Radar Finance Hongtu | Text by Xiao Sa | Edited by Deep Sea

After consecutive profitable quarters, Ideal Motor slowed down its pace of earnings in the first half of the year.

Recently, Ideal Motor released its financial report for the second quarter of 2024. The data showed that the company's revenue reached 31.7 billion yuan in the second quarter, up 10.6% year-on-year; while net profit was 1.1 billion yuan, down 52.3% year-on-year.

The decline in profitability was mainly due to price cuts in April and the increased sales of the lower-priced Ideal Motor L6 model, which lowered the gross margin. Correspondingly, Ideal Motor's vehicle gross margin in the second quarter was 18.7%, a decline from both the previous quarter and the same period last year.

In the second quarter, Ideal Motor's overall gross margin was 19.5%, compared to 21.8% in the second quarter of 2023 and 20.6% in the first quarter of 2024. The decrease in gross margin from the second quarter of 2023 and the first quarter of 2024 was mainly due to the decline in vehicle gross margin. Li Xiang, founder, chairman, and CEO of Ideal Motor, has publicly stated that a healthy gross margin threshold is 20%.

In the first half of the year, Ideal Motor's operating profit turned from a profit of 2 billion yuan in the same period last year to a loss of 117 million yuan. Fortunately, the company relied on interest income and net investment income of 1.439 billion yuan to maintain profitability, with a net profit attributable to ordinary shareholders of Ideal Motor of 1.695 billion yuan for the first half of the year.

After experiencing setbacks in the market performance of the MEGA model and price adjustments across its entire product line, Ideal Motor delivered a cumulative total of 189,000 new vehicles in the first half of this year, an increase of 35.8% year-on-year, which can be considered robust. However, at the earnings conference, management lowered the full-year sales guidance to 500,000 units, 300,000 units less than the target set at the beginning of the year.

In addition, considering the full competition with Huawei's "Harmony SmartRide" in the SUV segment and the uncertainty of another attempt at battery electric vehicles (BEVs), Ideal Motor is far from celebrating its successes. Citi released a research report stating that due to slowing sales of BEV models and unfavorable supply-demand relations, it downgraded Ideal Motor's gross margin forecast for the next two years and expected a valuation downgrade risk in 2025.

More than 1,300 fewer R&D personnel

According to Tianyancha, Ideal Motor is a smart new energy vehicle developer focused on providing smart transportation solutions and services.

In 2023, Ideal Motor had a fruitful year, with total revenue of 123.85 billion yuan and its first annual profit, achieving a net profit of 11.81 billion yuan, making it the first new-energy vehicle company in China to achieve annual profitability.

However, as we entered 2024, the situation changed. In the first quarter, Ideal Motor's revenue and net profit fell sharply quarter-on-quarter, and its operating profit turned to a loss of 585 million yuan, a far worse-than-expected performance that triggered a sharp drop in the company's share price after its announcement.

Facing the "flip" in performance, Ideal Motor quickly implemented a series of adjustments in staffing, pricing, and targets. First, in terms of cost reduction, rumors of layoffs emerged at Ideal Motor in early April but were quickly denied by the company.

By mid-May, multiple media outlets reported that after the May Day holiday, Ideal Motor was undergoing a new round of company-wide personnel optimization, with an overall optimization rate exceeding 18%. According to the 2023 financial report, Ideal Motor had nearly 31,600 employees, which meant that this round of optimization involved more than 5,600 people based on the optimization rate.

Unlike the previous swift denial, Ideal Motor did not comment on the reports of layoffs this time. According to the financial report, Ideal Motor did indeed conduct layoffs.

As of June 30, 2024, the company had 30,899 employees, compared to 31,591 employees as of December 31, 2023.

Based on this calculation, Ideal Motor's employee headcount decreased by 692 in half a year. Among them, R&D personnel were hard hit, with 5,373 R&D personnel at the end of the first half of 2024, a decrease of more than 1,300 from the end of the previous year.

Ideal Motor's cost reduction and efficiency enhancement measures have also borne fruit. The financial report showed that due to reduced employee compensation, R&D expenses decreased by 0.7% quarter-on-quarter in the second quarter. At the same time, due to reduced marketing and promotional activities and employee compensation, sales, general, and administrative expenses decreased by 5.5% quarter-on-quarter in the quarter.

Another significant move by Ideal Motor in the second quarter was the launch of lower-priced models and joining the price war through price cuts.

On April 18, the Ideal L6 was officially launched. The new car was introduced in two versions, Pro and Max, priced at 249,800 yuan and 279,800 yuan, respectively, making it the first Ideal Motor model priced below 300,000 yuan.

