Key points of investment:

LEAPMOTOR announced unaudited financial results at the end of the third quarter of 2024 (hereinafter referred to as the “2024 Third Quarter Results Announcement”): The company achieved revenue of 9.86 billion yuan in 24Q3, +74% year over month; net loss of 0.69 billion yuan, net loss of 0.99 billion yuan in the same period of 23 years, net loss of 1.2 billion yuan in 24Q2, and a sharp decrease in 24Q3.

24Q3 deliveries reached a record high, and the improved sales structure drove a month-on-month increase in bicycle revenue. According to the company's results announcement for the third quarter of 2024, 24Q3 delivered 0.086 million new vehicles, +94% year-on-year and +62% month-on-month, a record high in a single quarter. According to the wholesale sales volume of the Passenger Federation, by model, the company's 24Q3T03/C10/C11/C16 sales volume was 1.7/0.5/0.021/0.022/0.018 million vehicles, accounting for 20%/25%/26%/22%, respectively, +1/+25/ -35/+22pct, and -5/-6/+20pct month-on-month. We believe that the smart 6-seater SUV C16 has performed well in sales since its official launch in June 2024, and its high ASP has driven the company's bicycle revenue to increase month-on-month. According to our estimates, the company's 24Q3 bicycle revenue was about 0.114 million yuan, -0.013 million yuan year-on-year, and +0.014 million yuan month-on-month.

24Q3 gross margin improved significantly from month to month, and net loss continued to narrow. The company's 24Q3 gross profit margin was 8.1%, +6.9pct year over year, and +5.3pct month-on-month. According to the company's results announcement for the third quarter of 2024, the sharp month-on-month increase in gross margin was mainly due to: (1) optimization of the product sales structure; (2) ongoing cost management work; and (3) the scale effect of increased sales. The company's net loss for 24Q3 was 0.69 billion yuan, 23Q3 was 0.99 billion yuan, and 24Q2 was RMB 1.2 billion. Net loss narrowed year-on-month. Looking ahead to 24Q4, the company expects gross margin to maintain a steady upward trend in 24Q3. It is expected to exceed the annual gross margin target, and the net loss is expected to continue to narrow.

Globalization continues to advance, and we cooperate with Stellantis in all aspects. The Zero Sport C10 and T03 models have completed EU WVTA certification and have been officially launched in Europe since the 24M9. The cooperation between Zero Run and Stellantis is a comprehensive global cooperation in the areas of channel networks, after-sales service, automotive finance, logistics and parts empowerment. By the end of October 2024, 339 dealer stores had been opened in Europe, and all had sales plus after-sales service functions. Zero Run International will also gradually deploy the Asia Pacific, Middle East and Africa, and South American markets, and is expected to have more than 500 channels by 2025.

Profit forecast and investment advice: We expect the company to sell 0.287/0.518 million vehicles in 2024/25.

2024/25/26 revenue was 33.3/59.1/79.3 billion yuan, and net profit to mother was -3.4/-0.2/1.3 billion yuan. We used the PS method to value the company. The company's closing market value on November 14, 2024 corresponds to 1.2/0.7/0.5 times the 2024/25/26 PS. Considering that the domestic market will benefit from the expansion of the 0.1-0.2 million yuan economical smart car market, the asset-light overseas model of cooperation with Stellantis will open up new growth space. Referring to comparable companies, we gave the company 1.4-1.5 times PS in 2024, with a corresponding reasonable value range of HK$38.29-41.02 (converted at the exchange rate of HK$1 = RMB 0.9106). Maintain an “better than market” rating.

Risk warning: NEV sales fall short of expectations; raw material prices have risen sharply.