ZEEKR: Launching upgraded models criticized as "betrayal" to existing consumers, can it achieve a rebirth?

ZEEKR released its second-quarter financial report before the US stock market on August 21, 2024. Let's take a look at the key information:

1. Automobile sales gross margin basically meets expectations: The gross margin of the automotive business in the second quarter was 14.2%, which basically met the market and Dolphin's expectations of between 14% and 14.5%. Although the per-vehicle price decreased slightly due to the decline in the proportion of the high-priced ZEEKR 009 in the vehicle structure, the per-vehicle cost side saw a slight increase in gross margin due to the quarter-on-quarter increase in sales volume and the release of economies of scale. Finally, the gross margin of the automotive business saw a slight increase of 0.2% on a quarter-on-quarter basis due to the decrease in per-vehicle costs.

2. Significant increase in overall gross margin on a quarter-on-quarter basis: The overall gross margin in the second quarter increased by 5.4% to 17.2% on a quarter-on-quarter basis, mainly due to a significant increase in the gross margin of the battery and component business. This may be attributed to the growth in overseas sales of batteries and components in this quarter, driving the increase in gross margin. However, this business is mainly based on related-party transactions, and the sustainability of the gross margin remains unknown. The focus still needs to be on the automotive business.

3. Operating expenses increased significantly this quarter, mainly due to a higher amount of SBC expenses unlocked in relation to the IPO: Operating expenses in this quarter increased significantly compared to the previous quarter, with a quarter-on-quarter increase of 1.35 billion. However, this was mainly due to 9.44 billion in SBC expenses unlocked in relation to the IPO in this quarter, compared to just 0.03 billion in the previous quarter, resulting in an actual quarter-on-quarter increase of approximately 0.41 billion. This increase was relatively controllable, mainly due to the growth in research and development personnel and the expansion of sales channels.

4. Adjusted operating profit and net profit achieved a significant reduction in losses: After excluding the impact of SBC, both operating profit and net profit in this quarter achieved a significant reduction in losses, mainly driven by the significant increase in gross margin, led by the battery and component business.

5. Increase in cash and cash equivalents: ZEEKR's cash and cash equivalents in this quarter were 8.05 billion, an increase of 4.3 billion compared to the previous quarter's 3.8 billion. This increase was partly due to the slower cash consumption rate resulting from the reduced losses in this quarter, and mainly from the contribution of IPO financing (approximately $440 million raised in the IPO).

Dolphin Research Opinion:

Looking at the second-quarter performance, the key focus for ZEEKR is still on the fundamental car-making business. The gross margin of the car-making business in this quarter was 14%, which basically met Dolphin's and the market's expectations of 14%-14.5%.

Although the proportion of the highest-priced ZEEKR 009 in the vehicle structure declined this quarter, affecting the per-vehicle price, the strong sales of ZEEKR 001 drove the increase in sales volume and the release of economies of scale, leading to a slight increase of 0.2% in gross margin on a quarter-on-quarter basis.

From the expense side, although operating expenses increased significantly this quarter compared to the previous quarter (a quarter-on-quarter increase of 1.35 billion), this was mainly due to 9.44 billion in SBC expenses related to the IPO confirmed in this quarter, compared to just 0.03 billion in the previous quarter. The actual quarter-on-quarter increase in operating expenses was approximately 0.41 billion, which is still manageable, mainly due to the growth in research and development personnel and the expansion of sales channels.

After adjusting for the impact of SBC this quarter, the profit has achieved a significant reduction in losses, mainly due to the increase in ZEEKR's gross margin, with the main reason being the improvement in the gross margin of ZEEKR's battery and component business (increased from 6.9% in the previous quarter to 20.3% in this quarter), possibly due to the higher proportion of ZEEKR's battery packs being sold overseas.

However, since this part of the business is mainly related-party transactions, and the sustainability of the gross margin is unknown, and on the revenue side, it still depends on whether Geely's new energy vehicles can perform well and whether ZEEKR's sales volume can increase. Ultimately, it will still depend on the value of the complete vehicle segment. Currently, Dolphin Jun's focus on ZEEKR still lies in the automotive business, so the overall performance of this quarter can only be considered as basically meeting expectations.

