ZEEKR released its first quarter financial report before the US stock market on June 11, 2024. Let's take a look at the key information:

1) Car Sales Gross Margin Exceeds Expectations: The gross margin of the car business in the first quarter was 14%, exceeding Dolphin Jun's expectation of 12%, mainly due to the lower-than-expected decrease in the unit price. Compared to the old model, the new ZEEKR 001 has a price reduction of 31,000 to 57,000 yuan, and the unfavorable impact of the decline in the proportion of high-priced ZEEKR 009 models, resulting in a unit price decrease of only 20,000 yuan to 247,000 yuan, exceeding Dolphin Jun's expectation of 240,000 yuan.

2) Delivery of the New ZEEKR 001 Drives Rapid Sales Growth in the Second Quarter: The main model, the redesigned ZEEKR 001, has a significant price reduction compared to the old model, and after delivery of the new 001, sales in the second quarter are expected to rapidly increase. It is estimated that after the completion of capacity ramp-up, sales in the second quarter will increase by 59%-69% to 53,000-56,000 units on a quarter-on-quarter basis.

3) Significant Reduction in R&D Expenses Leads to a Decline in Operating Expense Ratio: Although sales and administrative expenses were rigid due to store expansion and overseas marketing this quarter, R&D expenses were significantly reduced, leading to a 6.5% decrease in the overall operating expense ratio.

4) Improvement in Operating Profit on a Quarter-on-Quarter Basis: The operating loss this quarter was -2.1 billion, better than Dolphin Jun's expected -2.3 billion operating loss. Although the gross margin decreased on a quarter-on-quarter basis, the significant reduction in R&D expenses drove an absolute increase in operating profit and profit margin compared to the previous quarter.

5) Cash Flow Level Still Relatively Low: ZEEKR's cash and cash equivalents were only 3.8 billion this quarter, continuing to decline on a quarter-on-quarter basis. Compared to the operating loss of 2.1 billion in the first quarter, ZEEKR's cash flow is not secure.

Although ZEEKR is supported by its parent company Geely's cash flow and there is no need to worry specifically about ZEEKR's cash flow issues, Geely has many new energy brands under its umbrella, which need to bear the losses and investments of multiple new energy brands. ZEEKR needs to gradually reduce its reliance on funding from Geely, achieve reduced losses on its own, and seek external financing.

Dolphin Research Institute's View:

From the first quarter performance, what we are most concerned about regarding ZEEKR is its fundamental car manufacturing business. In this quarter, the performance of the car manufacturing business looks good from both the revenue and gross margin perspectives, exceeding Dolphin Jun's expectations, mainly due to the lower-than-expected decline in ASP per unit.

Compared to the old model, the new ZEEKR 001 has a price reduction of 31,000 to 57,000 yuan, and the unfavorable impact of the decline in the proportion of high-priced ZEEKR 009 models, resulting in a unit price decrease of only 20,000 yuan to 247,000 yuan, exceeding Dolphin Jun's expectation of 240,000 yuan. The gross margin of the car business only decreased by 1.3% to 14% in the trough of car manufacturing, exceeding Dolphin Jun's expected 12%From the perspective of expenses, although sales and administrative expenses are still relatively rigid, the substantial reduction in research and development expenses has led to an absolute increase in operating profit and profit margin compared to the previous quarter, achieving a reduction in losses.

In terms of ZEEKR's current valuation, Dolphin Jun's valuation of ZEEKR is mainly focused on the fundamental car-making business. As for other businesses (three-electric sales and technical services), since they are mostly transactions provided to Geely's affiliated parties, Dolphin Jun pays more attention to business growth and the possibility of providing services to third parties, but does not currently value this part of the business.

Looking at the car-making business, ZEEKR still maintains its sales target of 230,000 vehicles this year. Based on the current sales trend, Dolphin Jun conservatively estimates that ZEEKR's sales in 2024 will be between 180,000 to 210,000 vehicles. The current stock price corresponds to a car business P/S multiple of only 0.9-1 times, compared to the current 2024 P/S multiples of new forces in the range of 1.1-1.5 times. The current valuation is still relatively low. But is this undervaluation due to a lack of confidence in ZEEKR, or is it a real investment opportunity? Dolphin Jun will issue a detailed report on ZEEKR in the future, so stay tuned!

