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Competition is fierce like a tiger? Ideals are solid as a dog

$ Ideal Automotive.US released its Q4 2022 financial report after-hours in Longbridge Hong Kong and pre-market in the US on Feb. 27th. In China's new energy car industry, Ideal Automotive runs fast and steadily:

**1. Sales guidance serves as a booster: ** After withstanding Tesla's price cut in January, Ideal Automotive-W.HK expects its Q1 car deliveries to reach 52,000-55,000 units, surpassing the market expectation of 47,000 units.

This means an average monthly delivery of around 20,000 units in February and March. Since the recovery is slowed down due to the post-holiday lag in February and the short period of 28 days, it is highly probable for Ideal to deliver over 20,000 units in March.

2. Pay attention to the possible competition hidden in the implied unit price: The overall guidance, whether it's revenue or income, has perfectly exceeded the market forecast. However, the hinted revenue of CNY 17.45-18.45 billion implies that ideal Automotive's Q1 unit price is likely to drop from CNY 370,000 + in Q4 to below CNY 330,000, close to the price range near the entire ideal vehicle matrix. Even considering the drag of L7 deliveries on the unit price, a unit price of CNY 330,000 may mean that preferential subsidies will also have some impact on ideal's unit price. Although the sales guidance is good, competition towards the unit price deserves attention.

3. The gross margin of a single vehicle basically stabilized in Q4: Although the gross margin of a single vehicle fell slightly below market expectations in this quarter, it was generally stable. In the opinion of Dolphin Analyst, the single vehicle gross margin rate is still at 20%; the main expectation gap is based on the market estimate that the price increase can cover the rise of lithium prices, but it did not actually do so.

4. Efficient execution, obvious leverage effect of operations: Although R&D and marketing expenses of new forces are relatively rigid, excellent execution ensures that both expense items in Q4 of Ideal are relatively controllable, especially sales expenses, which have slowed growth considerably after the end of new car promotion.

Dolphin Analyst's overall opinion:

Stable car deliveries in January, strong sales guidance in Q1, plus a positive operating cash flow of nearly CNY 5 billion due to highly efficient execution in Q4, all point to Ideal as possibly the most stable new force in China's electric vehicle sector in 2023.

Compared with XPeng, Ideal has more focused and clearly defined products; compared with NIO, under the model of single vehicle bestsellers, Ideal is more stable in terms of output, and will not fall into supply chain problems like NIO does from time to time.

Entering 2023, it is already possible to see that Ideal's leading position among new forces is becoming increasingly apparent. However, it is still necessary to keep a close eye on Ideal's vehicle delivery cycle changes, pricing changes, etc., to observe whether Ideal's advantages can be maintained. And more sustainable competitiveness still needs to observe Ideal's progress in pure electric car products.

Dolphin Analyst will share the summary of the conference call with Dolphin's user community via the Longbridge App shortly. Interested users are welcome to add WeChat ID "dolphinR123" to join the Dolphin Investment Research Group and get the summary of the conference call as soon as possible.

The detailed analysis is as follows:

I. Intense Competition or a Stable Business? A Stable Business!

After the Model Changeover, inventory devaluation, and contract losses, the Ideal Group has become the most attractive performer among newcomers to the auto market, setting a standard of quality.

1) Stable Pricing: In the intense price competition of 2023, while Tesla cut its prices to a minimum, Xpeng and NIO have also reduced their prices one after another. Currently, the Ideal Group is the only one among the Top Three newcomers in the market holding firm on pricing.

Based on current media reports, the Ideal Group only provided a ¥10,000 subsidy for Shanghai's Blue License Plate holders on display vehicles with a long inventory.

However, not having a mandatory price cut does not mean that Ideal Group has not adjusted its price policy. After the Chinese New Year, with the rapid release and delivery of the L8 and the L7 Air models, the Ideal Group has actually lowered the entry barrier for its two main models on the market indirectly.

Compared with the Pro and Max models in the same series, the Air model mainly reduced the intelligent driving features, and the supplier of the battery pack has been switched. Among these, L7 Air uses a Honeycomb energy battery and L8 Air uses a Xinwangda battery. The Orin-X chip from Nvidia was also replaced by the Horizon chip in L7 Air. The intelligent cockpit used a single 8155 chip, and the car's body perception did not include laser sensors.

2) Stable Sales Volume: Apart from holding firm on pricing, the most crucial point is that Ideal Group has maintained its sales volume. This is particularly important for January, when Tesla heavily reduced its car prices before the Lunar New Year Holiday, and Ideal Group still maintained the delivery speed, which is very rare among the newcomers. The group delivered 15,000 cars in January, with a large number of L9 models being delivered, followed by L8. The Ideal One model is close to being withdrawn from the market.

