Incidents:
On March 25, 2024, Zero Sports Auto announced its 2023 annual results announcement: In 2023, it achieved revenue of 16.747 billion yuan, an increase of 35.22% over the previous year; realized net profit of 4.216 billion yuan, compared with net profit to mother of -5109 million yuan in 2022, the loss narrowed.
Investment highlights:
2023Q4 revenue and gross margin increased significantly year-on-year, and revenue declined slightly month-on-month. 1) With 2023Q4, the company achieved revenue of 5.278 billion yuan, +75.04%/-6.67% YoY; realized net profit to mother of -954 million yuan, and year-on-month losses all narrowed. The company's 2023Q4 gross profit margin was 6.73%, +13.64pct yoy and +5.54pct month-on-month. The company's gross margin for the full year of 2023 was 0.5%, and the annual gross margin changed thanks to 1) the gradual expansion of the C series model, and the company's product structure was improved; 2) the company adhered to the cost advantage formed by global self-research. The company achieved global self-research in the three electric systems, and the self-developed self-production cost ratio was as high as 60% of the vehicle's BOM. On the cost side, 2023Q4's R&D/sales/management expense ratio was 11.80%/10.11%/16.56%, respectively, -4.13pct/-0.64pct/-9.85pct, and +3.41pct/+2.30pct/+4.45pct. The company invested 4.7 billion yuan in R&D over the past 5 years, achieving production of 8 complete vehicles, and the R&D capital utilization rate was higher than that of industry competitors.
Sales increased significantly in 2023, and the technical architecture achieved mass production iterations. According to the company's 2023 results announcement, the company's total sales volume in 2023 was 144,200 vehicles, an increase of 29.7% over the previous year. Among them, the C-series models of the Zero Sport brand sold a total of 106,000 units, accounting for more than 73.3% of total annual sales; the C11 achieved total sales volume of 81,000 units, +81.9% year over year; and the C01 achieved sales volume of 25,000 units, +419.1% year over year. Driven by the main sales of C series products, the company's bicycle revenue in 2023 was 1162 million yuan, +4.27% year over year. The company's new-generation global self-developed and self-produced technology architecture LEAP3.0 was officially launched and mass-produced with the new product C10 in March 2024. Under the new architecture, the vehicle generalization rate reached 88%. Thanks to the industry-leading generalization rate, the company's R&D efficiency is expected to be further improved. Furthermore, the company is opening up technical cooperation based on the new Clover architecture and is actively exploring more potential business models.
Firmly push forward the global strategy and accelerate asset-light plans to go overseas. In September 2023, the company officially launched a global strategy at the Munich Motor Show in Germany. In October 2023, a strategic cooperation was reached with Stellantis Group, and the two sides are progressing steadily by forming the “Zero Run International” joint venture. At that time, the company is expected to rely on the full empowerment of the Stellantis Group's commercial resources, give full play to the competitiveness of its products in terms of intelligence and cost performance, and quickly open up vehicle sales in the global market with a unique asset-light overseas model.
Profit forecasting and investment rating companies maintain efficient research and development, adhere to self-development of core components, outstanding cost advantages, smooth progress in the international strategy, steady growth in product sales and achievement of the annual gross profit correction target. Therefore, we are optimistic about the company's future development. We expect the company to achieve operating income of 438.90, 703.47, and 96.697 billion yuan in 2024-2026, with year-on-year growth rates of 162%, 60%, and 37%; achieving net profit to mother - 35.69, 3.78, and 3.16 billion yuan, the year-on-year reduction, loss correction, 751%; EPS -2.67, 0.28, and 2.41 yuan. PS valuations corresponding to the current stock price are 0.8, 0.5, and 0.4 times, respectively. Covered for the first time, a “gain” rating was given.
Risks suggest that the company's product sales fall short of expectations; the cost performance advantage is difficult to show under the industry price war; sales have not reached the expected target; product quality control evaluations are not as good as expected; the risk of unstable international market demand and exchange rate fluctuations; and overseas market business development falls short of expectations.