Below is the main content:

I. ZEEKR's car business unit price and gross profit margin exceeded expectations this quarter

From the revenue perspective, ZEEKR's business is mainly divided into three major segments: car sales, battery and other component sales, and technology service revenue.

Among them, car sales are ZEEKR's core business and the largest revenue contributor. Let's first look at the financial performance of ZEEKR's car sales business this quarter:

In the first quarter, ZEEKR is still at the bottom of its car sales operations, but the gross profit margin of ZEEKR's car sales business remains relatively stable at 14%, exceeding Dolphin Jun's expectation of 12% and only decreasing by 1.3% compared to the fourth quarter of last year at 15.3%.

Next, Dolphin Jun will analyze the reasons behind ZEEKR's better-than-expected gross profit margin in the car business this quarter from the perspectives of unit price and cost:

a) Average unit price: Decreased by only 20,000 to 247,000 compared to the previous quarter, exceeding Dolphin Jun's expectation of 240,000

The average unit price in the first quarter was 248,000 yuan, which is 20,000 yuan lower than the fourth quarter of last year at 267,000 yuan, mainly due to:

Changes in vehicle model structure: The proportion of the highest-priced ZEEKR 009 in the vehicle model structure decreased from 15% in the previous quarter to 4% this quarter, while the proportion of the lower-priced ZEEKR 007 increased from 2% in the previous quarter to 45% this quarter.
Price reduction for new car launches: Although the new ZEEKR 001 underwent significant changes, it also further reduced prices to stimulate sales. The launch price of the 24th model decreased by 31,000 to 57,000 yuan compared to the 23rd model.

b) Unit cost: Saved 14,000 to 213,000 compared to the previous quarter

The actual unit cost in the first quarter was 213,000 yuan, a decrease of 14,000 yuan compared to the previous quarter. Dolphin Jun believes that this is mainly due to the increase in the proportion of the ZEEKR 007, which has both a low unit price and cost, offsetting the impact of the decrease in sales volume and the increase in unit amortized cost compared to the previous quarterAs lithium carbonate prices have basically stabilized in the first quarter, the contribution to costs this year is limited, with a cost saving of 14,000 yuan per vehicle.

c) Gross profit per vehicle: down by 6,000 yuan

With the average price per vehicle decreasing by 20,000 yuan and a cost saving of 14,000 yuan per vehicle, in the last quarter, the gross profit earned per vehicle sold is 35,000 yuan. Compared to the previous quarter's actual gross profit of 41,000 yuan, there is a decrease of 6,000 yuan. The gross profit margin from selling vehicles has decreased from 15.3% in the previous quarter to 14% in this quarter.

2. First-quarter sales volume down by 17%, but the delivery of the new ZEEKR 001 drives a rapid recovery in second-quarter sales

Similar to the performance of new energy vehicles, ZEEKR's first-quarter car sales were 33,000 units, down by 17% compared to the previous quarter due to off-season sales and intensified competition.

However, since the launch and delivery of the 24th model 001 in March, ZEEKR's monthly sales have shown a rapid recovery trend. The redesigned 24th model 001 has achieved nearly 40,000 cumulative orders after its release, and after ramping up production capacity in April, ZEEKR achieved monthly sales of 10,000 units.

The reasons for this lie in the model's redesign. The 24th model ZEEKR 001, unlike minor updates in other competitive models, is a mid-term redesign product for ZEEKR. Core changes include an upgrade to the entire 800V high-voltage platform, an increase in the maximum total power of the motor from 400kW to 580kW, an upgrade in the intelligent driving system with the Qualcomm 8295 chip and standard installation of a LiDAR, while the price of the 24th model has been reduced by 31,000 to 57,000 yuan compared to the old model, showing full sincerity.

With the delivery of the new ZEEKR 001, ZEEKR's sales in April/May quickly rose to 16,000/18,600 units. Following the end of the ramp-up of the new ZEEKR 001's production capacity, it is expected that sales will continue to rise month-on-month. Dolphin Jun predicts that ZEEKR's sales in the second quarter will increase by 59%-69% to 53,000-56,000 units.

With a significant increase in second-quarter sales, economies of scale will lead to a decrease in per-vehicle depreciation and further reduction in procurement costs. Dolphin Jun predicts that ZEEKR's gross profit margin in the second quarter will show a month-on-month increase.