3) Confidence and Steadiness: Delivering 20,000 cars per month in February and March

What is even more admirable is that the delivery guidance for the first quarter of the year for the Ideal Group is promising: The company expects to deliver 52,000 to 55,000 cars in the first quarter, equating to an average monthly delivery of 20,000 cars in February and March. Considering the slow recovery after the Lunar New Year Holiday in February, and a shorter month, this means that Ideal Group may deliver more than 20,000 cars in March, which is highly probable. Especially, the current market expects Ideal's first-quarter delivery to be rarely more than 50,000 vehicles. Bloomberg's consensus expectations are less than 47,000 vehicles, and Ideal's sales guidance is quite confident.

II. Minor issues hidden in the guidance: downward trend in unit price

The company expects revenue in the first quarter to be between RMB 17.45 billion and RMB 18.45 billion. Due to the better-than-expected sales, the revenue guidance is also significantly higher than the market's forecast of RMB 16.5 billion.

The only flaw in the guidance is that the decrease in the unit price is too large. Based on the general proportion of other miscellaneous revenues of about 2%, it is estimated that the average unit price of Ideal in the first quarter may be less than RMB 3.3 million, which corresponds to a significant decline from the unit price of RMB 3.7 million in the fourth quarter.

As the Air model with a relatively low price didn’t began the delivery until early April, Dolphin Analyst estimated that the decline in unit price in the first quarter was mainly due to two factors:

  1. The delivery of the L7 started in March. Among L7, L8, and L9, L7 has the lowest pricing, and the delivery of these models will push down the average unit price;

  2. Another reason may also be related to the Ideal's subsidy.

However, even if the unit price falls to around RMB 3.3 million, which falls into the position of an entry-level model in the Ideal's average unit price, the extent of the downward fluctuation is still too large, and the drag of competition and subsidies cannot be ruled out.

If this is the case, a more conservative judgment is still needed for the gross profit margin in the first quarter. Especially, some models of BYD have also reduced their delivery period and dealers have reduced prices to stimulate sales. It is still necessary to closely monitor Ideal's sales performance, which can generate sales without substantial price cuts.

III. Automobile gross profit margin barely passes

Looking at the fourth quarter situation, Ideal's gross profit margin is basically maintained. To review, the actual gross profit margin of Ideal's car sales business in Q3 after deducting contract losses was 20.8%.

Ideal's automobile sales gross profit margin in the fourth quarter was 20%, lower than the market's expected 21.3%. In Q3, the main sales model of Ideal was the relatively low-priced Ideal One. The market originally expected that in Q4, the high-priced L9 in the L series would account for the main sales, and the unit gross profit margin could offset the increase in lithium battery prices due to the increase in unit selling price, combined with recovering sales. However, this did not happen according to the results.

As shown in the figure below, the average unit price in the fourth quarter was as high as RMB 370,000 plus, RMB 30,000 higher than the previous quarter. However, the cost also increased by RMB 27,000 plus, and finally, a vehicle only earned an additional RMB 3,000, and the unit gross profit margin decreased by 0.8 percentage points, mainly due to the gross profit margin eroded by the rise in raw material prices.

(Note: Last year's Q3 was the car sales gross profit data after deducting the impact of the 800 million+ contract loss)

IV. L9 Provides Stable Revenue for IDEAL with Stable Unit Prices

Given the largest determinant of revenues, which is sales volume, IDEAL's total revenue for this quarter at 17.65 billion yuan is consistent with market expectations. However, IDEAL has significantly less Ideal ONE vehicles in its sales volume structure, with the Ideal L9 as its main (accounting for 62%) model. The unit price of the Ideal L9 is also relatively high, reaching 371,000 yuan.

With a double boost from the 26% increase in unit price and 32% increase in sales volume, IDEAL's automotive sales revenue increased by 66% to 17.3 billion yuan YoY.

V. IDEAL Demonstrates High Efficiency in Execution

A rigid investment in research and development (R&D) and sales expenses is a common feature of the new forces in the industry. R&D expenses are used to pave the way for future product lines and to enhance their product promotion. Sales expenses are crucial for guaranteeing sales volume, as the new forces have less traditional offline sales networks to rely on.

In terms of investment discipline and investment efficiency, IDEAL could be regarded as the most outstanding among the new forces. This can actually be seen from their delivery capabilities in January: even with the triple burden of the pandemic, Chinese New Year, and the price reduction of Tesla, IDEAL still delivered 15,000 vehicles, compared with other new automakers who delivered fewer than 10,000.

