Ideal: Profit flash crash! The time has come to test the faith

Dolphin Investment Research

2024-05-20 18:51Posted on the official account of Zhejiang Dolphin Investment Research

Li Auto (LI.O) released its financial report for the first quarter of 2023 after the Hong Kong stock market and before the U.S. stock market on the evening of May 20, Beijing time. After the farce of Mega, the price reduction of the whole L series, and the adjustment of the company's sales guidance after serious overvaluation, the first quarter still exploded, mainly two major thunder points:

1. Directly turned into a loss of nearly 600 million, and the operating profit was thunderous: The company reported an operating loss of nearly 600 million, and the operating profit expected by the market to be close to 1 billion yuan was directly the wrong direction of profit and loss. If the seller's expectations on Bloomberg are lagging behind, Dolphin Jun sees the layman's recent report, and the expectation is that it is also four or five billion operating profits, so the operating loss this time is a relatively absolute expectation difference.

2. The market is underestimating expenses! How did this loss come about? To put it simply, the investment in the nature of operating expenses (Opex) such as R&D and marketing/administration is much higher than the market expects, and the actual double expenses are around 3 billion, while the market estimates the R&D expenses at 2.5 billion+, and marketing/administration, etc. is less than 2.2 billion. As for Dolphin's own expectations, it is mainly marketing expenses, which are underestimated by about 200 million.

3. Gross profit margin implied in revenue guidance: In fact, compared with the thunderstorm of profits, Dolphin Jun believes that the gross profit margin hidden mine behind the revenue guidance may be more serious. The price of a single car implied behind the sales volume + revenue guidance (299-31.4 billion) may be around 272,000, at least 30,000 lower than the 300,000 + in the first quarter, if the ideal can not effectively pass on the price reduction cost to the upstream suppliers, there is a great risk in the ideal gross profit margin in the second quarter, and the current market expectation may be slightly lower than the 19% gross profit margin in the first quarter.

4. Other indicators in the first quarter are reasonable: under the sales brand, the sales revenue of key bicycles and automobiles is 302,000, and the gross profit margin of automobiles is 19.3%, which is basically reasonable. The price reduction in the first quarter was mainly concentrated in the inventory of the old model in January, and there were some high-priced cars supported by the Mega in the structure, and the unit price and gross profit margin of the car in the first quarter were okay.

5. Second-quarter sales guidance passed: The company expects sales of 10.5-110,000 units in the second quarter, and the sales guidance is basically within market expectations when the current weekly sales have recovered to 8,000 driven by L6.

Dolphin's overall view:

From the perspective of the overall performance expectation in the first quarter, the problem is obviously on the operating expenses such as R&D, sales/administration, etc., and the market expectation is too low.

In fact, the first quarter of this year can be said to be the ideal "wrong self-awareness period", and there is no time to adjust the pace of business investment: the first quarter is the failure of the ideal Mega with a complete capital, and in terms of resource preparation, Mega has also led to the original L-series operating rhythm disorder.

At the same time of poor sales, the ideal resource investment is still matched with the annual target of 65-800,000 vehicles, which inevitably corresponds to a relatively high investment in R&D and sales expenses.

Especially in terms of sales expenses, the number of stores that soared in the fourth quarter of last year was basically concentrated in the second half of the quarter, especially in December, and the cost of this kind of store climbing reached the first quarter, even if there were only 7 new stores in the first quarter, it will be fully included.

Of course, this year, due to the investment in R&D of pure electric vehicles and the layout of charging networks, the decline in R&D investment and capital expenditure may be limited, mainly to improve sales, production and internal operation efficiency.

But at least the pace of investment adjustment is already on the way, and there has been news of layoffs of nearly 5,700 people (accounting for nearly 20% of the total number of employees at the end of last year) recently, so to a certain extent, the operating loss caused by Opex exceeding expectations in the first quarter is not particularly serious, especially in addition to the general losses of peers other than BYD, it is also forgivable to use losses to maintain market share.

Dolphin Jun believes that the more serious problem is mainly the expected guidance of gross profit margin behind the guidance: the large number of sales implied behind the sales revenue of 270,000+ bicycles is still borne by L6 with low gross profit.

If the gross profit margin of L6 is only 15%, and the general price reduction of L7, 8 and 9 series from April is 4-6%, the gross profit margin of overall automobile sales may be stable at around 16-17%, which is already good, and the gross profit margin of the market may still be around 18-19%.

Overall, if the gross profit margin of auto sales slips to around 17% (the call will need to focus on the quantitative or qualitative guidance of any gross margin expectations), and this year's R&D expenses are relatively rigid, even if marketing/administrative expenses start to tighten, this year's operating margin expectations will need to be lowered.

