GM losses+equity transfers confirmed that investment income affected 2Q24 performance: 1H24 operating income -12.4% to 277.09 billion yuan, net profit to mother -6.63 billion yuan, net profit after deducting -82.0% to 1.02 billion yuan, gross margin -1.2pcts to 8.5% year over year; of these, 2Q24 operating income was -21.4% YoY/-0.6% month-on-month to 138.1 billion yuan, net profit to mother YoY- 9.0% /month-on-month +44.2% to 3.91 billion yuan, net loss of about 1.1 billion yuan after deducting non-post-return net profit (vs. 1Q24 net profit of 2.12 billion yuan), gross margin -1.3 pcts/month-on-month -0.6 pcts to 8.2% month-on-month. 2Q24's net profit to mother increased month-on-month, after deducting non-attributable performance from profit to loss, mainly due to 1) MG India brought in investors and confirmed that 5.13 billion yuan was included in non-recurring income; 2) the performance of the joint venture was dragged down (1H24 SAIC-GM lost 2.27 billion yuan).

Joint venture contributions have weakened, and 2H24E Volkswagen and GM Wuling are expected to improve marginally: 1H24's return on investment in joint ventures and joint ventures was -51.6% to 2.21 billion yuan; 2Q24 investment income in joint ventures and joint ventures was -99.8% YoY /99.8% month-on-month to 0.004 billion yuan. 1) SAIC Volkswagen's sales volume in the first 7 months of 2024 was -1.5% to 0.593 million vehicles, while 1H24 SAIC Volkswagen made a profit of 0.86 billion yuan (cycle profit +59.1% to 0.002 million yuan).

The company has achieved results in cost reduction and inventory control at a reasonable level. It is expected that the product structure will be broadened by speeding up the introduction of hybrid models and upgrading the smart cabin function experience. 2) SAIC-GM's sales volume in the first 7 months of 2024 was -55.1% year-on-year to 0.241 million vehicles, and 1H24 SAIC-GM lost 2.27 billion yuan (bicycle loss of about 0.01 million yuan vs. profit of about 0.003 million yuan in 2023). It is expected that SAIC-GM may still face problems such as product structure transformation+structural cost reduction in the short term. 3) SAIC-GM-Wuling's sales volume increased 2.3% year-on-year to 0.644 million vehicles in the first 7 months of 2024. 1H24 SAIC-GM-Wuling made a profit of 0.1 billion yuan (bicycle profit +120.9% year-on-year to about 170 yuan). Its compact SUVs such as Starlight S and Yunhai are expected to maintain the brand's competitiveness in the compact economy car market.

Overseas adoption of flexible solutions and independent platform-based transformation: SAIC's passenger car sales volume in the first 7 months of 2024 was -20.2% to 0.385 million units, Zhiji's sales volume was +131.3% year-on-year to 0.027 million units, and SAIC Group's overseas sales volume was -9.7% to 0.57 million vehicles year-on-year. 1) Exports: Facing the impact of the EU's tariff policy, the company introduced HEV/fuel series models to avoid policy risks while adjusting production bases. Furthermore, the company is also actively preparing the factory site to ensure the long-term development of the European market. 2) Autonomy: The company will adopt a “big autonomy” strategy to integrate brand channels+technology-side resources; among them, MG and Roewe will adjust marketing channels to improve operating efficiency; the market performance of Zhiji continues to improve. The first SUV 2024 LS6 equipped with a smart lizard digital chassis was officially released at the Chengdu Auto Show, and brand sales are expected to reach 0.07-0.08 million vehicles during the year.

Maintaining the “gain” rating: Considering factors such as the long electrification transformation cycle of joint venture brands and the slowing growth rate of independent overseas sales, we lowered the 2024E-2026E net profit forecast of 31.3%/23.8%/17.6% to 10.26/12.34/13.76 billion yuan. In the medium to long term, we are optimistic that the company will rely on its advantages in terms of brand+resources to achieve a flexible valuation repair and maintain a “gain” rating after the implementation of the joint venture electric transformation and implementation + independent new product cycle.

Risk warning: Autonomous loss reduction falls short of expectations; Japanese sales volume and performance improvements fall short of expectations; risk of fluctuations in raw material prices; market risk.