Zero Run: When will the profit margin turn positive continuously, and when will the car circle Xiaomi "take the lead"?

$ LEAPMOTOR(09863.HK) (9863.HK) released its 2023 second quarter financial report after the Hong Kong stock market on the evening of August 25, Beijing time. Zero run this gross margin is still not positive, did not break the market doubt, but the overall loss due to sales release significantly. Take a look at the key information: * * 1. Gross profit margin in the second quarter is still not positive: * * Gross profit margin in the second quarter of the automobile business has not been positive although it has increased month on month. The biggest problem is that the price of bicycles has dropped due to the price reduction in March, but the cost of bicycles has been saved significantly, with gross profit margin rising to -5.2 month on month. * * 2. Unit price may continue to face downward pressure: * * C series currently accounts for 85%, and the room for unit price improvement brought about by the improvement of sales structure is limited. In August, the company has publicly announced the price reduction of some of its C- series models. At the same time, the company said that if the unit price of fierce competition still has room to continue to decline, the price of bicycles in the second half of the year may face continued downward pressure. * * 3. Whether gross profit margin can become positive depends on the release of extended-range sales: * * The extended-range model is expected to bring down the BOM cost of 2-30000 yuan per vehicle, and will also become the key to help it realize volume expansion and positive gross profit margin. Once the sales volume is pulled up, with the release of the scale effect brought about by the discount and the reduction of purchase costs, the reduction of sales rebates of dealers, and the improvement of gross profit brought about by the hot sale of the extended version, although the unit price is under pressure, the gross profit margin may still have room to continue to rise. 4. R & D sales continue to" save and save ": In terms of R & D and sales management costs, sales management costs increased slightly this quarter, but they are still very "stingy" relative to their peers. In research and development, zero run adhere to the whole domain self-research, but the lack of investment in research and development led to the overall self-research ability in general. In terms of sales, the company's positioning is more manufacturing-oriented, while distributors account for almost 86% of the store system, and brand strength is obviously insufficient. 5. Cash flow may be the biggest hurdle: Although zero-run operating cash flow turned positive this quarter, this improvement is not expected to be sustainable and may be less than a year left for zero-run. Seeking cooperation with established car companies or the best solution to the shortage of zero-run cash flow, once the cooperation is reached, it will directly solve the urgent need of zero-run cash flow shortage, and also open a new model of high gross profit for technology realization for zero-run. At the same time, through the recognition of established car companies for zero-run, it will enhance its brand strength and directly build a safety cushion for zero-run stock price.! Dolphin Jun's overall point of view: **For zero run, its investment opportunity should be when the price is low enough to find the inflection point investment opportunity for the gross profit margin to turn positive. After all, Wei Xiaoli has already passed the time point for the gross profit to turn positive, and zero run still has the opportunity for the gross profit margin to turn positive. * * Dolphin Jun recognizes that Zero Run is a company that is serious and practical in building cars. The company's product strength is also very high at the same price. At the beginning of the zero run to die in production led to slow action in the early stage, followed by hasty cart effect is not good, there is a crisis of capital chain to be broken, and therefore around the bend to make a car that is not within their own target positioning to do sales to finance so as not to start before the body die. This curve allowed it to survive, but it was also trapped in cost performance and low brand value, coupled with not being good at Internet marketing, and insufficient budget, resulting in insufficient brand sense. Therefore, the release of product power and production scale efficiency, as well as the positive improvement of gross profit brought about by the increase of the program, to achieve the positive change of gross loss, is the next life and death barrier to be stepped after the zero-run listing, and from the perspective of investment, risks and opportunities are derived from this. **And zero-run cash flow has also become the biggest difficulty at the moment, either after the sales volume burst to obtain market recognition to seek financing, or seek cooperation with established car companies to solve the cash flow urgent need, once the cash flow problem is resolved, zero-run stock price safety cushion can only really be established. The following is a detailed analysis: I, gross margin continues to turn positive, when will the future of zero run come? **** 