However, considering the current stock price, if we base it on the conservative estimate of sales volume of 180,000 to 200,000 vehicles in 2024 (conservatively not estimating incremental business from overseas operations, although there are reports that ZEEKR is considering using Geely's existing European factory (through Volvo production) to bypass the 20% tariff, which supports the target of 30,000 vehicles for overseas sales this year), the corresponding P/S multiple for 2024 is only 0.6-0.7 times, indicating a still low valuation. The reduction in losses this quarter (mainly driven by the battery and component business, although the sustainability is unknown) and the increase in cash and cash equivalents (mainly from IPO financing) are indeed positive for ZEEKR, which is undervalued. However, the long-term upside potential of the stock price still depends on expectations for the core automotive business.

Below is the main content:

I. ZEEKR's automotive gross margin for this quarter basically meets expectations

From the revenue side, 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 segment. Let's first look at the financial performance of ZEEKR's car sales business this quarter:

With the contribution of the 24 new models of 001 in the second quarter, ZEEKR has already emerged from the bottom of the first quarter, with a 66% increase in sales volume. However, as the sales volume is known, the market is more concerned about the gross margin of the automotive business:

The gross margin of the automotive business this quarter is 14.2%, a slight increase of 0.2% compared to the previous quarter, basically in line with market expectations.

a) Selling price per car: Down 0.2 thousand yuan to 245 thousand yuan this quarter

The average price per car in the second quarter was 245 thousand yuan, a decrease of 0.2 thousand yuan from the first quarter's 247 thousand yuan, mainly due to:

Changes in vehicle structure: The proportion of the highest-priced ZEEKR 009 in the vehicle structure continued to decline from 4.3% in the first quarter to 2.7% in the second quarter, dragging down the average price per car. However, the proportion of ZEEKR 001 (priced at 269-329 thousand yuan) increased from 46.7% in the first quarter to 71.3% in the second quarter, to some extent offsetting the impact of the decline in the proportion of ZEEKR 009, resulting in a decrease in the average price per car to 245 thousand yuan this quarter.

b) Cost per car: Decreased by 0.3 thousand to 210 thousand yuan

The actual cost per car in the second quarter was 210 thousand yuan, a decrease of 0.3 thousand yuan compared to the previous quarter, mainly due to the strong sales of the 2024 models of ZEEKR 001, driving the increase in sales volume (a 66% increase in sales volume), leading to a decrease in the cost per car, with some economies of scale being realized

c) Gross Profit per car: Basically flat compared to the previous quarter

In the second quarter, the gross profit earned per car was 35,000 yuan, which was basically flat compared to the previous quarter. Due to the impact of the decline in the gross profit margin of selling cars under the cost of a single car, the gross profit margin of selling cars increased by 0.2% from 14% in the previous quarter to 14.2%.

II. Second Quarter Sales Volume MoM Growth of 66%, Mainly Driven by the New ZEEKR 001

In the second quarter, due to the launch and delivery of the 24 ZEEKR 001 models in March, ZEEKR's monthly sales volume showed a rapid rebound trend.

However, since the launch and delivery of the 24 ZEEKR 001 models in March, ZEEKR's monthly sales volume has shown a rapid rebound trend, reaching a peak of 14,400 units in June. The proportion of ZEEKR 001 in the second quarter model structure increased from 47% in the first quarter to 71% in the second quarter.

The reason for this lies in the model's redesign. The 24 ZEEKR 001 is different from minor updates seen in other competitive models. It is a mid-term redesign product for ZEEKR, with core changes including an upgrade to the entire 800V high-voltage platform, an increase in the maximum total power of the motor system 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 24 models has been reduced by 31,000 to 57,000 yuan compared to the old models, showing full sincerity.

