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Ideal: "By 2023, we will capture 20% of the 300,000-500,000 luxury SUV market."

Below is a detailed summary of the conference call content for the fourth quarter of 2022 of Ideal Automotive.US. Please refer to "Fierce competition, Ideal steady as a rock" for financial report interpretation.

I. Ideal Automotive-W.HK Quarterly Data vs Market Expectations

1. Revenue side: Quarterly revenue of CNY 17.65 billion, YoY +66.2%, in line with market expectations (0% match).

2. Gross margin: Quarterly gross margin of 20.2%, YoY-2.2pct, slightly lower than market expectations (-1.36pct miss).

3. 1Q23 performance guidance

(1) Vehicle delivery volume: 52,000-55,000 units, YoY+ 64.0%-73.4%;

(2) Total revenue: CNY 17.45 billion - 18.45 billion, YoY +82.5%-93.0%.

II. Management's Remarks

1. Overview

In 2022, China's new energy vehicle market has once again shown explosive growth, with more and more customers favoring new energy vehicles. According to China Passenger Car Association data, in 4Q22, the penetration rate of new energy passenger cars rose to 31.7%, compared to 14.8% and 29.0% in 3Q21 and 3Q22, respectively.

Against this background, the company has continued to grow, launching Ideal L9, L8, and L7 models in less than a year, enriching its product matrix, achieving comprehensive coverage of the 300,000 to 500,000 yuan family SUV market, and further consolidating its leading position in this market. At the same time, the company has comprehensively strengthened its research and development, supply chain, and sales service capabilities, upgrading its business processes and organizational structure in preparation for expanding from a scale of 1 to 10.

In December 2022, deliveries exceeded 20,000, once again setting a historic new high for the company and China's new forces of car manufacturing, laying a solid foundation for development in 2023. Since September 2022, Ideal L9 has been leading China's large SUV monthly sales rankings; at the same time, Ideal L8 has also taken over the sales miracle of Ideal ONE, winning the sales championship of medium and large SUVs in December 2022.

In 4Q22, 46,319 new cars were delivered, and total deliveries for 2022 reached 133,246 units. According to data from China Automotive Engineering Research Institute on the amount of insurance, Ideal Automotive was the best-selling 30-50 million SUV model and 30-50 million new energy vehicle in China's December 2022 market, becoming the first choice of luxury SUV for families.

1Q23 is the traditional off-season for the automotive industry, but the company's order volume remains strong, fully reflecting the competitiveness of Ideal Automotive's products and services. I (Li Xiang) would also like to take this opportunity to sincerely thank all users and their families for their trust and support. In 4Q22, the total revenue reached RMB 17.65 billion, a year-on-year increase of 66.2%; the total revenue for the full year 2022 reached RMB 45.29 billion, a year-on-year increase of 67.7%. Thanks to cost control and operational quality, the gross profit margin remained steady at 20.2%, and free cash flow reached RMB 3.26 billion.

2. New Products

On February 8th, the five-seat flagship SUV, Ideal L7, was officially released, and test drives began the next day. Ideal L7 has excellent second-row space and comfort, as well as many flagship-level configurations. It is equipped with the company's self-developed four-wheel-drive extended-range electric system, and the CLTC comprehensive cruising range is 1,315 kilometers, with an acceleration of just 5.3 seconds per 100 kilometers. Ideal L7 was developed strictly in accordance with the standard of the C-NCAP 25% small overlapping offset crash test, and also has intelligent space and intelligent driving capabilities that continue to grow. Ideal L7 has three models: Air, Pro, and Max, which cover the price range of 300,000-400,000 yuan.

In addition, L8 Air was launched at the same time, effectively covering the 6-seat 300,000-350,000 yuan price range where Ideal ONE is located. The company will start delivery of L7 Pro and L7 Max in early March. L7 Air and L8 Air will start delivery in early April this year. With the launch of these products and configurations, Ideal L7, Ideal L8, and Ideal L9 product lines have completed their layout for the 300,000-500,000 yuan SUV market. After the Ideal L7 launch conference, more people became familiar with Ideal Auto. Not only did Ideal L7 receive enthusiastic feedback from test drive users, but the stores also attracted more diverse family users, while also boosting the attention and order volume of Ideal L8.

On December 16th, Ideal L9 won the "Chinese Car of the Year" award at the 10th Xuanyuan Awards. The "Xuanyuan Award" was jointly created by Automotive Business Review magazine and Austrian EFS Automotive Consulting Company and is known as the "Oscar" of the Chinese automotive industry.