In Q4, IDEAL's R&D expenses were less than 2.1 billion yuan. If we can say that R&D expenses are stable and rigidly related to personnel costs, then IDEAL's excellence mainly lies in sales and administrative expenses this quarter, with these expenses only reaching 1.6 billion yuan, which is significantly lower than the market expectation of 1.9 billion+.

One major expense in sales is opening new sales networks. By the end of Q4, IDEAL had opened 28 new retail stores compared to Q3, with the number of new cities where they started operations increased by two. In addition, the number of after-sales service centers remained basically unchanged, with only two new centers added and three cities removed.

From a quarterly perspective, IDEAL's sales expenses added only one hundred million yuan in Q4, which may be attributed to the reduction in expenses associated with the launch of new cars in Q3.

Overall, IDEAL has maintained its sales volume, overcome the relatively rigid growth of R&D and sales expenses, and contributed high restraint and operational efficiency towards this.

Moreover, regarding their goal alignment, IDEAL's R&D budget for 2022 peaked at 7 billion yuan..., actually achieving 6.8 billion yuan in actual expenses which is within the planned budget and does not exceed it. In addition, their initial plan was to open 400 retail stores, but they managed to open fewer than 300.

Section 6: Self-Sufficiency in Food and Grass, More Confidence in Fighting

While maintaining sales volume, Ideal's investment execution efficiency remained relatively high. The Q4 operating loss was only 130 million yuan, which is better than the market's expected loss of 460 million yuan. In addition, from a Non-GAAP perspective, after excluding equity incentives, Ideal's net profit reached 1 billion yuan, which is nearly a new high for these quarters.

In addition, the fourth-quarter operating cash flow performance was also very strong, with an operating cash flow of up to 4.9 billion yuan. Due to its high operating cash flow, even after deducting capital expenditures, its free cash flow reached 3.3 billion yuan. Faced with this year's fierce market, this earning ability has obviously given Ideal better confidence to fight against price wars.

Dolphin Analyst's historical articles can be found below:

December 9, 2022 Financial Report Review "Ideal's Profit Flash Crash? Not Fatal, But Very "Awkward""

December 9, 2022 Telephone Conference Summary "2023, "Billion-yuan" Ideal, An All-Electric Car"

August 16, 2022 Financial Report Review "Ideal's Thunderbolt Makes a Sound on the Ground, L9 Can't Support "The Collapse of Ideal""

August 16, 2022 Telephone Conference Summary "Ideal ONE Was "Eaten" by L9, L8 Will Be Released Early (Conference Summary)"

June 22, 2022, Product Release Summary "L9, Ideal's New "Ideal""

May 10, 2022, Conference Summary "Ideal: Will Release 3 New Products in 2023, Welcoming the Product Cycle Great Year" On May 10, 2022, Earnings Review "Ideal's Ideal, All Hope Is In The Second Half?"

On February 26, 2022, Meeting Minutes Completed "From 0-1 Verification to Seeing How Ideal Achieves 1-10 Growth (Meeting Minutes)"

On February 25, 2022, Performance Explanation Broadcasted "Ideal Car (LI.US) 4Q 2021 Earnings Call"

On February 25, 2022, Earnings Review "In Terms of Fundraising Capacity, Li Xiang's Ideal Is Now a Reality"

On November 30, 2021, Meeting Minutes "How Does Ideal Cars Compete with Xiaomi in Releasing Pure Electric Vehicles? (Meeting Minutes)"

On November 29, 2021, Performance Explanation Broadcasted "Ideal Car (LI.US) 3Q 2021 Earnings Call"

On November 29, 2021, Earnings Review "Compared to XPeng and NIO, Ideal's Profit is King: Speculative or Long-Term Investing?"

On August 31, 2021, Meeting Minutes "Ideal Car: Outperformed XPeng and NIO in 3Q, Aiming to Deliver 150,000 Cars Next Year (Meeting Minutes)"

On August 30, 2021, Performance Explanation Broadcasted "Ideal Car (LI.US) 2Q 2021 Earnings Call"

On August 30, 2021, Earnings Review "Ideal Car: Solid Performance and a Promising Future?" On June 30, 2021, Three Foolish Men Comparative Study - Part II "New Forces in Car Manufacturing (II): Fifty Days of Doubling, How Can Three Foolish Men Continue to Run Wild" was released.

On June 23, 2021, Three Foolish Men Comparative Study - Part I "New Forces in Car Manufacturing (I): Reduce the Market Enthusiasm and How Can Three Foolish Men Consolidate Their Position?" was released.

On June 9, 2021, Three Foolish Men Comparative Study - Part I "New Forces in Car Manufacturing (I): Invest in the Right People and Do the Right Things - An Analysis of the People and Events in the New Forces" was released.

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