q2 and ultimately be 100 times safer than human drivers. 2) Exploring the Scaling-law of smart driving, the paradigm remains. Tesla, Inc.'s vice president has discussed the key improvements of FSDv14, which still involve computing power + models + data. 3) Many features are yet to be updated. These include model size expansion, model context length extension, and improved map navigation, with further updates expected. The dilemmas and performance improvements of FSDv13 entering China 1) Data cannot leave. China requires core data generated by smart vehicles to be stored domestically, meaning that Shanghai data centers cannot connect to US computing centers for training. 2) Computing power cannot enter. The US restricts the export of high-end computing chips to China, and domestically produced chips face issues like interconnection between chips. 3) Performance needs to improve. Due to the aforementioned restrictions, the starting point for FSD entering China is at the L2 level. If methods such as simulation training, switching chips, and localizing data centers are used, the growth curve of FSD may slow down, giving local competitors a longer development window. The catalyst effect of FSDv13 entering China 1) Increase in penetration rate of advanced smart driving. FSD is driving local manufacturers to optimize algorithms, accelerate the deployment of end-to-end models, improve smart driving performance, and cultivate consumer habits. 2) Tesla, Inc.'s supply chain sales increase. FSD is essentially a software premium, which will drive up sales of specific Tesla, Inc. models, benefiting the entire industry chain. 3) Supporting infrastructure. Tesla, Inc. needs to deploy localized data centers to solve the dilemmas, involving requirements for smart computing centers and data management. 4) Optimization of competitive landscape. Domestic car sales prices are under pressure, with BYD Company Limited's "smart driving parity" further squeezing profit margins, smaller manufacturers may face significant survival pressures, and market share is expected to further consolidate towards leading manufacturers. Related targets: Tesla, Inc.'s industry chain suppliers: Ningbo Tuopu Group (601689.SH), Ningbo Xusheng Group (603305.SH); Vehicle manufacturers: XPeng, Inc. ADR Sponsored Class A (09868), Li Auto, Inc. Sponsored ADR Class A (02015), NIO Inc. Sponsored ADR Class A (09866), Chongqing Sokon Industry Group Stock (601127.SH), Xiaomi Group (01810), Anhui Jianghuai Automobile Group Corp., Ltd. (600418.SH); Autonomous driving chip manufacturers: HORIZONROBOT-W (09660), BLACK SESAME (02533); Component manufacturers: IMOTIONAUTOTECH (01274), Huizhou Desay SV Automotive (002920.SZ), BYD ELECTRONIC (00285), Foryou Corporation (002906.SZ), Ningbo Joyson Electronic Corp. (600699.SH), Jingwei Hengrun (688326.SH), Shanghai Baolong Automotive Corporation (603197.SH); Supporting infrastructure: INESA Intelligent Tech Inc. (600602.SH); LiDAR: ROBOSENSE (02498), Hesai Group Sponsored ADR (HSAI.US). Risk warnings: FSD may not land as expected in the future; local regulatory upgrades such as data security; reduced performance in special road conditions.