Authors: Wu Xiaoyu and Yi Silin Editor: Zhu Yimin Image source: IC
Ideal Cars, known for selling extended-range hybrid products, saw a surge in sales last year. This year, in order to seek a “second growth curve,” Ideal has put the release of 4 pure electric products on the product planning agenda. However, the highly anticipated first pure electric product, MEGA, did not bring corresponding sales feedback to Ideal and disrupted Ideal’s growth momentum. On the evening of May 20th, Ideal Cars released the first quarter performance report for 2024, with the most prominent data being an operating loss of 585 million. Just three months ago, Ideal’s 2023 financial report showed a profit of 11.81 billion. A large part of the operating loss comes from excessive investment in research and development and sales/administrative expenses. The financial report shows that Ideal’s research and development investment and marketing/administrative investment both reached 3 billion this quarter, exceeding market expectations. With this, Ideal ended four consecutive quarters of continuous profitability and returned to an operating loss in the fourth quarter of 2022, when Ideal was facing the difficult Ideal ONE replacement crisis. The loss data also unsettles investors. After the financial report was released, as of the close on May 21st, Ideal’s Hong Kong stock price had fallen to 80.65 Hong Kong dollars, a decrease of nearly 55% from the high point earlier this year. Due to the impact of lower-than-expected sales of the pure electric flagship product MEGA, the release schedule for Ideal’s pure electric products has changed several times since May. An insider told 21st Century Business Herald reporters that the decision on whether to launch pure electric vehicles this year and how to launch them has been discussed internally many times. Some propose following the previous release schedule of Ideal’s extended-range products, “first launch M9, then M8, M7”; while others advocate for “first launch M7, then M8 and M9” because of the economic downturn, cheaper cars should be launched first. Ultimately, Ideal Cars CEO Li Xiang decided during this financial report conference call: “This year, we will not release a pure electric SUV product, it will be released in the first half of next year.” The direct result of this decision is that “in the second half of this year, Ideal will not have any new models to launch, so it will only be in a defensive position,” a private equity investor told 21st Century Business Herald reporters. But the ideal situation may not be so bad, another investor believes that delaying the launch of subsequent pure electric products in the long run “is more conducive to Ideal launching more competitive pure electric products and winning time to better adjust channels” After a product launch failure, car companies will enter a brief period of pain, but it is also an excellent opportunity to identify problems, adjust themselves, and face market competition with a stronger posture After the failure of the Xiaopeng G9 launch, He Xiaopeng began to consider the most basic organizational issues, reorganizing more than 10 businesses into five committees divided by function: strategic, product, technology, sales, and OTA Ideal also did the same on April 7th, Ideal began a new round of organizational restructuring, dismantling the business department, establishing a product line department, focusing on decision-making for the commercial success of products, and operating the financial report. Li Xiang also emphasized once again at the meeting that the core change of this organizational restructuring is the establishment of a quality operation team, “allowing the business to focus more on making high-quality decisions, without having to spend time on repetitive operations, in order to improve execution efficiency” With a cash reserve of 98.9 billion yuan and a gross profit margin of 20.6%, perhaps Ideal’s biggest confidence in adjusting itself After falling into operational losses in the first quarter, this is undoubtedly a highly discussed financial report. We talked to three investors about issues such as the delay in launching pure electric products, second-quarter performance expectations, and the future opportunities of Ideal Cars. Here are their views Wang Yi, a private equity investor for 10 years “When to launch pure electric vehicles, the fundamental contradiction behind may not lie in how many charging piles are built” Ideal will not launch pure electric SUV products this year, but will instead launch them in the first half of next year – this is the most important announcement made by Ideal Car CEO Li Xiang at the financial report conference last night. Li Xiang’s explanation is that “the appropriate time for the launch of pure electric products in the market is when the number of self-operated supercharging piles reaches a level similar to that of Tesla China” I did a math problem. Tesla currently has over 1,900 supercharging stations, but the construction speed of Ideal charging stations is very slow: by the end of 2023, Ideal will have 262 supercharging stations in operation. In the first 5 and a half months of this year, NIO added 138 supercharging stations, averaging 25 new stations per month. At this rate, by the end of 2024, NIO will have a total of 562.5 supercharging stations. However, even if they build one station per day, they will only have 630 stations by the end of the year, far from their goal of over 2000 stations by the end of the year. According to Ouyang Minggao, Vice Chairman of the China Electric Vehicle