EHang Holdings Ltd (EH) 2022 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the EHang Second Quarter 2022 Earnings Conference Call. As a reminder, we are recording today's call. Now I will turn the call over to Julia Qian, Managing Director of the Blueshirt Group Asia, EHang's IR firm. Ms. Qian, please proceed.

Hello, everyone. Thank you all for joining us on today's conference call to discuss the Company's financial results for the second 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 management team, which includes Mr. Hu Huazhi, Chief Executive 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 capable law. Also please note that all numbers presented are in RMB and are for the second 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.

[Interpreted] Thank you, operator and Julia. Hello, everyone, thanks for joining our earnings call today. In Q2, EHang actively adapted to the macro environment at home and abroad. The world was gradually recovering from the continued impact of the COVID pandemic. We were able to achieve excellent results. In such environment, we not only spent more time and efforts to strengthen ourselves, but also continued to expand our orders, preorders, deliveries and customers, especially in China and Southeast Asia. This drove up our total revenue in Q2 by a significant increase of over 150% from Q1.

We continued to expand our strategic partnerships with business and finance partners, such as the C.P. Group, one of the largest commercial companies in Thailand, and the Agricultural Bank of China. These partnerships will be of strong support to EHang's long-term business development in the future. Our COO and CFO will elaborate on them later.

The most important thing for us at present is the EH216-S airworthiness certification, and the process has progressed into new phases since this year. It is based on our full understanding of the comprehensive set of airworthiness concepts that have been summarized by Western countries with their experience in recent century. This set of concepts have been embedded in the entire process of making an aircraft from design to mass production, which has an essential and profound influence on the safe production and operation of aviation products. Here, I would like to express my sincere admiration and appreciation to the pioneering predecessors, who contributed their valuable experience with tremendous efforts.

However, before the CAAC issued the Special Conditions, there had not been any available airworthiness certification standards applicable to this new type of aircraft, like EH216. In the early days, our AAVs conformed to our own safety standards, based on which we explored to start productization and production.

As there was no precedent, we had closely worked with the CAAC to further develop this new type of airworthiness standards together according to the relevant airworthiness concepts and principles in the past several months. We had established the aircraft design and production management systems, which not only meet the requirements of aviation industry, but also are compatible with our own management system. With that, every member of our team can work in line with airworthiness concepts and conforming to the scientific management and design methods, so as to enable every process in a controlled and regulated manner from design to production of EH216. In this regard, we finally reached a consensus with the CAAC expert team in Q2 on our Project Specific Certification Plan, and the Certification Basis, as well as the Certification Plan, respectively.

In respect of the airworthiness process for this unique unmanned aircraft system, we have not only referred to CCAR 23 airworthiness regulation and internationally recognized standards such as ASTM, SAE, RTCA, MIL, etc., and learnt from the configuration management and airworthiness experience of conventional aircraft OEMs, but also made innovation exploration on new topics in the unmanned aircraft system, including the unmanned system, data link and ground control system. We worked out 13 means of compliance applicable to EH216. Based on our previous experience, we are continuing carrying out internal tests according to the airworthiness standards and planning the activities for the demonstration of compliance.

Based on the CAAC and the Guangdong Provincial Government's Strategic Corporation Framework Agreement for Civil Aviation Development in Guangdong, they recently emphasized on speeding up developing the aviation manufacturing industry and new business forms of general aviation. Both the CAAC and Guangdong government have clearly put pushing forward relevant UAM pilot projects and strongly pushing forward the EH216-S AAV type certification process as their key tasks in 2022. It encouraged us and further enhanced our confidence to obtain the Type Certificate.

Moreover, in June, the CAAC newly established an aircraft airworthiness branch center in Guangzhou, where our headquarters is located, to be in charge of the airworthiness certification work for small aircrafts nationally. Currently, the VT-30, one of the products in our VTOL aircraft series, is at the stage of product design, airworthiness preparation and component verification. We believe that these favorable conditions and policy support in Guangdong can lay a solid foundation for VT-30 design, test flights, and airworthiness certification.

Next, I will turn the call over to our Chief Operating Officer, Mr. Xin Fang, for business highlights in Q2, thank you.

