9863: Private Placement And Dividend Prospects Will Fuel Undervaluation Reversal

Key Takeaways

• Expanding global presence and strategic partnerships, combined with localized production, are broadening market reach and diversifying revenue sources.
  
• Emphasis on affordable, tech-driven vehicles and vertical integration is boosting margins, differentiation, and sustainable growth.
  
• Heavy international expansion, rising competition, and reliance on subsidies and partnerships create significant risks for profitability, margin stability, and long-term cash flow sustainability.

Catalysts

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

• Leapmotor is positioned to benefit from rapid expansion in global electric vehicle adoption, with strong execution in both domestic and overseas markets demonstrated by rapid sales growth (221,664 units in H1, ~156% YoY growth), ongoing model launches (B-/C-/D-series), and aggressive international ramp-up through local production in Malaysia and Europe; this supports rising revenue and a larger addressable market.
  
• The company's focus on affordable, intelligently connected vehicles and continued R&D investment in proprietary smart driving systems (urban NOA, in-house AR-HUD, and full-stack autonomous solutions) enhances product differentiation, catering to growing consumer demand for high-tech mobility and supporting both top-line growth and margin expansion.
  
• Scaling production, deeper vertical integration, and optimized cost management (now showing 14%+ GP margin, targeting 15%) are driving sustained improvements in gross profit margin and operational leverage, creating conditions for higher earnings and robust net margin recovery.
  
• International expansion (leveraging Stellantis and FAW partnerships) in multiple regions with localized production and distribution (over 600 overseas outlets, production in Malaysia/Europe starting 2026, leadership in overseas start-up exports) increases volume potential and diversifies revenue streams, while regulatory tailwinds (carbon credits, EV incentives) drive additional non-auto and auto revenue.
  
• Intensification of channel coverage (now in 286 Chinese cities, outlet operation efficiency up 27%) and successful entrance into less-penetrated urban and rural markets in China, paired with best-in-class service and fast product refresh cycle, support continued domestic growth momentum and customer retention, positively impacting revenue and future profit sustainability.

Zhejiang Leapmotor Technology Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Zhejiang Leapmotor Technology's revenue will grow by 34.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.8% today to 5.0% in 3 years time.
• Analysts expect earnings to reach CN¥7.9 billion (and earnings per share of CN¥5.45) by about July 2029, up from CN¥538.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥14.3 billion in earnings, and the most bearish expecting CN¥6.1 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 17.0x on those 2029 earnings, down from 89.7x today. This future PE is greater than the current PE for the HK Auto industry at 10.3x.
• Analysts expect the number of shares outstanding to grow by 6.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.82%, as per the Simply Wall St company report.

Risks

• Rapid international expansion-especially into Europe and Southeast Asia-is relying heavily on partnerships (e.g., Stellantis) and joint ventures, carrying execution risk and potential for lower net margins due to revenue-sharing and complex integration, which may impact long-term earnings and margin consistency.
  
• The company's short
• to medium-term strategy prioritizes aggressive sales growth and brand building over overseas profitability, with Leapmotor International reinvesting initial profit margins into marketing and expansion rather than sustaining earnings, raising the risk of delayed or unpredictable earnings improvement from non-China markets.
  
• The competitive landscape in China's EV market is intensifying, with new, well-funded entrants (like Xiaomi and Li Auto) launching blockbuster models and ongoing price wars, risking margin compression and necessitating continual product innovation and pricing discipline to avoid revenue and gross margin erosion.
  
• The company's recent improvements in GP margin and profitability benefited partially from ancillary sources like carbon credit trading and government subsidies, which may be subject to policy change or non-recurring effects, threatening the sustainability of earnings and stable cash flows in future periods.
  
• As Leapmotor pushes into lower-tier Chinese cities and international markets, its reliance on offering high-spec, value-for-money vehicles will be challenged by possible input cost volatility (e.g., batteries, raw materials) and the rapid pace of technological change-potentially forcing higher R&D and CapEx just to maintain product competitiveness, thus impacting long-term free cash flow and return on investment.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of HK$66.5 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 HK$98.33, and the most bearish reporting a price target of just HK$49.86.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be CN¥157.1 billion, earnings will come to CN¥7.9 billion, and it would be trading on a PE ratio of 17.0x, assuming you use a discount rate of 10.8%.
• Given the current share price of HK$39.22, the analyst price target of HK$66.5 is 41.0% 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.