Ideal Summary: Market share remains the top priority, with a target of 20% gross profit margin.

Below is the summary of the Ideal Q1 2023 earnings call, for the interpretation of the financial report, please click Ideal is the best, grasp the new force leader.

1. Management Remarks

Delivery Status

In the first quarter of 2023, China's new energy vehicle market continued to maintain rapid growth, but intensified market competition triggered consumer wait-and-see sentiment. In this quarter, we achieved the best delivery performance in a single quarter, and Ideal delivered 52,584 vehicles, a year-on-year increase of 65.8%. This achievement has made us one of the top three new energy vehicle brands in China's market with a price of over 200,000 yuan, with a market share of 11%, far exceeding other new forces brands, once again proving our ability to design and create popular models, as well as the advantages and synergies of our supply chain manufacturing, sales, and service network. We will continue to work hard, rely on our advantages to grow rapidly, and expand our leading position.

In April 2023, our delivery volume reached a new high of 25,681 vehicles, and cumulative deliveries exceeded 335,000 vehicles. Ideal L7, L8, and L9 have all achieved outstanding performance in their respective sub-markets. According to the insurance data, Ideal L7 has not only won the sales championship of large SUVs in the Chinese market since the beginning of March, but also broke through 10,000 vehicles in the first complete delivery month of April, becoming our fourth model with a single-month delivery of over 10,000 vehicles. Ideal L8 also maintains sales leadership in the 6-seater new car market. In the Chinese full-size SUV market, Ideal L9 has been the monthly sales champion since it was launched at the end of August last year.

Financial Highlights

Under the leadership of strong delivery volume and benefiting from our continuous pursuit of excellent efficiency, our financial indicators have improved comprehensively. The company's total revenue in the first quarter reached RMB 18.79 billion, a year-on-year increase of 96.5%, and achieved mirror operating profit and net profit, while free cash flow reached a new high of RMB 6.7 billion. Healthy profitability and cash flow will provide strong support for the research and development of our products, platforms, and systems, and lay a solid foundation for our long-term development.

With the delivery of Ideal L7 air and Ideal L8 air starting in April, we have further expanded the product price and coverage of household users. It is expected that in the second quarter of this year, Ideal will further increase its market share in the new energy market above 200,000 yuan, and the delivery volume is expected to reach between 76,000 and 81,000 vehicles.

Driving Experience

Product delivery is just the beginning. In order to continuously improve the driving experience of household users, we continue to improve product power through OTA. Since the beginning of this year, we have completed two major OTA upgrades of version 4.3 and 4.4 for the Ideal L series, updating more than 100 functions and experiences in total. The OTA 3.3 version of Ideal ONE will also be officially pushed in the middle of this year. Safety

For household users, safety is always the top priority. Every model of the Ideal car is developed to the strictest standards and undergoes comprehensive safety testing. In April 2023, the China Insurance Automotive Safety Index released its latest batch of evaluation results, and the Ideal L8 received the highest rating in terms of in-car member safety, pedestrian safety, and vehicle-assisted safety. It also received a "d" rating for the 25% offset collision pole on the driver's side. The Ideal L9 also received a five-star certification with a comprehensive score of 91.3% in the latest China New Car Assessment Program (CN CAP) test.

Store Strategy

In the first quarter of 2023, we will continue to strengthen our commercial capabilities, including upgrading and expanding our online and offline integrated direct sales and service network to support the development of multiple models, provide users with more convenient and efficient services, and enhance our brand vision and influence. In terms of retail store network, with the release of multiple models, we will continue to increase new retail centers and quickly upgrade stores, replacing small stores with large ones that support multiple models. Since the release of the Ideal L9 in late June last year, we have optimized nearly 50 existing stores through relocation and expansion, and added more than 50 new stores.

As of April 30, 2023, Ideal has 300 retail centers covering 123 cities nationwide, and 318 after-sales and authorized version centers covering 222 cities. While accelerating business development, we always focus on sustainable development, deepening product services, and corporate governance.

Overall Strategy

In the next stage of development, Ideal will advance its dual-energy strategy released on April 18th.

On the one hand, we will enter the era of intelligent driving 3.0 represented by urban NOA.