Considering the continued strong performance of Ideal L8 and Ideal L9, as well as the launch of Ideal L7, this year the company aims to capture 20% of the entire luxury SUV market in the price range of 300,000 to 500,000 yuan. The delivery volume for 1Q23 is expected to be between 52,000 and 55,000.

3. Supply Chain

Despite the ongoing supply challenges, Ideal L9 and L8 both exceeded 10,000 deliveries in their first full month of delivery, which is not only thanks to Ideal Auto's supplier partners' support, but also reflects the company's solid supply chain management and coordination capabilities. With the gradual maturity of the industry and the gradual improvement of upstream and downstream supply situations, the company remains confident in its component supply for 2023. At the same time, the company will further strengthen supply strategy perception and planning, risk management and cost management to actively respond to potential supply challenges and risks. Ideal Automobile implements modular management for the supply chain, while actively strengthening the self-development and vertical integration of core products related to intelligent electric vehicles, in order to achieve a good balance between upstream costs and risk control while maintaining close and mutually beneficial cooperation with suppliers. Over the past three years, the company has begun to build its own factories for core components such as range extenders and electric drive assemblies to ensure quality and stable supply.

4. Sales Network

In 4Q22, we will continue to strengthen the construction of direct sales and service networks, enhance user accessibility and brand awareness, enhance commercial capabilities, and promote rapid sales growth.

As of January 31, 2023, Ideal Automobile has 296 retail centers in China, covering 123 cities; 320 after-sales maintenance centers and authorized sheet metal spray centers, covering 222 cities. Last year, while continuously expanding the sales network, the company also focused on upgrading the scale of retail centers, upgrading storefronts to support the placement of multiple models, and showing more products to more families. In the next few quarters, with the enhancement of the company's brand momentum, comprehensive stores will also be an important choice.

After more than three years of verification, the direct sales system with better user experience and lower sales costs is the long-term choice that the company adheres to as a high-end brand position. In 2022, the sales expenses have been lower than the R&D expenses, and the proportion of sales expenses to revenue will continue to be improved in 2023.

5. Research and Development

Research and development has always been the core of the company's value creation for home users. Outstanding R&D capabilities not only enable the company to stand out in the new energy vehicle market, but will eventually make the company a leading global technology enterprise. In 2022, progress has been made in R&D investment.

  1. In terms of electric drive, a new generation of range extender 2.0 has been installed on the Ideal L series products. Self-developed 1.5T four-cylinder range extender, with a maximum thermal efficiency of 40.5%, combined with the self-developed five-in-one electric drive system, achieves significant NVH optimization of the entire range extender system. Self-developed and mastered the core technology of software and hardware of the Ideal Magic Carpet air suspension, which achieves driving comfort and handling stability of home SUVs. Among them, the self-developed XCU central domain controller can process complex vehicle information at high speed and achieve precise control of the vehicle at millisecond level.

  2. Intelligent space is continuously evolving. "Ideal Classmate" has now evolved to a new generation of end-to-cloud architecture, has been launched on all models of the Ideal L series, and integrates the self-developed LisaRT reasoning engine for in-vehicle scenarios, which can support stronger and more complex algorithms in the car.

In addition, self-developed algorithms have made significant progress in voice and visual interaction. In terms of voice, the innovative MIMO-NET algorithm can achieve accurate separation of multi-sound zone human voices; combined with self-developed speech recognition algorithm MSE-NET, the wake-up rate and recognition accuracy of "Ideal Classmate" in actual vehicle test scenarios have been improved to 98%. In the face of the more challenging "high noise", "soft speaking" and "child speaking" three key scenarios in the industry, the wake-up rate and recognition accuracy of "Ideal Classmate" have also been improved to over 90%. In terms of visual aspects, the precision recognition of gestures made by all passengers in the car is made possible by the self-developed MVS-NET algorithm, which is then combined with innovative gesture wake-up technology to make the use of gesture interaction more free and natural, allowing the whole family to enjoy the fun of touch-free control.

As for intelligent driving, the hybrid BEV algorithm framework proposed by Tsinghua and MIT can be flexibly deployed on both AD Max and AD Pro sensor hardware combinations. The self-developed high-speed NOA prediction algorithm provides a comfortable experience for automatic lane changing and acceleration/deceleration. Currently, more than 220,000 families can use the high-speed NOA feature, and the driving distance of high-speed NOA navigation-assisted driving is close to 100 million kilometers. During the Spring Festival period in 2023 alone, the driving distance of all models with high-speed NOA was close to 8 million kilometers.

