Pure electricity+ range expansion boosts rapid business development, and profitability continues to improve. Zero Sports focuses on the mainstream NEV market. It was founded in 2015, listed on the Hong Kong Stock Exchange in 2022, and launched a “pure electric+extended range dual power” layout in 2023. Currently, 4 models are on sale, covering the 50,000-200,000 price range. The company sold 144,000 vehicles in 2023. According to the Passenger Federation's 2023 data, the company's share of the domestic NEV passenger car market was 1.6%. Thanks to the company's cost control capabilities and improved operating efficiency, the company's revenue in 2023 was 16.75 billion yuan, up 35.2% year on year, gross margin was corrected to 0.5% for the first time, and operating cash flow was corrected for the first time.

Global self-developed construction products are cost-effective, and C10 and C16 volumes can be expected. The company has achieved self-development and self-production of core systems and electronic components for intelligent electric vehicles, creating three major systems: power, smart driving, and smart cockpit. Self-developed and self-built parts account for about 60% of the vehicle BOM, and the generalization rate of the vehicle architecture has reached 88%. At the same time, in 2024Q1, the company's gross margin was -1.4%, +6.5 pct compared to the previous year. The LEAP3.0 technical architecture was released in January 2024. Among them, the “Clover” electronic and electrical architecture reduced the length of the wiring harness from 1,850 meters for domain control to 1500 meters for central integration, and the number of controllers was reduced from 42 to 28, further empowering the model to improve the cost performance ratio of the model. The C10 was launched in March 2024, with sales of nearly 5,000 units in the first month; in April, the C16 began pre-sale of Beijing cars. It is expected that the full price will be within 200,000 yuan, and the number of orders will exceed 1,150 units within 24 hours. It is expected to be launched and delivery will begin in June. The company plans to launch an average of 2-3 new models every year for the next 3 years, with pure electric and extended-range dual-power models. Sales are expected to grow rapidly as the product matrix is broadened.

With Stellantis to accelerate the overseas expansion process, overseas sales are expected to grow rapidly. In 2023, Stellantis acquired 21.26% of the company's shares for 1.5 billion euros, becoming the second-largest shareholder after the single largest shareholder group. In May 2024, it established a Zeropar International joint venture with Zero Sports Auto, holding 51% and 49% of the shares, respectively. Zero Run International will first launch a sales plan in Europe in September 2024, and expand its sales outlets in Europe to 200 by the end of 2024; from the fourth quarter of 2024, it will expand into India and Asia Pacific, the Middle East, Africa, and South America. The C10 and T03 will be the first to be launched in the European market. Zero Run International will launch at least 1 new model every year in the next 3 years, and overseas sales are expected to grow rapidly.

Profit forecast and investment advice: The company builds cost-effective products based on global self-development. C10/C16 is expected to contribute to the increase in new vehicles, accelerate overseas expansion in cooperation with Stellantis, and is expected to bring continuous growth to the company with its global layout. We expect the company's revenue for 2024-2026 to be 31.35 billion yuan, 543.5 billion yuan, and 77.50 billion yuan, respectively, and corresponding net profit to mother of -35.5, -4.8, and 1.67 billion yuan, respectively. Based on the closing price on June 14, 2024, the corresponding PS was 1.14, 0.66, and 0.46 times, respectively, covered for the first time, and gave a “buy” rating.

Risk warning: Market competition increases risk, automobile sales fall short of expectations, overseas business expansion falls short of expectations, and new model development falls short of expectations.