On the other hand, we will open a new chapter of extended-range electric vehicles and high-voltage pure electric vehicles. In terms of intelligence, as of now, we have provided high-speed NOA functions to more than 280,000 households, with a total mileage of more than 140 million kilometers. This quarter, we will extend from high-speed scenarios to urban scenarios, push the Ideal AD max 3.0 urban NOA function to internal test users, and strive to push it to more than 100 cities nationwide before the end of 2023. Next, benefiting from having the most training samples in China in the transformation of intelligent driving by the transformer model, Ideal will become the biggest beneficiary.

In terms of extended-range electric vehicles and high-voltage pure electric vehicle models, we will adhere to two parallel routes:

First, improve the efficiency of extended-range vehicles, providing a better user experience for city and long-distance power supply than fuel vehicles.

Second, improve pure electric technology, allowing the travel radius of households to extend beyond the city and achieve a refueling experience comparable to that of fuel vehicles. By 2025, our product matrix will include a super flagship model, five extended-range electric vehicle models, and five pure electric vehicle models, further expanding our user base and exploring incremental markets. Charging Network

This year, we will invest heavily in the construction of our ultra-fast charging network. Our 4C ultra-fast charging can reach a peak power of 480 kW, and combined with our pure electric vehicle models, it can achieve 400 kilometers of driving range with just 10 minutes of charging. We plan to build 300 high-speed charging stations by the end of 2023, covering the Beijing-Tianjin-Hebei region, the Yangtze River Delta, the Guangdong-Hong Kong-Macao Greater Bay Area, and the Chengdu-Chongqing economic belt. By the end of 2025, we plan to expand the charging stations to 3,000, covering 90% of the country's highways and major first, second, and third-tier cities. In the future, we will continue to strengthen our refined operational capabilities, build organizational capabilities that support larger-scale operations, and maintain healthy sales growth.

II. Analyst Q&A

Q1: How do you judge the trend of the automobile gross profit margin?

A1: Basically, we are confident in improving the gross profit margin. If we exclude the impact of the Ideal ONE sales on the profit margin, the gross profit margin for the first quarter is -1.6%, and now that Ideal ONE has been cleared out, there is some room for improvement. However, we still have some other BOM costs, so we still maintain the guidance of a 20% gross profit margin for the whole year.

Q2: What is the plan for pushing city navigation-assisted driving, the exact timetable for preliminary user testing, and pushing it to all car owners? What is the specific user profile and how does it affect purchasing decisions and driving experience?

A2: Overall, the city NOA testing has been relatively smooth, and early bird testing will be launched in June. The rules are still being formulated, and we will prioritize users with higher usage rates of highway assisted driving. These users have a higher willingness and frequency of use, as well as higher tolerance and understanding.

We will push it to 100 cities by the end of this year, and the specific progress of the push is related to the number of vehicles owned—the more vehicles owned, the more data packets there are, and the more opportunities there are to release the function early. It is also related to the training situation—the higher the coverage rate of complex intersections, the earlier the release.

Ideal cars are mainly targeted at family users. Family users have higher requirements for the safety of intelligent driving. We use shadow testing, real vehicle testing, extreme condition testing, etc. in our testing to make users feel at ease using our functions.

Q3: When is it expected to reach 30,000 units in monthly sales this year?

A3: Overall sales in the second quarter are climbing, and we strive to achieve a monthly delivery of over 30,000 units in June.

Q4: What is the plan for the release and delivery of pure electric vehicle models?

A4: The pure electric vehicle models will be released this year in the fourth quarter, and we will maintain a similar release and delivery pace as L7/8/9.

Q5: Will R&D expenses decrease? What is the outlook for the full-year expense ratio?

A5: We will maintain the R&D expenses target for the whole year at 100-120 billion yuan or more. As for the percentage of SG&A to revenue, we have been continuously improving since the fourth quarter of last year.

Q6: How do you view the competition from other companies and the overall competitive environment?

