Maintain BUY. Leapmotor’s 1Q25 net loss of RMB130mn beat our prior forecasts on higher average selling price (ASP) and GPM, as well as unexpected contribution from the strategic cooperation. We believe its cost reduction efforts, driven by its undervalued in-house R&D capabilities, have started to be reflected by its 1Q25 GPM and could be even more apparent after all the models are shifted to the Leap 3.5 architecture in mid-2025. We raise our FY25E sales volume forecast by 15% to 0.55mn units. We project breakeven at a net level in FY25E, followed by a tenfold increase to RMB1.2bn for FY26E net profit.
1Q25 results beat on higher GPM. Leapmotor’s 1Q25 revenue was higher than our expectation by 8%, partly due to its better-than-expected ASP despite higher discounts. Its 1Q25 GPM rose 1.6ppts QoQ to 14.9%, a record high, due in part to an unexpected service income from the strategic cooperation with FAW. We estimate that its vehicle 1Q25 GPM widened by more than 4ppts from 3Q24 with similar sales volume levels, which reflects Leapmotor’s superb cost reduction capabilities. SG&A and R&D expenses combined were also higher than our forecast by RMB350mn. Accordingly, its 1Q25 net loss of RMB130mn beat our forecast by about RMB350mn.
　　We have turned more optimistic about its FY25E sales volume and earnings. We raise our FY25E sales volume forecast from 0.48mn units to 0.55mn units, given stronger-than-expected sales performance and order intake during Apr to May. We lift our FY25E GPM forecast from 11.2% to 12.1%, taking into account the contribution from strategic cooperation with other OEMs and better-than-expected cost reduction capabilities related to the Leap 3.5 architecture. Management indicated that the Leap 3.5 could cut the smart cockpit and autonomous driving chip-related costs by 30-40% compared with the Leap 3.0. We expect Leapmotor International to contribute a share of profits of RMB110mn in FY25E, based on our sales volume forecast of 70,000 units for overseas markets. We also raise our forecast for the combined SG&A and R&D ratios by 0.5ppts to 13.8% due to higher-than-expected expenditures in 1Q25.
　　Earnings/Valuation. We raise our FY25E net profit forecast from - RMB98mn to RMB118mn. We also believe that Leapmotor will achieve more significant profit growth in FY26E. We maintain our BUY rating and raise our target price from HK$50.00 to HK$72.00, based on 1.5x FY25E P/S (prior 1.3x), given the recently improving market sentiment and higher visibility for Leapmotor’s earnings. Key risks to our rating and target price include lower sales volume and/or margins than we expect, and a sector de- rating.