EHang Holdings Ltd (EH) 2022 Q1 法說會逐字稿

Thank you for standing by, and welcome to the EHang First Quarter 2022 Earnings Conference Call. (Operator Instructions)

I would now like to hand the conference over to Ms. Julia Qian. Please go ahead.

Hello, everyone. Thank you all for joining us on today's conference call to discuss the Company's financial results for the first quarter of 2022. The earnings release is available on IR website as well as from Newswire services.

Please note the conference call is being recorded and the audio replay will be posted on the Company's IR website. Today, EHang's management team, which include Mr. Huazhi Hu, Chief Executive Officer; Mr. Edward Xu, Chief Strategy Officer; Mr. Xin Fang, Chief Operating Officer; and Mr. Richard Liu, Chief Financial Officer, will successively give prepared remarks. Remarks delivered in Chinese will be followed by English translations. All translation is for convenience purpose only. In the case of any discrepancy, management's statement in the original language will prevail. A Q&A session will follow afterwards.

Before we continue, please note that today's discussion will contain forward-looking statements made pursuant to the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the Company's actual results may be materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties is included in the Company's public filings with the SEC. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law.

Also, please note that all numbers presented are in RMB and are for the first quarter of 2022, unless stated otherwise. With that, let me now turn the call over to the CEO, Mr. Huazhi Hu. Please go ahead, Mr. Hu.

(foreign language)

Below is the translation of Mr. Hu's remarks.

Thank you, Julia. Hello, everyone. Thank you for joining our earnings call today. Since the first quarter of 2022, we have been facing and mitigating external impact and uncertainties resulting from macroeconomics, geopolitics and the ongoing pandemic and its associated prevention and control measures. However, the more adversities, the more important to maintain stable development. As such, we are more focusing on strengthening ourselves, and have ushered in a good start in this year, which is mainly reflected in airworthiness certification, the key talent recruitment and market expansion.

First of all, let's dive into our airworthiness certification process, which remains our first and foremost priority of the Company's development at the current stage.

As the world's leading designer, developer and manufacturer of passenger-grade autonomous aerial vehicles which is dedicated to achieve commercialization, we are undoubtedly receiving attention and facing expectations across the globe, as well as the most stringent standards and tests from regulators. This is the pressure a pioneer of an innovative industry will inevitably bear, but is also motivation for us to constantly challenge ourselves and make breakthroughs.

After more than 10 months of in-depth communication and cooperation between our airworthiness team and the type certification team of the CAAC, the CAAC formally adopted and issued "Special Conditions for EH216-S AAV Type Certification" this February, which laid a critical cornerstone for our airworthiness certification and is also a groundbreaking milestone in the development of this innovative industry.

Distinct from the type certifications of other aircrafts operated by pilots, the advanced and innovative nature of EHang's product in the aspects of unmanned aerial technology and operation mode leads to newer challenges in compliance and verification for data links, complex systems and software. However, our technical team and airworthiness team are tackling challenges step by step, and are continuing to explore and refine the means of compliance.

Our Project Specific certification plan is about to get the CAAC's approval with which, we will reach a consensus with CAAC over expected timelines of the certification project, the certification basis, means of compliance, verification plans, after-certification management, etc. in order to accelerate the airworthiness certification.

In terms of production, on the basis of AS9100D, an International aerospace and aviation quality management system certification that we have obtained, we are also following the CAAC's "Production Approval and Supervision Procedures", with an orientation to secure type certificate and production certificate, to further refine and improve our quality, manufacturing technique, production and supply chain systems.

Meanwhile, we have produced validation-used AAVs for manufacturing conformity inspection. We are trying to overcome the impact of many factors such as the domestic epidemic, and work closely with the CAAC to complete the certification work as soon as possible.

