Gross profit margin "turns from positive to negative", can Leapmotor "roll" out a bloody path in the outbound market?

Leapmotor (9863.HK) released its first quarter financial report for 2024 after the Hong Kong stock market closed on May 17th. Here are some key points:

1. Significant Decline in Gross Profit Margin in the First Quarter: The gross profit margin in the first quarter fell to -1.4% compared to the previous quarter, mainly due to the increase in per-vehicle manufacturing costs caused by a decline in sales volume, with no visible effect from cost reduction efforts this quarter.

2. Slight Revenue Outperformance Due to Price Increase per Vehicle: With the increase in the proportion of the C series in the vehicle structure this quarter, offsetting the impact of Leapmotor's price reduction in March, the per-vehicle price rebounded slightly, leading to revenue slightly exceeding market expectations.

3. Increase in Operating Expense Ratio: This quarter, due to the decline in sales volume, the overall scale effect was not realized, and both research and development expenses and sales expenses exceeded market expectations. The operating expense ratio increased from 27% in the previous quarter to 31% this quarter.

5. Decrease in Cash and Cash Equivalents: The decrease in sales volume this quarter led to a reduction in operating cash flow. The cash and cash equivalents in the first quarter, including restricted cash, were 17.6 billion, a decrease of 1.8 billion compared to the fourth quarter of last year. However, cash on hand remains sufficient, and a safety cushion for stock prices has been preliminarily established.

In terms of first-quarter performance, revenue slightly exceeded expectations, but the gross profit margin significantly fell below market expectations.

Leapmotor's gross profit margin declined significantly this quarter, dropping 8% from 6.7% in the previous quarter to -1.4% this quarter, well below the market's expected 7.1%.

The decline in gross profit margin this quarter was mainly due to 1) the increase in per-vehicle manufacturing costs caused by the decline in sales volume, and 2) the promotion of the full range of models in 2023, which Leapmotor adhered to, did not yield results this quarter.

On the expense side, due to the decline in sales volume, the overall scale effect was not realized, and both research and development expenses and sales expenses exceeded market expectations, ultimately leading to lower-than-expected operating profit.

Leapmotor's sales target for 2024 is 250,000 to 300,000 vehicles, with a gross profit margin target of 5%-10%. New models planned for this year include the mid-size SUVs C10/C16, as well as a 5-seat A-class SUV to be launched by the end of 2024. The introduction of the trade-in policy is expected to have a short-term stimulating effect on Leapmotor's sales (the trade-in subsidy is most beneficial to low-priced cars), but in the second half of the year, the 100,000-200,000 RMB price range will face competition from BYD's DMI 5.0 model and XPeng's "Mona" smart driving feature. Leapmotor will only start exporting models in the third quarter of this year, contributing an estimated 20,000 vehicles to the sales volume in 2024. Achieving Leapmotor's sales target of 250,000 to 300,000 vehicles this year is expected to be challenging.

Dolphin Jun predicts Leapmotor's sales in 2024 to be around 200,000 to 250,000 vehicles, with the current stock price corresponding to a P/S multiple of 1.8-2.1 for 2024. Compared to new forces in the market, Leapmotor still maintains a relatively high valuation. In the 100,000-200,000 RMB price range where Leapmotor focuses, BYD has an absolute advantage in pricing and gross profit margin due to its vertical integration layout Leapmotor can only passively reduce prices, with limited overall upside potential in gross margin, while the mid- to long-term stock price upside remains in overseas markets.

Here is a detailed analysis:

1. Gross margin declined significantly in the first quarter, well below market expectations

The most concerning aspect of Leapmotor's performance this time is the gross margin situation. However, the gross margin in the first quarter dropped significantly from 6.7% in the previous quarter to -1.4% in this quarter, well below the market expectation of 7.1%. The deterioration in gross margin was mainly due to the increase in per-vehicle manufacturing costs caused by the decline in sales volume.

