Core views
2024Q1 achieved revenue of 3.296 billion yuan, an increase of 20.41% year on year; realized net profit of 258 million yuan, an increase of 39.25% year on year; realized net profit of 247 million yuan without return to mother, an increase of 60.70% year on year. As the implementation period of the restructuring plan approaches, the company is expected to usher in a new round of development. Large asset impairment losses and credit impairment losses have been marginally reduced, and demand for “induction” motorcycles is strong at home and abroad, and the company is expected to unleash operational flexibility. Furthermore, the cash and undistributed profits on the company's accounts all exceeded 5 billion dollars, providing a solid guarantee for medium- to long-term development, but the company still risks postponing restructuring. The company's net profit from 2024-2025 is estimated to be 1,167 billion yuan and 1,363 billion yuan, corresponding to the current PE of 13X and 11X, giving it a “buy” rating for the first time.
occurrences
1) The company publishes its 2023 annual report. In 2023, the company achieved revenue of 13.066 billion yuan, an increase of 5.29% over the previous year; achieved net profit of 583 million yuan, an increase of 10.65% over the previous year; and realized net profit of 642 million yuan without return to mother, an increase of 35.71% over the previous year.
2) The company released a report for the first quarter of 2024. 2024Q1 achieved revenue of 3.296 billion yuan, an increase of 20.41% year on year; realized net profit of 258 million yuan, an increase of 39.25% year on year; realized net profit of 247 million yuan without return to mother, an increase of 60.70% year on year.
3) The company issued an announcement on the progress of the controlling shareholder restructuring and related risk reminders. Following another application from the reorganization entity, the Fifth Intermediate Court of Chongqing issued a civil ruling on May 20, 2024 (2022) against No. 76-7, approving the extension of the implementation period of the restructuring plan for three months (until August 21, 2024).
Brief review
The growth in the motorcycle business offset the decline in the general engine business, and the 2023 results achieved steady growth.
In 2023, the company achieved revenue of 13.066 billion yuan, an increase of 5.29% over the previous year; achieved net profit of 583 million yuan, an increase of 10.65% over the previous year; and realized net profit of 642 million yuan without return to mother, an increase of 35.71% over the previous year. The company is mainly engaged in motorcycles, engines and general machinery. In 2023, it achieved revenue of 94.67 billion yuan and 2,733 billion yuan respectively, accounting for 72.46% and 20.92% of total revenue, up 19.80% and 19.93% year-on-year respectively. The increase in annual performance was mainly due to a good trend in the motorcycle and engine business. The steady growth of road motorcycles, and strong domestic and foreign demand for medium and large motorcycles offsetting the decline in the general machinery business. 2024Q1 continued to perform well, achieving revenue of 3.296 billion yuan, up 20.41% year on year; achieving net profit of 258 million yuan, an increase of 39.25% year on year; and net profit without deducted from mother of 247 million yuan, an increase of 60.70% year on year.
The increase in gross margin in '23 was due to an optimization of the revenue structure, and the expense ratio declined during the 24Q1 period under cost control. In 2023, the company's gross profit margin, net profit margin, and period expense ratio were 18.54%, 3.63%, and 9.01%, respectively, compared with +1.15, -0.30, and +1.43pct. The increase in gross margin for the whole year was an increase in the share of revenue in the high-margin motorcycle business. The company's gross profit margin, net profit margin, and period expense ratio in Q1 2024 were 17.71%, 7.71%, and 8.45%, respectively, -0.57, +1.08, and -1.73 pct. Among them, the sales expense ratio, management expense ratio, R&D expense ratio, and financial expense ratio were 1.83%, 4.39%, 3.2%, and -0.99%, respectively, +0.56, -0.01, -1.05, and -1.23pct, year-on-year, respectively.
Strong domestic and foreign demand is driving the growth of the main business, and impairment loss accruals are expected to reduce and increase profits. (1) Large asset impairment losses and credit impairment losses have been marginally reduced, and the company is expected to go into battle lightly. In 2017-2018, the company's net profit to mother was 966 million yuan and 926 million yuan respectively. Since 2019, the company's asset impairment losses and credit impairment losses have surged. In 2019-2023, the company's net profit to mother was 6.23, 4.80, 3.85, 5.27, and 583 million yuan, respectively; asset impairment losses were 3.63, 2.19, 2.95, 3.34, and 379 million yuan respectively; credit impairment losses were 0.01, 1.26, 2.28, 2.40, and 10 billion yuan respectively. Asset impairment losses and credit impairment losses seriously hampered performance. According to the company's 2023 “On Accruing Credit Impairment Losses and Asset Impairment Losses” notice, the company accrued credit impairment losses and asset impairment losses of 389 million yuan in 2023, including impairment losses of 119 million yuan of assets held for sale and 125 million yuan in goodwill impairment losses. The impairment loss from holding assets for sale stemmed from the sale of shares in Italian CMD, a subsidiary of the company. An impairment loss of 199 million yuan was calculated based on the difference between the share transfer price and book value. Goodwill impairment losses are due to the goodwill formed from the acquisition of Jinye Machinery. As of December 31, 2022, the net book value of goodwill was 139 million yuan, and the book value was about 14 million yuan after accruing 125 million yuan in 2023. (2) Strong production and sales of Chinese and large motorcycles are expected to further drive performance growth. In 2023, the company sold about 87,000 induction motorcycles. The company built 1,334 sales outlets around the world, 864 foreign market channels, participated in international exhibitions and social media promotion in Italy, Las Vegas, etc., and further expanded high-end segments, and created the “EHOM” brand to develop its own brand business, focusing on brand promotion, channel development in the terminal consumer market, warehousing logistics and after-sales service system construction. Demand for CUHK motorcycles at home and abroad will continue to be strong in 2024, and the company's performance is expected to continue to grow as the production capacity of CUHK motorcycles increases. (3) There is plenty of cash on the account to further construct the moat. As of the 2024 quarterly report, the company's monetary capital was 5.466 billion yuan, short-term liabilities were 304 million yuan, and undistributed profit was about 5.677 billion yuan. Cash on account further creates competitive barriers for companies to ensure long-term development. As the implementation period of the restructuring plan approaches, the company is expected to usher in a new round of development.
