3Q24 results fell short of our expectations

The company announced the three-quarter report: 3Q24 revenue -37%/-43% month-on-month to 9.53 billion yuan, net profit to mother -1135%/-137% month-on-month to -0.11 billion yuan, deducting non-net profit -221% to -0.22 billion yuan month-on-month. 1-3Q24's cumulative revenue was -6% to 45.14 billion yuan, net profit attributable to mother -12% to 0.36 billion yuan, and after deducting non-net profit -23% YoY to 65.52 million yuan. The 3Q24 performance fell short of our expectations, mainly because the company took the initiative to leave the inventory, which had a negative impact on wholesale sales.

Development trends

Taking the initiative to leave the warehouse has put pressure on performance, developing new energy sources and going overseas. Referring to the China Automobile Association, the 3Q24 heavy truck industry's wholesale sales volume was -18%/-23% YoY to 0.1785 million vehicles, and FAW Jiefang Heavy Truck's wholesale sales volume was -29%/-37% YoY to 0.03 million vehicles. We believe that in the third quarter, the company took the initiative to reduce channel inventory and pressure on the dealer side, so the sales revenue growth rate was lower than that of the industry, thus preparing for the peak season in 4Q24. Referring to Jiaoqiang Insurance, the number of 1-3Q24 new energy heavy trucks sold was +143% to 0.048 million vehicles, and the company's license volume was +432% to 4,462 vehicles, with a market share of 9.2%, ranking third in the industry. Referring to the China Automobile Association, the export volume of 1-3Q24 heavy trucks was +5% to 0.221 million vehicles, and the company exported +55% to 0.043 million vehicles year-on-year, with a market share of 20%, ranking third in the industry.

Cost reduction and efficiency continued to advance, gross margin improved month-on-month, and costs were steady. The 3Q24 company's gross margin was -0.6pct/+0.2pct to 7.1% month-on-month, and the absolute value of expenses for the period was basically the same. We think the main reasons are: 1) the inventory level on the industry side has gradually returned to a reasonably low level, and price competition is slowing down; 2) the company continues to promote cost reduction and cost control measures and lean production management; 3) the company's internal engine allocation rate has improved sequentially. As of the end of 3Q24, the company's cash on hand was 19.1 billion yuan, with no interest-bearing liabilities. Notes and accounts receivable increased by 11.6 billion yuan to 13.6 billion yuan at the end of 2023. It was mainly affected by adjustments in the new energy distribution finance model and the longer billing period in overseas regions than at home. We believe the overall risk is manageable.

The establishment of Liberation International will increase export profits, and the plan is to sell shares in finance companies to focus on the main business. The company announced the establishment of FAW Jiefang International Trade Co., Ltd. in April, and has now completed procedures such as industrial and commercial registration and account opening. We believe that the company will adjust its overseas business from the parent group level to a listed company, which is expected to improve overseas operating capacity and profitability. The company announced in October that it plans to sell 21.8% of FAW Finance's shares in the joint venture company FAW Finance to the controlling shareholder FAW Co., Ltd., for a total price of 4.92 billion yuan. We believe that after the transaction is completed, the company will receive further financial support, focus on the main business of the commercial vehicle industry chain, and optimize the asset structure.

Profit forecasting and valuation

Due to weak demand in the commercial vehicle industry and fierce terminal price competition, we lowered our 2024 profit forecast by 74.7% to 1.02 billion yuan, and introduced the 2025 profit forecast of 1.9 billion yuan for the first time. Maintain an outperforming industry rating. The current stock price corresponds to 41.8/22.5 times 2024/2025 P/E. Considering the adjustment of profit forecasts, the sector's valuation center moved upward, maintaining a target price of 10.0 yuan, corresponding to 48.3/26.0 times 2024/2025 P/E, with 15.5% upside compared to the current stock price.

risks

Production and sales in the commercial vehicle industry fell short of expectations, industry competition intensified, and there was a risk of international trade friction.