1H24 results are in line with our expectations

The company announced 1H24 results: 1H24 achieved operating income of 14.41 billion yuan, -15.4% year-on-year; net profit to mother of 1.03 billion yuan, -12.9% year-on-year. The results were in line with our expectations.

Development trends

Internal and external factors affected the year-on-year decline in sales, and the product structure improved as scheduled to boost gross profit margins. 1H24 sold 6.382 million electric two-wheelers, -22% year-on-year, while e-scooters/e-bikes sold 1.9/4.483 million units respectively, -29%/-19% year-on-year. According to the company's semi-annual report, the company believes that macroeconomic uncertainty, a brief weakening in market demand, and distributors' inventory removal cycle have had a negative impact on the company's electric two-wheeler sales. The company responded positively, and the company's sales gradually rebounded from May and June. The product structure of 1H24 was improved and the unit price of batteries and electric drives increased. The total bicycle revenue reached 2,258 yuan, +183 yuan/month-on-month +126 yuan; the combined battery capacity utilization rate increased, and the gross margin increased to 18.0%, +1.1 ppt/month-on-month +1ppt, of which the gross margin of the battery and electric drive division reached 14.7%.

Bicycle net profit increased year-on-year, and the payment cycle affected 1H24 operating cash flow. 1H24's sales/development/management expenses were 0.61/0.42/0.49 billion yuan, respectively, -26.2%/-10.8%/-11.5%, and corresponding rates were 4.2%/2.9%/3.4%, respectively, totaling -0.3ppt/month-on-month. Other income and net revenue decreased by 43.2% year over year. We judge that it is mainly due to the base impact of 1H23 one-time government subsidies and exchange earnings. The net interest rate of 1H24 was 7.2%, +0.2ppt year on year. Net bicycle profit was 162 yuan/bicycle net profit of 123 yuan after deducting other income, +17/32 yuan year on year. In terms of cash flow, 1H24's net operating cash flow was -0.697 billion yuan, which turned negative year on year. The company believes that it is mainly due to factors such as a decline in revenue and payment of 2H23 acceptance notes. The book value of 1H24 cash and equivalent at the end of the period is 7.07 billion yuan, and there is plenty of cash on hand.

The policy guides the healthy development of the industry, the company actively prepares, and sales are expected to return to growth next year. Since April, government departments have continued to strengthen the management of the electric motorcycle industry by introducing new national standards and updating existing standards, and trade-in subsidies have begun to be implemented one after another in many places. On August 22, the Ministry of Industry and Information Technology officially released the first batch of companies that met the “Electric Bicycle Industry Specification Requirements”. Three Yadi factories were selected, accounting for 1/2. Driven by the policy, we believe that industry demand is expected to be more fully released next year. The company has a leading edge in Sandian's core technology, platform-based R&D and production, and actively applies new processes and technologies to meet the new national standards and market needs, and sales are expected to return to growth. The company continues to promote overseas market expansion, gradually expanding from Southeast Asia to Central Asia, South America, etc., and the medium- to long-term growth space is worth looking forward to.

Profit forecasting and valuation

1H sales are under pressure, 2H is still in the adjustment and recovery stage. We lowered our 24/25 profit forecast by 26.5%/24.3% to 2.5/3.1 billion yuan. The current stock price corresponds to 11x/9x 24/25E P/E. Leaders benefited from policy adjustments to maintain outperforming industry ratings; the sector's valuation center moved downward, and the target price was lowered by 28% to HK$14, corresponding to 15.7x/12.6x 24E/25E P/E, with 41% upside compared to the present.

risks

Policy implementation falls short of expectations; market competition intensifies; industry demand falls short of expectations.