Author: Zhang Yi
On May 10th, the financial report for the first quarter of 2022 released by LI Auto (Li Xiang) drew attention due to the continued strong development momentum despite the pandemic.
The data shows LI Auto achieved a revenue of RMB 9.56 billion in the first quarter, delivered 31,716 LI ONE vehicles, and had a gross profit margin of 22.6%. As of the end of the first quarter, LI Auto’s cash reserve was RMB 51.19 billion, and the company announced an increased investment in R&D and expansion of sales and service networks.
The total revenue for Q1 2022 was RMB 9.56 billion (USD 1.51 billion), an increase of 167.5% compared to Q1 2021’s RMB 3.58 billion.
The vehicle sales revenue for Q1 2022 was RMB 9.31 billion (USD 1.47 billion), an increase of 168.7% compared to Q1 2021’s RMB 3.46 billion. The increase in vehicle sales revenue was mainly due to the increase in vehicles delivered in Q1 2022.
Meanwhile, the gross profit margin of LI ONE in Q1 2022 was 22.4%, showing a significant increase from 16.9% in Q1 2021. The increase in gross profit was mainly due to the increase in average selling price following the increase in vehicle delivery volume since launching the 2021 LI ONE in May 2021.
The revenue from other sales and services in Q1 2022 was RMB 2.534 billion (USD 40 million), an increase of 127.2% compared to Q1 2021’s RMB 1.115 billion and an increase of 3.6% compared to Q4 2021’s RMB 2.447 billion. The increase in other sales and service revenue compared to Q1 2021 was mainly due to the increase in total vehicle sales, which also drove the sales of charging piles, accessories and services.
The total R&D investment in Q1 2022 was RMB 1.37 billion, reaching a new high and a YoY growth of 167.0%. LI Auto will continue to promote extended range technology, high-voltage pure electric technology, intelligent cockpit, and self-driving technology.
Continuing to target families, LI Auto will deliver LI Xiang L9 in the third quarter.In the first quarter, the Ideal ONE delivered a total of 31,716 units, a year-on-year increase of 152.1%. The Ideal ONE has been the highest-selling mid-to-large size SUV for 11 consecutive months. Furthermore, the company plans to deliver the Ideal L9, an intelligent flagship SUV specifically designed for family users, in the third quarter. The vehicle is built using a brand new, second-generation extended-range platform.
In recent years, Ideal Automotive’s product strategy has been aimed towards families with children. Both the Ideal ONE and the upcoming L9 are centered around the needs of family users. Ideal Automotive has expressed that their product strategy in the future will still be to serve families with children.
To cater towards this target demographic, they need to provide the right size, four-wheel drive, and sufficient intelligence, while keeping the price range between CNY 250,000 and 300,000. Furthermore, Ideal Automotive will also extend their product offerings to the CNY 350,000 to 400,000 and more than CNY 400,000 price ranges.
After the L9, three products will be launched next year: a new extended-range product, the first pure electric product, and a medium-sized vehicle priced between CNY 200,000 and 300,000.
Successful product positioning and pricing are the key factors that have contributed to Ideal Automotive’s continued success.
Unlike their past strategy of focusing primarily on a single platform, Ideal Automotive now values multi-platform product planning. Products are built from five different aspects, including extended-range, 800V, pure electric, autonomous driving, and intelligent driving. Different products are priced differently, thus preventing internal competition among products.
Similar to Apple’s pricing strategy for iPhones, an effective platform with different priced products is the core of Ideal Automotive’s product strategy.
What will be their response to rising battery prices and the impact of the pandemic?
In the first quarter, the price of raw materials, particularly lithium carbonate, rose due to the long development cycle of lithium resources and strong downstream demand, which led to a short-term supply and demand mismatch.
In addition, due to the impact of the pandemic, domestic suppliers have had difficulty resuming work, resulting in a decrease in delivery speed for the second quarter.
In response to the rising prices of raw materials and batteries, and the impact of the pandemic, Ideal Automotive is adopting multiple initiatives to mitigate the pressure.
On April 1st, during the launch of the new Ideal ONE, the company adjusted their prices considering the future price increases of raw materials. As of now, they have no plans to raise prices any further.
Ideal Automotive believes that the current battery and raw material costs have exceeded the reasonable range and should gradually fall in the long term. Although the high cost of batteries and raw materials will affect profits in the short term, they do not believe that the pressure will continue in the long term.At the same time, Ideal Auto will also continue to monitor the price changes of raw materials. The prices of raw materials for the next quarter have already been negotiated with suppliers.
Based on a long-term supply chain strategy, Ideal Auto will continue to expand its supplier network.
Cautious Expansion, Confidence in L9
Based on the sales of Ideal ONE last year, the price increase in April caused many consumers to place orders in late March, and sales slowed down at the beginning of April, with a decrease in orders. However, sales picked up in late April, and strong order flow reappeared.
Therefore, Ideal Auto is confident about the sales prospects of Ideal ONE and the upcoming delivery of Ideal L9.
For the second quarter of 2022, Ideal Auto expects vehicle deliveries to be between 21,000 and 24,000 units, an increase of 19.5% to 36.6% compared to the second quarter of 2021. Total revenue is expected to be between RMB 6.16 billion (USD 972.3 million) and RMB 7.04 billion (USD 1.11 billion), an increase of 22.3% to 39.8% compared to the second quarter of 2021.
Offline stores have always been an important sales channel for Ideal Auto.
