The world of electric vehicles continues to evolve rapidly, and on May 20, 2024, Ideal Automotive’s quarterly earnings report sent ripples through the industryKnown for its focus on smart electric vehicles, Ideal reported total revenue of 25.634 billion yuan for the first quarter—a 36.4% increase year-on-year but a staggering 38.6% dip compared to the previous quarterThis decline raises questions about the sustainability of Ideal's remarkable growth trajectory.

Sales figures tell a compelling story as wellVehicle sales revenue hit 24.252 billion yuan, which denotes a 32.3% increase when compared to the same period last yearDespite this, the quarter-to-quarter comparison revealed a dramatic downturn of 39.9%. Ideal’s gross vehicle margin took hits, listing at 19.3%, reflecting a decrease of 0.5 percentage points year-on-year and a 3.4 percentage points drop over the previous quarterThe numbers drew a sharp reaction from investors and stock market observers alike.

More concerning than the sales figures were the company's plummeting profitsIdeal’s net profit slumped to 591 million yuan, which represents a year-on-year drop of 36.7% and a jaw-dropping 89.7% decline compared to the last quarterWhen adjusted for non-GAAP metrics, the net profit recorded was 1.276 billion yuan, reflecting a 9.7% year-on-year decline and a staggering 72.2% drop from the previous quarter.

These disappointing results didn’t align with market expectationsFollowing the release of the earnings report, Ideal’s shares on the Hong Kong Stock Exchange plummeted by 19.27%, leading to a market valuation drop of 40.8 billion Hong Kong dollarsThis plunge illustrates how investor confidence can swiftly change in response to quarterly earnings.

To put this in a broader context, Ideal’s share price had peaked at 182.90 Hong Kong dollars in late February 2024. Since then, the decline has been quite significant, with the stock closing at 80.65 Hong Kong dollars on May 21, effectively resulting in a reduction of over 50% in this short span.

Initially, Ideal had approached the past quarter with optimism

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The company had achieved a record total sales volume of 376,000 vehicles in 2023, which led to a robust total revenue of 123.851 billion yuan and a net profit of 11.704 billion yuanWith such a promising performance, Ideal Automotive had set a challenging target of delivering 800,000 vehicles in 2024, along with a first-quarter goal of 100,000 to 103,000 units delivered.

However, the first quarter’s competition in the electric vehicle sector proved fierceThe midrange segment—particularly for vehicles exceeding 200,000 yuan—encountered intense competitionAs a result, Ideal's L-series models witnessed substantial sales erosion during this period.

The actual delivery figures were much less than hoped; Ideal managed to deliver only 80,400 vehicles in the first quarter—20,000 fewer than forecastedIn sharp contrast, the burgeoning competitor AITO achieved impressive sales numbers of 85,800 units, reflecting an astonishing year-on-year increase of 639%. This underscores the shifting dynamics in the electric vehicle market and raises concerns about Ideal's competitive positioning.

Furthermore, Ideal's expectations surrounding its first fully electric model, the Ideal MEGA, proved overly optimisticAt launch, CEO Li Xiang expressed that the MEGA would become a bestseller and aimed to sell over 500,000 units, requiring an average monthly target of 7,000 unitsDespite the high hopes, the performance fell drastically shortAccording to retail data, sales for the MEGA in March stood at just 3,229 vehicles, with April seeing a mere 1,145 units sold.

The combination of intensified competition in the L-series segment and the disappointing performance of the MEGA contributed to an underwhelming quarter for IdealIn an effort to reinvigorate its lineup, Ideal introduced updates for the L-series models and initiated promotional price reductionsThese changes led to a marginal decline in single-vehicle revenue from the previous quarter, falling slightly to 302,000 yuan

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Yet, the overarching decline in sales pushed production costs upward by 3,500 yuan to 243,000 yuan, resulting in a further reduction of gross profit margin to 19.3%.

Understandably, the first quarter saw Ideal's research and development expenses recorded at 3.049 billion yuan, with sales and administrative expenses reaching 2.978 billion yuanThese expenditures marked decreases of around 10% from the previous quarter’s figures, yet they correlate with a significant disparity in overall sales when juxtaposed against the previous quarter’s delivery of 131,800 vehiclesThis stark difference undoubtedly hampered net profit performance and contributed to the sharp quarter-on-quarter decline.

The stock market response reflected widespread concerns regarding Ideal's profitability and market positionIn response to a perceived overestimation of operational strategies, Ideal has made adjustments, reducing its full-year sales target from 800,000 to between 560,000 and 600,000 vehiclesMoreover, the timeline for launching its electric SUV has been postponed to the following yearReports indicate that Ideal is also undergoing an internal restructuring that could involve reducing its workforce by over 18%.

Despite these proactive measures, investor sentiment remained cautiousConcerns continue to swirl around Ideal’s declining profitability and burgeoning inventoryThe competitive landscape in the automotive sector is increasingly fierce, prompting Ideal to introduce more affordable models like the Ideal L6—price dropped to 249,800 yuan—along with substantial reductions of 18,000 to 20,000 yuan across the entire L-series line and 30,000 yuan for the MEGA.

These pricing strategies could lead to significant challenges for Ideal regarding revenue and gross margins, as the company anticipates second-quarter revenues of between 29.9 billion and 31.4 billion yuan, with expected deliveries ranging from 105,000 to 110,000 vehiclesIf estimates hold true, the anticipated average sales price for the second quarter would settle at around 272,000 yuan, a drop of 30,000 yuan compared to the first quarter’s average price of 302,000 yuan.

The decline in projected average vehicle pricing adds further pressure on Ideal’s gross margins

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