In other words, after this performance, the expectations of the corresponding market need to be lowered, and the ideal stock price may have to continue to pull back, and the pullback to the appropriate position can discuss the ideal margin of safety.

Here's the detailed analysis

Since the ideal sales volume has been announced, the most important marginal information is: gross profit margin in the first and first quarters; Second, the second quarter of 24 performance outlook.

1. The gross profit margin of the car sales business was 19.3%, lower than the market expectation of 20.2%

The gross profit margin of Li Auto's business in the first quarter was 19.3%, down 3.4% from 22.7% in the fourth quarter of last year, and lower than the consensus estimate of 20.2% and the 20% guidance of Li Auto's previous results.

However, due to the accounting adjustment of 400 million to 500 million warranty reserves in the gross profit margin in the fourth quarter of last year (too much provision was made before, and now it is reversed), the actual gross profit margin of the car sales business in the fourth quarter of last year was 21.5%-21.7%, and the gross profit margin of the car sales business in the first quarter actually fell by 2.2%-2.4% quarter-on-quarter.

(Note: The third quarter of '22 is the gross profit margin of automobile sales after excluding the impact of 800 million+ contract losses, and the fourth quarter of '23 is the gross profit margin of automobile sales after excluding 400 million warranty)

From the perspective of the bicycle economy:

1. Under the fierce competition, the price of all old models has dropped by 4,000 yuan

The average price of a bicycle in the first quarter was 302,000 yuan, and a car sold 4,000 yuan less than the previous quarter, which was basically the same as the price of a bicycle estimated by Dolphin Jun in the first quarter guidance of 302,000 yuan.

And because of the ideal model replacement (L series launched in March 24 facelift), in January for the 23 models of the whole series of 3.3-38,000 yuan price reduction, dragging down the price of a single car in the first quarter, although the higher price of mega was also delivered in March, but only accounted for 4% of the sales in the first quarter, the average price of a single car in the last quarter fell by 4,000 yuan month-on-month.

2. The cost of a single vehicle increased by 3,500 month-on-month

In the first quarter, the cost of a single vehicle was 243,000 yuan, which was 3,000 yuan higher than the actual cost of 240,000 yuan after excluding the impact of the warranty in the previous quarter.

In this quarter, due to the impact of the off-season + intensified competition in automobile sales, automobile sales fell by 39% month-on-month, capacity utilization declined, and the amortized cost of a single vehicle rose month-on-month, while the price of lithium carbonate has basically stabilized in the first quarter, and the contribution to the cost side this year is limited, and the cost of a single vehicle has risen by 3,500 month-on-month.

3. In the end, the bicycle earned 58,000 yuan

From the perspective of the earning power of bicycles, the ideal gross profit of selling a car in the first quarter was 58,000 yuan, an actual decrease of 8,000 yuan from the previous quarter, and the gross profit margin of the overall car sold fell from 21.7% in the fourth quarter of last year to 19.3% in the first quarter.

Second, the sales guidance for the second quarter of '24 is in line with expectations, but the unit price implied by the revenue guidance has fallen sharply!

a) The vehicle sales target for the second quarter of '24: 10.5-110,000, which is basically in line with market expectations

In the first quarter, Ideal was affected by the off-season of automobile sales + intensified market competition, and its sales performance was sluggish, and Ideal sales in the first quarter fell by 30% month-on-month to 80,000 units. After that, Ideal quickly adjusted its strategy and reduced the price of all models on April 22, with prices ranging from 18,000 to 30,000 yuan.

The market is most concerned about whether the orders for the ideal model can be effectively recovered after the price cut, and the weekly sales of the L6 last week contributed 2,790 units + the impact of the price reduction of the whole series, the weekly sales have recovered to a level of nearly 8,000 units.

The second quarter delivery guidance of Ideal is 105,000-110,000, which is a 31-37% quarter-on-quarter increase compared with the 80,000 units delivered in the first quarter. Since the delivery volume of 25,800 units in April is known, it is implied that the average delivery volume in May/June will reach 4-42,000 units, which is basically consistent with the expected 10-110,000 units of the big bank, which also means that the L6 needs to be quickly increased in the case that the mega has been launched and is facing failure.

b) The unit price reduction implied by the guidance is close to 30,000 yuan!

Compared with the delivery guidance, the market is most concerned about the impact of the gross profit margin in the second quarter after the price reduction in April, but the unit price expectation implied under the revenue expectation in this quarter has fallen sharply!

