Market share declined: In fiscal year 2023, China Innovation Airlines (03931.HK) recorded a total revenue of RMB 27.01 billion, an increase of 32.5% year-on-year. Among them, electric power sales, which account for about 80% of total revenue, increased 21.4% year-on-year to RMB 22.25 billion, and the share of energy saving system product sales also further increased. According to data from the China Power Battery Industry Innovation Alliance, in 2020, Chuangxin Airlines (03931.HK)'s power battery capacity grew by more than 70% to 32.9GWh year-on-year, and its market share increased from 6.5% in 2022 to 8.5% in 2023. Based on vehicle volume, Guangzhou Automobile (02238.HK), Xiaopeng (09868.HK) and Zero Sport (09863.HK) are still the Group's main customers. However, the Group's market share has continued to decline since the middle of the fourth quarter of last year. In the first four months of 2024, the Group's battery fleet increased by 3.6% year on year, but the market share fell sharply to 6.4%, returning to 2022 levels.

The customer union is changing: based on vehicle comparison data, according to vehicle volume, Xiaopeng (09868.HK) was the main customer of China Innovation Airlines (03931.HK) in the first quarter of 2024, and Guangzhou Automobile (02238.HK) retreated as the second largest customer, while the number of units for GAC (02238.HK) also declined month-on-month in the first three months. Thanks to the Group's pricing strategy, the Group's batteries are still somewhat attractive in an environment of downstream price wars. However, at the end of 2023, GAC (02238.HK) was officially put into operation due to the Pai Battery Factory. It is expected to complete the installation of all production lines by the end of 2025 and meet the equipment requirements of 600,000 vehicles. As one of the Group's main customers, GAC (02238.HK) is expected to gradually reflect the impact of Pai Battery, leading to a lower increase in the Group's installed capacity than the market.

Risk of production capacity growth: China Innovation Airlines (03931.HK)'s production capacity continues to grow, but downstream demand growth is relaxing, and there is a risk of adjustments in order volume from major customers, which may lead to low production capacity. However, the depreciation costs of new production capacity are high, and expansion brings heavy financing costs, and sales volume growth is extremely important for the Group. However, the Group's pricing strategy is more aggressive. Price reduction will further weigh down the Group's profit level, causing the Group to enter a difficult situation.

Therefore, we are quite concerned about the Group's future sales volume, especially the uncertainty brought about by major customers.

Pressure has not improved: due to i) declining raw material costs leading to continued weakness in sales prices; ii) capacity growth and uncertainty among key customers leading to potential lower capacity utilization rates; and (iii) further increases in forecast liabilities leading to a high level of financing costs, leaving Zhongchuang Xinhang (03931.HK) in a difficult situation where price, volume, and profit ratio cannot be realized simultaneously. We have always focused on the sales expression, market share and future production capacity plans of the group, as well as the expression of free cash flow under huge capital expenditure and interest expenses. However, given that the headwinds faced by the Group have not improved, and it may even deteriorate further. In particular, the uncertainty of the Group's customers has reduced the visibility of its long-term plans, so we downgraded the Group's rating to? hold it? At the same time, the target price was reduced to HK$15.70 per share.