"Hardcore" Red Sea Arena, Leapmotor's Bloody Breakthrough!

$LEAPMOTOR(09863.HK) released its Q2 2025 financial report after the Hong Kong stock market closed on August 18, Beijing time. This financial report continues to perform well, beating market expectations for three consecutive quarters. Specifically:

1. Revenue is roughly in line with expectations, but the average selling price of cars is declining due to a shift in model structure: This quarter's revenue was 14.2 billion, roughly in line with market expectations, but the average selling price of cars is still declining quarter-on-quarter, mainly due to the recognition of nearly 440 million in technology licensing revenue from FAW last quarter. Excluding this factor, the actual average selling price of cars this quarter declined by 3,000 yuan quarter-on-quarter, mainly due to the continued shift in model structure and cash discounts offered on existing models.

2. Although the gross margin has declined quarter-on-quarter, it still performs well: Leapmotor's gross margin this quarter was 13.6%, exceeding the market expectation of 12%, mainly due to the release of scale effects and the company's continued strong cost reduction capabilities. Excluding the impact of the technology licensing revenue from FAW, last quarter's car sales gross margin was 13%, so this quarter's gross margin actually increased quarter-on-quarter.

3. The three expenses are still increasing, mainly due to increased investment in intelligence and channel expansion: This quarter, Leapmotor's three expenses are still in a state of increased investment, with R&D expenses at 1.1 billion, compared to the market expectation of 850 million, mainly due to continued investment in intelligence. The company plans to achieve end-to-end city NOA capabilities by the end of the year.

In terms of sales expenses, this quarter's sales expenses were 800 million, compared to the market expectation of 650 million, mainly due to increased channel layout. The domestic retail channels increased by 50 to 806, mainly to prepare for the volume increase of the B series in the model structure.

4. Operating profit and net profit turned positive: This quarter's operating profit was 60 million, which has turned positive. Although the three expenses are still in the stage of increased investment, the leverage effect brought by the increase in sales volume was released, resulting in a bottom-line net profit of 160 million, achieving a turnaround from loss to profit.

Dolphin Research's View:

Overall, Leapmotor has once again delivered a good report card in the second quarter, continuously beating market expectations for four consecutive quarters. The highlights of this quarter's performance are the continued outperformance of gross margin (release of scale effects and strong cost reduction capabilities) and the successful turnaround to profitability at the net profit margin level due to the release of sales leverage effects.

Although the good performance expectations have been partially priced into the stock, during this earnings call, Leapmotor significantly raised its sales target again, from the previous 550,000-600,000 units to 580,000-650,000 units. Dolphin Research believes that Leapmotor has a high probability of achieving this revised target this year. Specifically:

① BYD's price war is limited, giving Leapmotor a relatively ample time window:

From the perspective of industry competition, BYD is limited by the "anti-involution" of the price war, which instead gives Leapmotor a relatively sufficient time window to attack BYD's basic market of 50,000-150,000 yuan models, continuously eating into BYD's market share.

② Leapmotor's strong cost reduction capability allows it to continuously launch more cost-effective models compared to competitors:

From Leapmotor's perspective, its consistently proven strong cost reduction capability gives it enough ability to launch more cost-effective models: for example, the Leapmotor B10 has higher configurations compared to the competitor BYD Yuan Plus (larger size, longer pure electric range), is cheaper, has a more attractive appearance, and is the first car company to bring lidar to models priced at 120,000 yuan.

This reflects Leapmotor's strong consideration of user needs, having a clear product definition, and being able to reduce costs through self-research. The result is a strategy of providing "lower prices, larger space, higher configurations" that continuously meets user needs, which is the fundamental reason Leapmotor can continuously create blockbuster models.

③ The fourth quarter peak season is starting, Leapmotor B01 order volume continues to maintain a good level, and B05 is about to be delivered:

Looking at the second half of the year, the fourth quarter is about to usher in the sales peak season. The Leapmotor B01 model is still climbing, with weekly orders reaching 14,000 units (corresponding to a run rate of nearly 60,000 units per month), and the mass production delivery of the B05 (a two-box small car) is expected in November. The possibility of achieving the revised sales target of 580,000-650,000 units is high.

Looking forward to the second half of the year, Dolphin Research believes that with the current achievement of the revised sales target, Leapmotor's stock price still has about 10-25% upside potential (corresponding to a market value of 91-102 billion).

Looking ahead to 2026, Leapmotor is about to launch the D series and A series, complementing its product system, while the export logic is the most certain among new forces, and Leapmotor may have further upward flexibility:

① The certainty of going overseas is very strong among new forces:

Leapmotor has strong certainty in exports among new forces, due to its channel strength and brand strength supported by cooperation with Stellantis. In the second quarter, it is still accelerating the expansion of overseas channels, with a net increase of 100 international channels, mainly laying sales channels in Europe (Leapmotor international channels total 600, with 92% in Europe). The B platform and A platform models are more suitable for Europe's demand for low-cost small cars, making the certainty of going overseas relatively strong.

