2023 results fall short of our expectations

The company announced its 2023 results: annual revenue of 1,648 billion yuan, 42.18% YoY, 4Q achieved revenue of 299 million yuan, or -36.44% year-on-year, mainly due to high inventory and weak consumption in the terminal market; net profit to mother in 2023 was 128 million yuan, corresponding to profit per share of 0.76 yuan, -75.03% YoY, and 4Q net profit of 0.07 billion yuan, YoY. The company's performance for the full year of 2023 and 4Q23 fell short of our expectations, mainly due to weak terminal demand.

Revenue from the entire product system declined significantly, but the profitability of the core business remained stable: 1) Electric scooter motor revenue was 743 million yuan, down 45.66% year on year, with a gross profit margin of 48.34%. Among them, wheel motor sales were 767,000 units, down 32% year on year, sales volume of central motor units was 54% year on year; sales volume of integrated wheel motors was 3.06 million units, down 28.8% year on year; 2) integrated wheel motor revenue was 500 million yuan, -36% year on year, gross profit margin of 0.72%; 3) kit revenue was 270 million yuan, -47.28% year on year, gross profit margin of 34.55%; 4) Battery revenue was 129 million yuan, gross profit margin increased by 23.41% year on year.

Development trends

The removal of e-bike channel inventory has continued for 2 years, waiting for demand to recover. According to the company's announcement, due to factors such as geopolitical conflict and inflation, the overall boom in the overseas e-bike terminal market was weak in 2023. We believe that compared to other export chain varieties, the effects of the e-bike supply chain are more obvious. There are two main reasons why demand bottomed out for longer: first, core demand is in Europe. Europe is affected by geographical factors and economic structure, and the demand recovery process is slower than in the North American market; second, during the pandemic, demand was more severely overdrawn compared to other types, and the industrial chain accumulated more inventory and longer time to be stored. We expect that in the future, with the steady progress of interest rate cuts in Europe and the clearance of e-bike channel inventories, the demand side of the electric scooter motor industry is expected to usher in favorable marginal changes this year. The company maintained stable profitability in its core business during the downturn in the industry. It can be seen that the company's competitive position in the industry is still stable.

Profit forecasting and valuation

Considering the high inventory in the terminal market and weak consumption of electric scooter products, we lowered the company's profit forecast for 2024 by 25.3% to $221 million, and kept the 2025 net profit forecast of 340 million yuan unchanged; the current stock price corresponds to a price-earnings ratio of 25.8 times/16.8 times for 2024/2025. We maintain our outperforming industry rating, but considering the decline in the valuation center, we lowered our target price by 36.0% to 40.00 yuan, corresponding to 30.4 times the 2024 price-earnings ratio and 19.8 times the 2025 price-earnings ratio. There is 17.8% upside compared to the current stock price.

risks

E-bike product development falls short of expectations; downstream demand falls short of expectations; industry competition intensifies.