The company released the 2024H1 performance report:

Q2: Revenue 3.502 billion yuan (-10.39%), net profit attributable to mother 0.311 billion yuan (+20.67%); net profit not attributable to mother 0.271 billion yuan (+23.07%);

H1: Revenue 6.976 billion yuan (-2.35%), net profit attributable to mother 0.609 billion yuan (+4.26%); net profit not attributable to mother 0.557 billion yuan (+10.18%).

Revenue analysis: export sales are the engine

Covos brand: We expect Q2 revenue of 1.7 billion yuan, a year-on-year low double-digit decline. Domestic and foreign sales are expected to account for 5:5, respectively, -27%/+10% compared to the same period. Driven by export sales growth, we judge that domestic sales are under pressure compared to Q1; referring to Aowei's domestic retail volume price, volume -21% /price +3%, the domestic sales coefficient is expected to decrease and increase.

Tianke brand: We expect Q2 revenue of 1.6 billion yuan, a year-on-year decline in the middle of the year. Domestic and foreign sales are expected to account for 6:4, respectively, -20%/+27% year-on-year, driven by export sales growth. We judge that domestic sales are under pressure compared to Q1; referring to Aowei's domestic retail volume price, volume +9% /price -23%, domestic sales are expected to decrease and increase.

Profit analysis: Q1 marginal repair, Q2 continued improvement

Gross profit margin: 51% gross profit margin in Q2, +3.5/+3.9 pct year over year, respectively (Q1 gross profit margin 47%, same /month on month -3.5/+0.7 pct);

Net interest rate to mother: Q2 net interest rate 8.9%, +2.3/+0.3 pct year over year, respectively (Q1 net interest rate 8.5%, same /month on month -1.5/+8.4 pct);

We believe: Q2 profit was further repaired to nearly 9% based on the marginal improvement in Q1, but there is still room for repair. Three reasons: 1) Margin restoration: The gross margin of the Covos brand has recovered to 48%, which is expected to be the main force for Q2 company's gross margin year-on-year restoration. We expect the gross margin of the Covos brand Q2 to be +5/+7pct month-on-month, respectively; 2) Rate control: Q2 four-fee sales/management/R&D/finance rates are -3.64/+0.78/0.78/year on year, respectively +1.25/+ 1.13pct, total Q1 fees - 2.8pct year on year; 3) Loss reduction in new business: loss level of 0.3 billion in '23, loss was drastically reduced in 24H1.

Equity Incentives and Employee Stock Ownership Plans:

Options and restricted stock incentives: 1) Factors: The total number of grantees was 1,033; the total amount accounted for 4.39% of the company's total share capital on the announcement date, including 3.00% of options and 1.39% of restricted stocks. Option exercise price/restricted stock grant price of $32.31/20.20 (current price: $40.17); 2) Target: based on 23 year revenue, revenue growth rates of at least 2%/5%/8%/10% for 24/25/26/27, respectively; 2.6% GAGR for 24-27; 3) Expenses: total 0.107 billion, amortized 0.15/0.46/0.026/0.015/0.006 billion in 24-28 years, with annual rate impact < 0.2%.

Employee stock ownership plan: 1) Factors: Total number of participants: no more than 11 participants, no more than 3.212 million shares, accounting for 0.6% of the total share capital, grant price of 20.20 yuan; 2) Target: based on 23 year revenue, the 24/25/26/27 revenue growth rate trigger value is not less than 2%/5%/8%/10%/10%, target value is not less than 4%/7%/10%/12%, all 4 years of GACR; 3) Expenses: Total 0.064 billion, amortized over 24-28 years 0.10/0.29/0.015/0.008/0.003 billion yuan, the annual rate impact was < 0.2%.

Investment advice:

Our opinion: How do you see the next half?

With domestic sales dominating revenue from Covos, the core focus in '24 was more about profit recovery. 24H1 has shown an improvement trend for two consecutive quarters. The revenue-side equity incentive conditions correspond to H2 revenue +5%, while the profit-side H2 base decreases and flexibility increases.

Profit forecast: Based on the company's interim results and industry developments, we will adjust the 24-26 profit forecast. In 2024-2026, the company's revenue is estimated to be 16.074/17.357/18.633 billion yuan (previous value 18.031/20.576/22.759 billion yuan), +3.7%/+8.0%/+7.3% YoY, net profit 1.402/1.522/1.712 billion yuan (previous value 1.513/2.038/2.505 billion yuan), +129.0%/+8.6%/+12.5% YoY; corresponding PE16/15/13X, maintaining a “buy” rating.

Risk warning:

Competition in the industry intensified, and new products fell short of expectations.