Next, let's move on to talent acquisition. We are very pleased to have our Chief Operating Officer, Mr. Fang Xin join us in February. He is responsible for managing the Company's daily operations and business development. Mr. Fang has more than 20 years of experience in corporate management, technology product solutions sales, as well as tourism project development and operation, which will bring new driving force for the Company.

Recently, we also welcomed Mr. Zhang Jiangke, our newly-appointed Vice President of Production, on board. He will lead our production team in elevating EHang's manufacturing system to more mature, optimized and industry-leading levels. Mr. Zhang has more than 20 years of experience in aircraft manufacturing technology. Notably, he was the manufacturing technology head of China's first fully-composite general-purpose aircraft compliant with the CCAR-23, and also the Deputy Chief Engineer of the large amphibious airplane compliant with the CCAR-25. He had also worked for Unison Engine Components, a wholly-owned subsidiary of General Electric. We will continue to move forward talent recruitment and R&D while always keeping steadfast in continued innovations.

On the market expansion front, in addition to continuing our development in China, we have also received pre-orders for a total of 210 units of passenger-grade AAVs so far this year in multiple Asian countries, including Japan, Malaysia, Indonesia and Thailand. This is a testament to the strong customer demand and global prospect for our products, which is further illustrated by plans for introducing EHang's AAVs into various local markets and co-developing regional air mobility business with us. We expect these pre-orders will be delivered gradually upon obtaining the airworthiness certificate and lay a solid foundation for our future growth.

I will now turn the call over to our Chief Strategy Officer, Edward Xu, to bring more detailed performance. Thank you.

Thank you, Mr. Hu. Hello, everyone. In the first quarter of the year, our Company continued its focus on the strategic goal of "UAM Platform Operator", steadily upgrading towards a "Sales + Operation" integrated business model. EHang's unique AAV technology and smart command-and-control system will enable the underlying technologies for the future air traffic management, the AAV distributed operation and management, the digital operating and service systems, as well as the ecosystem expansion. These are also EHang's differentiated advantages and the fundamental driving force empowering our commitment to becoming a leading "UAM Platform Operator".

Based upon our positioning of the AAV operational platform, we have been actively cooperating with upstream and downstream industry stakeholders, such as the government, regulators, professional scientific research institutions, aviation component suppliers, telecommunication service providers, general aviation operators, the airport and road infrastructure operators, real estate enterprises, large commercial groups, as well as our clients and partners in the fields of tourism, transportation, logistics, emergency and rescue, medical and firefighting to jointly explore and develop a UAM ecosystem tailored for AAVs, thus leading and promoting the development of a safe, efficient and sustainable smart air mobility industry.

For instance, our recent customers and partners in other Asian countries all have extensive resources and experiences in their local markets such as the C.P. Group, a large multinational conglomerate in Thailand. These strong partners will stimulate expansion and growth for the Company's overseas business development at both sales and operation levels. Besides China, Asia is one of the significant strategic markets for us.

Now, let me turn the call to our COO, Mr. Fang, to address our progress on the business front. Mr. Fang, please go ahead. Thank you.

(foreign language)

Below is the translation of Mr. Fang's remarks.

Thank you, Edward. Hello, everyone. It has been more than 3 months since I joined EHang. During the period, the Company has been operating well and smoothly with a focus on its strategic goal of "UAM Platform Operator" and the "Sales + Operation" integrated business model.

Since the first quarter of this year, like most Chinese companies, we have been facing pressure, challenges and uncertainties due to the resurgence of COVID-19 in China and stricter travel restrictions. For example, our original schedule of offline communication and on-site inspection meetings with the CAAC's TC team had to be delayed, and the tourism related business also saw adverse impact as our operational trial flights were restricted at certain tourism sites.

Nevertheless, we believe these external impacts are only temporary. We remain confident in our long-term development and growth with our inherent core technology advantages, clear strategy, diversified product lines and solutions, ongoing process for our industry-leading airworthiness certification and comprehensive layout, ever-growing market demand and pre-orders, and our firm manufacturing foundation.