1) Gross margin improved slightly, but still negative **Zero run as the leader of the second echelon of the new forces, has been criticized by the market is the continued negative gross margin, and this quarter zero run is still not successful to break the market doubt, gross margin is still negative. The gross margin of the zero-run automotive business in the second quarter was -5.2 percent, up 2.5 percent from -7.8 percent in the first quarter. The upward trend in gross margin is mainly due to the reduction in the cost of bicycles. However, it is worth mentioning that in terms of accounting treatment, zero running will include the sales rebate given to dealers in the price of bicycles, which is different from Xiaopeng's inclusion of the rebate given to dealers in the sales expenses. The result is that the gross profit margin continues to fail to turn positive. However, according to the company's disclosure that the gross profit margin has become positive in the second half of 2022 without considering the impact of dealer's rebate, Dolphin Jun calculated that the sales rebate given to dealers by zero run is about 8-10%, slightly higher than Xiaopeng's 8% rebate. According to this calculation, the adjusted gross profit margin in the second quarter is actually 2.6, which has also become positive. This particular accounting treatment can lead to greater gross margin elasticity if sales are up. Assuming that the unit price of the company remains unchanged, the increase in sales volume not only dilutes the fixed discount fee and obtains the purchase premium, but also can further improve the gross profit margin level by giving dealers a lower sales rebate. Please refer to Xiaopeng G6 explosion model to drive the overall sales volume up and reduce the deduction point to dealers from 8% to 4-6%.! * * 2) The "price-for-quantity" strategy leads to a decline in the cost of bicycles * * Dolphin King will start with the price and cost of bicycles to dismantle the slightly increased gross profit margin of zero running this quarter: **a) Average price of bicycles: * * Average price of bicycles in the second quarter is 128000 yuan, and average price of a car is 8500 yuan lower than the first quarter, which is much lower than the market expectation of 157000 yuan. The market's expectation of unit price upward mainly comes from the C- series hot sale. The proportion of C- series sales priced at 15-210000 has increased from 63% in the first quarter to 85% in the second quarter, which will increase the average price of bicycles. However, the price reduction of the whole system in March (with a maximum reduction of 5.9W) had a serious negative impact on the unit price, making the average price of bicycles brought about by the sales structure far less than the impact caused by the price reduction. The average price of bicycles dropped by 8500 yuan compared with the previous quarter, which was also the first time that the company's bicycle price dropped since the first quarter of 22 years. **B) Bicycle cost: * * Bicycle cost in the second quarter was 135000 yuan, down 13000 yuan from the previous quarter. The improvement in gross profit margin in this quarter mainly came from the decline in bicycle cost. In addition to the dilution of the discount fee and purchase premium brought about by the increase in sales volume, as well as the downward cost of lithium carbonate, Dolphin Jun estimated that the significant savings in the cost of the bicycle mainly came from the introduction of the zero-run increase program, relying on the scale effect and the downward cost of lithium carbonate alone can not drive the downward cost of this quarter. The introduction of the zero-run increase program has a positive effect on gross margin improvement. Because the price range of zero-run focus is 150000-200000, which is subject to the cost factor of lithium battery, pure electric vehicles face relatively large cost and gross profit pressure. According to the fact that the battery cost accounts for about 40% of the total cost, and the battery capacity of the extended version developed on this basis is reduced by about half compared with the original pure electric version, it is estimated that the extended version is expected to bring about a decrease in the BOM cost of 2-30000 yuan per vehicle, while the current extended version is only 4,000-6,000 yuan cheaper than the pure electric version, which can bring about a gross profit increment of 1.6-24000, at present, C11 pure electric and extended-range version delivery volume accounted for half. **c) Gross profit of bicycles: * * Average price of bicycles dropped by 8500 yuan, saving 13000 yuan in bicycle cost, improving gross profit rate of bicycles by 2.7 month on month, but still negative, with gross profit rate of -5.3 in the second quarter.! ! * * 3) The unit price in the third quarter may continue to decline, and the increase in gross profit depends on the release of extended sales * * As the proportion of Series C in the second quarter has reached 85%, the room for increase in unit price brought about by the improvement in sales structure is limited. At the same time, in order to continue to uphold the price-for-volume strategy, Zero Run publicly announced in early August that some of its C- series