The revenue of the first quarter of 24 given by the ideal is 29.9 billion to 31.4 billion, and the contribution is estimated to be 1.4 billion according to other income, and the unit price corresponding to the guidance in the first quarter of 24 is about 272,000 yuan, which is close to 30,000 yuan compared with this quarter!

The downward range of bicycle prices is mainly due to the fact that the ideal price reduction for all models on 4.22, the price drop is 18,000-30,000 yuan, and the price reduction ratio is about 4%-6%.

At the same time, the unit price is expected to drop by 30,000 yuan month-on-month, which is also affected by the model structure. Due to the launch of the low-price and low-margin L6 in April, the proportion of the model structure in the second quarter will increase significantly, which will also drive down the price of bicycles. However, the launch of the high-priced and high-margin Mega model failed, and the weekly sales of 5.6-5.12 fell to only 147 units, which contributed very little to the model structure and could not drive the unit price to rise.

The price of 270,000 yuan for a single vehicle implies that the gross profit margin in the second quarter is a "hidden thunder" to be exploded, and the market for the gross profit margin in the second quarter is only 18%-19%, which does not fully expect the unit price to fall by a large extent.

Fourth, R&D and sales expenses continue to be rigid

1) R&D expenses: continue to be rigid, and the pace of investment in the first quarter has not been adjusted

The ideal R&D expenses in this quarter were 3.05 billion, which was only 450 million lower than the previous quarter, and continued to remain rigid, exceeding market expectations of 2.56 billion.

It can be seen from the 3.05 billion R&D expenses in this quarter that the ideal is not adjusted in the preparation of R&D resources, and it is still invested in accordance with the original plan of 65-800,000 vehicles for the whole year, and from the seasonal changes in R&D expenses in the same period last year, 3 billion is actually a normal data without adjusting the investment rhythm.

Although there are currently layoffs (the number of intelligent driving teams will be reduced to less than 1,000 people), due to the investment in pure electric models this year, it is still expected to be relatively rigid this year.

2) Sales and management expenses: the accelerated laying of channels in the fourth quarter of last year + the announcement of new models in the first quarter is still rigid

The sales and administrative expenses in this quarter were 2.98 billion, down only 300 million from the previous quarter, significantly exceeding market expectations of 2.17 billion.

In terms of sales and administrative expenses, the company sold a large number of Mega and L series 2024 new cars in the first quarter, although the number of new stores in the first quarter was not much (only 7 new stores), but the peak of new stores in the fourth quarter of last year was actually in December last year (106 new stores), which means that the first quarter will be fully included in the sales expenses, and in the case of poor sales, in fact, there is no time to adjust the pace of sales expenses in the first quarter, and the market directly underestimated 1 billion yuan in this part.

But fortunately, Ideal has begun to adjust the investment in the Opex side, and the sales side has slowed down the opening of stores, and at the same time announced a new round of layoffs of 6,500 people, with a layoff ratio of more than 18%, of which the ideal sales and service personnel are the focus of layoffs (close to 12,000 by the end of 2023), and it is expected that the sales and service costs can be effectively reduced in the future of this year.

Fifth, revenue and gross profit margin are lower than market expectations

In the case that the sales volume has been announced, the ideal total revenue in the first quarter is 25.6 billion, an increase of 136% year-on-year, a decrease of 39% quarter-on-quarter, lower than the market expectation of 26 billion.

The lower than expected revenue was mainly due to the lower than market expectations in the automotive business, while other businesses (insurance, used cars, etc.) were basically the same as the previous quarter in the quarter, and other businesses contributed revenue of 1.38 billion yuan in the quarter, exceeding market expectations by 960 million yuan.

The lower than expected gross profit margin in this quarter was mainly due to the sequential decline in the gross profit margin of the automotive business, with a gross profit margin of 20.6% in the last quarter, lower than the market expectation of 21.1%.

6. The mismatch of OPEX input leads to negative operating profits!

Ideally, in the first quarter, the operating profit with heavy gold content turned negative! The absolute value fell by 3.2 billion from 2.6 billion in the fourth quarter of last year to -600 million in this quarter, and the operating profit margin fell from 6.3% in the fourth quarter of last year to -2.3% in the first quarter, which was significantly lower than the market expectation of 4%!

From the core point of view, the most important thing is because of the mismatch of the input side of operating expenses, and the investment rhythm is still prepared in accordance with the original sales target, and finally there is a difference of nearly 1.5 billion with market expectations, and the operating profit has turned negative for the first time since 23 years!

Net income remained positive for the quarter, mainly due to a contribution of interest income of nearly $1.1 billion, net income of $600 million, and adjusted SBC net income of $1.3 billion.

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