3Q23 performance is lower than we expected.

The company announced 3Q23 results: 1-3Q23 achieved revenue of 1.349 billion yuan, year-on-year-43.3%, net profit of 121 million yuan, year-on-year-74.6%; of which, 3Q23 realized revenue of 436 million yuan,-47.9%, month-on-month-5.3%, and net profit of 16 million yuan,-87.0%. Affected by the depressed demand for electric bikes, the performance was lower than we expected.

The profit margin of 3Q23 declined slightly, and the expense rate remained stable during the period. 1-3Q23 gross profit margin year-on-year-4.1ppt to 27.3%, net profit margin year-on-year-11.0ppt to 8.9%; of which, 3Q23 gross margin year-on-year-3.6ppt to 24.0%, net profit margin-11.1ppt to 3.7%. 3Q23's sales / management / financial expense rates are + 2.9ppt/+3.7ppt/+0.8ppt to 6.9% to 6.8% to 0.9% respectively year-on-year.

Trend of development

The demand for electric bikes remains in the doldrums and is still in the stage of channel destocking. Since the second half of last year, the demand for electric bikes downstream of the company has remained depressed for the following reasons: (1) the epidemic has brought about an overdraft effect on the demand for electric bikes. Due to the shortage of supply chain of electric bikes during the epidemic, more inventory has been accumulated in the terminals and channels of electric bikes around the world. (2) the conflict between Russia and Ukraine has led to an increase in the cost of living in Europe, the demand for electric bikes as optional consumer goods has shrunk, and the industry has entered a long destocking cycle. Although after more than a year of channel inventory, but we believe that the industry is still in the trough, there are no signs of inventory clearing demand recovery.

The underlying technology of torque sensor can be extended to the field of humanoid robot. The company is one of the few companies in the world that have torque sensor technology and have a certain revenue scale in the field of electric bikes. Torque sensor has a wide application prospect in the field of humanoid robot dexterous hand, with high technical barrier requirements and high value. Based on the underlying technology, we believe that the company has the potential to migrate this technology to the field of humanoid robots.

Profit forecast and valuation

Due to the continuous pressure on the demand for electric bicycles and the increase in the company's market expansion and after-sales expenses, we have reduced the 2023 pedal net profit by 54.7% to 154 million yuan / 297 million yuan. The current share price corresponds to a price-to-earnings ratio of 28.4 times 2024. Taking into account the adjustment of earnings forecasts and the improvement of the prosperity of the motorcycle industry next year, we cut our target price by 13.6% to 62.50 yuan corresponding to 35.4 times 2024 earnings, which is 24.9% higher than the current stock price and maintains an industry rating that outperforms.

Risk

Domestic competition aggravated the risk, and the demand for overseas electric bikes fell more than expected.