Is pure electric the breakthrough point for Li Auto? | Insights from Aito

On the evening of February 26th, the leading new energy vehicle company, Ideal, announced its Q4 2023 earnings report. Throughout 2023, Ideal achieved record highs in sales volume, operating income, net profit, and gross profit margin, surpassing its competitors in the new energy vehicle market.

In the core indicators for the fourth quarter, Ideal achieved an operating income of 41.73 billion RMB, a year-on-year increase of 136.4% and a month-on-month increase of 20.3%, exceeding the market's expectation of 39.8 billion RMB. The net profit reached 5.75 billion RMB, a year-on-year increase of 2068.2% and a month-on-month increase of 104.5%. The gross profit margin was 23.5%, an increase of 3.3 percentage points year-on-year and 1.5 percentage points month-on-month.

However, in 2024, Ideal faces new challenges. The first challenge is whether the sales volume of the L-series models, which are the foundation of Ideal, can maintain its growth momentum under the continuous impact from Aito.

Secondly, the all-electric model MEGA, set to be launched in March, is crucial in achieving high sales volume like the L-series models.

In Q4 of 2023, Ideal once again achieved a record high in sales volume, reaching 132,000 vehicles, surpassing the estimated delivery level of 125,000-128,000 vehicles. Ideal not only achieved its annual sales target with 12 consecutive months of month-on-month growth but also exceeded 50,000 vehicles for the first time in December.

However, as Ideal climbs to a higher level, it will also face new challenges. Aito, with popular models such as M7, M9, and M5, is gradually eroding Ideal's market share in the extended-range field. As Aito converts accumulated orders into effective sales, the negative impact on Ideal is gradually becoming apparent.

In January 2024, Aito surpassed Ideal for the first time with a performance of 33,000 vehicles, a month-on-month growth of 34.8%, securing the top spot in sales among new energy vehicle companies. Considering Aito's rapidly increasing production capacity (the estimated delivery time for the M7 two-wheel drive version has been reduced to 2-4 weeks) and the thickness of orders (currently, the large orders for M7 have exceeded 140,000 vehicles). If Ideal's L-series models do not have a good response strategy, the threat posed by Aito will further intensify. In Ideal's sales guidance for the first quarter of this year, it is also reflected that the company expects to deliver between 100,000 and 103,000 vehicles, returning to a monthly sales level of 30,000 vehicles, with a indeed slower growth rate.

As Ideal's Chairman Li Xiang said, "In the market of over 200,000 new energy vehicles, in the fourth quarter of this year, the top three brands will consume 70% of the market share, more concentrated than traditional fuel vehicles."

Currently, in the market of over 200,000 new energy vehicles, the focus is on outstanding companies such as Tesla, BYD, Ideal, and Aito, which have stabilized their monthly sales above 30,000 vehicles, as well as emerging stars like ZEEKR and Deep Blue. At present, both the main scope of the price war and the range of updated leading equipment configurations are concentrated in this price range, making the competition quite intense.

From the current sales level, Ideal's sales are lower than Tesla and BYD, and are on par with Aito, with Ideal aiming to stand out and become one of the top three brands as mentioned by Li Xiang, where Aito is its biggest competitor.

2. Aito, Ideal's true competitor?

Specifically, Aito's strong momentum is reflected in the following two points:

Firstly, relying on Huawei's intelligent driving system, Aito is undoubtedly at the forefront in the field of intelligent driving. Starting from January 31 this year, Aito's M5 and the new M7 intelligent driving versions will gradually upgrade to the advanced OTA version, enabling advanced intelligent driving in urban areas without relying on high-precision maps nationwide.

Today, intelligent driving systems have become almost standard in mid-to-high-end new energy vehicles, and Aito is clearly one step ahead of Ideal. Although Ideal has been consciously increasing its investment in the field of intelligent driving, there are still gaps in the progress of NOA pilot cities and the level of functionality.

Secondly, compared to last year, the price competition in 2024 will be more intense, with BYD making a price cut at the beginning of the year. As a direct competitor, Aito has followed suit by lowering prices multiple times, putting increasing pressure on Ideal, which has always maintained a no-discount policy. Aito not only upgraded the new M7 in terms of range, configuration, and intelligent driving, but also reduced the price by 40,000 yuan. Now, for the yet-to-be-mass-delivered M9, they have launched an activity to effectively reduce the price by 50,000 yuan.