A6: From our actual orders, L8 orders are still growing and are in a virtuous cycle of user recognition. On the other hand, looking at specific models, our main competitor is still Tesla Model Y, and other competitors have not entered the top 20 of L8 competitors. Q7: Is profit and cash flow a priority or market share and sales volume a priority? How should pricing strategy be considered in the competitive environment and the situation of declining battery costs?

A7: For us, market share is the most important, and the core goal of the second quarter is to increase the market share of NEVs above 200,000 units from 11% in the first quarter to 13%.

We currently have no plans to lower prices because when we make detailed long-term plans and pricing for our cars, we have already set each model at the level, size, and corresponding price range that is most competitive. This is the fundamental reason why we have always been cautious and made long-term considerations in pricing.

Q8: How does the design gross profit of pure electric vehicle strategy compare to that of extended-range vehicles? How is the capital expenditure related to the pure electric vehicle strategy expected to develop?

A8: Capital expenditures over the past three years have been about RMB 10 billion. Starting from this year, the estimated capital expenditures for the next three years, including high-performance computing (HPC), are about RMB 18 billion. However, it may change - if our early tests on HPC are successful, we may adjust our expansion plans.

Q9: How is the product strategy and profit margin of pure electric vehicle models expected to develop? Will a pure electric MPV be developed into an extended-range version? What is the product strategy and rough timetable for the 200,000-300,000 RMB price range? How to differentiate the segmentation opportunities of medium or compact car models?

A9: In order to make high-voltage pure electric vehicle models, we invested a lot in advance, so our core goal is to be able to sell high-voltage pure electric vehicles at prices close to extended-range vehicles and still achieve similar gross profit margins.

Whether it is an extended-range electric vehicle or a high-voltage pure electric vehicle, there is only one core goal, which is to replace fuel vehicles on a large scale. There are two most important things involved here.

One is that users can use the car smoothly, so we build a large number of supercharging stations on highways to ensure that users' real experience, safety, and convenience can be close to that of fuel vehicles.

On the other hand, as I just mentioned, we do not pass on such costs to consumers, so we will enable users to buy the most competitive products in the same level at a more appropriate price through effective research and development and supply chain layout.

Q10: How is the sales and service network layout planned? How is the development strategy for lower-tier cities considered?

A: We plan to effectively upgrade small stores that can only accommodate 1-2 cars; open comprehensive stores in cities with relatively high market share because the test drive experience in comprehensive stores will be better.

As for lower-tier cities, we will comprehensively cover fourth-tier cities, mainly through comprehensive stores in auto cities, because the coverage method and ideas of mature brands such as BBA have been verified.

Q11: What is the trend of new orders since May 1st? How is the situation of the AIR model? What is the sales proportion in non-first and second-tier cities? After the monthly sales of the L7/8/9 three models reach 30,000 units, is there still higher expectations?

A11: Order and delivery performance 10 days ago was significantly better than in April;

Air version models saw significant growth in sales, with L7/8 air models bringing a 20% increase;

Currently, the best performing cities in terms of growth are the new first-tier cities, which are also the main consumers; third- and fourth-tier cities are the core areas where we will focus on expanding in the future to gain more market share.

Q12: What are the difficulties and adjustments in the strategy for sinking markets?

A12: In the first quarter, we upgraded our organizational processes, changing from managing by region to managing by province, with stores directly managed by the province. Resource allocation is handled by the headquarters and given to the provinces for autonomous management.

These measures have brought about significant growth - in Q4 of last year, our number of stores did not increase much, but the output per store and per person both increased significantly, and the conversion rate from leads to orders improved significantly.

For third- and fourth-tier cities, we believe more in the management capabilities of (managers) from first-tier cities, and we believe they can find effective ways to manage different cities.

Q13: How will capacity expansion be arranged this year/next year? Are there any bottlenecks in terms of component shortages?

A13: Currently, we have two production lines at our Changzhou factory,

One produces L8/9, with double shifts and a monthly capacity of 20-25,000;

The second produces L7/8, with a single shift and a monthly capacity of 10-12,000, meeting our needs for this year.

The Beijing factory is used to produce pure electric vehicles, with a planned annual capacity of 100,000 units, and subsequent production line optimization and expansion based on demand.

Risk disclosure and statement for this article: Dolphin Analyst Disclaimer and General Disclosure