As noted earlier, since the first quarter of this year, our market expansion in other Asian countries has achieved positive progress initially. In January this year, we received a preorder for 50 units of EHang 216 series in Japan from AirX, a leading Japanese air mobility digital platform company and private helicopter charter service provider. In March, we partnered with AEROTREE, a leading Malaysian aviation company, and received a pre-order for 50 units of EHang 216 series and 10 units of VT-30. In April, we received a pre-order for 100 units of EHang 216 from an Indonesian aviation company, Prestige Aviation, and successfully performed a flight demonstration in Jakarta, the capital of Indonesia. Last week, we formed a strategic partnership with C.P. Group, one of the largest conglomerates in Thailand, and both parties plan to establish a joint venture in Thailand to introduce EHang AAVs to the Thai market with comprehensive cooperation.

Meanwhile, we continued to advance trial operations under the "100 Air Mobility Routes Initiative". With a focus on the Guangdong-Hong Kong-Macao Greater Bay Area, we have worked with our customers and partners like general aviation companies and real estate companies to launch 9 AAV operation spots in Guangzhou, Hezhou, Shenzhen, Zhaoqing, Sanya, Zhuhai, Yangjiang and other cities.

To date, more than 4,800 operational trial flights have been carried out in practical flight environments and application scenarios. Moreover, our commercial flight routes are in the process of continuous development, test flight, data accumulation and verification, in order to ensure adequate verification of flight safety and consistent quality with sufficient flight record.

Not only that, we are accelerating the layout of the digital low-altitude ecosystem. To ramp from our inherent software platform advantages, we are planning on low-altitude flight services and digital airspace management, to create various aerial operation scenarios for smart cities, such as aerial sightseeing, aerial transportation, aerial media, etc.

In addition, we are actively developing and building our online booking platform system, namely our operating system. The core system architecture and database construction of online flight bookings, together with flight scheduling, aircraft dispatching, task management and other functions have already begun to take shape. The initial flight scheduling and operating system has been developed and is running tests, and it is expected to put into daily operations in the third quarter of this year.

Overall, all AAV-related operations are being prepared in advance to ensure that the Company can quickly start commercial operational services after obtaining relevant regulatory certifications. With the joint efforts of EHang and all parties in the Urban Air Mobility industry, including the governments, regulators, customers and partners, we expect to achieve our mission in the near future to make everyone enjoy a safe, autonomous and eco-friendly air mobility experience.

I will now turn the call over to our CFO, Richard Liu, for financial results. Richard, please go ahead. Thank you.

Thank you, Xin, and hello, everyone. Before I go into details, please note that all numbers presented are in RMB and are for the first quarter of 2022, unless stated otherwise. All percentage changes are on a quarter-over-quarter basis unless otherwise specified. Detailed analyses are contained in our earnings press release, which is available on our IR website. I will now highlight some of the key points here.

In the first quarter of 2022, we continued to execute our strategies towards an urban air mobility platform operator. Additionally, we maintained our focus on the EH216 type certification process with the CAAC and further developing the "100 Air Mobility Routes Initiative" with increasing operational trial flights in selected locations in China. With these concerted efforts, we remain confident and positive on the long-term prospects of our business growth.

As a result, in Q1 of 2022, total revenues were RMB 5.8 million, compared with RMB 8.7 million in Q4 of 2021. The EH216 series of AAV deliveries in Q1 were 3 units, compared with 4 units in Q4. However, it's worth noting that recently we have seen increasing interest from customers in China and overseas. For example, we have secured AAV pre-orders of up to 210 units in Japan, Malaysia, and Indonesia, since the beginning of the year, which demonstrates strong demands and great potential for our products internationally. These pre-orders are expected to be delivered in the coming years.

Our overall gross margin has continued to maintain at a high level as compared to those of other companies with new energy mobility products such as electric cars. Our gross margin was 62.5% in Q1, up 2.4 percentage points from 60.1% in Q4 last year, mainly due to changes in revenue mix.