[Interpreted] Thank you, Mr. Hu. Hello, everyone. As the COVID situation in China have gradually stabilized since Q2 of this year, the tourism market has also been recovering steadily. The post-pandemic era expediated the transformation of tourism, such as scenic spots, by bringing innovative business models to scale up emerging consumption. In June this year, the CAAC issued the "14th Five-Year Special Plan for General Aviation Development", to promote the development of low-altitude flight tourism by supporting related authorities to expand aerial sightseeing in more scenic spots, and to establish a low-altitude flight tourism network connecting scenic spots, resorts, theme parks, and other tourist destinations.

Under the national policy of supporting integrated development of aviation and tourism, we formed a strategic partnership with Tianxingjian Cultural Tourism Investment company, an affiliated enterprise of the Jishou city government in China's Hunan province, with the plan to develop a scenic flight project at the Aizhai Wonder Tourist Area, a national 5A-level scenic spot in Jishou. In Q2, we delivered 5 units of EH216 AAVs for the customer's initial purchase order, and initiated trial flight operations in Aizhai. The customer plans to purchase additional 25 units of EH216 in the future. This project creates a replicable public-private business cooperation model for low-altitude flight tourism, which is helpful for expanding our ongoing business projects in other regions.

According to statistics, China has more than 300 5A-level scenic spots and over 4,000 4A-level scenic spots, indicating tremendous market potential for expanding low-altitude flight tourism. Against this backdrop, we are making excellent progress in our "100 Air Mobility Routes Initiative". So far, more than 5,700 operational trial flights of EH216 have been conducted in practical aerial sightseeing scenario at 11 operation spots in China. After obtaining the airworthiness certificate, EH216 is expected to provide our tourism customers and end-users, with a unique, safe, technologically advanced, cost-effective and pleasant low-altitude flight tourism solution and experience.

In Southeast Asia, where the UAM market is also in high demand and has rich use cases, we are actively expanding our presence through the empowerment of local partners. In Q2, we received a pre-order for 100 units of EH216 AAVs from an Indonesian aviation company Prestige Aviation, which is the largest pre-order we have received in Asia so far. We have also reached a strategic cooperation with C.P. Group, one of the largest conglomerates in Thailand, with an intent to establish a joint venture for introducing EHang AAVs to Thailand. The two parties also intend to carry out comprehensive cross-sector cooperation in aerial tourism, air logistics and transportation, urban air mobility and smart city management in the future.

We expect signs of business recovery in the second half of this year as we are actively adapting to the macro environment, continuing moving forward on EH216 certification, securing more product orders, and expanding our regional aerial media business in the Europe market. We remain confident in our growth potentials and long-term outlook given our core values and unique advantages.

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

Thank you, Xin, and hello, everyone. Before I go into details, please note that all numbers presented are in RMB and are for the second 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 second quarter of 2022, our strategic shift towards an urban air mobility platform continued as we aim for a solution-and-operational service-integrated model. The ongoing efforts are yielding positive results with increasing deliveries in China and orders or pre-orders in Asia, reflecting our solid business strengths. As we continued to focus on the EH216 type certification process, we also made further development in our "100 Air Mobility Routes Initiative" with continuously increased operational trial flights as well as expansion of operation spots in China. Additionally, we struck a strategic partnership with the Agricultural Bank of China Guangzhou Branch for RMB 1 billion indicative credit facilities to support our strategy execution and business growth in the following years.

In Q2 of 2022, total revenues were RMB 14.6 million, representing an increase of 152.5% from RMB 5.8 million in Q1. This was along with a 166.7% increase in EH216 AAV deliveries in Q2 to 8 units, from 3 units in Q1. Demands for our AAV products have been increasing both in China and internationally. One typical sample in China is that, in Q2, we delivered 5 units of EH216 AAVs to a local government-backed tourism operator in Hunan province for aerial sightseeing operational services. The customer plans to buy additional 25 units if the project progresses. Another example is that we have obtained pre-orders of up to 210 units from customers in Japan, Malaysia and Indonesia since the beginning of this year and we see the trend of further expansion in Southeast Asian markets.

Additionally, we were able to further drive a 4.6 percentage points expansion in gross margin to 67.1% in Q2 from 62.5% in Q1, even though our overall gross margin had already been at a high level compared to other new energy mobility product companies such as electric car companies. This continues to show our competitive edge as the first mover in the global UAM and eVTOL industries.

