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With a net loss of $2.7 billion, how Qin Lihongaround the bend

time:2022-09-13 17:24:51 source: browse:0

After experiencing a situation where sales have lagged behind the broader market over the past year and entering the product replacement phase, whether the new generation of products can take sales up a notch determines how far it can go.

Co-founder and President Qin Lihong shared the stage the company is in at the Chengdu Motor Show at the end of August: the past year has not caught up with the dividend in the face of rapid end-market growth. Delivering three new cars this year and laying out a mass-market brand is like being on a race track where everyone runs straight at the beginning and is established earlier and takes the lead in the bend, with the product replacement being the first big bend. In the bend the speed will adjust, out of the bend the speed will go back up and now Azera is almost out of the bend.

The sales figures are in line with Qin Lihong's judgement: in August this year, over 10,000 new cars were delivered, putting Azera back in the top three new car manufacturers.

But to meet its full-year target, Azera can't let up just yet. From January to August this year, a total of 71,556 new cars were delivered this year, which is still a significant gap from this year's sales target of over 150,000 cars, meaning that from September to December, the average monthly sales need to be close to 20,000 cars.

During the second quarter earnings call held on September 7, founder, chairman and CEO Li Bin expressed confidence in completing the full-year delivery target, but also said that the supply chain would be under more pressure in the fourth quarter.

Looking at the financial figures, gross margins declined due to factors such as rising raw material prices, and losses in the second quarter were higher than expected.

Revenue for the second quarter was RMB10.29 billion, up 21.8% year-on-year and up 3.9% sequentially, a single quarter high. However, net loss attributable to common shareholders was RMB2,745.5 million, expanding 316.4% year-on-year and 50.4% sequentially.

In addition to new car deliveries, the importance of overseas operations is also rising. in August, Li Bin went to the North American headquarters in California, USA, and next he is preparing to go to Europe. After Norway, this year will see official landings in Germany, the Netherlands, Sweden and Denmark.

The North American headquarters was set up back in 2016, but there has been no entry into the US market. Li Bin said on a conference call that the US is a very competitive market and the regulatory system is very different from China and Europe. For the US market, it will "think long term and prepare patiently".

In the second quarter of this year, the losses of the new car makers widened due to the Shanghai epidemic, chip prices and rising raw material prices. But compared to Xiaopeng and Ideal, Azera's losses widened more significantly this quarter. Net losses were 2.745 billion yuan, up 316.4% year-on-year; Xiaopeng's second quarter net loss was 2.709 billion yuan, up 126.1% year-on-year; and Ideal's net loss was 641 million yuan, an expansion of 172.2% year-on-year.

Behind this is the continued decline in automotive gross margins. For the whole of last year, the automotive gross margin was 20.1%, but in the first quarter of this year, the automotive gross margin was 18.1% and fell to 16.7% in the second quarter.

Because of the rising cost of raw materials, a price increase for the models was announced on 10 May this year. This was previously taken into account and the target for this year's automotive gross profit had been lowered, set at between 18% and 20%, but the performance in the second quarter showed that there was considerable pressure to achieve this target.

Vice President of Finance Qu Yu said the positive impact of the price increase for some models will be reflected in the third quarter earnings report. Most of the ES7s delivered in the third quarter, a version with high margins, are expected to have a small increase in vehicle margins in the third quarter. However, in the short term, battery costs are still facing a lot of uncertainty, which will have a negative impact on gross margins.

In addition, more new models are being delivered this year, which also means an increase in marketing and other expenses, with cost of sales in the second quarter at 8.952 billion yuan, up 30.2% year-on-year. However, Li Bin said he would increase investment in research and development, and the proportion of selling, general and administrative expenses is continuing to decline.

R&D investment in the second quarter reached RMB2.15 billion, up 143.2% year-on-year and 22.0% sequentially, almost half of last year's full-year R&D investment and considerably higher than the RMB1.265 billion and RMB1.53 billion spent by Xiaopeng and Ruiyuan in the second quarter.

In the conference call, Li Bin said that in core technology areas, including chips, Azera aims to build full-stack self-research capabilities. This time, Nvidia was restricted from exporting chips to China, and in the short term, no car chips are involved. The chip of the current arithmetic power can already support the needs of self-driving training, and Nvidia is still cooperating. Li Bin said he believes that the core capabilities can help to cope with the risk of industrial policy changes, but also to improve gross margins and technical competitiveness.

In addition to core technology capabilities such as chips, investments are also being made in mobile phones and self-research batteries. Li Bin once talked about the starting point of making mobile phones in an interview, "I want to give car owners a mobile phone with the best connected car experience".

For the battery business, Li Bin said in a quarterly conference call earnings report, has set up a battery team of more than 400 people, deeply involved in battery materials, cell and package design, battery management system, manufacturing processes and other research and development work.

A battery company executives said this, car companies will try to do their own battery sooner or later, the current concentration of the battery industry is too high, the head of the enterprise is more powerful, car companies lack the right to speak. But he also said that the current car companies self-research battery is mainly strategic, large-scale production and no advantage.

Previously, Li Bin had said that he planned to reach break-even in the fourth quarter of 2023 and hoped to achieve full-year profitability in 2024. At present, of the three Azure Minority companies, the only one that has ever achieved quarterly profitability is Ideal Auto.

Speaking to China Entrepreneur, Gui Lingfeng, director of Kearney Management Consulting Greater China, said that with star walk-in models not yet fully delivered on the one hand, and unabated operational investment on the other, further pressure on gross margins seems an inevitable outcome. This, coupled with the rising supply chain costs faced by the industry as a whole, including the new forces on their upstream voice and control of quality and costs, compared to traditional car companies have a certain gap, which will also superimpose the impact on the final gross profit level. "It's never a company that relies on product power alone either, and perhaps a better determinant of their new platform product sales is whether the dividends of their user operation model can be sustained." Gui Lingfeng said.

He Xiaopeng had pointed out in a public speech in July this year that one of the challenges Xiaopeng Auto faces in 2022 is how to find a better long-term balance between quantity and quality, and how to have a profitable and operationally effective quality. This is also a problem that the new car makers are facing at the moment.