Huayang Group's performance is in line with our expectations

The company announced the 2024 three-quarter results. In the first three quarters, the company achieved operating income of 6.84 billion yuan, an increase of 42.62% year on year; achieved net profit of 0.46 billion yuan, an increase of 56.20% year on year; achieved net profit deducted from mother 0.45 billion yuan, an increase of 61.31% year on year. Corresponding to the single quarter of 3Q24, the company achieved operating income of 2.65 billion yuan, up 37.25% year on year and 20.21% month on month; realized net profit of 0.18 billion yuan, up 53.54% year on year, up 22.89% month on month; realized net profit without return to mother 0.17 billion yuan, up 56.58% year on year and 24.51% month on month. The performance was impressive, in line with previous forecasts and our expectations.

Financial concerns: 1) The gross margin of the 3Q24 company fell by 0.82/0.88 ppt to 21.06%, respectively, and continued to show a slight downward trend. On the one hand, we believe that it is continuously affected by price competition in the automobile market; on the other hand, since the gross margin level of some initial sales of new products is still low, but the growth rate is fast, causing a certain drag on gross margin, we expect gross margin to be optimized as the scale of mass production of new products rises.

2) The company continues to maintain a strong ability to control expenses, and the net interest rate level due to mother increased year-on-month.

Development trends

New cockpit products continue to be released, and the automotive electronics business is expected to continue to grow rapidly. In the third quarter, several fixed-point projects supported by the company were launched: in August, the Great Wall Blue Mountain Smart Driving Edition was officially launched, and the company equipped it with a 29-inch ultra-large SR-HUD, a 17.3-inch rear entertainment screen and a precision motion mechanism for the ceiling screen; in September, the company equipped the Changan Deep Blue S05 with a “package” solution for cockpit domain control, AR-HUD, and 50W high-power wireless charging. We believe that the company's automotive electronics business is expected to continue to grow rapidly with the rise in mass production of newly listed projects and continued acquisition of new targets. In terms of HUD, Gaogong data shows that in the first three quarters, domestic HUD shipments reached 2.316 million units, an increase of 50% over the previous year, and the penetration rate reached 15%. We believe this reflects the continuous increase in market recognition of HUD; the company maintained more than 20% of the domestic market share in the first three quarters, and its dominant position was stable.

Regional service capacity has been strengthened. In July 2024, the company established new subsidiaries in Shanghai and Chongqing. As a result of the increase in leased office space, the company's usage rights assets and lease liabilities increased by 60.41% and 90.64% respectively by the end of the third quarter. We believe that both Shanghai and Chongqing are important regional hubs in the automotive industry chain, and improving the local service capabilities of the two places is expected to further enhance the company's product competitiveness.

Profit forecasting and valuation

Considering the company's continuous release of new products and effective cost control, we revised the 2024/25 net profit of 5%/5% to 0.677/0.857 billion yuan respectively. The current stock price corresponds to 2024/25 23.9/18.9 times P/E.

We maintain our outperforming industry rating. Considering the recent upward shift in the industry valuation center, based on a 25-fold P/E increase in 2025, the target price is 18% to 40.80 yuan, and there is still 32% room for an increase of 32% compared to the current stock price.

risks

The HUD penetration rate fell short of expectations, the cockpit electronics competition pattern deteriorated, and product price cuts exceeded expectations.