In Q2, our adjusted operating expenses, which are operating expenses excluding share-based compensation expenses, were RMB 63.4 million, compared with RMB 46.1 million in Q1. The increase was mainly attributed to continuous R&D of new AAV models and the ongoing EH216 certification process, both of which are progressing steadily, and professional service fees related to annual report filing and other legal matters and additional provisions for accounts receivable in light of impact from the ongoing COVID-19 epidemic and control measures in China.

With that, in Q2, our adjusted operating loss was RMB 51.2 million, compared with RMB 41.7 million in Q1. Our adjusted net loss was RMB 50.8 million in Q2, compared with RMB 40.9 million in Q1.

Our balance sheet remained solid with RMB 240.7 million of cash, cash equivalents, restricted cash and short-term investments as of the end of Q2, even with a slight increase of RMB 3.8 million quarter-over-quarter. With that, we believe our business is on a good track.

That concludes our prepared remarks. Let us now open the call for questions.

(Operator Instructions) We have the first question from Tim Hsiao.

I actually have 2 quick questions. The first one is we saw EHang having been making some good progress in terms of customer acquisitions, especially in Asia over the past few quarters. Just wondering how many pre-orders we have got so far and when do you plan to start the delivery? In addition, could you also get some updates regarding to our collaborations with the government? What size of the contribution should we expect and when do we think it is going to kick in? My second question is about the funding, we noticed that we have the partnership with the Agricultural Bank of China, and that entitle us to around a billion indicative credit facilities. Just wondering how we are going to use that and are you going to accelerate the investments in upcoming months? What kind of cash burn rate does it look like right now? Could you share a little bit more information about our investment plan in the upcoming quarters?

[Interpreted] Hi Tim, this is Xin Fang. Let me take your first question about orders. Since the beginning of this year, we have received a total of 210 units of pre-orders for passenger-grade AAVs in the Asian market.

More than 200 units of pre-orders in Asia are expected to be delivered in about 3 years, subject to customer needs and our obtaining the type certificate in China or other relevant certifications in the local market.

In addition to the pre-orders, we also have received some customer orders, both in-hand or in discussions, which are able to be quickly delivered in the short time based on the customers' demands. For example, in Q2, we received the orders from the customer in Jishou and also completed the deliveries for the first batch of 5 units, which have already been put into trial operations.

At present, we are in talks with some local governments regarding potential cooperation and plans to set up operational centers in different regions. In order to actively prepare for the commercial operations once we obtain the type certificate, we have already signed a strategic cooperation agreement with certain governments. Upon this agreement, there will be some purchase orders, which plans to be completed successively within this year and expected to make a notable contribution to our full year results.

Hi, Tim. This is Richard. I will take your second question.

Basically, this partnership is the first time that the Agricultural Bank of China, as one of the largest commercial banks, to partner with and grant such indicative credit facilities to us, an innovative eVTOL technology company. This represents that traditional financial institutions have started to tap into this type of new industry. It is a good sign not only for EHang, but also for the industry. Basically, the RMB 1 billion indicative credit facilities cover comprehensive banking products and services of Agricultural Bank of China to support our operations and business development over the following years, including regular credit loans, financial leasing, supply chain financing, etc.

So as a starter, they have extended to us a RMB 30 million credit loan. Further, we have been discussing the financial leasing option to facilitate our business growth after the TC is obtained. Thus, in the near term, money will be used more towards supporting operations and sales growth. In respect of investment, in terms of CAPEX investment, as we have an existing production facility, we will see how the sales would grow to plan for any future CAPEX needs.

Regarding the cash burn, as you know, EHang has been running a lean operation in China, and this is somewhat EHang's unique style if compared to others. You probably can get a feeling from our cash flow statement. If you ask for current level, to give you a rough idea, the current average monthly cash burn rate of our operations is around RMB 17 million or roughly USD 2.5 million. If annualizing it, you would get around RMB 200 million or roughly USD 30 million. As it is expected that sales would increase after the TC is obtained. The operational cash flow or the cash burn situation is expected to be further improved following that.

Hope this answers your question.

Yes. Thank you very much, Mr. Fang and Richard for a detailed sharing.

We are taking the next question from Di Wu.