This year, the company will further expand the navigation-assisted driving capability to urban scenarios and plans to open the early bird user beta test of urban NOA on the AD Max in 4Q23.

In addition, the self-developed AEB algorithm has added the application of laser radar on the AD Max, creating the industry's first AEB function that combines laser radar algorithm and expands the safety scenarios of laser radar algorithms from main traffic participants such as vehicles, cyclists, and pedestrians to irregular obstacles including non-conformal vehicles and nighttime scenes.

Looking to the future, the company will continue to parallelly self-develop the core technologies of extended-range electric and high-voltage pure electric vehicles, continuously improve the intelligence level of products, and continue to invest resources in product development, platform development, and system development, and promote the long-term growth of IDEAL's cars.

Conclusion

Finally, the company's long-term success depends on continuous investment in research and development and business capabilities, as well as the creation of new popular models, strengthening brand value, and continuously enhancing the flywheel effect. 2023 will be another year of rapid development for the New Energy Vehicle industry, especially for IDEAL cars. It is believed that IDEAL cars, adhering to innovative and diverse product matrices, will continue to surpass user demands and create the best products and services.

Q&A

Q: Management has previously mentioned (Li Xiang's Weibo post) that the overall monthly delivery of L7 is expected to reach a guaranteed minimum of 25,000 vehicles after delivery, and the overall monthly delivery of L7, L8 Air version will reach a guaranteed minimum of 30,000 vehicles after delivery. How long will it take to achieve this steady-state monthly delivery target, and will the supplier delivery be able to keep up with this pace?

A: 1) Time to achieve monthly delivery target

April is the first complete delivery month for L7, L8 Pro and Max versions, and May is the first complete delivery month for the Air version. We aim to achieve the monthly delivery targets of 25,000 and 30,000 vehicles in 2Q23.

2) Delivery network

In the second half of 2022, there are two problems with ramping up production capacity:

  1. The overall delivery plan is too aggressive (believing that as many orders as there are should result in as many cars delivered), which puts pressure on the supply chain;

  2. Changing from delivering a single vehicle to delivering multiple vehicle models presents a huge challenge for the sales and service network.

Starting in Q4 2022, we will upgrade the entire delivery process for planned and actual deliveries to ensure high quality in the entire product development, supply and manufacturing, sales and service process. The process upgrade will bring significant gains in three areas:

  1. More reasonable resource allocation;

  2. Employees will have a greater sense of accomplishment;

  3. Significantly improve supplier and partner efficiency.

Overall, this is a fundamental change for our company as we transition from delivering a single vehicle to delivering multiple vehicle models in terms of the entire process and capability.

Q: What is the contribution of battery price reduction and long-term strategic bundling to the gross profit margin of new cars in 2023, and at what time point will the gross profit margin of new cars rise?

A: Returning to a rational price range for batteries (regardless of whether it’s due to lithium mining concessions or a linkage mechanism between raw materials and battery prices) improves the competitiveness and market share of new energy vehicles. It is also good news for power battery and new energy vehicle manufacturers.

As Ideal’s new vehicle models continue to increase and sales continue to improve, power batteries are becoming an increasingly important system for new energy vehicles. Over the long term, to meet supply security and project development progress, the company adopts a diversified battery supply strategy.

A few days ago, the important raw material for batteries, lithium carbonate, exceeded 400,000 RMB/ton. In the long run, a return to a rational range for battery prices is the general trend. Currently, the company is negotiating prices with its partners and has no more information to disclose.

Q: The gross profit margin for Q4 2022 is 20.2%, lower than 1Q22 and 2Q22 (at that time, Li One was also in the final stage of delivery), and 60% of L9 accounted for the total delivery volume for Q4 2022. Is the decline in gross profit margin due to lower-than-expected deliveries of L9, or is the gross margin for the second-generation platform not higher than that of the first generation platform?

A: First of all, the gross profit margin is healthy and consistent with guidance.

Second, the revenue and gross margins for Q4 2022 are due to the diversified delivery structure, with L9 having the largest proportion of deliveries. L9 and L8 are at the end of delivery, and costs will decline next quarter.

Third, with the large-scale delivery of the L series in the future, the steady-state gross margin of the L series will reach 25%.

Q: The company's pure electric MPV's main selling point is "fast charging." How to achieve true "fast charging" and achieve the same gross profit margin level as the extended range SUV?