However, due to increased market competition and gradually decreasing orders, sales declined in July to less than 10,000 units. ZEEKR quickly made adjustments to get sales back on track (the management had previously guided for a monthly delivery volume of 20,000 in the third quarter and 30,000 in the fourth quarter), and to achieve the annual sales target of 230,000 units. They took several measures:

1) Quickly launch model redesigns and continue to reduce prices compared to the 24 models: ZEEKR launched the ZEEKR 009 redesign in July, followed by the 2025 ZEEKR 001/ZEEKR 007 in August. The redesigns share a common feature - continuing to reduce prices based on the original 24 models. The starting price of the 25 ZEEKR 001 is reduced by 10,000 compared to the 24 models, the 25 ZEEKR 007 Intelligent Edition is reduced by 20-30,000 compared to the 24 models, and the ZEEKR X price is reduced by 13-21,000 (a price reduction of 6-10%). The largest price reduction is for the ZEEKR 009, with a price reduction of 60-100,000 yuan, reaching 12-20%. This had a direct effect, with ZEEKR 009 sales increasing by 172% in July to nearly 1,600 units

2) The main model ZEEKR 001's intelligent driving defects have been addressed, and ZEEKR 007 has replaced the self-developed second-generation Gold Brick battery: Among the 24 serious shortcomings of ZEEKR 001 is the intelligent driving system, which still uses the Mobileye solution with chip computing power lagging behind competitors (with only 48 Tops of computing power). However, the biggest change in the 25th ZEEKR 001 model is the replacement of the intelligent driving chip from 2 Mobileye EyeQ5H chips to dual Orin-X chips (except for the entry-level version), with a total computing power of 508 TOPS.

In comparison, ZEEKR 007 comes with standard LiDAR and dual Orin X chips, and adopts the self-developed second-generation Gold Brick battery (charging rate reaching 5.5C, taking only 10 minutes to charge from 10% to 80%). Additionally, except for the four-wheel drive performance version, the rest of the versions have reduced prices by 20,000 to 30,000 yuan.

3) Accelerating the launch of new models: ZEEKR's large SUV, ZEEKR 7X, will be released and launched in September, while the compact MPV, ZEEKR Mix, will be released and launched in October.

If ZEEKR maintains the previous guidance of 230,000 deliveries and a 15% gross profit margin for the automotive business, it also implies:

1) The gross profit margin of the automotive business in the second half of 2024 will continue to increase compared to the first half: Mainly due to the increased proportion of high-priced and high-margin ZEEKR 009 facelifts (management guidance indicates that ZEEKR 009 deliveries will return to 2,000 units in September compared to an average monthly delivery of 500 units in the second quarter), as well as the profit margin increase brought by overseas contributions: In the first half of 2024, only 3,000 units were exported, and management guidance indicates that 30,000 units will be exported for the whole year, meaning that most exports will be completed in the second half of the year.

2) The average monthly delivery for the next 5 months in 2024 will reach 25,000 units: On one hand, due to export contributions, according to management's guidance of 30,000 units, it implies that exports will reach 5,000 units per month in the second half of the year, and on the other hand, it comes from the contributions of facelift models and new models.

After discussing ZEEKR's main automotive business, let's take a look at the performance of other businesses:

III. Significant Increase in Battery and Component Business Revenue Gross Margin

In the second quarter, the revenue of the battery and component business was 5.3 billion, which was about 1 billion lower than the previous quarter, mainly due to a decrease in sales of battery modules in the domestic market compared to the previous quarter. However, the gross margin of the battery and component business in this quarter reached 20.3%, an increase of approximately 13.4% compared to the previous quarter's 6.9%, which directly led to the company's overall gross margin increasing from 11.8% in the previous quarter to 17.2% in this quarter. Dolphin believes that this may be due to the higher proportion of ZEEKR battery packs sold overseas, which enjoy higher gross margins.

In a previous in-depth article "ZEEKR: Overindulgent by the Parent Company, Toxic or Beneficial?", the significance of this business segment for ZEEKR was discussed. As this business segment is mainly dominated by related party transactions, and the sustainability of gross profit margin is unknown, the key lies in whether the new energy vehicles from the Geely Group can perform well on the revenue side, whether ZEEKR's sales volume can break through, and ultimately, the value will be realized through the value of the complete vehicle segment.

