2Q24 results slightly exceeded market expectations

The company announced 1H24 results: corresponding to 2Q24 revenue of 38.48 billion yuan, +548% year-on-year; net profit to mother of 1.41 billion yuan, reversing year-on-year losses. We believe that scale effects and product structure improvements drive profit release, and gross margin and profit structure slightly exceed market expectations.

Development trends

2Q structural improvements and the release of scale effects led to a month-on-month increase in gross margin, and cost-based R&D expenditure diluted profits. According to the Passenger Federation, AITO sold 98,782 units in wholesale in 2Q24, +19% over the previous month. M9 deliveries climbed and its share of sales increased by half, leading to improvements in product structure. According to our estimates, 2Q24 gross margin reached 24.8%, +6.1ppt compared to the previous month. The overall 2Q24 period expense ratio was +4.1ppt, of which the sales/management/R&D rate was 15.4%/1.9%/4.9%, and +2.6/+0.2/+1.3ppt compared to the previous month. According to the company's semi-annual report, the share of 1H24 costed R&D expenditure increased sharply to 73%. If you refer to the 1H23 R&D expenditure ratio (15%), 1H24 R&D expenses increased by about 0.98 billion yuan year-on-year. In addition, losses from non-main businesses also result in dilution of profits, such as Jinkang Power and Huaihai Power. Sales volume and net profit for the second quarter were +0.014 million units/+1.19 billion yuan, respectively, and the marginal net margin reached 10.1%.

We hope to invest 10% and deepen the “business+equity” cooperation model with Huawei. Celis announced on August 25 that its wholly-owned subsidiary Celis Automobile Co., Ltd. plans to purchase 10% of Huawei's shares in Shenzhen Yinwang Intelligent Technology Co., Ltd. (“Promise”) with a transaction amount of RMB 11.5 billion. After delivery, Celis has the right to nominate a director to the board of directors and to nominate a member of the Audit Committee. Based on the Promise simulation report, Promise 1H24's revenue was 10.435 billion yuan and net profit was 2.231 billion yuan. The company believes that this transaction will help Huawei and Orient support and empower Celis to upgrade the strategic cooperation to a “business cooperation+equity cooperation”. At the same time, the minority shares of the target company of this acquisition are expected to have a positive impact on the investment income of listed companies.

The product side continues to work hard and is optimistic about the smart selection model for a long time. According to Auto Home, the company's new model, the M7 Pro, will be released on August 26. It will be equipped with the basic version of the Huawei ADS Driver Assistance System. The pre-sale price is 0.2498 million yuan i; at the same time, the M9 five-seater version is expected to launch ii on August 30 at the Chengdu Auto Show. We believe that AITO has become a benchmark for luxury new energy vehicle brands, and this investment is expected to further deepen cooperation between the two parties. We expect the company to further expand its product matrix on the basis of complementing the luxury SUV category, and at the same time accelerate the expansion of overseas markets and open up room for long-term growth.

Profit forecasting and valuation

We keep our profit forecast for 2024/2025 basically unchanged. The current stock price corresponds to 15x 25E P/E, maintaining the outperforming industry rating and target price of 124 yuan, corresponding to 23x 25E P/E, which has 54% upside compared to the current stock price.

risks

New car launch orders fell short of expectations; market competition intensified.