Under pressure, Ideal had to engage in a price war. The company announced in January this year a price reduction of 33,000 to 38,000 yuan for different versions of the L series. So far, the results have been positive. During the two weeks of the Spring Festival (February 5-18), Ideal's sales (7,000 vehicles) finally surpassed Aito's (5,500 vehicles).

In response to this, Wall Street News · Insight Research believes that Ideal's future breakthrough point may lie in pure electric vehicle models. As a competitor, Aito has made little progress in the field of pure electric vehicles, despite launching pure electric versions of the M7 and M5, their performance in the market is mediocre, with sales far behind the extended-range versions. The latest M9 model, although available in extended-range and pure electric versions, still attracts market attention and orders mainly for the extended-range version.

In contrast, Li Auto is ambitiously focusing on pure electric models, with increasing investments. Not only has it introduced an 800V ultra-fast charging pure electric solution (with a planned network of 2,000 ultra-fast charging stations by 2024) to prepare in advance for the energy supplementation of pure electric models, but its Beijing base with an annual production capacity of up to 100,000 pure electric vehicles is also nearing completion. The upcoming launch and delivery in March of the 5C pure electric flagship model MEGA is expected to make a significant impact, opening a second battlefield for Li Auto beyond extended-range products and breaking through the sales ceiling.

3. Li Auto's profit-making ability continues to strengthen

While other new players in the automotive industry are still striving for a balance between profit and loss, in the fourth quarter of 2023, Li Auto's net profit reached 5.75 billion yuan, a year-on-year increase of 2068.2%, and a month-on-month increase of 104.5%. The profit per vehicle has also increased from 5,700 yuan in the same quarter last year to the current 43,560 yuan, continuously reaching new highs.

Further looking at the gross profit margin, Li Auto stated that due to accounting adjustments for the provision of reserves for quality costs, the gross profit margin in the fourth quarter of 2023 increased to 23.5%, a month-on-month increase of 1.5 percentage points, once again surpassing the electric vehicle giant Tesla (Q4 gross profit margin 17.6%). Against the backdrop of BYD and other new energy vehicle companies initiating the final round of price wars in the fourth quarter, Li Auto has managed to withstand the pressure, with its profit-making ability not significantly affected.

Moreover, Li Auto's cash flow remains strong. In the fourth quarter of 2023, Li Auto's operating cash flow reached 17.29 billion yuan, a year-on-year increase of 251.1% and a month-on-month increase of 19.2%. In terms of cash reserves, Li Auto still maintains a leading position. As of the end of 2023, Li Auto's cash and cash equivalents, restricted cash, time deposits, and other funds amounted to as high as 103.67 billion yuan, surpassing the yet-to-achieve self-sufficiency of XPeng and Nio, breaking through the one trillion yuan mark for the first time.

The repeated record-high sales have laid a solid foundation for Li Auto, while the continuously strengthened profit-making ability gives Li Auto the confidence to face price wars in the future.

4. Continuous growth in expenses, but no major issues

Li Auto's expenses continue to grow rapidly, but Li Auto stated that this is in line with its product layout, smart driving research and development, and the expansion of sales channel coverage, with no significant overall issues. In the fourth quarter of 2023, Ideal's R&D expenses reached 3.49 billion yuan, a year-on-year increase of 68.6% and a quarter-on-quarter increase of 23.9%. In order to catch up with the likes of Huawei and XPeng in the field of intelligent driving (Ideal City NOA has been rolled out to 113 cities nationwide, but with restricted road access) and to open up a second sales growth curve in the pure electric field (Ideal will launch three pure electric models this year), it is unlikely that Ideal's R&D investment will decrease.

By the fourth quarter of 2023, Ideal had expanded its coverage to 140 cities, an increase of 7 cities compared to the previous quarter, with 467 direct retail centers, an increase of 106 centers. The expansion of the distribution network also led to a significant increase in sales expenses, with sales, general, and administrative expenses reaching 3.27 billion yuan in the fourth quarter, a year-on-year increase of 100.6% and a quarter-on-quarter increase of 28.5%.

Currently, Ideal Motors is at a crossroads of opportunities and challenges. Whether Ideal can maintain its lead in the competition in the pure electric vehicle market and achieve its annual sales target of 800,000 vehicles, relying on its reputation and user word-of-mouth accumulated in the extended-range electric vehicle field, remains to be seen. We look forward to the launch of Ideal's new all-electric mega brand in the first quarter of this year, as well as the subsequent implementation of the NOA city coverage plan, which may provide us with the answer.