2) Increase in per-vehicle manufacturing costs leads to gross margin significantly below market expectations

Dolphin Jun will start by analyzing the per-vehicle price and cost to break down the deterioration in Leapmotor's gross margin this quarter:

a) Per-vehicle average price increased due to sales structure improvement:

In the first quarter, the average per-vehicle price was 104,000 yuan, with an increase of 9,000 yuan compared to the fourth quarter of last year, exceeding the market expectation of 100,000 yuan.

The price war for new energy vehicles in 2024 started in February with the launch of BYD's Honor Edition, while Leapmotor, which also focuses on the price range of 100,000-200,000 yuan, could only reduce prices.

In early March, Leapmotor introduced 24 new models (including the C10 model delivered in January), with significant price reductions compared to the old models before the price reduction. For example, the price of C01 was reduced by 13,000-50,000 yuan, and T03 was reduced by 10,000-20,000 yuan. At the same time, Leapmotor also offered limited-time discounts for 23 old models, reducing prices by 15,000-32,000 yuan, putting pressure on per-vehicle prices.

However, the sales structure improved this quarter, with a decrease in the proportion of low-priced small car T03 from 38% in the previous quarter to 28% this quarter, providing some cushion against the price reduction, ultimately leading to an increase in per-vehicle prices this quarter.

b) However, the decline in sales volume this quarter led to an increase in manufacturing costs:

The per-vehicle cost in the first quarter was 106,000 yuan, an increase of 17,000 yuan compared to the previous quarter's 89,000 yuan.

The increase in manufacturing costs this quarter was mainly due to a 40% decline in sales volume, which raised per-vehicle amortized costs due to lower capacity utilization. The price of lithium carbonate has stabilized, with limited contribution to costs this year.

However, Leapmotor's insistence on full-domain self-research for cost reduction, which is its main competitive advantage in the 100,000-200,000 yuan price range, did not show any progress this quarter c) Single vehicle reappears with a gross loss:

The average price of a single vehicle increased by about 0.9 million yuan, but the cost of a single vehicle increased by 1.8 million yuan, causing the gross profit margin of a single vehicle to turn negative again this quarter, lower than the market's expected 7%.

II. First-quarter sales volume decreased by 40% month-on-month, significant promotion effect of price reduction on sales volume

In the first quarter of this year, due to the off-season sales and the impact of the Spring Festival holiday, the overall sales volume of new energy passenger vehicles declined, and Leapmotor was no exception. In the first quarter, a total of 33,400 vehicles were sold, a decrease of 40% month-on-month.

However, under the impact of price reductions on old models and the introduction of 24 new models at low prices, the effect of volume recovery was significant. Sales in April have rebounded to 15,000 vehicles, with the new model medium-sized SUV C10 accounting for 5368 units in April, representing 36% of the total.

Leapmotor's weekly sales also recovered to 4700 units last week, and it is expected to achieve sales of 18,000 to 20,000 vehicles in May, with a further increase of 20% to 33% month-on-month. It is expected that in the second quarter, due to the month-on-month growth in sales volume and the release of economies of scale, the difficulty of returning the gross profit margin to positive is not great.

III. Revenue slightly higher than market expectations

Leapmotor's total revenue in the first quarter was 3.5 billion, a decrease of 34% month-on-month, but higher than the market's expected 3.34 billion, mainly due to the slightly higher than expected single vehicle revenue.

This quarter, with the contribution of the new car C10 in sales volume, the overall sales volume of the C series increased from 62% in the previous quarter to 72%, driving the increase in single vehicle revenue and thus making the revenue slightly higher than market expectations.

IV. Operating expense ratio increased

In terms of research and development, Leapmotor insists on full self-research. Previously, self-research focused more on electrification, but intelligentization is also continuously catching up. In terms of sales, Leapmotor's positioning still leans towards a manufacturing company. As of the end of 2023, manufacturing personnel accounted for 49%, while sales only accounted for 14% (mainly due to the basic adoption of a dealer model).

In terms of operating expenses this quarter, due to the month-on-month decline in sales volume, although the absolute value of operating expenses has decreased this quarter, the operating expense ratio has increased from 27% in the previous quarter to 31% this quarter.

