Investment advice

1H24 experienced an operating slump under pressure on sales, then quickly adjusted, and has been able to see continuous improvement in fundamentals since the 3rd quarter. Looking ahead, the company's first-mover advantage for hybrid products is expected to be maintained, preparations for the launch of pure electric products continue to advance, and smart driving technology has made marginal breakthroughs. We continue to be optimistic about the company's long-term competitiveness in the global middle and high-end new energy markets.

rationales

Where are the changes in industry and company operations going? On the industry side, we have seen that the penetration rate of 1H24 middle and high-end new energy sources has undergone phased adjustments. Currently, price competition is fierce but is slowing down. We think it is expected to gain strength again in the future. On the company side, the company achieved a leading position as a new energy vehicle company with high-quality household SUVs. The sales share was under pressure under pressure under the influence of 1H24, and organizational and operational adjustments were quickly carried out; sales reached a new high of 0.051 million vehicles in July, and the 2 quarterly reports improved month-on-month. We believe that the difficult situation has been reversed. Looking ahead, we are optimistic that 2H24 monthly sales will stabilize at 0.05 million vehicles and have an opportunity to break through upward. The scale effect, technology procurement cost reduction, and precise fee control will help improve profitability. We expect the 3-4 quarter results to return to a record high.

Big water, big fish, consolidate hybrid competitive advantage and expand pure electricity growth. The company focuses on the broad luxury brand fuel replacement market. Leaving aside the short-term turmoil of price competition, long-term winners still need to focus on technology and product competitiveness. On the hybrid side, the 0.2-0.3 million yuan market penetration rate is still low. The company has established a first-mover advantage in the hybrid market. Price decline and scale cost reduction form a positive cycle. We believe it is expected to support its continuous consolidation of position and sales growth. In terms of pure electricity, there is a lot of space in the middle and high-end pure electric market and the pattern is undecided. The company is speeding up the improvement of the energy supplementation network, adjusting the sales system, focusing on leveraging the differentiated advantages of pure electric platforms, and accumulating energy in early preparations to wait for next year's new models, hoping to break through the sales ceiling corresponding to the pure electric market.

Smart driving and quick correction capabilities shape the moat and are optimistic about the company's long-term value. Since 2021, the company has continued to increase investment in smart driving research and development. After several technical architecture adjustments, NoA began full promotion in July. The end-to-end + VLM model began testing, functional iteration accelerated, and smart driving entered the leading echelon. In addition, the company's organizational structure is empowered by advantages and has the ability to quickly correct errors, and has led the company to quickly get out of the adjustment period many times. We believe that the current industry is changing rapidly and the market is changing rapidly. Smart driving may be the key for car companies to win in the second half, and the ability to quickly correct errors is expected to guarantee the flexibility of the company's business adjustments.

Profit forecasting and valuation

Taking into account the 2024 business adjustments and the current competitive situation, we lowered our 2024/25 non-GAAP profit forecast by 13/ 22% to 8.8/13.5 billion yuan, respectively. Currently, US stocks and Hong Kong stocks both correspond to 18/11x2024/25 non-GAAP P/E. The current market has poor expectations for the competitiveness of the company's pure electric products and the leadership of smart driving technology. Considering the company's future growth, we believe that the current valuation has medium- to long-term layout value. Maintaining an outperforming industry rating and maintaining the target price of US/Hong Kong stocks at $33/HK$130, corresponding to 18x non-GAAP P/E in 2025, with 56% and 60% upside, respectively.

risks

The increase in pure electric sales fell short of expectations, the progress of smart driving fell short of expectations, and the level of fierce price competition exceeded expectations.