1Q24 results were higher than our expectations

The company announced its 2023 results: it achieved annual revenue of 12.11 billion yuan, an increase of 6.44% over the previous year, and realized a net profit of 1,008 billion yuan for the whole year, an increase of 43.65% over the previous year. 1Q24 achieved revenue of 3,061 billion yuan, a year-on-year increase of 6.31%, and realized net profit of 278 million yuan to mother, an increase of 31.96% over the previous year.

The 2023 results were in line with our expectations, and the 2024 Q1 results exceeded our expectations.

The scale effect is evident, and profitability continues to increase. The company achieved gross margin of 33.5% and net profit margin of 8.3% in 2023, up 8.1 ppt and 2.2 ppt, respectively. The gross margin and net margin achieved by 1Q24 were 32.52% and 9.51%, respectively, down 1.64ppt and increased 2.21ppt, respectively. In the first quarter of 2024, the company achieved a sharp increase in net interest rate with a year-on-year decline in gross margin. We think it may have mainly benefited from the increase in scale effects. The company invested 924 million yuan in R&D in 2023, accounting for 7.63% of revenue, an increase of 22.88% over the previous year.

Development trends

The all-terrain vehicle business was under pressure in the short term, and high-displacement exports contributed to strong growth. In 2023, the company achieved sales of 146,500 all-terrain vehicles, with revenue of 6.504 billion yuan, a year-on-year decrease of 4.88%; total sales of two-wheelers were 99,300 units/99,700 units respectively, and corresponding revenue was 2,189 billion yuan/2,291 billion yuan respectively, up 8.63% and 78.22% year-on-year respectively. We believe that the company's overseas exports of high-displacement motorcycles contributed to its main performance growth point last year. The company currently exports high-displacement products between 150cc and 250cc, which have obvious cost performance advantages over foreign competitors' products.

In 2023, the domestic export volume of 250cc or more motorcycles was 198,000, an increase of 54.9% over the previous year. We believe that in the future, the company's 250cc or more products will also have the potential to seize overseas markets with exports.

Profit forecasting and valuation

Considering the strong export demand for high-displacement motorcycles, we raised the company's profit forecast for 2024 by 6.3% to 1,318 billion yuan, and introduced a profit forecast of 1,618 billion yuan for 2025. The current stock price corresponds to a price-earnings ratio of 16.0 times/13.0 times for 2024/2025. Maintaining an outperforming industry rating, we raised our target price by 21% to 175 yuan due to strong export demand for high-displacement motorcycles and increased profitability beyond expectations, corresponding 20.0 times the 2024 price-earnings ratio and 16.3 times the 2025 price-earnings ratio. There is 25.0% upside compared to the current stock price.

risks

Exports of high-displacement motorcycles fell short of expectations; the all-terrain vehicle business declined more than expected.