On April 22, Ideal Motor officially reduced prices across its entire product line by 18,000 to 30,000 yuan and compensated owners who purchased new models, including the Ideal Mega and 2024 L-series models, before the price reduction by reimbursing the price difference. The company provided a cash subsidy of 30,000 yuan to Ideal Mega owners and 15,000 to 20,000 yuan to L-series owners.

The low-priced Ideal L6 model has contributed increasingly to Ideal Motor's deliveries since its launch, with cumulative deliveries exceeding 50,000 units in three months and exceeding 20,000 units in a single month for the first time in June.

However, the increase in sales did not drive an increase in gross margin. Data showed that Ideal Motor's gross margin in the second quarter was 19.5%, a decrease of 2.3 percentage points from the same period last year and 1.1 percentage points from the first quarter of this year. In the second quarter, Ideal Motor's vehicle gross margin was 18.7%, compared to 21% in the second quarter of 2023 and 19.3% in the first quarter of 2024.

At last year's Spring Media Communication Conference, Li Xiang said that as a smart electric vehicle company, a 20% gross margin is the threshold for healthy development of Ideal Motor.

However, with the further decline in gross margin this year, Ideal Motor's previously upward earnings momentum has reversed. Data showed that in the second quarter, revenue reached 31.7 billion yuan, up 10.6% year-on-year; net profit was 1.1 billion yuan, down 52.3% year-on-year; and adjusted net profit was 1.5 billion yuan, down 44.9% year-on-year.

Regarding this, Li Tie, CFO of Ideal Motor, expressed confidence during the earnings conference call that with the optimization of scale effects and adjustments to sales policies, the company expects the vehicle gross margin to rebound to above 19% in the third quarter, and the overall gross margin to return to above 20%.

China Merchants Securities also believes that Ideal Motor's improvement in the third quarter is highly certain. This is mainly due to the surge in sales of the Ideal L6 driving a significant quarter-on-quarter increase in total sales in the third quarter, with enhanced scale effects driving an improvement in gross margin. In addition, cost-saving measures such as layoffs in the second quarter led to a noticeable decrease in expense ratios compared to the previous month. If these measures continue to be effective in the second half of the year, expense ratios will continue to decline in the third quarter, leading to an improvement in profitability.

However, the bank believes that uncertainties remain for Ideal Motor in the fourth quarter due to the lack of major new products and the potential for the company to be forced to lower prices in response to aggressive expansion by competitors.

Pure electric vehicles to be launched next year

On March 1 this year, Ideal Motor launched its first pure electric MPV model, the Ideal Mega, but the vehicle faced questions about its design, pricing, and sales performance upon its launch.

Twenty days after the new car's launch, Li Xiang issued an internal letter reflecting on the recent series of questions raised about the Ideal Mega. He bluntly stated that the company's misjudgment of the market timing for the Ideal Mega and its excessive focus on sales volumes were the main reasons for the question it faced.

After the Ideal Mega's setback, the company promptly made multiple adjustments and delayed the launch of pure electric products.

However, due to this incident, Ideal Motor significantly downgraded its annual sales target. Initially, Li Xiang announced in February 2024 that the company would increase its sales target for 2024 to 800,000 units. However, in March, the company officially downgraded its full-year sales guidance from 800,000 units to 560,000 to 640,000 units.

During the earnings conference call after the second-quarter report, company management stated that if the passenger car market develops healthily in the second half of the year, they are confident in completing the delivery of 500,000 vehicles for the full year.

In response, Goldman Sachs released a research report stating that management's guidance for third-quarter vehicle sales is 145,000 to 155,000 units, with revenue expected to reach 39.4 billion to 42.2 billion yuan. The bank noted that the management's downgrade of the full-year sales guidance to 500,000 units during the business meeting was in line with its expectations.

However, with no new car launches in the second half of the year, it will not be easy for Ideal Motor to achieve the delivery of 500,000 vehicles for the full year. Some analysts have pointed out that the number of models in the same segment as the Ideal L6 is increasing, and their prices are more favorable than the Ideal L6. Its old rival, Wenjie, has launched the Wenjie M7 Pro starting at 249,800 yuan to compete for market share.

In terms of pure electric vehicles, Ideal Motor originally planned to launch three pure electric SUVs in the second half of the year, but after the poor performance of the Mega, the company has postponed the launch of new pure electric products until the first half of 2025.

According to Ma Donghui, President of Ideal Motor, the overall progress of pure electric vehicle research and development is normal, with multiple rounds of small-batch prototype testing and production already completed, and the entire vehicle production plant has been constructed.