After discussing ZEEKR's main automotive business, let's take a look at the performance of other businesses:3. Battery and Component Business Revenue Exceed Expectations

In the first quarter, the revenue of the battery and component business was 6.3 billion, exceeding Dolphin's expectation of 4.4 billion, with a quarter-on-quarter increase of 2.3 billion compared to the fourth quarter of last year. The gross profit margin of the battery and component business is 6.9%, slightly lower than Dolphin's expectation of 7.5%.

ZEEKR's battery component business is mainly provided by the acquired Ningbo Weirui, maintaining relatively stable growth on the revenue end. However, currently this business is mainly provided to ZEEKR's internal and related companies under the Geely system. Since Weirui mainly provides three-electricity services, it indicates that the revenue growth of this business is directly related to the sales growth of ZEEKR and Geely's new energy brands.

The significant quarter-on-quarter growth in revenue of the battery and component business this quarter is mainly due to the increase in sales of battery packs and electric drives provided by Weirui to Geely's new energy brands, as well as the growth in overseas shipments of battery components.

3. R&D Service Business Revenue Significantly Declines

In the first quarter, the revenue of the R&D service business was only 2.4 billion, lower than Dolphin's expectation of 4.3 billion, with a significant decrease of 1.3 billion compared to last year. However, the gross profit margin of R&D services is 64.2%, exceeding Dolphin's expectation of 24%.

Similar to the battery and component business, ZEEKR's R&D services are mainly provided to ZEEKR's internal and related companies under the Geely system. Unlike the continuous stable growth of the battery and component business, the revenue of R&D service business shows greater volatility and seasonal characteristics. The quarter-on-quarter decline in R&D service business this quarter is mainly due to the reduction in R&D services sold to related parties and technology licensing services to external parties.

4. Significant Reduction in R&D Expenses, Sales and Administrative Expenses Remain Firm

1) R&D Expenses Significantly Reduced This Quarter

In the first quarter, ZEEKR's R&D expenses were 1.9 billion, which is significantly reduced compared to 3.2 billion in the fourth quarter of last year, mainly due to seasonal fluctuations (variations caused by different design and development stages of new products and technologies).

Compared to new forces, ZEEKR's self-developed and self-produced in the three-electricity field, especially starting from 2023, layout of the core battery cells in the three-electricity, as well as the 800V electric control, is the most comprehensive in the three-electricity field, giving ZEEKR models advantages in long endurance and power performance compared to competitors.

However, in terms of intelligent driving, ZEEKR has obvious shortcomings. Apart from the ZEEKR 007 model, ZEEKR still uses Mobileye's solution, with a chip computing power of only 48 Tops. In terms of deployment speed, as of April this year, ZEEKR's intelligent driving high-speed NZP has opened 65 cities, while urban NZP is still in the testing phase, lagging behind the speed of opening cities without maps pursued by new forces and HuaweiHowever, ZEEKR has already realized this obvious shortcoming. ZEEKR seems to be trying to detach from Mobileye, starting to equip the ZEEKR 007 with the NVIDIA Drive Orin X chip, and preparing for the next generation of vehicles to be launched in 25 years with the NVIDIA Drive Thor chip (chip computing power reaching 2000 TOPS), as well as starting to develop in-house intelligent driving algorithms, with an expected increase in research and development investment in intelligent driving this year.

2) Sales and administrative expenses this quarter were 1.95 billion, still rigid

In the first quarter, sales and administrative expenses were 1.95 billion, an absolute decrease of 2.5 billion compared to the previous quarter's 2.2 billion, exceeding Dolphin's expectations of 1.8 billion. The rigidity of sales expenses is mainly due to ZEEKR's previous increase in sales personnel deployment and compensation, as well as the expansion of offline direct sales channels and increased marketing overseas.

This quarter's operating loss was -2.1 billion, better than Dolphin's expected loss of nearly 2.3 billion, with an operating profit margin of -14%, a 4% increase compared to the previous quarter's -18%. Although the gross profit margin decreased by 2.4% compared to the previous quarter, the operating expense ratio decreased by 6.5% due to a significant reduction in research and development expenses. Finally, both the absolute value and profit margin of this quarter's operating profit have improved compared to the previous quarter.

Risk Disclosure and Statement of this Article: Dolphin Research Disclaimer and General Disclosure

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