The company announced on October 27 that the revenue in the third quarter of 2022 was 837 million yuan, + 25.6% compared with the same period last year, and the net profit was 124 million yuan,-0.50%, and 127 million yuan, + 4.54%, respectively. The company's revenue continued to grow and its performance declined slightly. The company is one of the leaders of the global electric bicycle drive system and components (PAS). The short-term growth rate of the company has been restrained by the decline in consumption in Europe and high inventory in North America, but in the long run, the global motorcycle penetration rate is currently less than 15%, with great potential for growth. Considering the low fading probability of negative factors in Europe and the United States during the year, we downgraded our company's EPS forecast for 2022-23-24 to $5.62 EPS (the original forecast was $6.03) and gave a target price of $146 at 26x PE in 2022, maintaining the "Buy" rating.

Revenue continues to grow and Q3 performance is under pressure. The company announced on October 27 that revenue in the first three quarters of 2022 was 2.379 billion yuan, + 25.3% compared with the same period last year, and net profit was 474 million yuan, + 9.28%, and 475 million yuan, + 11.3%, respectively. Among them, the revenue in the third quarter of 2022 was 837 million yuan, + 25.6% compared with the same period last year; the net profit of returning to the mother was 124 million yuan,-0.50% of the same period last year; and the net profit of deducting non-return was 127 million yuan, + 4.54% of the same period last year. The company's Q3 revenue maintained growth, mainly due to the rapid increase in domestic integrated wheel motor business income, which led to the overall income growth, but the overall gross profit margin declined rapidly; the performance was under pressure. mainly due to the decline in consumption in Europe due to the macroeconomic impact, the company's product sales have been greatly affected. Due to poor shipping and the failure of bicycle-related subsidies in the second half of last year, the current channel inventory is high, and the sales growth rate is under pressure this year.

The structural adjustment affected the overall gross profit margin, and the rate increased month-on-month during the period. In the third quarter of 2022, the company achieved a gross profit margin of 27.6%, a significant decline compared with the same period last year-2.94pcts, month-on-month and month-on-month. This is mainly due to the rapid increase in the proportion of domestic integrated wheel motor business, which is significantly lower than that of overseas business, resulting in a decline in overall gross profit margin. We estimate that after excluding the domestic business, the 3Q gross profit margin is about 41% (the same caliber gross profit margin is about 42% in the first half of the year), and the profitability of the company's traditional overseas electric bicycle products is stable. The company's expense rate in the third quarter of 2022 was 8.32%, year-on-year + 0.22pct, month-on-month + 2.57pcts, and the expense rate increased. Among them, the sales expense rate is 3.96%, year-on-year + 0.14pct, month-on-month + 0.93pct, mainly due to the company's efforts to promote products and improve after-sales service during the reporting period; management expense rate 3.11%, year-on-year + 0.02pct, month-on-month ratio-0.16pct; R & D expense rate 2.94%, year-on-year + 0.66pct, month-on-month + 0.24pct, product R & D investment increased Financial expense rate-1.70%, year-on-year-0.61pct, month-on-month + 1.57pcts, mainly due to exchange rate fluctuations.

The domestic market is poised for growth, while the long-term growth trend of the European market remains unchanged. In September this year, the domestic electric bike brand Universe Electric and the company jointly held a new product fair. All three electric bikes on display are equipped with octagonal central motors, and are expected to further install the battery system developed by the eight parties in the future. at present, three products have been put on sale. Although the domestic electric bicycle market is still in its infancy, considering that 70% of the electric bicycles are made in China and the sales of two-wheeled bikes in China account for more than 1% of the world's sales in 2021, the demand for two-wheeled cars is strong, we are optimistic about the development potential of the domestic electric bicycle market in the future. Through close cooperation with local electric bicycle brands, on the one hand, we can cultivate and promote domestic electric bicycle cycling culture, cultivate consumer awareness and pry the domestic market; on the other hand, the consumer feedback of localized products will also help the company to further improve its products, adapt to the needs of domestic consumers and accelerate product iteration. In terms of overseas markets, we predict that the compound growth rate in Europe in the next 2-3 years is expected to reach 20%. According to Shimano and Giant Machinery, the inventory of high-end products will remain low; as the basic part of the company's business, demand in the European market remains stable. Due to inventory factors, the demand for hub motors in the US market is under pressure this year, but we believe that the logic of long-term product penetration improvement remains unchanged. During the reporting period, the company established the first domestic EMC laboratory in the industry, built a DDS closed-loop system and continuously improved it, and the industry leading edge of the product end and sales side continued to consolidate. With the repair of market demand in Europe and the United States, the company is expected to return to the high-speed development channel.

The electric motorcycle business is becoming clear, and the second growth curve is waiting to blossom. At present, the domestic electric motorcycle market is in the early stage of development, and the major independent brands have laid out one after another, such as Chunfeng Power set up a high-end electric motorcycle travel brand Polar Core, which released the baboon electric version in September; Qianjiang Motorcycle launched the electric imitation race OAO in July, with another track; Longxin GM established the electric motorcycle brand Yinwei in July and launched the electric scooter Real5T in the same period. The company also has a layout in the track for a long time, and disclosed in November last year that it plans to raise no more than RMB 1.2 billion for the manufacturing project of the electric two-wheeler drive system and the construction project of the R & D and testing center. The Suzhou factory covered by the fund-raising project has set up a new production line of traditional motors (including electric light motorcycle). After completion, the single factory will have the production capacity of 1.2 million traditional motors. In addition, the company's R & D and testing center will set up an electric motorcycle research laboratory, which will also lay a good foundation for the company's electric motorcycle business. In a joint exhibition with Universe Electric in September, the company said that in the future, it will launch a series of electric motorcycle products, such as Wind, Forest, Fire, Mountain and Thunder, to locate different travel and play scenes. We believe that the company has been in the electric motorcycle business layout for a long time, R & D end, production end, product end full capacity, is expected to open up a second growth curve, thickening revenue and performance improvement.

Risk factors: the demand uncertainty caused by the deterioration of overseas macroeconomic environment; the deterioration of overseas trade policy; the intensification of industry competition and the lower-than-expected development of new product markets.

Profit forecast, valuation and rating: the company is one of the leaders of the global electric bicycle drive system and components (PAS), with a rich variety of products, large user scale, strong customization ability and unique brand and customer advantages. The development of electric motorcycle business is expected to open up the second growth curve for the company. Short-term corporate growth has been curbed by the decline in consumption in Europe and high inventory of two-wheelers in North America, but in the long run, global electric bike penetration is currently less than 15 per cent, with great potential for growth. Considering the low fading probability of negative factors in Europe and the United States during the year, we lowered our company's annual EPS forecast for 2022-23-24 to 5.62, 7.40 and 9.57 yuan (the original forecast was 6.03, 8.16 and 10.48 yuan). Since the listing of the company, the average PE corresponding to the consensus expectation of Wind is 38x. Considering the high overseas exposure of the company's business and certain performance uncertainty, it is given a certain discount at 1 times the standard deviation (12x) and a target price of 146yuan at 26x PE in 2022, maintaining the "buy" rating.