1) Research and development expenses:

In terms of research and development, Leapmotor insists on full self-research. In the key three-electric systems (except for battery cells), intelligent cockpit, intelligent driving hardware, and algorithms, all are self-developed. Research and development expenses this quarter were 520 million, a decrease of 120 million from the previous quarter, mainly due to the product development pace and seasonal impact related to the Spring Festival On the research and development front, Leapmotor released the LEAP3.0 technology architecture in January 2024, with self-developed components accounting for 60%-70% of the total vehicle cost, and an industry-leading 88% architecture standardization rate.

Leapmotor has always insisted on gaining cost advantages through self-made core components, making its models competitive in the price range of 100,000 to 200,000 RMB in terms of pricing and configuration. It continues to improve gross profit margins by reducing costs through technology.

In terms of intelligence, Leapmotor has been catching up. The C10 and C11 high-end intelligent driving versions (priced at 165,800/185,800 RMB) are equipped with Qualcomm 8295 chips and NVIDIA ORIN X dual high-end chips, with 254 Tops computing power. In addition to intelligent hardware such as LiDAR and an 8-megapixel HD camera, there are more than 30 sensors, providing cost-effectiveness compared to models in the same price range.

However, this year, due to increased investment in intelligent driving (200 more personnel will be allocated to intelligent driving, reaching 500 in total), as well as increased costs for computing power rental and the substantial investment required for new models, it is expected that R&D expenses will increase compared to last year.

2) Sales Expenses:

Leapmotor's first-quarter sales expenses were 430 million RMB, a decrease of 100 million RMB compared to the previous quarter, mainly due to a seasonal slowdown in advertising and promotional expenses.

The company mainly adopts a distribution model on the sales side, with distributors accounting for about 85% of the overall sales system, while sales and marketing personnel only account for 14%. Compared to new energy vehicle peers where sales personnel account for 35%-50%, Leapmotor's proportion is significantly lower, positioning the company more as a manufacturing-oriented company.

The company has made changes in its sales strategy, adopting a survival of the fittest model for distributors. In the first quarter, the number of stores decreased by 50 to 510 compared to the end of 2023, with a strategic focus on increasing sales per store.

However, the company has always been positioned as a manufacturing-oriented company (with manufacturing personnel accounting for 49%). While Leapmotor's products are cost-effective in the same price range, the previous low investment in marketing has weakened the company's brand strength. Additionally, the company's strategy is to first penetrate the market and then upgrade the brand, making it more challenging compared to Nio and Li Auto, which set the tone with high-priced cars before exploring lower price ranges.

Leapmotor insists on setting its main price range at 100,000 to 200,000 RMB, planning to introduce 2-3 new products each year and gradually expand into the 60,000 to 250,000 RMB new energy vehicle market.

3) Administrative Expenses:

This quarter's administrative expenses were 140 million RMB, a slight decrease compared to the previous quarter, mainly due to adjustments in option plan expenses caused by personnel changes.

The operating expense ratio in this quarter has decreased by 320 million in absolute value due to the decline in sales, but the operating expense ratio has increased by 4.5% compared to the previous quarter, reaching 33% this quarter. Meanwhile, the gross profit margin has been somewhat affected this quarter, leading to a decrease in both operating profit margin and net profit margin compared to the previous quarter.

Cash safety cushion established, with medium to long-term upside potential coming from incremental contributions from overseas markets.

In the first quarter, Leapmotor's cash and cash equivalents (including restricted cash) amounted to 17.6 billion, a decrease of 1.8 billion compared to the fourth quarter of last year, mainly due to a decrease in sales resulting in a reduction in operating cash flow, while accounts payable are still being paid according to terms.

With Stellantis' subscription payment of 7.8 billion, Leapmotor's cash flow shortage issue has been directly resolved, and a stock price safety cushion has been established. Leapmotor plans to keep losses within 4 billion this year, while also expecting to continue generating positive cash flow of 1 billion in 2024 through advances from suppliers (bringing in a net cash flow increase of 5-6 billion).