② The possibility of Leapmotor starting a technology licensing revenue model:

If Leapmotor can continuously start a model of exporting electronic architecture licenses to car companies, and the revenue becomes a recurring income, Leapmotor's valuation multiple may have further upward space.

③ Confirmation of carbon credit income:

Due to the European carbon emission regulations' time window from 2025 to 2027, Leapmotor's electric vehicles sold in Europe can generate carbon credit income (agreement signed in June 2025), and this part of the income is basically a pure profit model (referencing Tesla), improving Leapmotor's income and gross margin levels (transaction cap of 1.5 billion yuan).

The following is a detailed analysis:

1.Gross profit margin performance remained strong in the first and second quarters.

With Leapmotor's earnings results now released and vehicle sales already in the books, investors are most concerned about the gross profit margin of its automotive business. Due to the higher gross profit margin from technical service fees with FAW in the previous quarter, the actual gross profit margin on vehicle sales was approximately 13%.

The market expected a gross profit margin of 12%. Due to the increased share of the low-priced B10 in the second quarter and the launch of the C16 and C11 facelifts in April, along with price cuts for older models, the market projected an overall gross profit margin of only around 12% in the second quarter, a decrease of nearly 3 percentage points quarter-over-quarter.

Leapmotor's gross profit margin for the current quarter was 13.6%, exceeding market expectations of 12%, primarily due to economies of scale and the company's continued strong cost reduction capabilities. Excluding the impact of the recognition of technology licensing revenue from FAW in the previous quarter, the gross profit margin for the current quarter still increased quarter-over-quarter.

PS: However, since Leapmotor’s revenue is mainly divided into ① automotive business revenue and ② service and other sales revenue, but Leapmotor did not split these two business data by quarter, Dolphin Jun analyzed it based on the total revenue dimension.

From a per-vehicle perspective (including revenue from services and other businesses):

a) The average price per vehicle was 106,000 yuan, down 8,000 yuan quarter-over-quarter:

The average price per vehicle in the second quarter was 106,000 yuan, down 8,000 yuan quarter-over-quarter. However, due to the recognition of technical service fees from the FAW partnership (approximately 440 million yuan) in the previous quarter, the actual per-vehicle price this quarter decreased by 3,000 yuan quarter-over-quarter after adjusting for this impact.

Let's take a look at Leapmotor's second-quarter vehicle sales:

① Some discounts were still offered on older models in the second quarter, and the C-series continued to see price cuts in June:

In the second quarter, Leapmotor offered some discounts on older models in April and increased cash discounts on the C11 and C16 in June (the C11/C16 enjoyed cash discounts of 20,000 yuan and 9,000 yuan in June, respectively). The per-vehicle price continued to decline.

② Looking at its model mix, Leapmotor's model mix continued to decline in the second quarter:

Due to the strong sales of the B10, the share of the lowest-priced B series in Leapmotor's model mix increased by 21% to 24% quarter-over-quarter, while the share of the more expensive C series decreased by 20% to 57.6%, lowering the overall unit price.

b) The actual cost per vehicle was 92,000 yuan, a decrease of 5,000 yuan quarter-over-quarter, with economies of scale continuing to drive cost reductions.

The actual cost per vehicle sold this quarter was 92,000 yuan, a decrease of 5,000 yuan quarter-over-quarter. The main reason for the cost reduction per vehicle was Leapmotor's continued strong sales, with sales increasing by 53% quarter-over-quarter to 134,000 units. This resulted in a decrease in the fixed depreciation cost per vehicle, and Leapmotor still possesses strong cost reduction capabilities.

c) Actual gross profit per vehicle was 14,000 yuan, a quarter-on-quarter decrease of 3,000 yuan.

The actual gross profit per vehicle in the second quarter was 14,000 yuan (excluding the impact of partnerships), a quarter-on-quarter decrease of 3,000 yuan. The decrease was primarily due to a decrease in unit price.

2. 2025 sales target further raised, from 550,000-600,000 units to 580,000-650,000 units.

During this earnings call, Leapmotor significantly raised its sales target again, from the previous 550,000-600,000 units to 580,000-650,000 units. Dolphin believes that Leapmotor is highly likely to achieve this further increase this year. Specifically:

① BYD's price war has been limited, giving Leapmotor a relatively ample window of opportunity:

From an industry competitive perspective, BYD's price war has been limited by the "anti-involution" policy. This, in turn, has given Leapmotor ample time to attack BYD's core 50,000-150,000 yuan segment and continue to eat into BYD's market share.

② Leapmotor's strong cost-cutting capabilities enable it to continuously launch models with higher cost-performance compared to its competitors:

From Leapmotor's own perspective, Leapmotor's proven cost-cutting capabilities have enabled it to launch models with superior value. For example, the Leapmotor B10 boasts higher specifications (larger size, longer all-electric range) than its competitor, the BYD Yuan Plus, while being more affordable and attractive in appearance. It is also the first automaker to introduce LiDAR into the 120,000 yuan price range.

