On February 25th, 2022, Ideal Automobile officially released their 2021Q4 financial report as well as their 2021 annual report. Boosted by the overall growth of the new energy market in 2021 and the launch of the redesigned Ideal ONE, Ideal achieved a YoY increase in deliveries of 177.4% in 2021, with 2021Q4 becoming the quarter with the highest delivery volume in Ideal’s history. As a result, the Q4 financial report established multiple new highs as well.

In addition, the information about the new car X01 and Ideal Automobile’s future plans discussed during the financial report conference is also quite informative.

Overall, reading this will definitely be worth it.

Summary of the 01 Financial Report

Regarding the highlights of the Q4 financial report, we can explore them briefly through Li Xiang’s address in the PDF document:

We achieved profitability and RMB3.8 billion operating cash flow in the fourth quarter even as we accelerated the pace of R\&D investment and sales network expansion – a significant reflection of our operating excellence.

In the fourth quarter of 2021, Ideal Automobile achieved profitability and generated RMB3.8 billion in operating cash flow while accelerating R\&D investment and sales network expansion. This is a significant reflection of our operating excellence.

Since it’s been said, let’s look at the financial data.

One car, one hundred billion

2021Q4 Financial Report

Ideal’s latest financial report includes their 2021Q4 quarterly report and their 2021 annual report. First, let’s look at the Q4 financial report in order.

• The total revenue for 2021Q4 was RMB10.62 billion, setting a new quarterly record, an increase of 156.1% from RMB4.15 billion in 2020Q4, and an increase of 36.6% quarter-on-quarter from Q3 of 2021;

• Automobile sales revenue for 2021Q4 was RMB10.38 billion, setting a new quarterly record, an increase of 155.7% from RMB4.06 billion in 2020Q4, and an increase of 40.5% quarter-on-quarter from Q3 of 2021;

• The gross profit margin per car for 2021Q4 was 22.3%, an increase from 21.1% in 2021Q3;

• The overall gross profit margin for 2021Q4 was 22.4%, 17.5% in 2020Q4, and 23.3% in 2021Q3.

• Gross profit for Q4 2021 was RMB 2.38 billion, an increase of 228.5% compared to RMB 0.725 billion in Q4 2020, with a QoQ increase of 31.3%;

• Sales cost was RMB 8.24 billion, an increase of 140.8% compared to RMB 3.42 billion in Q4 2020, mainly due to the increase in vehicle delivery quantity;

• Net profit was RMB 0.296 billion, compared to a net loss of RMB 0.0215 billion in Q3 2021;

• Operating cash flow was RMB 3.84 billion, an increase of 110.7% YoY and 76.9% QoQ, with free cash flow of RMB 1.62 billion;

• As of December 31, 2021, the company’s cash reserve (cash and cash equivalents, restricted cash, and balance of fixed-term deposits and short-term investments) was RMB 50.16 billion, compared to RMB 48.83 billion in the third quarter;

• In Q4 2021, the R&D cost of IDEAL was RMB 1.23 billion, a QoQ increase of 38.4% compared to RMB 0.8885 billion in Q3 2021. This accounted for 11.58% of total revenue in Q4;

• Sales and management expenses were RMB 1.13 billion, an increase of 10.2% compared to RMB 1.02 billion in Q3 2021, and an increase of 162.2% YoY. The expense increase was mainly due to the growth in personnel, venue rental, and network expansion in the company’s scale expansion process.

In Q4, IDEAL achieved a quarterly revenue of over RMB 10 billion for the first time, with the revenue from vehicle sales accounting for 97.74%, which shows that selling cars is the core business of IDEAL. However, what is even more noteworthy is that IDEAL achieved this milestone with only one model, IDEAL ONE, which is a rare case among independent brands.

In addition, in the context of the shortage of automotive parts, chip supplies, and rising battery raw materials in the past year, IDEAL also achieved a slight increase in unit gross profit in Q4 2021. The data shows that although they were in this situation, they were not in a quagmire.

Another noteworthy point is that IDEAL achieved positive profitability in Q4 2021. At the same time, the R&D investment of IDEAL in Q4 was RMB 1.23 billion, accounting for 11.58% of revenue, which even exceeded the sales and management expenses in the quarter.

Yes, IDEAL is now willing to spend money on R&D, but they still remain the “frugal factory” when it comes to other expenses. The positive results undoubtedly cannot be separated from this spending philosophy, but what it reflects is the efficiency and execution of the company’s overall operation.

