Core views

The company released its 2024 three-quarter report. The Q3 revenue performance exceeded expectations. The early layout of emerging categories such as electric bicycles, electric golf carts, and high-displacement all-terrain vehicles entered the harvest period, and Q3 achieved high growth. At the same time, the company reduced promotional campaigns during the off-season to prepare for the peak sales season in Q4. Expenses decreased during this period, and net profit increased markedly.

Looking ahead to Q4, as the peak sales season in North America approaches, the company will increase its promotional efforts. The sales scale is expected to continue to grow, and the net interest rate is expected to continue to improve.

occurrences

On October 28, 2024, Taotao Auto Industry released its report for the third quarter of 2024.

In 2024Q3, the company achieved operating income of 0.829 billion yuan (YOY +47.61%), net profit to mother 0.119 billion yuan (YOY +70.53%), and a net margin of 14.39% (YOY+1.93pct).

Brief review

1. Revenue analysis: All-terrain vehicles continue to be replenished, and new product launches drive growth 1) Traditional categories: demand is weak in the off-season, waiting for peak season promotions. Categories such as electric scooters and electric scooters are mainly sold through supermarket channels. Demand for off-season sales is weak. The company reduced its promotional efforts, and at the same time, after imposing tariffs, it had an impact on production and sales, so traditional strong categories such as scooters and balance scooters performed poorly. Small-displacement all-terrain vehicles and off-road motorcycles are not affected by tariffs. The company's small-displacement ATV products are further enriched. With excellent cost and price advantages, it gradually introduced North American dealer channels and TSC specialty supermarket channels, and maintained the growth trend in Q3.

2) Emerging categories: The early layout has entered the harvest period, and the share of high growth of new products has increased rapidly.

The products, channels, and brands of electric bicycles, electric golf carts, and high-displacement all-terrain vehicles have been further expanded, all of which have achieved volume growth. The company's Ebike business launched a new HOVERFLY brand on the Amazon channel, which differentiates and complements the existing GOTRAX brand; the new four-seater electric golf cart product was widely praised by leading dealers in the US industry with its excellent performance and cost advantages, and achieved comprehensive coverage of the US core market area; high-displacement all-terrain vehicles were mass-produced, and 300CCATVs were mainly aimed at markets outside of North America, and continued to be sold in Q3.

2. Profit analysis: Profit levels continue to rise, and there is still room for improvement in the long term 1) Gross profit margin and expense ratio: Gross margin has declined due to structural changes. In terms of reasonable control of expenses, Q3 gross margin was 36.99%, -4.02pct year on year, mainly affected by changes in business and regional structure. There was a month-on-month increase, mainly due to the continuous release of new products such as electric golf carts. The scale effect was evident, and gross margin increased markedly. In terms of expenses, the cost rate for the Q3 period was -4.53pct year-on-year, and the sales/management/R&D/finance expense ratios were -8.13/-0.90/ -0.31/+4.80pct, respectively. The main factors were: 1) the company reasonably controlled promotion efforts in North America to prepare for the peak sales season in Q4; 2) the exchange revenue decreased year over year.

2) Net interest rate: Net interest rate increased, profit level continued optimization. The expected Q3 net interest rate was 14.39%, +1.93pct compared to the previous year, mainly benefiting from the decline in the expense ratio during the period. As subsequent products and regional structures improve, and the scale effect of emerging products continues to show, the company's net interest rate level is expected to continue to rise.

3. Q4 outlook: Peak season sales+new product releases can be expected, and revenue and profit are expected to continue to increase in revenue. As peak sales seasons in North America such as Black 5 and Christmas arrive, the company will increase its promotional efforts, and the sales scale of traditional categories is expected to pick up; at the same time, emerging categories such as electric golf carts, electric bicycles, and high-displacement all-terrain vehicles are expected to continue to grow, and the sales scale is expected to continue to grow. In terms of profit, with the recovery in the sales scale of traditional categories with high gross margins and the gradual release of the company's production capacity, the scale effect of emerging categories continues to show, and the company's gross margin will continue to rise. At the same time, there is still room for dilution in the company's expense ratio in the subsequent period, and the net interest rate is expected to continue to improve.

Investment advice: The smart mobility industry is on the fast track of growth. The company's traditional categories have obvious cost performance advantages, the North American market takes the lead, and proposes the development direction of large displacement+high-end +intelligence+oil to electricity to open up new categories and new growth curves, and the revenue scale is expected to double. The company is expected to achieve net profit of 0.403/0.523/0.624 billion yuan in 2024-2026, EPS of 3.67/4.77/5.69 yuan, and current stock price corresponding to PE of 17.55/13.51/11.32 times, maintaining a “buy” rating.

Risk analysis

1) The volume of emerging categories falls short of expectations: The company's emerging categories such as electric bicycles, electric golf carts, and high-displacement all-terrain vehicles are at a critical point in volume. If the new products fail to meet customer needs, or the product power and cost performance ratio are lower than competitive products, it may cause poor sales, which in turn affects current year's results.

2) Decline in demand for traditional categories: The European market is affected by factors such as inflation. Demand for optional products such as electric scooters has declined markedly, and the competitive pattern of traditional categories is scattered, and Taotao's market share is low. If demand in Europe continues to be sluggish and other leading brands increase their investment, the company's sales scale in traditional categories may face a further decline.

3) Freight and exchange rate fluctuations: The company's business mainly exports intelligent electric low-speed vehicles and special vehicles, and the share of export revenue remains above 95%, so it is greatly affected by freight rates and exchange rates. First, the overall freight rate is currently at a low level. If freight rates increase drastically, it will not only increase product transportation costs, which will have a negative impact on gross margin, but also create resistance to exports, thereby affecting the overall operation of the company. Second, long-term exchange rate fluctuations will affect the business strategies of foreign trade enterprises. The US dollar exchange rate fluctuates greatly in the short term. Currently, the spot exchange rate of the US dollar to the RMB is above 7.1.