Incident: Huayu Auto released its 2024 quarterly report. The 24Q1 company achieved revenue of 37 billion yuan, +0.6% year on year; net profit to mother was 1.26 billion yuan, -12% year over year. 24Q1's gross profit margin was 12.54%, 1.34pct lower than the same period in 2023; the net profit margin was 3.87%, 0.71pct lower than the same period in 2023.

Revenue resilience is stronger than downstream, and profitability is affected by annual decline. Among Huayu Auto's main customers, SAIC Motor Group's production was -13% year-on-year in 24Q1, Tesla -2% year-on-year, while the company maintained a basic year-on-year flat revenue in 24Q1.

According to the company's financial analysis report for the first quarter of 2024, the main negative factors affecting 24Q1 profit were gross profit and financial expenses; management and R&D expenses contributed positively. We speculate that the annual decline will have a certain impact on the company's 24Q1 profitability.

Functional parts have strong profitability. The 24Q1 Huayu Auto Functional Parts Division achieved net profit of 530 million yuan, which was the same as the previous year, contributing 42% of net profit to mother. Among them, the joint venture functional parts business contributed 306 million yuan in net profit, bucking the trend and increasing 74 million yuan over the previous year. The Huayu Auto Functional Parts segment includes important organizational components such as Huayu Sanden, Huizhong, Braking Systems, and Bosch Huayu.

Cash flow is strong, and CAPEX demand is low. According to Huayu Auto's financial report, the company's operating cash flow for most of the past year surpassed or was similar to net profit, showing strong bargaining power in the industrial chain. According to the company's financial analysis report, the company's consolidated investment plan for 2024 is 4.94 billion yuan. Aggregated 24Q1 actually invested 750 million yuan. Compared with the net profit of the same caliber of 2.12 billion yuan, the volume is quite limited. Therefore, we believe that Huayu Auto has plenty of cash flow.

We expect Huayu Automobile's 2024/25/26 revenue to reach 1762/1825.189.1 billion yuan, net profit to mother 75/81/88 billion yuan, corresponding EPS of 2.39/2.57/2.8 yuan. The corresponding PE at the close of May 7, 2024 was about 6.9/6.4/5.9 times. We believe that the company's intelligent electrification support is progressing steadily, giving the company a reasonable PE range of 8-10 times in 2024, corresponding to a reasonable value range of 19.16-23.95 yuan. Maintain an “better than the market” rating.

Risk warning: Economic growth falls short of expectations, and raw material prices have risen sharply.