Making a comeback, Li Xiang still has high expectations for pure electric vehicles, stating that he hopes to enter the first tier of high-end pure electric products within about two years.

To achieve this, Li Xiang emphasized the need to solve two problems: one is product design, and the other is the ability to provide more than 2,000 fast-charging stations to users upon delivery of pure electric vehicles.

However, it should be noted that the growth rate of pure electric vehicle sales is not high. According to the China Passenger Car Association, in July, China sold 318,000 plug-in hybrids, up 73% year-on-year and 3% month-on-month; 122,000 extended-range vehicles, up 115% year-on-year and 5% month-on-month. In comparison, 505,000 pure electric vehicles were sold wholesale in July, up 0.9% and 9% year-on-year and month-on-month, respectively.

Industry insiders believe that the growth rate of pure electric vehicles has continued to slow, and their market share may be surpassed by plug-in hybrids. Against this backdrop, some institutions are not optimistic about Ideal Motor's re-entry into the pure electric vehicle market.

Citi released a research report stating that due to slowing sales of BEV models and unfavorable supply-demand relations, it downgraded Ideal Motor's gross margin forecast for 2025 and 2026 by 0.1 and 0.8 percentage points, respectively, to 18.8% and 17.9%, lowered its target price from 113.8 yuan to 100.7 Hong Kong dollars, and expected a valuation downgrade risk in 2025.

Increasing number of competitors

Just as Ideal Motor prepares to re-enter the pure electric vehicle market, its stronghold in the extended-range segment is facing an influx of strong competitors.

Chief among them is Huawei's "Harmony SmartRide," which also focuses on extended-range vehicles. Recently, with the unveiling of the second model co-developed by Huawei and JAC Motor, the Zhijie R7, the number of Huawei Harmony SmartRide models has increased to six, including the Wenjie M5, Wenjie M7, and Wenjie M9 co-developed with Seres, the Zhijie S7 and Zhijie R7 co-developed with Chery, and the Xiangjie S9 co-developed with BluePark New Energy.

To what extent Ideal Motor's high-priced models, the Ideal L9 and L8, are affected by the Wenjie M9 in the market competition is currently unquantifiable. However, in terms of sales, according to agency statistics, the sales of the L9 and L8 were approximately 24,000 and 21,000 units, respectively, in the first quarter, but declined to approximately 20,000 and 16,000 units, respectively, in the second quarter.

In addition, multiple pure electric vehicle companies have announced plans to launch extended-range models this year. On August 21, at the AVATR extended-range technology launch event, AVATR Technology unveiled its extended-range technology, Kunlun ER, and plans to launch multiple pure electric and extended-range models within the year.

On the same day, at Geely Auto's mid-year earnings conference, it was announced that the company's large flagship SUV model, the Zeekr, will be equipped with two powertrain options, including pure electric and super hybrid, and is expected to be launched in the fourth quarter of next year. According to introductions, the Zeekr super hybrid system is a new powertrain form that integrates the advantages of pure electric, plug-in hybrid, and extended-range technologies.

Earlier, in May, Volkswagen announced that it would expand its lineup of plug-in hybrid models; in June, Gu Huinan, general manager of GAC Aion, revealed that GAC Aion would complement its lineup with plug-in hybrid and extended-range models and plan to launch them next year at an appropriate time.

Separately, Xiaomi Auto plans to launch its third model, an extended-range SUV, aimed at family use, in 2026, according to Cailian Press.

In the industry's view, in addition to the better sales performance of extended-range electric vehicles, the immaturity of pure electric technology is also a reason why automakers are entering the hybrid camp.

Qu Fang, investment advisor at Wanlian Securities, said that automakers' layout in plug-in hybrid vehicles is related to both the slowing growth of foreign pure electric vehicles and the growth of domestic market demand. Plug-in hybrid vehicles were once considered a transitional stage for pure electric vehicles, but due to the incomplete maturity of pure electric vehicle technology, the market has chosen more practical plug-in hybrid vehicles.

With more brands entering the market, the extended-range hybrid segment is becoming increasingly crowded and competitive. As an early automaker focusing on extended-range technology, Ideal Motor reaped the benefits of the extended-range market early on, but now it needs to face more competitors vying for a share of the pie.

Speaking about the current market competition, Li Xiang said during the earnings conference, "Harmony SmartRide is Ideal Motor's strongest competitor in the market, and we believe that both sides will coexist healthily in the long run."

However, Ideal Motor's competitors are not limited to Huawei alone. What kind of answers will Ideal Motor deliver in the future? Radar Finance will continue to follow up on this story.