models would be reduced in price, including three C01 and two C11 models, of which the C01 model would be reduced by a maximum of 20000 yuan and the C11 model by a maximum of 10000 yuan. At the same time, the company said that if the competition is fierce and the unit price still has room to continue to decline, the second half year, the price may face downward pressure. For zero-run cars, the key word in 2023 is "pull sales". The company's monthly sales target for the second half of the year is 15000-20000. The increase in range models will also become the key to help it achieve volume expansion and positive gross profit margin. However, * * once the sales volume is pulled up, with the reduction of discount and purchase cost brought about by the release of scale effect, the reduction of sales rebate of distributors, and the improvement of gross profit brought about by the hot sale of the extended version, although the unit price is under pressure, the gross profit margin may still have room to continue to rise * *, and the target of zero run in the second half of this year is to realize the positive profit in a single month, I hope I can only count on the hot sales of the C11 extension and the upcoming C01 extension.! **The king of 2. price/performance ratio, the new product cycle is coming? * * * 1) Survival by Price for Quantity * * It is different from the method that first-line new forces generally raise funds to make brand tonality first, and then reduce the price to bring the price of Vera's long products. Zero running is completely opposite. T03, a low-cost and low-margin car, was used to save itself once, and C11 and C01 models with higher prices were subsequently introduced to make profits. However, this strategy has achieved certain success. The sharp increase in delivery volume in this quarter comes from the hot sale of C series. The proportion of C series sales priced at 15-210000 has increased from 63% in the first quarter to 85% in the second quarter, reflecting the successful transformation of the company's products from low-end T series to higher margin C series. However, the disadvantage of this method is that it is difficult to increase the price even if the configuration goes up, and the company's brand presence is obviously insufficient. The price of C11 in January was increased by 6000 yuan. The overall monthly sales in January dropped directly from more than 8000 in December last year to more than 3000 in January. The average monthly sales in the first quarter also reached only 3500. The sales volume dropped significantly. Zero running once again faced the problem of life and death.And Zero Run quickly adjusted its strategy, using a price-for-volume approach to win development time. Zero Run cut prices to varying degrees for all models in March. The highest drop was 59000. The price cut was not low, and it was also directly effective. It directly increased the delivery volume in the second quarter by 233 from the first quarter 11000 to the second quarter 34000.! There are two main sources of confidence for zero-run price reduction: 1) The price reduction effect is achieved by introducing entry-level reduced models. According to media reports, some industry insiders have compared the 2023 C11 pure electric version of the entry model with the entry model released in December 2020, although the new model is 4000 yuan lower than the old model, but users have lost more than 30 previous emphasis on luxury, smart, comfortable configuration. Including battery capacity reduction, battery material from ternary lithium to lithium iron phosphate, intelligent driving sensor from 28 to more than 10 2) through the global self-research strategy to optimize costs to reduce prices. At present, the cost of self-research coverage of zero-run cars has reached 70%, and the cost of self-research has been reduced through technological innovation (e. g. CTC) and scale effect brought by capacity release.! 2) C11 extended range model to start a new product cycle? Zero Run launched C11 extended range model in March to cut into the plug-in hybrid track, 2023 is a big year for plug-in hybrid cars, and the year-on-year growth rate of plug-in hybrid cars reached 91% in the first half of 2023, while pure trams only achieved a year-on-year growth of 31.5. And C11 extended range 100000-200000 price segment new energy penetration rate of only 22.7 by the end of 2022, the lowest in all price ends, the market space is large, and the program to solve the user group's anxiety, bringing a wider user base than the original C11 pure electric version. At the same time, in terms of configuration, zero-run C11 extended range is striving to be the king of cost performance. Compared with dark blue S7, galaxy L7 and BYD song DM-I of the same price, the zero-run C11 extended range has larger battery capacity, higher pure electric endurance and total motor power. At present, there are still fewer SUV's at the price end of the C11 extended range, and users who buy the extended range will try their best to choose models with longer pure electric range and pay more attention to battery capacity. Compared with competing products, the long pure electric range of zero running is helpful to compete with the plug-in hybrid models at the price end and snatch