Investment advice
As a leading domestic motorcycle company, Longxin GM is expected to usher in a new round of development as the implementation period of the restructuring plan approaches. Large asset impairment losses and credit impairment losses have been marginally reduced, and demand for “induction” motorcycles is strong at home and abroad, and the company is expected to unleash operational flexibility. Furthermore, the cash and undistributed profits on the company's accounts all exceeded 5 billion dollars, providing a solid guarantee for medium- to long-term development, but the company still risks postponing restructuring. The company's net profit from 2024-2025 is estimated to be 1,167 billion yuan and 1,363 billion yuan, corresponding to the current PE of 13X and 11X, giving it a “buy” rating for the first time.
Risk analysis
1. Risk of fluctuating raw material costs. The company's core products rely on key raw materials such as steel, aluminum, and plastics. Commodity prices may fluctuate due to the instability of the international political and economic environment. Such fluctuations may adversely affect the company's cost structure, operating performance, and gross margin.
2. Risk of exchange rate changes. In view of the high share of the company's export business, changes in the exchange rate of RMB and the currency of the export destination country may have a significant impact on the company's financial situation. Global macroeconomic events, such as regional political conflicts and interest rate adjustments by the Federal Reserve, may cause exchange rate fluctuations, which in turn affects the company's export competitiveness and exchange losses, and increases the company's financial costs.
3. The controlling shareholder's bankruptcy and restructuring fell short of expectations. On November 21, 2022, the Fifth Intermediate People's Court of Chongqing (hereinafter referred to as the “Fifth Intermediate Court of Chongqing”) decided to approve the “Substantial Merger and Reorganization Plan for 13 Companies Including Longxin Group Co., Ltd.” (hereinafter referred to as the “Reorganization Plan”). According to the “Reorganization Plan”, 13 companies including Longxin Group Co., Ltd. (hereinafter referred to as “13 Longxin Companies” or “Reorganization Entities”) will complete the settlement of the cash portion of the creditors within 9 months from the date the court decided to approve the restructuring plan, and approved it 12 months after the court decided to approve the restructuring plan Complete the “Reorganization Plan” within. Following the application of the reorganization entity, the Fifth Intermediate Court of Chongqing issued a civil ruling on November 20, 2023 (2022) against No. 76 (5), approving the extension of the implementation period of the restructuring plan for six months (until May 21, 2024). As of May 21, 2024, the court ruled that the extended execution period had arrived, and the bankruptcy and restructuring of the controlling shareholder of the company did not meet expectations. During the extension of the implementation period of the restructuring plan, the formation of a restructuring investment group had basically been completed, and it will take some time to complete the implementation of the restructuring plan. Following another application from the reorganization entity, the Fifth Intermediate Court of Chongqing issued a civil ruling on May 20, 2024 (2022) against No. 76-7, approving the extension of the implementation period of the restructuring plan for three months (until August 21, 2024). From April 30, 2024 to May 21, 2024, 13 Longxin companies did not receive investment payments from partner funds. At the same time, no new cash claims were settled during this period. As of May 21, 2024, the amount of cash claims settled was still 1,632 billion yuan, accounting for 16.59% of the total amount of cash settlement claims. On May 21, 2024, due to the partner fund's failure to fulfill its payment obligations in accordance with the restructured investment payment arrangement agreed in the “Reorganization Investment Agreement”, the restructuring entity sent a “Notice Concerning the Disqualification of the Restructured Investor” to the Partner Fund to disqualify the partner fund as an investor in the restructuring and seek other investors separately. In the future, the restructuring entity will continue to negotiate and sign new restructuring investment agreements with the former joint investor Chongqing Development Investment Co., Ltd. (hereinafter referred to as “Chongqing Development”) and investors in various sectors on the principle of not overturning the original restructuring plan and settlement plan to advance the implementation of the restructuring plan.
4. Macroeconomic changes and market risks. Global macroeconomic fluctuations, including regional political conflicts and monetary policy adjustments, may lead to unstable demand in overseas markets and increase the risk of companies' production and inventory.