Affected by the imminent implementation of new standards such as lithium batteries and chargers, departmental dealers in Q3 took the initiative to reduce inventory and remove old standard products, affecting the pace of purchase. At the same time, consumers are waiting for the implementation of the trade-in policy, which is affected by delayed demand, and the company's performance has been disrupted in the short term. The company's gross margin increased by 0.66 pct year-on-year, and the product upgrade logic was continuously verified. Looking ahead to next year, the two-wheeler sector is expected to show a positive supply and demand situation under the influence of trade-in and the implementation of the revised version of the new national standard. The company's product upgrade process is smooth, and stores are expanding in an orderly manner, and it is expected to enjoy a higher market share in the year the policy is implemented.

Incident: 24Q3 operating income 6.873 billion yuan/YoY -5.05%, net profit to mother 0.603 billion yuan/-9.02%, net profit excluding non-attributable net profit 0.553 billion yuan/-9.82% YoY. Excluding the impact of equity incentive expenses, Q3 net profit to mother fell by about 2-3% year on year; 24Q1-3 revenue 17.464 billion yuan/year on year +0.05%, net profit to mother 1.554 billion yuan/year on year- 0.25%

The new standard switch disrupts short-term shipments, and the product structure improvement logic continues to be verified. We estimate that 24Q3's sales volume fell by about -10% year on year, mainly affected by the implementation of new standards such as lithium batteries and chargers on November 1. Departmental distributors Q3 took the initiative to reduce inventory and remove old standard products, affecting the pace of purchase. At the same time, consumers waited for the implementation of the trade-in policy and demand delays. At the same time, we estimate that the company's bicycle ASP increased by about 5% year-on-year. Mid-range and high-end models such as the Luna, Yangwang, and Snapdragon were popular. The results of streamlining SKUs were remarkable, and the product upgrade logic was continuously verified.

Gross margin has increased, and cost control is relatively stable. 24Q3 gross profit margin 16.79% /year over year +0.66pct. Product structure optimization drives gross margin growth. The 24Q3 sales/management/ R&D/finance expense ratios were 2.97/2.31/2.42/ -0.87%, respectively, +0.25/0.37/0.07/0.59pct year on year, and 8.77% /0.39pct year-on-year net profit margin. The company's cost control is relatively stable, and it is expected that after excluding equity incentive costs, profit performance will be better.

With a variety of business types, the tricycle business is expected to create a second curve. The company is making efforts to upgrade the two-wheeler product structure and expand sales channels. It plans to invest in a production base in Jianfeng County to supplement the production capacity of electric tricycles and enrich product types, which is expected to open up a second growth curve for the three-wheeler business.

Investment advice: Looking ahead to next year, demand is expected to be stimulated by the implementation of the two-wheeler trade-in model model model and the implementation of local municipal rules. The two-wheeler sector's supply and demand structure is improving, the company's product upgrade process is smooth, and stores are expanding in an orderly manner, and it is expected that it will enjoy a higher market share in the year the policy is implemented. We expect the company's net profit to be 1.992/2.416/2.828 billion yuan in 2024-2026, corresponding to the PE valuation of 15.5/12.8/10.9 x, maintaining the “Highly Recommended” rating.

Risk warning: The competitive landscape of the industry has deteriorated, the effects of policy implementation have fallen short of expectations, terminal sales are weak, new product development and sales fall short of expectations, and channel expansion falls short of expectations