According to production and sales data in October, Changan Auto's (000625.SZ) sales volume in October ended the downward trend of consecutive monthly declines year-on-year, achieving a 4.07% increase. However, in the current fiercely competitive automotive industry, the slight increase in sales volume still fails to conceal the difficulties faced by Changan Auto.

Securities Star has noticed that in the first three quarters, Changan Auto experienced an increase in revenue but a decrease in profits, with net profit attributable to shareholders of the listed company dropping by over 60%. Due to the continuous year-on-year decline in monthly sales volume in the third quarter, Changan Auto's revenue and net profit both fell in the third quarter. Although the company has been promoting its transition to new energy vehicles, traditional fuel vehicles are still the mainstay of Changan Auto's sales, with new energy vehicle sales accounting for less than 30%. Its sub-brands Deep Blue and AITO have shown weak performance, with only about 60% of their sales targets achieved this year, and neither has achieved profitability as of the first half of the year.

01. Revenue and Net Profit Both Fell in Q3

The third-quarter report shows that in the first three quarters, Changan Auto achieved operating revenue of 110.96 billion yuan, a year-on-year increase of 2.54%; corresponding net profit attributable to shareholders of listed companies was 3.58 billion yuan, a year-on-year decrease of 63.78%; and net profit after non-operating deductions for the same period was 1.681 billion yuan, a year-on-year decrease of 48.87%. Changan Auto stated that the main reason for the decline in profits was the acquisition of Deep Blue Auto Technology Co., Ltd. in the first quarter of 2023, where the originally held equity was remeasured at fair value, recognizing non-recurring gains and losses of 5.02 billion yuan, and there were no such gains this year.

In terms of costs, the total operating costs in the first three quarters increased by 4.37% year-on-year to 109.876 billion yuan, compressing Changan Auto's profit margin. Among them, administrative expenses, R&D expenses, and financial expenses have contracted to varying degrees, but selling expenses increased by 18.34% year-on-year to 4.707 billion yuan, reflecting increased investment in marketing and sales channel expansion.

Breaking down the single quarters, Changan Auto achieved a good start in revenue in the first two quarters, with Q1 and Q2 revenues of 37.023 billion yuan and 39.7 billion yuan, respectively, up 7.14% and 28.33% year-on-year; the corresponding net profits attributable to shareholders of listed companies were 1.158 billion yuan and 1.674 billion yuan, with growth rates of -83.39% and 145.13%, respectively. The decline in Q1 profits was related to the recognition of investment income from the acquisition of Deep Blue Auto Technology Co., Ltd. in the same period last year.

However, the trend of increasing revenue and net profit in Q2 did not continue into Q3. Changan Auto achieved revenue of 34.237 billion yuan in Q3, a year-on-year decrease of 19.85%; corresponding net profit attributable to shareholders of listed companies was 748 million yuan, a year-on-year decrease of 66.44%. During the third-quarter earnings presentation, Changan Auto explained that the decline in net profit attributable to shareholders of listed companies in the third quarter was due to two main reasons: firstly, actively adjusting the sales structure led to a decline in sales volume, affecting current revenue and profit performance; secondly, the concentrated launch of new products at the end of the third quarter increased R&D and selling expenses; thirdly, to cope with fierce market competition, additional resources were invested.

Securities Star notes that the decline in Q3 performance is consistent with its sales trend. Production and sales bulletins show that Changan Auto sold 570,900 vehicles in the third quarter, a decrease of about 12.69% from the same period last year's 653,900 vehicles. Starting from June, Changan Auto's sales volume has declined year-on-year for four consecutive months, with declines of 0.3%, 17.86%, 10.63%, and 9.98%, respectively. However, for the entire first three quarters, Changan Auto achieved cumulative sales of 1.905 million vehicles, a slight year-on-year increase of 1.89%.

To promote sales growth, Changan Auto has implemented the strategy of "collaborative production and financing to promote sales" since the beginning of this year, increasing the credit sales quota for complete vehicles. However, correspondingly, its accounts receivable for the first three quarters of Changan Auto increased significantly to 4.226 billion yuan, a year-on-year increase of 58.32%. Additionally, due to increased payments to suppliers, the net cash flow generated from operating activities decreased by 74.86% year-on-year to 4.393 billion yuan.

