Tariffs And Rising Compliance Costs Will Severely Limit Expansion

Key Takeaways

• Geopolitical friction and stricter foreign regulations severely constrain global expansion and increase compliance costs, intensifying pressure on margins and long-term profitability.
  
• Reliance on costly R&D, competitive price wars, and risky joint ventures undermine scalability, threaten earnings growth, and pose significant execution and integration risks.
  
• Rapid product innovation, global partnerships, and smart technology investments position Leapmotor for sustained growth, broader market reach, and long-term margin improvement.

Catalysts

Engages in the research and development, production, and sale of new energy vehicles in Mainland China and internationally.

• Heightened trade tensions and the rise of protectionist measures-such as increased tariffs in key international markets-threaten to severely limit Leapmotor's global expansion efforts, which will restrict total addressable market growth and drive stagnation or decline in revenues from new regions over the next several years.
  
• Increasingly strict environmental and sustainability regulations, particularly in export destinations like Europe, could dramatically raise compliance and adaptation costs, disproportionately impacting smaller players such as Leapmotor and exacerbating margin pressure and undermining prospects for sustained profitability.
  
• Ongoing heavy investment in research and development, coupled with selling expenses that remain elevated in a fiercely competitive market, will likely keep Leapmotor's net margins deeply negative for an extended period, making the pathway to breakeven and scalable earnings uncertain.
  
• Reliance on strategic joint ventures, such as the Stellantis partnership for overseas production and platform sharing, brings significant execution risk; failure to achieve meaningful brand differentiation or successful integration could suppress anticipated overseas revenue growth and erode long-term brand equity.
  
• Intensifying price wars and oversupply in the Chinese EV market, coupled with rapid shifts in battery and automotive technology, threaten to compress gross margins and necessitate ongoing capital-intensive upgrades, putting Leapmotor's earnings growth and cash flow under sustained structural pressure.

Zhejiang Leapmotor Technology Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Zhejiang Leapmotor Technology compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Zhejiang Leapmotor Technology's revenue will grow by 31.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -8.8% today to 5.5% in 3 years time.
• The bearish analysts expect earnings to reach CN¥4.0 billion (and earnings per share of CN¥3.02) by about July 2028, up from CN¥-2.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.4x on those 2028 earnings, up from -26.4x today. This future PE is lower than the current PE for the HK Auto industry at 18.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.11%, as per the Simply Wall St company report.

Zhejiang Leapmotor Technology Future Earnings Per Share Growth

Risks

• Leapmotor has demonstrated very strong year-on-year revenue growth, reporting RMB 12 billion in Q1, up approximately 187%, and continued improvement in gross profit margins, which if sustained could lead to stronger top-line growth and improved earnings.
  
• The company's product strategy emphasizes rapid R&D cycles, with advanced technology integration such as the LEAP 3.5 architecture and Qualcomm chips, enabling it to deliver intelligent and cost-optimized EVs at scale; this platformization and vertical integration position Leapmotor to achieve higher margins and long-term profitability.
  
• Leapmotor's aggressive global expansion, particularly through strategic partnerships with Stellantis, enables rapid localization and mass production in international markets such as Malaysia and Europe, opening up new revenue streams and supporting top-line expansion.
  
• The company's increasing operational efficiency, combined with a robust and expanding sales channel network (targeting more than 1,000 stores), suggest it can continuously reach a broader customer base, which is likely to support higher sales volume and potential revenue growth.
  
• Continued large-scale investment in smart driving technologies and positive customer feedback on these functions position Leapmotor to capitalize on secular trends in autonomous and intelligent mobility, potentially resulting in competitive differentiation and improved long-term margin structure.

Valuation

• The assumed bearish price target for Zhejiang Leapmotor Technology is HK$36.07, which represents two standard deviations below the consensus price target of HK$69.58. This valuation is based on what can be assumed as the expectations of Zhejiang Leapmotor Technology's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$89.84, and the most bearish reporting a price target of just HK$25.5.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥73.3 billion, earnings will come to CN¥4.0 billion, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 12.1%.
• Given the current share price of HK$61.15, the bearish analyst price target of HK$36.07 is 69.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.