This reflects Leapmotor's deep focus on user needs, its clear product definition, and its ability to reduce costs through in-house research and development. The result is a strategy of offering "lower prices, more space, and higher specifications" that consistently meets user needs. This is the fundamental reason Leapmotor continues to create hit models.

③ With the start of the fourth quarter peak season, Leapmotor B01 orders continue to maintain a strong level, and B05 deliveries are imminent:

Looking at the second half of the year, the fourth quarter is about to enter its peak sales season, and the Leapmotor B01 model continues to grow. Leapmotor's overall weekly order level has reached 14,000 units (corresponding to a monthly run rate of nearly 60,000 units). The B05 (a small hatchback) will enter mass production and delivery in November. Dolphin believes that the revised sales target of 580,000-650,000 units is likely to be achieved.

3. Investments in the three expenses are increasing, primarily due to increasing investment in intelligent technology and channel expansion.

In R&D, Leapmotor adheres to fully in-house research and development. Previously, this research focused more on electronics, but in 2025, the focus shifted to intelligent technology. In terms of sales, Leapmotor continues to expand its dealer network in preparation for the ramp-up of its B-platform models.

1) R&D Expenses: Invested in intelligent technology and new models.

Leapmotor's R&D expenses in the second quarter were 1.1 billion yuan, exceeding market expectations by 850 million yuan.

Leapmotor adheres to comprehensive in-house R&D, focusing on independently developing all key software and hardware for core systems and electronic components in smart electric vehicles. The company manufactures and supplies all core components for the three electrical systems (electrical, electronic, and control systems) and some controllers in-house. Its strong vertical supply chain integration capabilities contribute to its ability to consistently exceed market expectations in cost reductions.

The company continued its aggressive investment in intelligent driving in the first half of the year, with continued investment increasing. The company plans to achieve end-to-end urban No-Apparent Assisted Driving (NOA) capabilities by the end of the year. Further strategic investments are planned in the second half of 2025, increasing R&D resources for end-to-end and VLA technologies, and achieving combined urban No-Apparent Assisted Driving (AD) capabilities by the end of 2025.

2) Selling Expenses: 800 million yuan this quarter, exceeding market expectations of 650 million yuan.

Leapmotor's second-quarter selling expenses were 800 million yuan, slightly exceeding the market expectation of 650 million yuan. This was primarily due to Leapmotor's continued channel expansion, with 50 new domestic retail channels added to 806, further expanding its reach into lower-tier markets. This is in preparation for increased sales of the B series within its vehicle model mix and supporting the upwardly revised annual sales target of 560,000-650,000 units.

Regarding its overseas channels, Leapmotor International opened 600 stores in the second quarter, a net increase of 100 stores compared to the first quarter. These stores are primarily located in Europe, with 550 European channels representing 92% of Leapmotor International's total channels. B-platform and A-platform models are more suited to Europe's demand for affordable small cars, making their overseas expansion relatively certain.

The operating profit for this quarter was 60 million, which has turned positive. Although the investment in the three expenses is still in the stage of increasing, the leverage effect brought about by the increase in sales has been released, and the bottom line net profit was 160 million, which also turned losses into profits.

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Holun Jun's Historical Articles:

March 10, 2025 Financial Report Commentary: "Zero Run: A Dark Horse Counterattack, Is "Little Ideal" Going on a Kill?"

March 11, 2025: "Zero Run (Minutes): 2025 Sales Target: 500,000-600,000 Units"

August 15, 2024 Financial Report Commentary: "Zero Run: Revenue and Gross Profit Both Fall Short of Expectations, Can It Reverse its Downturn in Overseas Sales?"

August 16, 2024 Conference Call Minutes: "Maintaining 2024 Sales Target of 250,000 Units and 5% Gross Profit Margin for the Year"

May 17, 2024 Financial Report Commentary: "Gross Profit Margin Turns from Positive to Negative, Can Zero Run Carve Out a Strong Foothold in Overseas Sales?"

March 25, 2024 Financial Report Commentary: "Gross Profit Margin Continues to Rise, Can Zero Run Lead in Overseas Sales?" "

March 26, 2024 Conference Call Minutes: "Full-Year Gross Profit Margin Continues to Remain at 5%-10%"

October 16, 2023 Financial Report Commentary: "Gross Profit Margin Turns Positive, Has Leapmotor Finally Begun to 'Cross the Line of Life and Death'?"

October 17, 2023 Conference Call Minutes: "Gross Profit Margin Expectations Continue to Improve, Has the Leapmotor Investment Opportunity Arrived?" (Leapmotor 3Q Conference Call Minutes)

August 25, 2023 Financial Report Commentary: "Leapmotor: Gross Profit Margin Continues to Fail to Turn Positive, When Will Xiaomi Take the Lead in the Automotive Industry?"

September 29, 2022 In-Depth Report: "Leapmotor: After a 30% Plunge After IPO, Is the 'Redmi Version of Xpeng' a Loser or a Genuine Opportunity?"

Risk Disclosure and Statement for This Article: Dolphin Investment Research Disclaimer and General Disclosure