Hundred People’s Association, the market share of new energy vehicles will exceed 50% by 2026, leading to more intense competition among products. NIO is adamant about building its own supercharging stations because high-end electric vehicle users do not want to spend time charging or wait at public charging stations. However, in my opinion, waiting to release pure electric vehicles until after the completion of the charging station construction may be a false proposition. BYD had a net cash flow of 169.73 billion yuan last year but is not enthusiastic about building charging stations. NIO currently has the most self-built charging and battery swapping stations among car companies, with 4800 stations, followed by Xiaopeng with 2200 and Tesla with 1600. BYD is not among the top five in this list. Despite this, BYD’s pure electric vehicles performed well, outselling Tesla in the fourth quarter of last year and becoming the world’s largest pure electric vehicle manufacturer. The annual operating cost of a medium-sized charging station is between 100,000 and 200,000 yuan (27600$). To reduce construction costs and avoid short-term losses, BYD has chosen to collaborate closely with third-party operators. Li Xiang’s keen product sense, the past success of NIO’s extended-range products, and recognition of Li Xiang himself are three factors that led my fund to hold NIO’s stock. Initially, many people did not approve of NIO’s extended-range technology, considering it a transitional route. However, Li Xiang remained steadfast in his belief. The L series, which adopted the extended range route, sold 376,000 vehicles last year, the best performance among new forces. However, after the sales of the first pure electric product MEGA fell short of expectations, I saw a shift and hesitation in the internal strategy of Ideal within just three months – even though these strategies should have been adhered to and correct in my opinion. Last June, at Ideal’s Family Technology Day, Ideal’s view on supplementary energy was that “compared to urban areas, users driving new energy vehicles on highways have more range anxiety” because of the concentration of highway traffic and long user driving distances, they have to charge once every few hours. At that time, Ideal’s layout pace for supplementary energy was – prioritizing the construction of super charging stations on highways. After MEGA was released, Ideal believed that the travel scenarios of households buying MEGA were mostly in urban areas, with the farthest being the suburbs, so they accelerated the pace of setting up charging stations in urban areas. We once conducted a survey on the driving experience of pure electric vehicle users: electric vehicle users in urban areas generally charge once a week, using a 3C charging pile instead of a 5C one takes about 20 minutes more. This is not unacceptable to users. Ideal itself setting up 5C charging piles is a more time-consuming and costly matter. In terms of supplementary energy layout, Xiaopeng had adjusted the route. When Xiaopeng released the G9 in September 2022, they used 4C batteries, but when the G6 was released last year, they reverted to using 3C batteries. At that time, Xiaopeng’s powertrain team conducted research: with few charging piles, the acceptance of 4C batteries by users simply did not meet expectations. Taking Guangzhou as an example, there are only dozens of 4C fast charging piles, but there are hundreds of 3C piles. “The technology scores 90 points, but the market resources only score 60 points, and the multiplication of the two is a failing grade,” said Gu Jie, head of Xiaopeng’s powertrain center, in an interview with the media in August last year. However, we must also see the positive side, as Ideal’s gross profit margin was particularly resilient this quarter. In the fourth quarter of last year, Ideal sold 131,800 vehicles, with a gross profit margin of 23.5%. In the first quarter of this year, despite the fierce price war in the automotive industry and the lack of scale effects from MEGA, Ideal’s gross profit margin still remained at 20.6%. This is something even Tesla finds difficult – in the third quarter of last year, due to price cuts and declining delivery volumes, Tesla’s gross margin fell to 17.9%, the lowest level in four years. Ideal warned in the financial report that “the second quarter will be the most difficult quarter for the company this year.” Strong gross margin may be Ideal’s way of adjusting its confidence. Li Mingyue, a 7-year investor in the new energy field, said, “Delaying pure electric vehicles may have a short-term impact on stock prices, but it is a good move in the long run.” According to Ideal’s plan, 2024 was supposed to be Ideal’s “big year for pure electric vehicles”: the delay in the release of 3 pure electric SUVs disrupted Ideal’s product planning. Ideal will face the dilemma of new product shortages, and sales will still rely on the support of the L-series old cars, which will naturally affect Ideal’s stock price in the short term. But in the long run, delaying pure electric products is a good move for Ideal. This allows Ideal to launch more competitive pure electric products, set up channels, and win time. To launch pure electric vehicles, the layout of supercharging stations is only a necessary condition, not a sufficient one. The release of pure electric vehicles mainly depends on whether Ideal will modify the pure electric products, how they will be modified, and whether Ideal has set up corresponding channels for pure electric products. From what I understand, Ideal focuses on “changing