[[Investment Highlights]

The market segment continues to expand, and sales are expected to continue to be realized. (1) From January to August 2024, the new energy penetration rate in the passenger car market reached 44.7%, plug-in hybrid models sold 1.78 million units, +61% year-on-year, and 0.75 million extended-range models sold, +121% year-on-year. The growth rate far exceeded the overall growth rate, and the product logic was verified by the market. (2) The average price of passenger cars rose from 0.153 million yuan in 2020 to 0.179 million yuan in 2024, showing a continuous upward trend. Looking at the structure, the share of sales of models over 0.2 million rose from 14.2% in 2017 to 32.3% in January-August 2024, and sales of models over 0.3 million rose from 5.7% in 2017 to 14.7% in January-August 2024. The share of sales of mid-range and high-end models increased year by year, and the trend of consumption upgrading was obvious. (3) From January to August 2024, the penetration rate of independent brands reached 51%, with new forces accounting for 7% of the market. Consumer trust in independent brands and new car companies continues to rise.

Channel expansion combined with single store efficiency improvements, and the company's operations are expected to continue to improve. In July '24, 51,000 new vehicles were ideally delivered, +49.4% year over year, and +6.8% month-on-month, setting a record high in monthly deliveries. A total of 23,9981 vehicles were delivered in 24 years, +38.5% year-on-year. According to Marklines data, in 2023, the company sold 0.376 million vehicles, +182% year-on-year. The new sales volume is due on the one hand to improved product competitiveness, and on the other hand, to continuous channel expansion. By the end of July, the company had 487 retail centers across the country, covering 146 cities. The average sales volume of a single store in 2023 was 0.265 billion yuan/unit, which is a significant increase compared to 2022. As the company's channels continue to sink and expand, and the efficiency of single stores continues to improve, the company's overall operation is expected to continue to improve.

Profitability recovered in Q2 due to positive adjustments in the face of problems. 24H1 was under overall pressure, achieving revenue of 57.31 billion yuan, +21% year over year, operating profit -0.12 billion yuan, -47% year over year, and net profit to mother of 1.695 billion yuan, -47% year over year. In March 2024, Li Xiang acknowledged in an internal open letter that his grasp of the pace of the pure electric market had been misjudged. In April, the company quickly responded to organizational changes and announced the launch of the Matrix Organization 2.0 upgrade, involving organizational structure adjustments in various departments. Looking at 24Q2, the company achieved revenue of 31.7 billion yuan, +10.6% year-on-month, realized net profit of 1.1 billion yuan, -52.3% year-on-year, +86.2% month-on-month, operating profit of 0.468 billion yuan, -71.2% year-on-year, reversing losses from month to month (Q1 was -0.585 billion yuan). It is expected that as new car sales continue to increase and terminal preferential policies are adjusted, profit levels are expected to gradually recover.

The “Dual Energy Strategy” was released, and the model plan was gradually improved. In terms of product planning, the company has planned three all-electric SUVs, which are expected to be released in the first half of 2025. By 2025, the company is expected to form a product layout of “1 super flagship+5 extended-range electric models+5 high-voltage pure electric models”, targeting a market of 0.2 million or more to fully meet the needs of home users.

They continue to catch up on the road to smart driving, and there are early signs of a closed commercial loop. In May '24, the company launched the NOA experience. In July, all AD Max models covered will be rolled out in full. The company's intelligent driving mileage increased from 1.2 billion kilometers at the end of 2023 to 1.9 billion kilometers in June 2024. The number of participating users exceeded 0.81 million, and the per capita mileage was greater than 2,300 kilometers. By accumulating a large number of model training materials, intelligent driving capabilities are expected to improve rapidly. At the same time, the share of NOA test drives in stores has nearly doubled, and orders for AD Max models equipped with unmarked NOA features have increased dramatically, accounting for rapidly exceeding 50%. The commercial loop for smart driving is beginning to show signs.

[Investment advice]

Company profit forecast and investment rating: In the short term, with the launch of the company's dual energy strategy, the product matrix is constantly being enriched, channel coverage is gradually expanded, and sales are expected to continue to grow; in the medium to long term, the company insists on full-stack self-research on core technology and the level of intelligence continues to improve. Smart driving technology is expected to form a closed commercial loop, and the company's performance is expected to continue to rise steadily. The company's revenue for 2024-2026 is estimated to be 1679.79, 2261.86, and 274.528 billion yuan, respectively, and net profit to mother of 112.53 billion yuan, 164.08 billion yuan, and 23.530 billion yuan respectively; the corresponding EPS is 5.30, 7.73, and 11.09 yuan, respectively. The corresponding PE is 16, 11, and 8 times, respectively, and the corresponding PS is 1.08, 0.80, and 0.66 times, respectively. Judging from the comparison situation in the same industry, the new-power car builders Xiaopeng Motor, NIO Auto, and Zero Sports Auto were selected. The average PS values that the industry unanimously expected in 2024/2025/2026 were 1.14/0.71/0.56 times, respectively, maintaining the company's “gain” rating.

[Key Assumptions]

The company is expected to achieve revenue of 167.979, 226.186, and 274.528 billion yuan in 2024-2026, up 36%, 35%, and 21% year-on-year.

The company achieved sales of 0.376 million vehicles in the full year of 2023, contributing a large increase to the company in 2023 after L7, L8, and L9 production capacity climbed; Mega and L6 began delivery in 2024Q1 and Q2, respectively, and the L6 sales performance was impressive.

It is planned to continue expanding the product lineup after the launch of pure electric models in 2025, and sales are expected to be 0.532, 0.735, and 0.906 million vehicles in 2024-2026, respectively.

[Potential catalysis]

The dual-energy strategy was implemented at an accelerated pace, and a breakthrough was achieved in sales volume when pure electric models were launched;? Breakthroughs in smart driving technology have increased the sales share of AD max models, driving the company's profitability;? The company's cost reduction measures have been successfully implemented.

[Risk Reminder]

Risk of channel expansion falling short of expectations. The company's sales network expanded rapidly. By the end of July 2024, there were 487 retail centers across the country, covering 146 cities. If subsequent channel expansion falls short of expectations, the company's sales coverage may not be further expanded, affecting sales growth.

The risk of introducing new models that fall short of expectations. The company expects to form a product layout of “1 super flagship, 5 extended-range electric models, and 5 high-voltage pure electric models” by 2025. If the new car launch schedule falls short of expectations, it may affect sales growth, scale effects cannot be formed, gross margin will be affected, and at the same time, management and R&D expenses cannot be amortized.

The risk of further intensification of competition in the industry. Currently, various car companies are waging price wars in order to maintain sales volume and seize market share. If industry competition intensifies and the price war intensifies, it may further reduce the company's profit level.