consumers who care more about the range. In terms of smart driving, although the smart driving configuration of this price band is weak, for example, Galaxy L7 and Deep Blue S7 do not have any auxiliary driving functions, the Leap Piolt smart driving system is standard for the extended range of Zero Run C11, and it is also equipped with a millimeter wave radar, which is more sincere.! Zero Run is about to launch the extended range C01, which is scheduled to go on sale in September. At the same time, Zero Run also plans to release the first model B11 of the new B series and another new car next year. B11 is positioned as a medium and large SUV, including pure electric and extended range versions, or equipped with lidar, Avida Orin, Qualcomm 8295 chip and 800V fast charging architecture, which can be described as full configuration, to further promote the zero-run brand upgrade, zero-run new model cycle is expected to start. * * 3. revenue increased 45% year-on-year * * The total zero-run revenue in the second quarter was 4.37 billion, up 45% year-on-year, but it was lower than the 5.35 billion expected by the market, mainly due to the significantly lower-than-expected bicycle revenue. Although the revenue of bicycles decreased month on month, it increased 27% year on year, mainly due to the hot selling of C series. The proportion of C series sales priced at 15-210000 has increased from 27% in the second quarter of last year to 85% in this quarter, reflecting that zero running has successfully transitioned products from T series to C series.! 4. R & D and sales of" provinces and provinces " In R & D, Zero Run insists on global self-research, but the self-research ability is generally average. In terms of sales, zero-run is more oriented towards manufacturing companies, while distributors account for almost 86% of the store system (as of the end of 2022). In terms of research and development and sales management costs, zero-run is very "stingy" compared with its peers: * * 1) research and development expenses: * * in research and development, zero-run adheres to global self-research, and in key three-power systems (except batteries), intelligent cockpit, intelligent driving hardware and algorithms are all self-developed. However, from the perspective of R & D investment, the R & D cost in the second quarter of zero run was 0.41 billion, which was the same as that in the previous quarter. The R & D cost rate was only 9%. The R & D investment was mainly applied to the R & D of new vehicle parts. Compared with the ideal/Xiaopeng second quarter 2.4 billion/1.4 billion research and development investment, or a lot of savings, but the overall self-research capacity is slightly general. On the tram self-developed three-piece set-three electricity + smart cabin + smart driving: the electric control of the motor in the zero-run three electricity has no recognition degree, and the battery body is integrated mainly in the way the battery core is integrated into the car. The automatic driving is relatively weak, far behind Tucki's XNGP, and the performance on the intelligent cockpit is basically acceptable. However, Zero Run accounted for more than 30% of the BOM cost by virtue of global self-research. In the first half of the year, the company was also committed to reducing the cost of technology. For example, it issued an integrated four-leaf clover electronic architecture and CTC 2.0 version and platform sharing to achieve a scale effect to reduce the cost, thus having the confidence to fight a price war and at the same time resisting the capacity risk caused by the shortage of parts in the industry. Zero Run also insists on building its own factory. Zero Run currently has a monthly production capacity of 30000 vehicles in Jinhua factory. At the same time, it is also building Qiantang factory. The planned production capacity is 400000 and the production capacity is completely sufficient.! * * 2) Sales Expenses: * * The sales expenses in the second quarter of Zero Run were 0.43 billion, an increase of 0.03 billion compared with the previous quarter, with a sales expense rate of 10%. The increase in this quarter mainly came from the marketing investment of new models, but Zero Run was still in the middle and low of the new power in absolute value, on the one hand, because the company was more oriented towards manufacturing companies, on the other hand, the rebate deduction the company will give to dealers is not recorded on the revenue side of the sales expense. Compared with other new forces, zero running is more biased towards production and manufacturing companies -there are very few sales personnel. In 2022, sales personnel will only account for 16% of the total number of employees, but production personnel will account for nearly 50%, while nearly 50% of the first-line new forces Wei Xiaili will be sales personnel. At the same time, Zero Run adopts a self-employed + franchise sales model similar to Tucki, in which dealers are the main force, accounting for 86% of the store system, so the sales cost is low compared with other new forces. However, there are obvious disadvantages in the positioning of such a manufacturing company. Although the product strength of zero-run cars is very good at the same price and has a high cost