2021 annual report

Let’s take a look at the full-year financial report for 2021 after the quarter report:

• Total revenue was RMB 27.01 billion, an increase of 185.6% compared to RMB 9.46 billion in the previous year;- The automotive business revenue was RMB 26.13 billion, an increase of 181.5% compared to the previous year’s RMB 9.28 billion, mainly due to the increase in automotive deliveries in 2021;
• Other sales and services amounted to RMB 881.3 million, an increase of 406.8% compared to RMB 173.9 million in 2020;
• Sales cost was RMB 21.25 billion, an increase of 168.7% compared to RMB 7.91 billion in 2020, which followed the growth of revenue mainly driven by the increase in vehicle deliveries in 2021;
• The total net profit is RMB 5.76 billion, an increase of 271.9% compared to RMB 1.55 billion in 2020;
• The gross profit margin per vehicle was 20.6%, an increase of 4.2% compared to 16.4% in 2020, which was mainly due to the improvement of supply chain cost management and the increase of the average selling price;
• The overall gross profit margin was 21.3%, compared to 16.4% in 2020, primarily due to the increase in vehicle deliveries;
• Operating expenses were RMB 6.78 billion, an increase of 205.5% compared to RMB 2.22 billion in the previous year;
• Research and development (R&D) expenses were RMB 3.29 billion, an increase of 198.8% compared to RMB 1.1 billion in 2020. The increase in R&D expenses was mainly due to the increase in R&D personnel and the development of new products;
• Operating loss was RMB 1.02 billion, an increase of 52.0% compared to RMB 0.67 billion in 2020;
• Net loss was RMB 0.3215 billion, an increase of 111.9% compared to RMB 0.1517 billion in 2020;
• General sales and administrative expenses were RMB 3.49 billion, an increase of 212.1% compared to RMB 1.12 billion in 2020, mainly due to the increase in employee compensation and sales network expansion;
• Operating cash flow was RMB 8.34 billion, an increase of 165.6% compared to RMB 3.14 billion in 2020;
• Free cash flow was RMB 4.33 billion, an increase of 75.8% compared to RMB 2.46 billion in the previous year;
• As of December 31, 2021, Ideal Automobile had 11,901 employees.

Throughout 2021, the significant increase in Ideal Automobile’s delivery volume brought substantial revenue growth. The strategy of one model and one configuration allowed Ideal to achieve the expected marginal effect after the model’s initial sales volume, and the annual gross profit margin of more than 20% is a good demonstration of this.
On the other hand, the total gross profit growth rate of Ideal Automobile in 2021 exceeded the YoY delivery volume growth rate, which is also a successful demonstration of its explosiveness strategy. Such a growth pattern is also evident in Tesla’s recent financial reports.# Translation

In the year of 2021, the R&D expenditure of the ideal reached 3.29 billion yuan, nearly twice as much as last year, accounting for 12.18\% of the yearly revenue and 57.11\% of the total gross profit.

As for the gross profit and R&D investment, Li Xiang has stated before that realizing 20\% gross profit and executing over 10\% R&D investment are two mutually supportive ends of long-term development, the ideal cycle that has officially started in 2021.

Factory and Outlook

In addition to the ideal Beijing factory that began construction in October last year, in December 2021, Ideal Auto also established a strategic cooperation framework with the Chongqing Municipal Government to build manufacturing base in Liangjiang New Area, Chongqing. The addition of this production base will further enhance the company’s ability to meet the increasingly strong market demand and consolidate its foundation for continuous growth.

According to the information revealed in the subsequent conference call, the Beijing factory under construction in Changzhou is planned to have an annual capacity of 500,000 vehicles, which can reach 750,000 vehicles in double-shift production. Earlier official announcements also mentioned that the Beijing plant can achieve the joint production of four models, and the first phase of the factory will be put into operation in 2023.

The final part of the financial report sets the sales guidance for Q1 2022 as follows:

• expect to deliver 30,000 to 32,000 vehicles, an increase of approximately 138.5% to 154.4% over Q1 2021;
• expect total revenue to be between RMB 8.84 billion and RMB 9.43 billion, an increase of approximately 147.2% to 163.7% over Q1 2021.

The conference call after the financial report is the more exciting part.

02 An Informative Conference Call

In the QA section of the financial report conference call, there are many valuable pieces of information to be deeply understood. Li Xiang himself revealed a lot of information on the company’s strategy for new product and threw out some tantalizing hints.

Due to time constraints, our records of the conference call are brief and may contain some omissions and flaws, so please understand.

Highlights of the QA Section

Q1: What is the management’s thinking on the product cycle of the industry, and has the company prepared sufficient capacity and channels for the new products that will follow?

A2: The key is to see what kind of demand users have and how much money they are willing to spend. From the perspective of the enterprise, the product strength of the car consists of a circle composed of space, size, safety, quality, and supply. The more this circle coincides with the user, the more successful the product. In terms of the production capacity and channels of new cars, Ideal has made preparations not only in its own production capacity but also in the supply capacity.

Q2: How does Ideal achieve its own spatial intelligence?

A2: Spatial intelligence is not about entering other spaces but about bringing some technology and applications into the scene of the car, and then implementing a high degree of completion.Q3: What is the impact of supply pressure on Ideal and how will Ideal respond this year? From a product perspective, what new features will ideal’s intelligence bring?

A3: Ideal has been affected by supply shortages and we will continue to seek more supply partners, and keep up with the industry’s supply situation. In terms of intelligence, we hope that the Ideal can reduce accident rates by 80% compared to traditional cars through assisted driving. X01 has greatly improved in perception and calculation, and its safety performance will be more prominent.

Q4: How will Ideal show differentiation in its future strategies and how does it consider overseas strategies?