the interior, enhancing luxury,” and has limited changes to the appearance of the product. Compared to product changes, setting up marketing channels is a bigger challenge for Ideal. If pure electric products are released this year, with the existing 4 products, whether Ideal’s sales network can support 4 new cars in the store at the same time is a test. If there is not even booth space, how will Ideal sell cars? Moving old cars away will also affect the sales of older models to some extent. Li Xiang also realizes this point. “If you want to support a new model to achieve sales of over 10,000 units per month, you probably need to add 500-600 fixed booths nationwide, otherwise there will be a problem of increasing the number of products without increasing sales.” Li Xiang said in the financial report conference call. Delaying the release of pure electric products is Ideal’s way of adjusting itself to future competition, and it is currently the best solution. In the second quarter, perhaps the worst quarter for Ideal in my opinion, ideal gross profit will be affected by product structure: the L6, priced at 249,800 yuan (34480$), is the cheapest product in the L series, with relatively low gross profit; but its proportion is increasing, with sales of L7, 8, 9 in the third quarter this year expected to be between 20,000 and 30,000 vehicles, but investors expect L6 to sell 20,000 vehicles in half a month. Increased sales will drive the stock price, currently orders for L7, 8, 9 are improving, and the weekly sales orders I am tracking are expected to exceed 8,000 vehicles per week. Public opinion is not the core factor affecting users’ car purchases. When it comes to buying a car, users will return to rationality. By the end of 2022, affected by model upgrades, Ideal also faced public opinion storms, but sales reached 133,200 vehicles that year, a year-on-year increase of 47.2%. In the context of price wars, cars are getting cheaper and cheaper. It is a harsh survival environment for companies making high-end cars. Even so, Ideal is still making money, which is the best way for Ideal to prove itself. Sarah, a private equity investor for 3 years, said, “It is not wrong to invest more in the end-to-end field before the turning point of intelligent driving.” MEGA sales are lower than expected, coupled with the price reduction of the 2024 Ideal L7Air and L8Air. Before the financial report is released, few investors would expect this to be a good-looking quarterly report. Surprisingly, the second quarter is the bottom of Ideal’s car before our expectation was the first quarter, which is also the direct reason for the 14% drop in Ideal’s stock price. After the layoffs, an important factor in raising Ideal’s administrative expenses in the second quarter is the high investment in fixed costs of compensation, coupled with the price reduction of the entire Ideal series on April 7th and sales lower than expected, which will directly affect Ideal’s gross profit. In the third quarter, the cost optimization of the layoff measures will be evident. According to the 2023 financial report, optimizing 5,600 people will save Ideal about 2.1 billion yuan, with an average cost savings of 37,500 yuan (5180$) per person. However, after the delay in releasing pure electric products, in the second half of this year, Ideal has no new cards, and is in a defensive position. Wei brand Blue Mountain, Chery Star Era, Zero Run C10 and other similar competitors continue to emerge, product competition is fierce, price reduction may be an inevitable choice. But if Ideal Automobile chooses to lower prices again, the cost savings from personnel optimization will hardly offset the impact of declining gross profit margins. During the financial report meeting, management provided a second-quarter sales forecast of 105,000 to 110,000 units, with an average price of 272,000 yuan (37540$). Therefore, Ideal’s quarterly sales revenue is 30.8 billion yuan. The cost of giving up one percentage point of gross profit for Ideal is 300 million yuan. Layoffs are a responsible business decision, but I don’t understand optimizing the smart driving team. During this financial report conference call, Ideal’s layout of smart driving is also conservative. Ideal Automobile’s Executive Director and President Ma Donghui believes that Tesla’s proposed end-to-end large model is a data-driven ultimate implementation method. The technological trend is easy to reach a consensus, however, “not all car companies have the ability and resources to do so.” End-to-end models are centered on the ability to feed data and train unlimited rule-based AI large models, improving the understanding, perception, and data decision-making capabilities of complex scenarios, which can greatly reduce the cost of intelligent driving training. Currently, Ideal has a cash reserve of 98.9 billion yuan, making it the richest car company in China aside from BYD, with a strong financial foundation for advancing smart driving technology. The industry generally believes that by 2025, intelligent driving will reach a turning point. Before the turning point arrives, it is correct to invest more in the end-to-end field. The evolution of end-to-end not only requires money but also time. Tesla’s smart driving team has only over 200 people, and it is not achieved overnight. Tesla first perfects the small model, then integrates perception models and control models one by one. The low input-output ratio of smart driving is foreseeable in the short term, but it will be too late for Ideal to start when all smart cars can run on the road.