I have 2 questions as well. The first one is could the management team elaborate a little bit more on the business model for the AAV for the tourist attraction corporation? For example, will the tourist attraction be leasing or buying the AAV from EHang or who will be operating the AAV and such? For my second question, now that we have seen that there are many competitors now in the making of AAV, what would the management team feel is the most important innovation to stay AAV industry leader, for example, like battery or noise cancellation technology, or propeller technology or like having a command control center, what will be the most crucial and how is EHang doing in that particular area?

[Interpreted] This is Xin Fang. I will take your questions. The demand and business model for aerial sightseeing in scenic spots have existed for a long time. The traditional ways including the cable cars and helicopters, which can not only provide a tourist with a fresh aerial sightseeing experience, but also serve as point-to-point transportation vehicles in scenic spots, which are favored by both tourists and scenic spot operators.

However, the traditional way has certain limitations such as the high cost and expenses for infrastructures, aircraft acquisition and maintenance and professional pilots. Therefore, the scenic spot operators cannot have a good return on investment.

The key innovation of our AAVs is that they are designed for multiple use cases with features of high safety, efficiency, and low-cost operations reflected in our aircraft structure and full redundancy safety design and fleet management. In terms of the aerial tourism, the EH216 can realize stable flight in low-altitude based on our multi-rotor structure, and it can be centrally monitored and managed. What's more, it saves the high cost of having professional pilots.

The scenic spots as our customers can purchase or lease our AAVs or only providing infrastructures for qualified operators who can take charge of flight monitoring and operational support.

EHang provides both the AAV sales and the UAM operational services to our customers. Taking our partnership with Jishou customer as an example, in Q2, our customer not only placed a purchase order for the EH216, but also plans to work with us to develop a scenic flight project at Aizhai Wonder, a national 5A-level scenic spot in Hunan, through both parties' complementary resources and joint operations.

Regarding your second question, as an industry leader, our autonomous technologies are our leading competence in the AAV industry, while other competitors are still at the stage of manual control phase. In terms of autonomous technologies, we have invested all our efforts from day one, including flight control algorithms, the flight lift systems, battery systems and also the command-and-control systems, altogether, integrated our unmanned aircraft system. With continuous iteration and evolution of these technologies, we are able to stay ahead in the industry. That is the answer to your questions.

We are going now to take our next question from Verena Jeng.

[Interpreted] I have 2 questions. First, on the technology. Any differences in the entry barrier across the logistics, firefighting, and also the passenger AAV? Can these different products share the same production line? What is the roughly unit level to breakeven? My second question is on safety. Could we take over the flight if any emergency happens? If hackers paralyze the system, what can we do to let AAV safely landed?

This is Richard. Thanks for your question. Let me try to answer your questions. Our EH216L, the logistic model; EH216F, the firefighting model are essentially within the EH216 series of products. Our approach has been, first, focus on developing a fundamental model for passenger carrying use, which the corresponding model is EH216-S. It requires large payload and the highest safety level and then further developed EH216L and EH216F on top of the fundamental model based on different specific needs. The core modules such as flight control, propulsion, etc., are the same actually. The relevant functional parts are tailor-made to suit for different needs.

With that, I guess, you probably can tell now the entry barrier could be on the core technology part, which are shared and require a large amount of time and manpower to be developed. As to the production line, it can also be shared.

In respect of breakeven, we can look at them as a whole. To give you a rough idea, it is estimated that annual sales, to give you a rough range, around 250 to 300 units of EH216 series of products could carry the Company to breakeven on adjusted basis given the current levels of expenses and prices.

Regarding your second question, our AAV flies by itself along the pre-determined flight routes in normal situation. In case of emergency, the AAV usually can deal with the situation by itself. Having said that, if necessary, the ground operational staff who are monitoring the flight can take over the control through the ground command-and-control system. In respect of your hacking question, the connection between the AAV and the command-control system is through wireless private network and separated from the public network, and there are high-level cyber-security protection measures.

So in case the ground command-and-control system would be hacked, the AAV can still fly by itself to complete the pre-determined flights or find the nearest safe area to land.

There are no further questions. I will now hand back the conference over for closing remarks. Please go ahead.

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

This concludes the conference for today. Thank you for participating. You may all disconnect.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]