The ideal performance was steady, and the Q3 gross margin exceeded expectations. The company sold 0.153 million in Q3, up 45%/41% year over year. Despite the rapid decline in sales of the low-cost model L6, the company's overall bicycle ASP declined very little. Q3 revenue was RMB 42.87 billion, up 23.6%/35.3% YoY. The gross margin was recorded at 21.5%, up 2.0pct from month to month; of these, the gross profit margin of vehicles was 20.9%, up 2.2 pct from month to month, exceeding expectations, mainly due to cost reduction, which reflected the company's excellent cost control capabilities. R&D expenses were significantly reduced month-on-month, mainly due to a reduction in the cost of developing new products and a reduction in employee remuneration. The month-on-month increase in SG&A was mainly due to CEO performance-based rewards and an increase in the number of employees. Net profit to mother recorded 2.8 billion yuan, which was the same year on year, and increased by 155% month on month. Net profit margin to mother was 6.6%, -1.6pct/month-on-month, -1.6pct/month-on-month, respectively. Non-GAAP net profit increased 11%/156% year over year to RMB 3.845 billion, and non-GAAP net profit margin was 9.0%, -1.1 pct/month over month and +4.2 pct, respectively.

End-to-end+VLM smart driving solutions were fully promoted, and the pace exceeded expectations. At the end of July, Ideal Auto opened early bird testing of a dual-system intelligent driving solution based on the E2E end-to-end model and the VLM visual language model.

The company conducted tests on a scale of 10,000 people in mid-late September. Subsequently, on October 23, the company launched the OTA 6.4 update for Ideal MEGA and Ideal L series models, and fully promoted a new smart driving solution combining end-to-end +VLM to all AD Max owners. The pace far exceeded expectations. Looking forward to the future, the company plans to fully promote one-click smart driving capabilities from parking space to parking space to AD Max users by the end of this year.

Charging and sales channels continue to expand, laying the foundation for the launch of pure electric models. 1) In terms of charging networks, as of November 3, the ideal is to have 1004 overcharging stations and 4910 charging stations across the country. We expect that before the official launch of pure electric models next year, the company will have 2000+ supercharging stations, so that users can enjoy a satisfying charging experience when they get a car, and increase the number to 4,000 by the end of 2025. 2) In terms of sales channels, the company has been gradually replacing underperforming supermarket stores with Auto City stores this year. The share of Auto City stores increased from 24% at the end of last year to 31% in the middle of this year, and it is expected that this ratio will increase to more than 40% by the end of this year. In terms of the number of booths, the company expects that by the end of this year, the total number of booths nationwide will increase to 3,600 + by the end of 2024, a significant increase from 2,600 + at the end of last year.

The Q4 results are expected to remain steady. Looking ahead to Q4, the company directed vehicle deliveries of 0.16-0.17 million vehicles, up 21.4% to 29.0% year on year, corresponding annual deliveries of 0.502-0.512 million vehicles; revenue was 43.2-45.9 billion yuan, up 3.5% to 10.0% year on year. At the gross profit level, we believe that benefiting from economies of scale and possible vendor rebates towards the end of the year, gross margin is expected to remain at a high level in Q4. In terms of SG&A fees, we expect that Q4 CEO rewards will also need to confirm 42 million yuan of share-based incentive fees, which is a significant decrease from 0.593 billion in Q3; while general SG&A fees may increase as the company opens more stores. We expect the company's annual R&D expenses to be under 12 billion yuan.

Investment advice: We expect the company to sell approximately 0.51/0.64/0.84 million vehicles in 2024-2026, with total revenue of 146/169.5/222.4 billion yuan; GAAP net profit to mother is 7.7/9.6/12.9 billion yuan, GAAP net profit margin is 5.3%/5.7%/5.8%; non-GAAP net profit to mother is 10.3/11.8/15.4 billion yuan, non-GAAP The net profit margin was 7.1%/6.9%/6.9%. We gave it a target market value of 223.6 billion yuan, corresponding to a target price (2015.HK) of about HK$115 and (LI.O) of about $30, corresponding to 19x 2025 P/E, maintaining a “buy” rating.

Risk warning: risk of model development and sales falling short of expectations, risk of fluctuations in upstream parts supply, risk of iteration of intelligent driving technology falling short of expectations.