Event: Ideal Auto announced 2024Q3 results: 2024Q3 achieved operating income of 42.9 billion yuan (exceeding the previous guideline limit), +24% year over year and +35% month on month; net profit 2.8 billion yuan, +0.3% year on month, +156% month on month; non-GAAP net profit of 3.9 billion yuan, +11% year over month and +156% month on month.

Benefit Policy Q3 saw a significant increase in delivery volume, which led to revenue growth.

1) 24Q3's automotive business achieved revenue of 41.3 billion yuan, +23% year over year and +36% month over month. Sales of the L series were stable. The delivery volume of 24Q3 vehicles was 0.153 million vehicles, +45% year over month. The reporting period benefited from the successive introduction of land subsidy policies and increased demand. In particular, the amount of subsidies in some provinces was tiered based on vehicle prices, which favoured high-end car sales.

2) Bicycle ASP was about 0.281 million yuan, down 0.039 million yuan year on year and up 0.001 million yuan month on month. Although the share of L6 increased during the reporting period (36% and 49% in Q2 and Q3 respectively), it is expected that the increase in the share of AD MAX versions will bring positive contributions.

The scale effect was prominent, the share of smart driving increased, and gross margin increased month-on-month.

1) The gross margin of the 24Q3 automobile business was 20.9%, down 0.3 pct year on year and 2.2 pct month on month. We believe that sales growth mainly brought about a more significant scale effect and an increase in AD MAX share; 2) 24Q3's R&D expenses were 2.6 billion yuan, -8.2% YoY and -14.6% month-on-month; R&D expenses were 6.0%, -3.5pct month-on-month. It is mainly due to a decrease in R&D investment in new products and technologies and a corresponding reduction in employee remuneration.

3) The 24Q3 company's sales, general and administrative expenses were 3.4 billion yuan, +32% year over month, and +19% month on month; sales, general and administrative expenses ratio was 7.8%, -1.1 pct month on month. Mainly due to early confirmation of equity incentive costs and an increase in the number of employees, leading to an increase in remuneration. The sales network continued to be optimized during the reporting period. By the end of Q3, there were 479 retail centers plus 436 after-sales maintenance and sheet spray centers, a decrease of 18 and an increase of 15, respectively, compared to the end of Q2.

Operating profit reached a record high, and bicycle profits recovered month-on-month.

24Q3 achieved operating profit of 3.4 billion yuan, a record high of +47% year-on-year and +634% month-on-month; bicycle profit was 0.018 million yuan, -0.8/+0.008 million yuan year-over-year, respectively.

Cash reserves are sufficient, and cash flow has improved significantly.

As of the end of 24Q3, the company held 106.5 billion yuan in cash, an increase of 9.2 billion yuan over the end of the previous quarter. The net cash flow from operating activities in 24Q3 was 11 billion yuan, an increase of 11.4 billion yuan over the previous month (-0.43 billion yuan in Q2), which is expected mainly due to a month-on-month increase in delivery volume and an increase of cash received; free cash flow was 9.1 billion yuan, an increase of 11 billion yuan over the previous month (-1.9 billion yuan in Q2).

Prospects:

1) According to the company's guidelines in the financial report, 24Q4 is expected to deliver 0.16-0.17 million vehicles, achieving revenue of 43.2-45.9 billion yuan; it is estimated that 0.502-0.512 million vehicles will be delivered throughout the year, with a cumulative revenue of 143.4-146.1 billion yuan.

2) The growth range series is expected to continue to be popular and the sales structure is optimized: ① The company's strategic effect on the L series is remarkable, and the subsequent steady monthly sales of the L series is expected to maintain more than 0.05 million vehicles; ② the ideal post-OTA6.0 smart driving experience has greatly improved, driving an increase in the AD MAX version order ratio. In October, end-to-end +VLM has started full promotion with OTA6.4, and it is expected that the sales structure will continue to be optimized.

3) The solid layout of the pure electric series is expected to start a major product cycle: ① The company has solidly laid out high-voltage fast charging technology on the vehicle side and accelerated the layout of overcharging piles. By the end of October, it had more than 1,000 supercharging stations, laying a solid foundation for the subsequent launch of pure electric products. ② MEGA's products are strong. After the company reverses its thinking and operates at a pace from 0 to 1, sales are expected to break through (monthly sales have continued to grow since June). ③ The launch of new pure electric products in 2025 is expected to start a major cycle of pure electric products.

Investment advice: The company's net profit due to mother in 2024-2026 is estimated to be 8, 15.4, and 26.4 billion yuan, respectively, corresponding to the current market value PE, which is 20, 11, and 6 times, respectively. Referring to comparable company estimates, a 25-year 18xPE is given, corresponding to a 6-month target price of $130.57, equivalent to HK$142.58.

Risk warning: industry competition increases risk, supply chain cost reduction falls short of expectations, model launch pace falls short of expectations, etc.