However, Aito acknowledges that ZEEKR's innovation and iteration speed in the battery business segment is relatively fast. The first-generation Gold Brick battery production factory, Quzhou Jidian, was completed in the fourth quarter of 23, and was only installed on 24 models. However, the second-generation Gold Brick battery was released in August, with faster charging speed (maximum charging power can reach 5.5C, only 10 minutes from 10% to 80% charge), installed on 25 ZEEKR 007 models, enhancing the competitiveness of the models.

IV. Strong Volatility in R&D Service Business Revenue and Gross Margin

In the second quarter, R&D service revenue was 1.3 billion, an increase of 1.15 billion compared to the previous quarter, with an R&D service gross margin of 36%, a significant decrease from 64.2% in the previous quarter.

Similar to the battery and component business, ZEEKR's R&D services are mainly provided to internal departments of ZEEKR and related companies within the Geely system. However, unlike the relatively stable growth in revenue on the sales side of the battery and component business, the revenue volatility of R&D service business is significant. The increase in R&D service revenue this quarter is mainly due to the increase in service revenue provided to related parties.

V. Significant Increase in Operating Expenses Due to SBC Related to IPO this Quarter

From the expense side, although operating expenses increased significantly compared to the previous quarter (an increase of 1.35 billion), this was mainly due to the confirmation of SBC expenses related to the IPO, which amounted to 944 million this quarter, compared to just over 3 million in the previous quarter, resulting in an actual operating expense of -4.3 billion, an increase of approximately 410 million compared to the previous quarter, which is still manageable.

1. R&D expenses this quarter were 2.62 billion, a slight increase compared to the previous quarter

In the second quarter, ZEEKR's R&D expenses were 26 billion, an increase of 700 million compared to the previous quarter, mainly due to the increase in SBC expenses related to the IPO this quarter, as well as an increase in the number of R&D personnel.

Compared to new forces, ZEEKR's self-developed and self-produced in the three electric areas, especially starting in 23 to layout the most core battery cells in the three electric areas, as well as 800V electric control, the most comprehensive layout in the three electric areas, making ZEEKR models have advantages in long endurance and strong power performance compared to competitors (including the faster charging speed of the second-generation Gold Brick battery, installed in some versions of the 25 007).

In terms of autonomous driving, the previous main model ZEEKR 001 had obvious shortcomings in the hardware section of autonomous driving, using the Mobileye solution with a chip computing power of only 48 Tops, and delivered by Heihe. However, ZEEKR has realized this obvious shortcoming. In the ZEEKR 001 model launched in August, except for the entry-level version, the rest of the models have upgraded the autonomous driving hardware from 2 Mobileye EyeQ5H chips to dual Orin-X chips (except for the entry-level version), with a total computing power of 508 TOPS and standard equipped with LiDAR.

Currently, in terms of the speed of autonomous driving deployment, the high-speed NZP deployment speed has accelerated. As of June, a total of 169 cities have been deployed (compared to 104 new cities in April). It is expected that cities without maps will start delivery by the end of the year. Although the progress is still behind new forces and Huawei, efforts are being made to catch up.

ZEEKR is also preparing to equip the new car to be launched in the next 25 years with the NVIDIA Driver Thor chip (with a chip computing power of 2000 TOPS), and the investment in self-developed intelligent driving algorithms this year is expected to increase. The previously announced annual R&D investment is about 8 billion yuan.

2. Sales and administrative expenses this quarter were 2.6 billion, also an increase from the previous quarter

In the second quarter, sales and administrative expenses were 26 billion, an increase of about 6 billion compared to the previous quarter of 20 billion in absolute value, mainly due to the increase in SBC expenses related to this quarter's IPO and the expansion of sales channels.

This quarter's operating loss was -1.7 billion, but after excluding the adjusted SBC expenses of 940 million related to this quarter's IPO, the adjusted operating profit and operating profit margin achieved a significant reduction in losses. This was mainly due to the increase in ZEEKR's gross margin, with the main reason being the improvement in ZEEKR's battery and component business gross margin (increased from 6.9% in the previous quarter to 20.3% in this quarter).

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