As of April 30, 2022, Ideal Auto had 225 retail centers covering 106 cities, and operated 292 after-sales maintenance centers and authorized Ideal Auto sheet metal spray centers in 211 cities.
Affected by the epidemic, the planned number of 400 stores will be slightly slowed down, but overall, Ideal Auto still hopes to open as many offline stores as possible to increase sales channels.
In addition, to cooperate with Ideal Auto’s pure electric products, Ideal Auto is also actively promoting the construction of charging piles after carefully considering the needs of consumers. Currently, Ideal Auto’s relevant team is building and promoting charging piles on highways, focusing on the construction of high-speed charging piles between cities, especially large cities.
Attached is an excerpt from the key points of this performance briefing for reference:
Q: What assumptions is the company’s second-quarter forecast based on? When will L9 be launched?
A: The assumptions are based on the resumption of work at suppliers. Although many suppliers are still having difficulty resuming work, we see many good signs of resumption, and our orders are set based on the situation. L9 will be delivered in the third quarter. In the past two quarters, the supply and demand in the industry have been good, and the uncertainties are the resumption of the supply chain and the duration of the epidemic, which leads to a decline in consumption power.
Q: The profit margin for the first quarter is good. What is the guidance for the full year?
A: It is not a good time to provide new guidance.
Q: Does the company’s procurement policy change due to China’s insistence on zero tolerance policy?
“`A. We have been expanding our supplier network, and this will not change. In response to the epidemic, we will consider short-term adjustments. However, we will not make any significant changes to our supply chain strategy in the long term because the epidemic is a one-time event and the supply chain strategy is for the long term.
Q. The cost of batteries has increased, and the price of IDEAL ONE has increased by 18,000 RMB. Has IDEAL made any other adjustments, such as battery or vehicle configurations?
A. The price increase of IDEAL ONE on April 1st has taken into account the future rise of raw material prices. However, based on our current information, we haven’t seen the need to raise the price again.
Q. What is the order situation after the price increase? Will there be early purchases in March? What is the demand for high-end models after the epidemic?
A. After the price increase in April, many people placed orders at the end of March, so sales at the beginning of April were a bit sluggish. In the second half of the month, we saw strong order flow, so we still have confidence in the sales of IDEAL ONE.
Unless the epidemic continues to have a significant impact on the economy, demand for high-end sales should still be good. L9’s product strength is also strong, and even if demand is not good, we believe in our products.
Q. After the release of L9, five products will be released intensively in the next 18 months. How does the company achieve sustained explosive sales?
A. The product planning has been the core since 2019, and it is different from the past single-product strategy. The five platforms of extended range, 800V, pure electric, autonomous driving, and intelligent driving are developed according to this goal.
The success of IDEAL ONE is mainly due to successful positioning and reasonable product development. Different power will have different forms. Extended range is good for SUVs, but MPVs and sedans are not suitable. Pure electric is not suitable for full-size SUVs, and our pure electric products will not be like any other products in the current market.
Our products will not compete internally, and new products will be developed in the 25-30 price range.
There will also be different products in different price ranges. IDEAL ONE is positioned in the middle price range, and there will be extended range and electric products in the higher and lower price ranges, but all will have the above functions.
Our product strategy is similar to the iPhone, with a set of effective platforms launched at different price points, which is our core product strategy.
Q. With the increase in the cost of batteries and the insufficient supply of upstream lithium mines, will the supply of batteries limit the growth rate of new energy vehicles in the future? How do you view the increase in the price of lithium mines, is it long-term or short-term? How acceptable is it to consumers?
A. We believe that battery costs and raw material costs have exceeded a reasonable range, and in the long term, they should decline. This year, we still expect them to be at a high level. High-priced lithium prices will be passed on to consumers and will damage demand to a certain extent, but we have confidence in our product strength. After the price increase of IDEAL ONE in April, the orders are still strong.Q: At the end of April, what was the planned number of stores and will the impact of the epidemic slow down? After launching pure electric products, will the fast charging stations be built by itself?
A: We set an ambitious goal for store openings, and due to the impact of the epidemic, we have lowered our targets. However, offline stores are still an important means to promote sales, so we will still try to open more stores.
For charging stations, we have a team working on it. The team mainly establishes charging stations on highways, especially between big cities. For cities, we will carefully select locations based on consumer demand.
Q: What other revenue growth comes from? Some other manufacturers have annual or mid-year battery cost negotiations, what is our approach to negotiating?
A: We have agreed on the raw material prices for the next quarter with our suppliers, and we will also continue to monitor the prices in the future. Currently, the prices for next quarter’s raw materials have exceeded our original expectations.
Q: On product planning, there are many cars priced under 200,000 yuan on the market. Will we continue to focus on SUVs next year? What is our view on the 200,000 yuan range? Will we miss the opportunity for development if we don’t have products until the year after next?
A: Our product strategy for 2025 is still to serve families with children, so we need to have products with good size, all four-wheel drive, and strong intelligence. This is what we want to provide for our target users, so we will focus on the 25-30 range and cultivate the 35-40 range, and we will also participate in the 40 and above range.
After L9, there will be three new products next year, including a new range extender product, the first pure electric product, and the first mid-size car product priced at 200,000-300,000 yuan.
Q: When calculating battery costs, the cost has increased by 30%, but the Q1 gross profit margin has increased compared to the previous quarter. When will the cost increase be factored in?
A: The Q1 results have already taken into account some of the increase, and there will be a major increase in battery costs in Q2. At the same time, vehicle prices will also increase. Therefore, the gross profit margin for next quarter may not be as strong as Q1.
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.