A: We will answer this question mainly from three aspects:

Pure electric and extended range are similar, mainly solving two problems.

The first problem is difficult charging and slow charging (i.e., matching infrastructure);

The second issue is the high cost of batteries.

Therefore, the company chose to use an 800-volt battery and a self-built silicon carbide module factory to improve power transmission efficiency, which is also in line with the improvement of the vehicle development. Currently, the test results show that compared with products driven by mainstream 400-volt IGBTs, battery power can be saved by 15%. Above is the theoretical answer. The third aspect is that we will hear from actual products next. In the future, every pure electric product launched by the company will surpass user needs and every model in the L series.

Q: Based on the target of 25,000 and 30,000 units, can we assume that the order volume of the L7 Air version is 5,000 units/month, and has the overall order volume of the L7 exceeded that of L8 and L9?

A: Firstly, the L7 is in the final stage.

Secondly, the 1Q23 guidance includes thousands of deliveries (test drives) for the L7.

Q: Is the 4Q22 and 3Q22 gross margin flat due to the following reasons: 1) Lithium mine price increase of 100,000 RMB; 2) Li One inventory clearance promotion activities (approximately 1,000 units in 4Q22); & 3) New products reach the cost high point within the first 50,000 units. Can you indicate whether the cost will drop significantly after the first 50,000 units and its impact on the 1Q23 gross margin?

A: The factors you mentioned have a comprehensive impact of approximately 2% on the gross margin, and it is inconvenient to split the gross margin here. The full-year gross margin guidance for 2023 is expected to be higher than 20%.

Q: Under the new green license plate policy, what is the sales ratio in the Shanghai region, and what is the ratio of old-for-new swaps?

A: Due to the early release of sales volume in November and December 2022, the order situation in January 2023 is not good, but it has been significantly repaired in February.

The company expects that in non-green license plate markets, the Shanghai region will achieve a market share similar to that of Beijing.

Q: Will there be a pure electric MPV launched as scheduled in 2023, what are the new car plans for 2024, and will there be a pure electric sedan launched in 2024?

A: First, the release and delivery of the flagship product are tied to key technologies. The delay in product launch is mainly for binding the most advanced technology. The high-end Qualcomm 8295 chip will welcome an important upgrade at the end of this year, and the new car will be equipped with the most advanced flagship chip.

Second, in terms of pure electric models, similar to L system models will be launched to meet the needs of a wide range of family users in the price range of 200,000-500,000 RMB.

Q: How to achieve the goal of "taking 20% of the market share of all luxury SUVs in the 300,000-500,000 RMB price range," and how to view the SUV market in the 200,000-300,000 RMB price range?

A: (1) RMB 300,000-500,000

In 2022, the company's market share in the 300,000-500,000 RMB price range is 9.5%.

In 2023, the market size of the 300,000-500,000 RMB price range is expected to be 1.4-1.5 million units. The company's goal is to double its market share and firmly sit on the throne of SUV sales champion when it reaches 20% market share.

(2) RMB 200,000-300,000

It is more difficult to enter the RMB 200,000-300,000 market, which will only be entered after the scale effect is stronger. Q: How does AI technology innovation drive the development of autonomous driving and its impact on user experience?

A: The company has invested a considerable amount of time in AI-based cognitive technologies. They are crucial for the development of ideal intelligent spaces, which can provide users with high-quality experiences.

Currently, we are closely monitoring ChatGPT, which has large language models (LLMs) and portraying models that are very similar to ideal intelligent space technology. We believe these technologies have great potential in the visual modules of autonomous driving. Related research and development are underway.

Q: Three SUV models have the same price. How do you view the cannibalization of the three products and the corresponding profit margin range of 20,000-30,000 vehicles with stable sales?

A: (1) Cannibalization among L7, L8, and L9

First of all, from the perspective of actual delivery results, the boundaries between L7 and L8 user groups are very clear: L7 users are households of two or three people, while L8 users are families with a second child or three generations under one roof. The increase in attention to L7 has also driven the growth of L8 orders.

Secondly, the price coverage of L7, L8, and L9 is to build a product network, not just a product line, to meet the needs of 300,000-500,000 yuan for each household SUV user. That is to say, in the price range of 300,000-500,000 yuan, users hesitate between choosing L7, L8 or L9, rather than hesitating between choosing Longbridge or other brands.

(2) Profit margin range

We just mentioned that the stable-state gross profit margin of the L series should be above 25%, but considering the delivery of L series models, battery prices, and macro environment this year, we still hope that the gross profit margin can be above 20%.

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