In Q1, our adjusted operating expenses, which are operating expenses excluding share-based compensation expenses, decreased by 49.1% quarter-over-quarter to RMB 46.1 million from RMB 90.4 million in Q4 last year. There were lesser provisions for accounts receivable related to the impacts of COVID-19 pandemic. Additionally, expenditure on R&D materials were lower than Q4 last year as they usually vary following development progress for different projects between periods.

With that, in Q1, our adjusted operating loss was RMB 41.7 million and adjusted net loss was RMB 40.9 million, each representing an improvement of roughly 50% from RMB 83.8 million and RMB 82.2 million in Q4 last year, respectively.

With regard to our balance sheet, as of the end of Q1, we had RMB 236.9 million of cash, cash equivalents, restricted cash and short-term investments. We will continue our efforts to effectively manage our operating expenditures.

That concludes our prepared remarks. Let's now open the call for questions. Operator, please go ahead.

(Operator Instructions) Our first question comes from Tim Hsiao from Morgan Stanley.

I've got a few quick questions. The first one, I think Mr. Fang during the presentation briefly touched on your collaboration with the C.P. Group announced last week. So just wondering, could you please share a little bit more about the details of business opportunities we are looking for, and how the business model will work, and what kind of contribution we should expect in the upcoming quarters? The second question is about production disruption, because I think a lot of supply chains that basically suffered from recent COVID lockdown, have you encountered any hiccups in terms of production, part sourcing or Type Certificate obtainment and all the operation related stuff? Do we see any risk of further delays in terms of the fixed certificate receiving? So that's my second question.

My last question is about our new models. Can you please share a little bit more about the operational updates on VT-30, when will we plan to get the certificate on this new model? So those are my 3 questions.

(foreign language)

(foreign language) Last week, we were very pleased to announce the strategic partnership with Thailand's C.P. Group, and we plan to establish our joint venture to launch our partnership. It reflects both companies' high recognition of each other and the willingness for a deep cooperation. This will lay a good foundation for AAV sales and urban air mobility business in Thailand in the future, and we look forward to initiating our collaboration.

(foreign language) As we know, the C.P. Group is not only one of the largest conglomerates in Thailand, it also has investments in 21 countries and economies. The group is comprised of 8 business lines and 14 business groups covering various sectors of agriculture industry and food, retail and distribution, media and telecommunications, e-commerce and digital, property development, automated and industrial products and pharmaceuticals, etc.

(foreign language) We see a lot of our potential use cases for our AAVs in the C.P. Group business fields such as tourism, logistics, health care, disaster relief, agriculture and so on.

(foreign language) Both of us plan to leverage our own expertise and resources in a long-term, comprehensive collaboration on the AAV product sales and marketing, regulatory compliance, the business development and infrastructure deployment, talent cultivation and so on for our future UAM operations, and introduce the safe, autonomous and the sustainable air mobility technology and solutions to the Thailand and more markets.

(foreign language) That is my answer to Tim's first question. Thank you.

(foreign language) In light of the recent COVID epidemic for your second question, as mentioned before, since the first quarter of this year, like most Chinese companies, we have been facing pressure, challenges and uncertainties due to the resurgence of COVID-19 pandemic in China and stricter travel restrictions.

(foreign language) In respect of our production, we didn't see any significant impact so far from the epidemic on our supply chain, because our suppliers are mostly in the Guangdong area in South China. Due to the changes of the global landscape, we saw some price increase of some raw materials. So we did some preparation with some inventory of the key components and materials beforehand.

(foreign language) In respect of the Type Certification, the process was affected and had been slowed down as our offline communication and on-site inspection meetings with the CAAC's TC team could not be normally conducted. Having said that, we have been trying our best to minimize the impact of the macro factors, including the recent domestic epidemic, and working closely with the CAAC to complete the certification work as soon as possible.