A4: Ideal’s differentiation lies in its ability to create products for families and the efficiency of its company system. Ideal will follow up on its own shortcomings. Next, domain controllers, and electronic and electrical infrastructure all have self-developed teams, and Ideal’s technological deficiencies will be strengthened. We have a dedicated team planning for overseas expansion, but in the short term, our focus remains on the domestic market.

Q5: How will X01 differentiate itself from higher-priced products and previous products? What has Ideal prepared in terms of infrastructure and supply-side efforts for the transition to BEV?

A5: X01 will meet many of the needs that original Ideal ONE users felt were not satisfied, and it will also create many forward-looking needs that current users are not aware of. The key to the Ideal BEV product line is the 4C power battery, which requires a lot of research and development because the supply side is still immature, including the 850V voltage platform, and the corresponding electric drive system also requires a lot of in-depth research and development. Ideal is also researching a 400 kW charging pile, which, when combined with several other technologies, will form a 10-minute recharge and 400 km charging ecologically closed loop.

Q6: Does Ideal have other user groups besides family users? In the long run, will the transition to BEV bring any differences in the user group?

A6: At the beginning of the Ideal ONE project, there were 2 million family users with a household income of 200,000 RMB or more; now there are 6 million, and by 2025 there will be a market of 10 million. We will continue to cultivate this market. Currently, Ideal has only a little over 2% market share in the family user market, so there is still plenty of room for improvement. We need to achieve 20% to 25% to complete our journey from one to ten.

In addition to the QA section, several pieces of information were also revealed during the opening remarks of the meeting:

1. The Ideal X01 will be released in the second quarter of this year, with delivery in the third quarter. In 2023, Ideal will launch two high-voltage platform super-fast charging pure electric car models.

2. At present, production capacity is being expanded in an orderly manner, and the cumulative planned annual capacity of the Beijing and Changzhou factories is 500,000 vehicles, which can reach 750,000 vehicles under double-shift production.

3. The Ideal will maintain an investment of more than 10% in research and development for the long term.

4. Shortages of auto parts and chips in the automotive industry are still ongoing, and Ideal is actively coordinating supply resources from multiple parties.From the Q&A, it can be seen that Li Xiang emphasized “product” and “methodology” very much. Regardless of whether the questioner is asking about the product, industry, or market, the final answer falls on “product” and “methodology” according to Li Xiang’s ideal leadership.

In the case of the market positioning of ONE and X01, an ordinary person would most likely answer that “X01 is bigger, longer, and more high-end than ONE.”

However, Li Xiang’s answer did not specifically compare X01 with ONE but rather imply that X01 is a more impressive “product” than X. As Steve Jobs once said, customers don’t know what they truly want until you present them with an impressive product.

In the Q&A, Li Xiang said similar things – X01 aims to meet the needs that ONE cannot satisfy and fulfill potential needs that users themselves cannot imagine. In Li Xiang’s eyes, X01 is a car that surprises users, not just an older sibling of ONE.

Regarding the intelligence aspect of the “product,” Li Xiang particularly emphasized the end goal – through the application of intelligent technology, to make Ideal’s cars have an accident rate 80% lower than traditional fuel vehicles throughout their entire lifecycle with the help of assisted driving. It has to be said that this is a bold and exciting goal. With such expectations established, we hope that X01’s subsequent assisted driving capabilities will surprise us.

The most important question throughout the entire conference call, in our opinion, is actually about Ideal’s market positioning. After introducing pure electric products in the future, will Ideal still focus only on the home user market? Is the overall user base too small?

Li Xiang chose to answer this question with data: the market for family cars priced above 200,000 RMB in China will reach 10 million by 2025, which is much larger than people imagine.

Although Ideal ONE has already taken the crown of the best-selling mid-to-large-sized SUV, this is still far from the goal. In February 2021, Li Xiang released an internal memo in which he mentioned that the company’s strategic goal for 2025 is to achieve a 20% market share and become China’s leading intelligent electric vehicle company. At that time, Ideal’s expectations were that China’s new energy vehicle sales would reach 8.07 million units by 2025, and a 20% market share meant 1.6 million units in sales.

However, later on, this data was adjusted to 2 million units within Ideal, which, combined with this financial report, means that the new target market is “family cars priced above 200,000 RMB.” Based on a market strategy that focuses on developing family users, Ideal aims to attain a 20% to 25% share, and the 2 million unit goal comes from this.

Conclusion# 2021 is the year that IDEAL Automotive completes the journey from 0 to 1. As the first new energy vehicle with monthly sales exceeding 10,000 units, IDEAL ONE has proven a lot to the market and changed some people’s views on IDEAL Automotive. However, it is not yet time to celebrate. As Li Xiang said, IDEAL currently has only a little over 2% market share in the family vehicle market.

The highlight of IDEAL’s 2021 financial report is not the revenue, gross profit, or net profit, but rather the proportion of R&D investment in IDEAL during the year. IDEAL’s shortcomings in self-development and technology are being gradually addressed with a planned and strategic approach.

In 2022, when we gather on the same stage, we may again see a unique IDEAL.

This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.