3Q24 results are basically in line with our expectations

The company announced 1-3Q24 results: 1-3Q24 revenue of 17.46 billion yuan, +0.05% year-on-year, and net profit to mother of 1.55 billion yuan, -0.25% year-on-year. Corresponding to 3Q24 revenue of 6.87 billion yuan, -5.1% YoY, +21.9% month-on-month, net profit of 0.6 billion yuan to mother, -9.0% YoY/+29.0% YoY, basically in line with our expectations.

Development trends

The new standard switch disrupted 3Q sales, and bicycle revenue and gross margins were steady. Since November 1, many new standards such as electrical safety, chargers, and lithium-ion batteries have been implemented1. We believe it will have had an impact on the enthusiasm of 3Q dealers to pick up goods. 3Q24's sales volume grew steadily month-on-month, and there was year-on-year pressure. The 3Q24 gross profit margin was 16.3%, +0.68ppt/month-on-month. It remains relatively stable. We judge that the proportion of high-margin new products remains high. 3Q24's sales/R&D/management expenses were 0.2/0.16/0.17 billion yuan, respectively, and +3.9%/13.1%/-2.2% year over month, all down from month to month. We believe that the main impact of the year-on-year increase in equity incentive costs was 3.0%/2.3%/2.4%, respectively, totaling +0.7ppt/month-on-month.

Cash flow improved month-on-month, and operational efficiency improved. 3Q24 net cash flow from operating activities was 2.72 billion yuan, a high increase from month to month; net cash flow from investment activities was 2.15 billion yuan, and net outflow decreased month-on-month, with CAPEX expenditure of 0.89 billion yuan, which remained at a relatively high level; monetary capital and transactional financial assets totaled 8.33 billion yuan at the end of 3Q, an increase of 2.1 billion yuan over the previous month, and there was plenty of cash on hand. 3Q24 Operational efficiency was improved, and the number of accounts receivable turnover days and inventory turnover days were reduced to 6.3 and 10.1 days.

Policy expectations drive improvements in industry sales and pattern interpretation expectations, and industry leaders are expected to fully benefit. In August/September, the Ministry of Industry and Information Technology successively released a list of two batches of companies that meet the “Electric Bicycle Industry Specification Requirements”; since the end of August, various provinces across the country have successively released electric bicycle trade-in plans. According to Xinhua News Agency report2, as of October 22, 30 provinces had introduced implementation rules, using more than 66 million yuan of subsidy funds to recycle used cars and sell new cars, with sales of 0.1763 million yuan each. We believe that the standard switch may have an impact on short-term sales in the industry. The company is stepping up certification of new standards and is expected to quickly resume normalized sales. Looking ahead to next year, if the new national standard is strictly implemented as scheduled, we believe it is expected to drive the company's sales back to a growth trajectory.

Profit forecasting and valuation

Considering the continued accrual of equity incentive fees, we lowered our 24/25E profit forecast by 6.4%/10% to 2.01/2.42 billion yuan. Considering policy incentives and stock replenishment expectations, we maintain a target price of 37.5 yuan, corresponding to 16x/13x 2024/25E P/E, with 5% upside compared to the current stock price.

risks

Policy implementation and implementation fell short of expectations; market competition intensified.