(foreign language) From the perspective of sales delivery and operation, our tourism-related business was also impacted as our operational trial flights were restricted at some tourism sites.

(foreign language) With regard to the revenue of this year, as we are facing many challenges and uncertainties, we are closely watching the development of the market conditions and also the certification progress, and we are adjusting our strategies to be adaptable accordingly. But we remain confident in the long-term outlook going forward.

(foreign language) That is my answer to your second question. Thank you.

(foreign language) For your third question, at current stage, our airworthiness certification work is focusing on the EHang 216-S product.

(foreign language) For the product of VT-30, we have maintained the principle of safety first, and there is no need to rush in the process of designing, R&D and testing for this product. We have been establishing this airworthiness system. We started with a lot of aircraft component tests first to ensure the overall safety of the aircraft, and then carried out a larger number of flight tests.

(foreign language) That is my answer to your third question.

The next question comes from Wu Di from TF Securities.

I have 2 questions as well. My first question is regarding to employees in the research and product development department. I see that we have around, I'm guessing, a 50% increase in personnel and mostly in the R&D side. Is it possible to give us a rough distribution between the 189 R&D personnel increase? For example, certain percentage is working on AAV and its new model and so on. Given the big increase in your R&D employees, what areas are those newly recruited employees mostly working on? For my second question, it is about the strategic partnership between EHang and C.P. Group. We see that EHang is actively forming key partnership with companies in each country of Southeast Asia. Are we going to see similar strategies in rest of the global regions? Most importantly, will we see similar strategic partnership in China as well?

Let me take your first question, and Edward will answer your second question regarding the market strategy. I understand the number of employees you're talking about is from our 20-F of 2021. The size of our R&D team has been steadily increasing as we continue to enhance our R&D capabilities, which is our core competitive advantage. Basically, the distribution of our R&D team follows our R&D strategy, which is to establish an integrated technology platform that is across different technological functional areas and lays a foundation to create synergy for developing different products. Overall, our R&D team is roughly 40% in hardware development and 30% in software development, with the rest in other major areas such as certification and testing, etc. The core team of our R&D team has been stable and with the Company since early days. They have accumulated abundant and leading experience and insights in AAV and eVTOL technologies. The big increase in 2021 you mentioned, was evenly distributed with an emphasis on the certification and testing areas, as the year 2021 was an important year for our certification process. I hope this answers your question.

I'd like to answer your second question. Regarding our global strategy forming partnerships, basically, as we mentioned earlier, we've positioned ourselves as "UAM Platform Operator". We understand that the UAM industry is a whole ecosystem. We are trying our efforts to build this whole ecosystem, which means that it consists not only the regulators, but also different partners, in which we are cooperating with real estate operators, amusement park operators and conventional aviation operators, etc. As you can see, this time, we just formed a very good partnership with the C.P. Group in Thailand, which is very honorable with high reputation and strong capabilities in Thailand. Similarly, we are also seeking different partnerships with different countries and markets. But as you know that our focus is in China first, which means that in China, we had built extensive partnership with quite a number of reputable companies which include the Greenland, Hong Kong and Shenzhen Expressway and Guangzhou Infrastructure Communication Group, etc. We have quite a number of solid partners in China. In overseas market, as we mentioned earlier, we focus on Asia, including Japan, Korea, and Southeast Asian countries such as Thailand, Malaysia and Indonesia, etc. We actually see very good interest from those markets. Furthermore, we are also working with some European and U.S. market partners, which means that you can see we had a very good relationship with these partners. Hopefully, you are going to see more partnership in the future.

There are no further questions at this time. I'll now hand the call back to Mr. Liu for closing remarks.

Thank you, operator. This is Richard Liu. Thank you all for participating on today's call and for all your support. We appreciate your interest and look forward to reporting to you again next quarter on our progress. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.