Core views

The company released its 2024 semi-annual report. The Q2 revenue performance achieved a high increase. Mainly, the all-terrain vehicle business remained steady, motorcycles and electric two-wheelers grew rapidly, while inventory control and cost control drove an improvement in profit levels. Looking ahead to the second half of the year, the company's sales scale and profit margin are expected to continue to increase as demand for all-terrain vehicles and motorcycles improves and new products are launched, and the combined sales cost ratio declines. In addition, the company issued equity incentives and employee stock ownership plans. The revenue CAGR for the next three years is 18%, demonstrating confidence in long-term development.

occurrences

On August 15, 2024, Chunfeng Power released the 2024 semi-annual report.

In 2024H1, the company achieved operating income of 7.529 billion yuan (YOY +15.73%), net profit to mother 0.709 billion yuan (YOY +28.49%), and a net margin of 9.41% (YOY+0.94pct).

Among them, Q2 achieved operating income of 4.468 billion yuan (YOY +23.20%), net profit to mother of 0.431 billion yuan (YOY +26.35%), and a net interest rate of 9.65% (YOY+0.24pct).

Brief review

1. Revenue analysis: Four-wheel plus two-wheel advantage consolidated, extreme core electric channel construction accelerated 1) All-terrain vehicle: By optimizing channel inventory and product structure, the company sold 0.0814 million vehicles in the first half of the year, up about 3% year on year; average sales price was 0.0434 million yuan, down about 4% year on year; achieved sales revenue of 3.532 billion yuan, down -1.55% year on year, accounting for 46.92%. The company's leading all-terrain vehicle export position is stable. According to the China Automobile Association's “Production and Marketing Alert”, Chunfeng export sales account for 71.75% of the industry; distribution outlets in the US market continue to expand, and various sales channels are developing well, comparable to first-tier brands such as Polaris, Bombardier, and Honda. The market share is increasing year by year, becoming the most growing brand; the European market continues to rank first in market share. New mid-range and high-end U/Z products are expected to open up room for growth.

2) Motorcycles: The company adheres to the strategy of combining domestic and international markets and continuously improving the product system. In the first half of the year, it sold 0.1539 million vehicles, up about 56% year on year; average sales price was 0.0434 million yuan, down about 9% year on year; achieved sales revenue of 3.248 billion yuan, up 41.95% year on year, accounting for 43.14%. The company's domestic and foreign sales have continued to grow. In terms of domestic sales, the company has accumulated more than 600 channels, and brand penetration continues to increase, with cumulative sales of 0.068 million vehicles, up about 42% year on year; the average sales price was 0.0211 million yuan, down about 3% year on year; and achieved sales revenue of 1.446 billion yuan, an increase of 38.25% year on year. In terms of export sales, the company has accumulated a network of more than 1,500 dealers, strengthened market development and channel layout, and sold 0.0858 million units, up about 69% year on year; the average sales price was 0.021 million yuan, down about 14% year on year; and achieved sales revenue of 1.802 billion yuan, an increase of 45.07% year on year. The company launched a number of high-displacement models this year, while improving domestic and foreign channel coverage and brand marketing capabilities. The sales scale and profit level are expected to continue to improve.

3) Electric two-wheelers: The company successfully launched new AE2 and AE4 series products and strongly entered the high-end e-autonomous field. It sold 0.0204 million vehicles in the first half of the year, with an average sales price of 0.0057 million yuan, achieving sales revenue of 0.116 billion yuan, an increase of 300.44% over the previous year, accounting for 1.54%. The company has a global layout, focusing on core markets such as Jiangsu and Guangdong in the domestic market, building benchmark markets and model provinces through targeted development, increasing the density of service outlets, and increasing domestic sales channels by 81.03%. At the same time, it is actively expanding international channels. The products have covered more than 30 countries and regions including Europe, Asia and South America. The export channel has grown by 181.25%, and the global market share is gradually expanding, and is gradually becoming the third business growth curve.

4) Accessories: Achieved revenue of about 0.59 billion yuan, a year-on-year increase of about 36.96%, accounting for 7.84%.

5) Other business: Achieved revenue of 0.158 billion yuan, a year-on-year decrease of 20.31%, accounting for 2.10%.

