New B-Series Launch And Stellantis Partnership Will Boost Global Growth And Earnings

Key Takeaways

• Expansion into international markets and partnerships could drive revenue growth and scale economies.
  
• Increased R&D investment enhances autonomous driving, boosting high-margin offerings and technological advantage.
  
• Heavy reliance on the Chinese market and EU tariffs could strain profitability and growth amidst economic and geopolitical challenges.

Catalysts

Zhejiang Leapmotor Technology Co., Ltd. principally engages in the research and development, production, and sale of energy vehicles in the People’s Republic of China.

• Strong growth in deliveries and revenue, with continuous monthly record-breaking sales figures and an optimized product mix, is driving an expectation of increased future revenue.
  
• Launch of new models such as the B-Series in 2025, anticipated to drive significant growth and capture a larger market segment, potentially improving earnings.
  
• Expansion into international markets, particularly Europe, Asia Pacific, and other regions, with an established network supported by partnerships like Stellantis, which could contribute to revenue growth and scale economies.
  
• Improvement in gross margins from 4.8% to 8.1% with ambitions to reach a 10% margin by next year through economies of scale and cost efficiencies, signaling potential enhancement in net margins.
  
• Increase in R&D investment to enhance autonomous driving capabilities and smart features across multiple new models, driving higher-margin product offerings and expanding Leapmotor's technological competitive edge, expected to ultimately boost earnings.

Zhejiang Leapmotor Technology Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Zhejiang Leapmotor Technology's revenue will grow by 57.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -21.0% today to 2.2% in 3 years time.
• Analysts expect earnings to reach CN¥1.7 billion (and earnings per share of CN¥1.23) by about December 2027, up from CN¥-4.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥3.8 billion in earnings, and the most bearish expecting CN¥-1.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 45.1x on those 2027 earnings, up from -9.3x today. This future PE is greater than the current PE for the HK Auto industry at 20.9x.
• Analysts expect the number of shares outstanding to grow by 0.46% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Zhejiang Leapmotor Technology Future Earnings Per Share Growth

Risks

• European Union's new tariffs on Chinese electric vehicles increase the costs of exporting to Europe, which may compress margins and impact profitability.
  
• Heavy reliance on the Chinese market poses a risk if domestic consumer preferences shift or if the automotive market growth slows in China, impacting sales and revenue.
  
• The need to establish localized production in Europe raises capital expenditure demands, which may strain financial resources and impact earnings in the short term.
  
• Economic uncertainty in Europe, combined with geopolitical tensions, could limit the effectiveness of market expansion efforts, affecting revenue growth.
  
• The ambitious expansion and technology development plans necessitate significant R&D investment, which may not immediately translate into increased profitability, affecting net margins.

Valuation

• The analysts have a consensus price target of CN¥40.23 for Zhejiang Leapmotor Technology based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CN¥52.92, and the most bearish reporting a price target of just CN¥24.94.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CN¥77.4 billion, earnings will come to CN¥1.7 billion, and it would be trading on a PE ratio of 45.1x, assuming you use a discount rate of 11.4%.
• Given the current share price of CN¥30.65, the analyst's price target of CN¥40.23 is 23.8% higher.
• 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.