Incident: The company released its report for the third quarter of 2024. In the first three quarters of 2024, the company achieved operating income of 17.464 billion yuan, +0.05% year over year; realized net profit to mother of 1.554 billion yuan, -0.25% year over year; and realized deducted non-net profit of 1.446 billion yuan, or -0.03% year over year. In 3Q2024, the company achieved operating income of 6.873 billion yuan, -5.05% YoY; realized net profit of 0.603 billion yuan, or -9.02% YoY; realized net profit of 0.553 billion yuan without return to mother, or -9.82% YoY.

The gross margin increased significantly year on year, and the cost ratio for the period increased: the company's gross profit margin for the third quarter of 2024 was 17.42%, +1.62 pct; the company's gross profit margin for the third quarter of 2024 was 16.79%, +0.66pct; the sales expense ratio for the third quarter of 2024 was 3.53%, +0.51 pct year on year; the R&D expense ratio was 2.64%, +0.26 pct year on year; financial expense ratio -1.24%, +0.54 pct year on year.

Stricter industry policies are expected to lead to increased concentration and open up room for growth in overseas business: In the first half of 2024, the Ministry of Industry and Information Technology, the State Administration of Market Supervision and Administration and the State Fire and Rescue Administration jointly issued the “Electric Bicycle Industry Specification” and the “Electric Bicycle Industry Specification Notice and Management Measures”, as well as the “Safety Technical Specification for Lithium Ion Batteries for Electric Bicycles” issued by the State Administration of Market Supervision and Administration, which put forward higher safety requirements for industry production standards and lithium battery usage standards. At the same time, the country is actively formulating new mandatory national standards for electric two-wheelers, and continues to promote the high-quality development of the industry.

We believe that industry policies are getting stricter, it is expected that backward production capacity will be cleared, and industry concentration will further increase.

In terms of overseas expansion, the company focuses on promoting agent expansion and localization of post-market services in the Southeast Asian market, laying a solid foundation for the Emma brand to gain popularity and reputation in the region.

Investment advice: We expect the company to achieve net profit of 2.103, 2.511, and 3.013 billion yuan in 2024-2026, corresponding PE of 14.41, 12.07, and 10.06 times, respectively, to maintain an “increase in holdings” rating.

Risk warning: risk of raw material price fluctuations; risk of industry competition increasing risk; risk of overseas expansion falling short of expectations.