Earnings Digest | Is Zeekr's Share Price Significantly Undervalued?

Yesterday, $ZEEKR(ZK)$ reported its Q2 earnings, and its stock surged 10.7%!

Although Zeekr's Q2 results were impressive, they were in line with expectations. After all, monthly sales figures for electric vehicles are publicly available. So, what’s behind Zeekr surge?

Revenue for Q2 hit ¥20 billion, up 58.4% year-over-year.

Breaking it down

- Automotive sales revenue was ¥13.4 billion, up 59%.

- Battery and parts sales totaled ¥5.3 billion, a 36.1% increase.

- R&D and other revenue was ¥1.3 billion, soaring 327%.

The surge in Automotive sales was driven by increased volume, with 54,811 units sold in Q2, a 100% year-over-year increase.

However, revenue growth was only 59% due to the introduction of lower-priced models, which significantly reduced average revenue per vehicle.

July sales were already reported at 15,655 units, up 30% year-over-year but down 22% month-over-month, raising some concerns.

Nevertheless, Zeekr's management maintained its annual sales target of 230,000 units. With 103,500 units sold from January to July, Zeekr needs to sell nearly 130,000 more units in the remaining months, averaging 26,000 units per month to meet the goal.

Launch New Models

This target is ambitious, but Zeekr recently launched several new models:

- The mid-to-large SUV ZEEKR 7X in July.

- The luxury flagship MPV ZEEKR 009 on July 19, with deliveries starting July 22, 2024.

- The upgraded ZEEKR 001 and a high-end sedan model on August 13.

Looking ahead, Zeekr might enter the range-extender market, potentially boosting sales.

Despite high growth in Automotive sales, the Q2 gross margin for Automotive business was a surprising 14.2%, better than $XPeng Inc.(XPEV)$ $XPENG-W(09868)$ 's 6.4%.

Unlike other EV brands, Zeekr also earns from batteries and R&D services, thanks to its relationship with its parent company, $GEELY AUTO(00175)$ $Geely Automobile Holdings Ltd.(GELYF)$ .

For Q2:

- Battery and parts revenue reached ¥5.3 billion, up 36%, with a gross margin of 20.3%, a record since 2022.

- R&D and other revenue was ¥1.3 billion, up 327%, with a gross margin of 36%.

Sales to related parties are often frowned upon by the market. Given the unpredictable nature of R&D revenue and its sustainability, this segment is not well-regarded by investors.

Yet, even excluding battery and R&D revenues, Zeekr’s valuation remains low, with a price-to-sales ratio of just 0.7, much lower than competitors like $Li Auto(LI)$ $LI AUTO-W(02015)$ and $NIO Inc.(NIO)$ $NIO-SW(09866)$ .

Thus, Zeekr is significantly undervalued.

The market was rattled by July’s sales dip, but with the Q2 report confirming the annual sales target and a lower valuation compared to rivals, the stock’s surge is understandable.