Leapmotor's core competitiveness lies in its self-developed capabilities across the board, with self-developed components accounting for 60%-70% of the total vehicle cost, achieving cost reduction through technology, making its vehicle prices and configurations competitive. It has successfully gained a foothold in the 100,000-200,000 yuan price range.

However, in the second half of this year, Leapmotor will face competition from BYD's new model, the "Price Butcher" BYD DMI 5.0, in the 100,000-200,000 yuan price range. The DMI 5.0 technology has made significant breakthroughs in fuel consumption and endurance (fuel consumption reduced from 4L/km to 2.9L/km, achieving a range of 2000 km on a full tank/full charge), posing a significant challenge to competing models (Leapmotor's extended-range models currently can only achieve a range of 1000 km).

At the same time, in the 100,000-200,000 yuan price range, BYD's vertically integrated layout advantage allows it to maintain a gross profit margin of 28% in the automotive sales business (including battery business), even amidst widespread price reductions of 10,000-30,000 yuan in the Honor Edition. This means that BYD still has the ability to continue price wars in the 100,000-200,000 yuan range, while Leapmotor can only passively follow price reductions, with limited upside potential for gross profit margin.

Leapmotor's sales target for 2024 is 250,000-300,000 vehicles, with a gross profit margin target of 5%-10%. This year, the company will introduce new models such as the mid-size SUV C10/C16, as well as a 5-seat A-class SUV at the end of 2024. The introduction of the old-for-new policy is expected to have a short-term stimulating effect on Leapmotor's sales (a 10,000 yuan subsidy for trading in old energy vehicles is most beneficial for low-priced cars). However, in the second half of the year, the 100,000-200,000 yuan price range will face competition from BYD's "Price Butcher" DMI 5.0 model and XPeng's 100,000-150,000 yuan range with the intelligent driving "Mona", while Leapmotor only began exporting models in the third quarter of this year It is expected that it will only contribute around 20,000 units to the sales volume in 2024, and it will be difficult for Leapmotor to achieve its target of 250,000-300,000 units this year.

Dolphin King expects Leapmotor's sales volume in 2024 to be around 200,000-250,000 units, with a P/S multiple of 1.8-2 times. Compared to new forces, it still maintains a relatively high valuation. However, Leapmotor, focusing on the price range of 100,000-200,000 yuan, can only passively reduce prices due to BYD's absolute advantage in pricing and gross profit margin under vertical integration layout. The overall upside space for gross profit margin is limited, and the medium to long-term stock price upside potential still lies in overseas markets.

Leapmotor has the advantage of brand and channels brought by Stellantis. It is expected to only contribute meaningful sales volume and profit growth from 2025 onwards. Leapmotor is expected to achieve overseas sales volume of 86,000 units in 2025 and 182,000 units in 2026. In 2025, Dolphin King is expected to contribute around 600-700 million yuan in net profit to Leapmotor (of which 470 million yuan is licensing fees, and 230-330 million yuan comes from Leapmotor's sales of vehicles and parts to the joint venture company), accelerating Leapmotor's net profit turning positive.

Historical Articles by Dolphin King:

March 25, 2024 "Continuous Increase in Gross Profit Margin, Can Leapmotor Lead the Way in Going Global?"

March 26, 2024 "Annual Gross Profit Margin Continues to Maintain 5%-10%"

October 16, 2023 "Successful Turnaround in Gross Profit Margin, Has Leapmotor Finally Crossed the Life and Death Line?"

October 17, 2023 "Expectations for Gross Profit Margin to Continue Improving, Is it Time for Leapmotor Investment Opportunity? (Leapmotor 3Q Earnings Call Summary)" channel=t10236996&invite-code=4NOXYT&app_id=longbridge&utm_source=longbridge_app_share)

On August 25, 2023, "Leapmotor: Gross margin continues to fail to turn positive, when will the "Redmi version of XPeng" lead the way in the automotive circle?"

On September 29, 2022, "Leapmotor: After a 30% crazy plunge in listing, is the "Redmi version of XPeng" cutting leeks or a real opportunity?"

Risk disclosure and statement of this article: Dolphin Investment Research Disclaimer and General Disclosure