2. Profit analysis: Profit levels continue to rise, and there is still room for improvement in the long term 1) Gross profit margin and expense ratio: Demand and structure suppress gross profit margin in the short term, and inventory control drives down the cost ratio. In terms of gross profit, 2024H1 gross margin was 31.51% (YOY-1.07pct), of which Q2 gross margin was 30.82% (YOY-0.52pct). In terms of expenses, the cost ratio decreased by 2.28 pct year on year during the 2024H1 period, and the sales/management/R&D/finance expense ratios were -2.95/+0.47/+0.28/ -0.08pct year on year; among them, the cost ratio increased by 0.54 pct year on year during the Q2 period, and the sales/management/R&D/finance expenses ratio was -1.77/+0.53/+0.33/+1.44pct, respectively. Main factors: 1) The company's North American all-terrain vehicle inventory level is reasonable, and promotion expenses have been reduced; 2) Exchange revenue decreased year-on-year. Looking ahead to the second half of the year, as demand for all-terrain vehicles and motorcycles improves and new products are launched, the company's sales scale and gross margin are expected to continue to increase; at the same time, the company's Q3 sales expense ratio is expected to drop significantly as the results of promotion and inventory removal gradually become apparent.

2) Net interest rate: Net interest rate increased, profit level is continuously optimized. The net interest rate for 2023H1 is 9.41% (YOY+0.94pct), of which the Q2 net interest rate is 9.65% (YOY+0.24pct), which mainly benefits from reduced sales expenses and income tax rates. As domestic and foreign demand further improves in the second half of the year, regional and product structure optimization, gross margin continues to rise, and expense ratios gradually return to normal levels, the company's net interest rate level is expected to continue to rise.

3. Issuing equity incentives and employee stock ownership plans, demonstrating confidence in long-term development. The company released the 2024 equity incentive plan and the 2025-2026 employee stock ownership plan. Among them, the number of stock options to be awarded to the incentive target under the equity incentive plan was 3.55 million shares, accounting for about 2.34% of the total share capital. The exercise price of the initial stock option granted was 106.00 yuan/share. 1) Motivation target:

The 2024 equity incentive plan covered a total of 1,310 people, accounting for 25.86% of the total number of employees at the end of 2023, including the company's core management personnel and core technical (business) personnel; the holders of the 2025-2026 employee stock ownership plan are core company managers working in the company or subsidiary that play an important role in the overall performance and development of the company, including directors, senior managers, general managers of central managers, assistant general managers, etc., and the total number is expected to be no more than 29. 2) Incentive conditions: The equity incentive plan and employee stock ownership plan will evaluate the company's performance indicators on an annual basis in the 2024-2026 fiscal year to meet the performance assessment target as one of the conditions for holders to unlock in the current period: the cumulative operating income from 2024/2024-2024/2024/2026 is not less than 14/30.5/50.5 billion yuan. That is, the revenue in 2024/2025/2026 will not be less than 14/16.5/20 billion yuan, and the year-on-year growth rate of 2024/2025/2026 will not be less than 16%/18%/21%.

Investment suggestions: The power sports industry is on the fast track of growth. Consumption upgrades and increased demand for leisure and entertainment are boosting the penetration of all-terrain vehicles and medium- and large-displacement motorcycle products. The company's products have obvious cost performance advantages. The company proposes a globalization+intelligence+electrification development strategy, which is expected to enjoy industry dividends and continue to explore new business growth points. We predict that in 2023-2025, the company will achieve net profit of 1.335/1.709/2.117 billion yuan, corresponding EPS of 8.82/11.29/13.98 yuan, and the current stock price corresponding PE is 14.27/11.15/9.00 times, maintaining a “buy” rating.

Risk analysis

1) Overseas demand falls short of expectations: The share of overseas sales of two-wheelers and four-wheelers continues to expand. Among them, two-wheeler exports are mainly in emerging markets such as Asia, Africa, and Latin America. Four-wheeler exports are mainly in mature markets such as Europe and America, which are greatly affected by overseas demand. If overseas faces economic downturn or increased inflation, overseas sales of Chinese motorcycle companies will be impacted.

2) Risk of freight and exchange rate fluctuations: Chinese motorcycle companies' share of export revenue has increased overall, so they are greatly affected by freight rates and exchange rates. First, if freight rates increase dramatically, it will not only increase product transportation costs, which will have a negative impact on gross margin, but also create resistance to exports, thereby affecting the overall operation of the company. Second, long-term exchange rate fluctuations will affect the price strategies and business strategies of foreign trade enterprises. The US dollar exchange rate fluctuates greatly in the short term. Currently, the spot exchange rate of the US dollar to the RMB is above 7.1, which is at a high level compared to the same period last year.

3) Trade frictions and the risk of additional tariffs: Due to the rapid increase in the market share of Chinese companies in the ATV sector in recent years, seizing the market share of North American and Japanese brands, tariffs are currently being imposed on ATVs exported to the US. If they later seize market share in the UTV sector, and trade frictions further intensify, or tariff policies are further tightened, it will affect the competitiveness and profit margins of Chinese enterprises.