The 2023 results were in line with market expectations, and the 1Q24 performance exceeded market expectations. The company released 2023 and 1Q24 results: in 2023, the company achieved operating income of 35.84 billion yuan, +5.1% year-on-year; net profit to mother - 2.45 billion yuan, a year-on-year reduction in losses, and the 2023 results were in line with market expectations. 1Q24's revenue was 26.56 billion yuan, +421.8% year on year; net profit to mother was 220 million yuan, reversing losses year over year, and gross margin improved significantly, driving 1Q24 results to exceed market expectations.

Development trends

The sales contribution of core models continued to increase, and gross margin improved significantly in 1Q24. According to the Passenger Federation, the M5/M7 sold 3.51/68,500 units respectively in 2023, and M7 sales contributed +223% year-on-year to the main increase.

The 1Q24 company sold a total of 114,000 units, including 95,000 new energy vehicles. By model, the M7/M9/M5 were 697/1.07/0.29 million units respectively, and the M7/M9 increased significantly. The sales contribution of Celis' core models continued to increase, and gross margin improved markedly due to scale effects and supply chain cost reduction. 4Q23 gross margin reached 10.7%, 1Q24 gross margin increased to 18.7%, +12/month-on-month +8ppt.

The R&D side maintains a high level of investment, and the 1Q24 rate is manageable for high revenue growth. Sales/management/R&D expenses in 2023 were $54.7/16.5/1.70 billion, respectively, +13.4%/-6.9%/+29.1% year-on-year, and sales and R&D rates were +1.1/+0.9ppt year-on-year. The company believes that it is mainly due to publicity, increased sales and service expenses, and increased product and technology research and development. In 1Q24, sales/management/R&D expenses were 34.1/45/9.5 billion yuan respectively, R&D expenses were +176% YoY/+58% YoY, while sales/management/R&D rates decreased by 12.8%/1.7%/3.6% year-on-year, respectively. In addition, Chongqing Ruichi, the company's original wholly-owned subsidiary, introduced external investors through capital increases, generating investment income of 1,522 billion yuan and increasing 4Q23 profits.

The product side continues to work hard and is optimistic about the smart selection model for a long time. The new M5 was released in April, with a starting price of 249,800 yuan. The non-smart driving version was cancelled, and the cumulative number of pre-sale orders for 12 hours exceeded 10,000 units1. Huawei unveiled the Qiankun ADS3.0 autonomous driving system at the Beijing Auto Show, and upgraded features such as active safety and smart driver-to-parking NCA functions. We believe it is expected to empower the product. The company announced that it intends to purchase 100% of Longsheng New Energy (Gigafactory) shares by issuing shares (66.39 yuan/share). The company believes that this acquisition will help it continue to maintain advanced productivity on the production side. We believe that the company's 1Q profit correction is significant. With sufficient order support, M9 growth is expected to drive 2Q24 sales and profits to continue to strengthen. We are optimistic about the cooperation model between the company and Huawei, and the two sides will achieve collaboration and win-win results. We look forward to further extending the product matrix on the basis of complementing the luxury SUV category while expanding overseas markets.

Profit forecasting and valuation

With high sales growth and improved gross margin exceeding expectations, we raised our 24/25 profit forecast from $54/48 million to 50/8 billion yuan. A profit inflection point has appeared, and it is expected to enter a steady phase in '25. It will switch to a 25 EP/E valuation. The current stock price corresponds to 18 x 25E P/E. Maintaining an outperforming industry rating, with plenty of orders in hand, and the structure is expected to improve. Considering the valuation level of comparable profitable NEV companies, we raised our target price by 19% to 124 yuan, corresponding to 23x 25E P/E. There is 30% room for growth compared to the current stock price.

risks

Order conversion fell short of expectations; NOA in unmapped cities across the country fell short of expectations.