02. New Energy Vehicles Account for Less Than 30%

Changan Auto currently has three major brands: Changan, Deep Blue, and AITO. Among them, the Changan brand has three sub-brands: Changan Yinli, Changan Qiyuan, and Changan Kaicheng. At the same time, it produces and sells joint venture brand models through joint ventures Changan Ford and Changan Mazda.

The October production and sales bulletin shows that Changan Auto sold 2.1558 million vehicles from January to October, a year-on-year increase of 2.14%, of which 1.7974 million were independent brand sales and 318,600 were overseas sales of independent brands.

According to the China Passenger Car Association, retail sales of new energy passenger vehicles in October reached 1.196 million, a year-on-year increase of 56.7% and a month-on-month increase of 6.4%. The domestic market penetration rate reached 52.9%, exceeding 50% for the fourth consecutive month. The association analyzed that higher subsidies for trade-ins, combined with the advantages of new energy vehicles, have contributed to the continuous increase in new energy vehicle sales.

Although new energy vehicles have gradually become the mainstream in the market, Changan Auto's new energy vehicle segment does not account for a high proportion, and fuel vehicles of the Changan brand and joint venture brands are still the main sources of its revenue and profit. Data shows that Changan Auto's independent brand new energy sales were 85,300 vehicles in October and 532,900 vehicles from January to October, a year-on-year increase of 46.37%. However, the sales proportion of the new energy vehicle segment is only about 24.72%, indicating that its new energy vehicle development is significantly lagging behind the market, with over 70% of the company's sales still contributed by fuel vehicles.

On October 21, at the 2024 Changan Technology Ecosystem Conference, Changan Auto Chairman Zhu Huarong stated that by 2030, Changan Auto's annual sales target is 5 million vehicles. Among them, independent brand sales will reach 4 million vehicles, with new energy sales accounting for over 60%, and overseas sales accounting for over 30%.

Securities Star notes that the accelerated decline of fuel vehicles has severely impacted Changan Auto's profits. In the new energy vehicle segment, although sales have increased, its sub-brands Deep Blue and AITO have yet to achieve profitability.

In terms of sales, Deep Blue delivered 27,900 vehicles in October, up 79.6% year-on-year and 22.7% month-on-month, with cumulative deliveries reaching 171,300 vehicles from January to October, surpassing last year's full-year delivery of 136,900 vehicles. AITO's performance lags behind Deep Blue, delivering 10,100 vehicles in October, up 256% year-on-year and 121.6% month-on-month, achieving the milestone of over 10,000 deliveries for the first time. However, its cumulative sales from January to October were only 51,000 vehicles.

Although sales performance exceeded last year's figures, the completion rate of this year's annual sales targets was not ideal. Deep Blue's annual target is 280,000 vehicles, and AITO's is 84,000 vehicles. As of October, the completion rates for the two were 61.18% and 60.71%, respectively.

Although the third-quarter report did not disclose relevant performance information, according to the mid-year report, Deep Blue and AITO are deeply in the red. In the first half of this year, AITO achieved revenue of 6.152 billion yuan and a net profit of -1.395 billion yuan; Deep Blue achieved revenue of 13.981 billion yuan and a net profit of -739 million yuan. Looking at a longer time frame, from 2022 to 2023, AITO's net profits were -2.015 billion yuan and -3.693 billion yuan, respectively, while Deep Blue's net profits were -3.197 billion yuan and -2.999 billion yuan, respectively, for the same periods. In two and a half years, the cumulative losses of AITO and Deep Blue reached 7.103 billion yuan and 6.935 billion yuan, respectively.

In contrast, for fuel vehicles, in the first half of this year, Changan Ford, among the major shareholding and controlling companies, was the main source of profit contribution. It achieved a net profit of 1.821 billion yuan, a year-on-year increase of 127.86%, bringing a long-term equity investment income of 619 million yuan to Changan Auto.

Since the third quarter, Changan Auto has been accelerating the launch of new energy products to promote sales. On September 26, AITO 07 was officially launched; on October 18, Changan Qiyuan A07, A05, and Q05 Zhenxiang Edition were launched; on October 20, Deep Blue S05 was officially launched; on October 21, Changan Qiyuan E07 was officially launched; and on November 2, AITO 12 Dual-Motor Version was launched. Changan Auto stated that the multiple products launched densely in September and October have received positive market responses and order performance. However, in the remaining two months, Changan Auto still faces considerable challenges in achieving its annual sales target for new energy vehicles. (This article was originally published on Securities Star, Author | Lu Wenyan)

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