The world of electric vehicles continues to evolve rapidly, and on May 20, 2024, Ideal Automotive’s quarterly earnings report sent ripples through the industry. Known 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 quarter. This decline raises questions about the sustainability of Ideal's remarkable growth trajectory.

Sales figures tell a compelling story as well. Vehicle sales revenue hit 24.252 billion yuan, which denotes a 32.3% increase when compared to the same period last year. Despite 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 quarter. The numbers drew a sharp reaction from investors and stock market observers alike.

More concerning than the sales figures were the company's plummeting profits. Ideal’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 quarter. When 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 expectations. Following 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 dollars. This 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. 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 yuan. With 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 fierce. The midrange segment—particularly for vehicles exceeding 200,000 yuan—encountered intense competition. As 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 forecasted. In 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 optimistic. At 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 units. Despite the high hopes, the performance fell drastically short. According 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 Ideal. In an effort to reinvigorate its lineup, Ideal introduced updates for the L-series models and initiated promotional price reductions. These changes led to a marginal decline in single-vehicle revenue from the previous quarter, falling slightly to 302,000 yuan. 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 yuan. These 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 vehicles. This 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 position. In 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 vehicles. Moreover, the timeline for launching its electric SUV has been postponed to the following year. Reports 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 cautious. Concerns continue to swirl around Ideal’s declining profitability and burgeoning inventory. The 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 vehicles. If 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. Having already witnessed a fall to 19.3% for Q1, there’s emerging concern that Q2 gross margins may fall even further.

Moreover, the disappointing performance of the L-series and MEGA has contributed to an overstock situation as production levels remained high despite waning demand. By the end of the first quarter, Ideal's inventory soared to 12.159 billion yuan, nearly double the 6.872 billion yuan figure seen at the end of 2023. This stock level closely approaches 1.5 months of sales volume based on average monthly sales costs.

With such elevated inventory levels, any continued shortfalls in anticipated sales could lead to price reductions or risks of inventory impairment—potentially harming Ideal's profitability. It seems clear that the market's short-term anxieties are not without merit, and many industry watchers will now look to see if Ideal can reverse this downturn and regain momentum in a fast-paced arena.

The unfolding narrative regarding Ideal Automotive is emblematic of the electric vehicle industry at large, where excitement and optimism can quickly give way to uncertainty and caution. The coming months will be critical as the company endeavors to address its challenges and reestablish its footing in a highly competitive marketplace.