performance, the investment of low marketing expenses makes the company's brand strength insufficient. At the same time, the company's strategy is to sink first and then upgrade the brand. Compared with Weilai and ideal, it is obviously more difficult to set the tone for itself and then lower the price. The company's brand upgrade has been difficult to really complete, it is also only through a price-for-volume strategy that the space and time to survive can be won. And Zero Run also seems to be aware of this problem. The company has replaced some senior management in January. Xu Jun and Zhang Weili, who have worked in Huawei for many years, served as chief operating officer and marketing officer respectively. They have rich brand and marketing experience, which means that Zero Run will also start to make efforts in marketing and channels. However, the company adjusted its target at the beginning of the year (the number of stores reached 800) in terms of store expansion, and was more committed to improving the efficiency of single stores. In the first half of the year, the company reformed its distribution system and optimized 20 stores.! * * 3) Management expenses: * * Management expenses 0.21 billion in this quarter, an increase of 0.03 billion compared to the previous quarter, the increase in management expenses mainly comes from the increase in employee compensation, the company has given some share-based payments in employee compensation, the increase in management expenses is normal. * * 5. profitability improved, substantial loss reduction * * zero run second quarter net profit -1.14 billion, net interest rate compared to the first quarter-79% increased to-26%, to achieve a substantial loss reduction. The key to loss reduction also lies in the increase in gross margin and the dilution of R & D and sales management expenses brought about by the upward sales volume, which leads to the release of operating leverage.! How long can Zero Run, which continues to lose money, survive 6. to a shortage of" ammunition "? Zero Run Cash and cash equivalents (including restricted cash) were 10.2 billion in the second quarter, up 1.3 billion 8.9 billion from the first quarter. The market has been most worried about the liquidity problem of zero run. This quarter, zero run successfully realized the positive operating cash flow for the first time. The operating cash flow increased from -2.6 billion in the previous quarter to about 2.8 billion in this quarter. The explanation given by the company is due to the receipt of government subsidies for new energy vehicles and the improvement in gross profit margin of vehicle sales, but as the subsidies have declined and the net profit has maintained a quarterly loss of about -1.1 billion, this improvement is not expected to be sustainable. According to the current cash consumption rate of the company, if there is no continued financing, the time left for zero running may be less than a year. * * Sales volume has always been the core of maintaining the cash flow of car companies. Once the sales volume is done and recognized by the market, financing is also a natural thing and the hope of zero-run survival. Therefore, zero-run has always adhered to the strategy of "exchanging price for quantity" to reduce prices to promote sales volume. **In addition, Zero Run can also choose to seek cooperation from established car companies to obtain cash flow, while enhancing brand strength through the recognition of Zero Run by established car companies. Following Xiaopeng's hand-in-hand with Volkswagen, the realization of technical cooperation has also become a new model for car companies to make profits. Zero Run insists on global self-research, and has layouts in many core areas of smart cars such as batteries, motors, electronic control systems, smart driving and smart cockpit. At the same time, Zero Run has T/A/C/D positioning for different models. Car platform, and sufficient self-built production capacity. It is rumored that Stellantis and Volkswagen's brand Jetta are negotiating cooperation with Zero Run, which has a greater demand for such cooperation than other new forces because it lacks cash flow compared to other new forces. Zero Run also recently announced that it has the ability to export a single core component and vehicle architecture to the outside world, and has definite technical cooperation with two overseas brands.**Once the cooperation is reached, it will directly solve the urgent need for zero-run cash flow shortage, and also open a new model of high gross profit for zero-run technology realization. At the same time, it will enhance its brand strength through the recognition of zero-run by established car companies, which will do no harm to zero-run. * * And the market obviously thinks so too. After it was announced that Zero Run would cooperate with Stellantis, Zero Run's share price directly rose by about 10%. Once the cooperation was reached, a safety cushion for Zero Run's share price was directly built.! Dolphin Jun Historical Article Reference: September 29, 2022 "Zero Run: After 30% of Listing Frenzy, Is" Red Rice Version of Tucki "Cutting Leeks or a Real Opportunity?" Risk Disclosure and Statement of this Article: Dolphin Investment Research Disclaimer and General Disclosure