1Q24 results are in line with our expectations

The company announced 1Q24 results: The company achieved operating income of 4.95 billion yuan, -9.0% y/month-on-month +38.3%, and net profit to mother of 480 million yuan, +1.2% y/month-on-month +49.4%. The 1Q24 results were in line with our expectations.

Development trends

1Q24 sales were under pressure, but bicycle revenue increased year-on-year, and gross margin and bicycle net profit showed impressive performance.

The 1Q24 company sold 2.465 million vehicles, -11% year-on-year. We think it was mainly affected by rain and snow and national inspections. The company's new 1Q sales performance, such as Luna and Yangwang, was good. The large single product effect was outstanding. Combined with the weakening of price competition at the industry level, the company's 1Q24 bicycle revenue achieved year-on-year growth, and the performance was relatively steady.

The gross margin of 1Q24 was 17.6%, +2.3ppt compared to the previous year. We judge that it was mainly driven by the introduction of new products and strengthened cost control. Net profit of bicycles reached 196 yuan, an increase of 21 yuan over 2023.

Rates increased slightly year-on-year during the period, and operating cash flow was positive month-on-month. 1Q24's sales/management/R&D expenses were 1.8/1.3/120 million yuan respectively, +24.9%/+14.1%/+5.4% year-on-year, and corresponding rates were 3.6%/2.6%/2.5%, respectively, and +0.96/0.53/0.34ppt. We judge that store expansion and advertising demand will drive sales expenses increase, and R&D investment in core technologies such as motors, controllers, batteries, and new material applications will drive up R&D costs. The company maintains efficient turnover and has plenty of cash on hand. 1Q24 The company's operating cash flow was 680 million yuan, a month-on-month correction, but it is still in the capital expenditure phase. The company has plenty of cash, with a monetary capital of 6.85 billion yuan at the end of the first quarter.

Policy expectations drive improvements in industry sales and pattern interpretation expectations, and industry leaders are expected to fully benefit. Fourteen departments including the Ministry of Commerce issued the “Plan to Promote the Trade-In of Consumer Goods” 1, which refers to the trade-in practices of automobiles and home appliances, and the relevant departments are studying and promoting the trade-in of electric bicycles; the Ministry of Industry and Information Technology issued a public call for opinions on the “Electric Bicycle Safety Technical Specification” mandatory national standard revision plan project 2, which we believe has boosted the market's expectations on the sales volume and pattern interpretation of the electric motorcycle industry. Looking at the short term, we judge that with the arrival of the peak season, the gradual withdrawal of national inspections and the launch of new products, the year-on-year growth pressure on 2Q sales will ease or ease. At the same time, the company is actively strengthening channel expansion and efficiency improvement efforts, which is expected to drive an increase in store efficiency. Looking at the medium to long term, we believe that the revision of the new national standard may drive product design optimization, raise safety standards, raise production qualification thresholds, and benefit leading enterprises with comparative advantages.

Profit forecasting and valuation

We maintain our 2024/2025 earnings forecast. The current stock price corresponds to 13x/10x 2024/25E P/E.

Maintaining an outperforming industry rating and considering potential policies that are expected to boost industry demand and benefit industry leaders, we raised our target price by 10% to 46 yuan, corresponding to 17x/14x 2024/25E P/E. There is 33.5% room for growth compared to the current stock price.

risks

Policies fell short of expectations; market competition intensified.