Key points of investment

2024 Q3 Quarterly Report Overview: Revenue and profit are under slight pressure due to inventory removal

1) Revenue & profit: 24Q3 achieved operating income of 6.873 billion yuan (yoy -5.05%), net profit due to mother 0.603 billion yuan (yoy -9.02%), net profit of 0.553 billion yuan (yoy -9.82%) after deducting non-return to mother net profit of 0.553 billion yuan (yoy -9.82%). The slight pressure on revenue and profit is mainly due to the official implementation of the “Electric Bicycle Electrical Safety Requirements” (GB42295) and the “Safety Technical Specification for Lithium-ion Batteries for Electric Bicycles” (GB 43854) from November 1, so the channel accelerated removal of non-standard product inventories in Q3.

2) Sales volume & bicycles: The 24Q3 sales volume is expected to be 3.46 million units (yoy -10%), corresponding ASP is expected to be 1986 yuan, which is expected to increase the year-on-year increase of 106 yuan, yoy +6%; the corresponding bicycle net profit is expected to be 174 yuan, an increase of 2 yuan over the previous year. If restricted stock incentives are amortized this quarter in 2024 (estimated 0.04 billion yuan), the net profit of bicycles is expected to be 186 yuan, an increase of 14 yuan, yoy +8%.

3) Profitability: Gross margin and net interest rate to recover equity incentive expenses continue to rise. The gross profit margin for 24Q3 was 16.79%, +0.66pct year on year; the net profit margin was 8.77%, -0.43pct year on year. If you add back the 2024 restricted stock incentive amortization for the current quarter (estimated 0.04 billion yuan), the net profit margin was 9.35%, +0.20pct year over year.

Expense side: revenue pressure -> slight increase in expense ratio; pay attention to quarterly disturbances in incentive amortization expenses this year

Sales/management/R&D/finance expense ratios for the 2024 Q3 order were 2.97%/2.31%/2.42%/-0.87%, respectively, +0.26pct/+0.37pct/+0.07pct/+0.59pct, respectively; Q3 revenue was under pressure due to declining inventory sales, and cost rigidity caused various expense ratios to increase.

2023 Stock Options Incentive Plan Q1-Q3 We expect a total amortization of 0.026 billion yuan, and the 2024 Restricted Stock Incentive Plan Q2-Q3 We expect a total amortization of 0.08 billion yuan (Q1 not amortized); if the incentive target is not unlocked, this portion of the amortization will be recovered in Q4, totaling about 0.106 billion yuan.

The mid-term dimension of the industry side: Continuing to reaffirm demand-side catalysism+supply-side optimization brought about by multiple policies 1) Demand side: Local rules for trade-in are gradually being implemented. Since the two-wheeler season has now entered the low season, it is expected that the real contribution will increase significantly next year. On October 14, 2024, the Shanghai Municipal Commission of Commerce issued trade-in rules. From October 16, 2024 to June 30, 2025, electric bicycle trade-in will be given a one-time subsidy of 500 yuan to individual users; we expect that in the future, all regions may fully introduce the rules using Shanghai as a reference, and industry demand is expected to grow rapidly.

2) Supply side: A new “new national standard” is about to be launched, which is expected to drive increased industry concentration. On September 19, 2024, the Ministry of Industry and Information Technology issued the “Electric Bicycle Safety Technical Specification (Draft for Comments)”, which indicates that the consultation phase will end on October 19 and be quickly launched after subsequent improvements. We believe that the key to competition for electric two-wheelers in the second half may be to quickly launch models that meet market needs on a compliance basis. As an industry leader, Emma Technology has low cost compliance and quick response capabilities, and is expected to gain more share in this round of supply optimization.

Profit Forecast and Valuation:

The dual-oligopoly pattern in the electric two-wheeler industry has been determined. Ssangyong's position is difficult to shake, and the certainty of increasing market share and profitability of superleading brands has once again increased. The company's revenue for 2024-2026 is estimated to be 21.36/24.99/29.08 billion yuan, up 1.5%/17.0%/16.4%, net profit to mother 1.92/2.47/3.07 billion yuan, up 2.3%/28.1%/24.6%. The PE corresponding to the current market value is 16.0/12.5/10.0 X. As a leading company in the industry that favors both supply and demand, Emma Technology has excellent quality, steady operation, and maintains a “buy” rating.

Risk warning:

Policy progress falls short of expectations; industry market demand falls short of expectations; overseas market development falls short of expectations.