EHang Holdings Ltd (EH) 2022 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the EHang Fourth Quarter 2022 and Fiscal Year 2022 Earnings Conference Call. As a reminder, we are recording today's call. Now I will turn over the conference to Anne Ji, EHang's Senior Director of Investor Relations. Ms. Anne, please proceed.

Hello, everyone. Thank you for joining us on today's conference call to discuss the Company's financial results for the fourth quarter and fiscal year of 2022. The earnings release is available on the Company's IR website. Please note the conference call is being recorded and the audio replay will be posted on the Company's IR website.

On the call today, we have Mr. Huazhi Hu, our Founder, Chairman and Chief Executive Officer; Mr. Xin Fang, Chief Operating Officer; Mr. Richard Liu, Chief Financial Officer; and Nick Yang, an Independent Director of the Board. The management team 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 fourth quarter and fiscal year of 2022, unless stated otherwise.

With that, let me now turn the call over to our CEO, Mr. Huazhi Hu. Please go ahead, Mr. Hu.

[Interpreted] This is the English translation of Mr. Hu's remarks. Hello, everyone. Thank you for joining our earnings conference call today. 2022 as a year of opportunities and challenges for EHang. Against the everchanging backdrop of macroeconomic volatilities, political uncertainties, and the pandemic, we remained committed to our strategies and continued to make meaningful progress during the year in our main priorities of airworthiness certification, business development and ecosystem establishment. This not only strengthens our resilience for long-term development, but also reinforces our leadership in the global urban air mobility industry.

In the fourth quarter of last year, the EH216-S Type Certification successfully entered the final phase of demonstration and verification of compliance. However, due to massive infections after China lifted COVID control policies, until this year's Chinese Spring Festival holiday, the relevant TC progress was delayed to a certain extent. But now, we have manufactured the conforming aircraft for the purpose of airworthiness verification at our Yunfu Production Facility, passed the aircraft manufacturing conformity inspection, and are conducting compliance tests at flight bases in Guangzhou, Hezhou and other locations.

In February this year, the CAAC Chief Engineer, and officials from the Department of Aircraft Airworthiness Certification, the Department of Flight Standard, the office of Air Traffic Regulation, the Central and Southern Regional Administration, as well as experts from the TC team, inspected the flight base in Hezhou. We worked together effectively, and the joint efforts of all parties not only accelerated the compliance flight tests and other review process in the final stage, but also made plans and arrangements for the next steps, which boosts our confidence in post-certification operations.

As of today, we have been actively carrying out the work for demonstration and verification of compliance based on the means of compliance agreed by the CAAC. Our work includes submission of compliance test plans, laboratory tests, ground tests and inspections, flight tests, etc. At present, over 70% of the compliance tests have been either completed or to be signed soon. It means we have substantially completed over 90% of the entire type certification process.

We believe EHang is leading among the few eVTOL type certification projects that have been officially accepted by civil aviation regulators worldwide. Although the TC process for such a new innovative aircraft is full of difficulties, I'm proud of our team's unwavering efforts and groundbreaking achievements over the past few years. At the same time, we are very grateful to China's civil aviation regulator, the CAAC, for their full support and high attention to this innovative AAV. We believe we will bring the expected good news in the near future.

Therefore, we believe that EHang will take a lead in entering a new era of air mobility in 2023 and anticipate witnessing an epoch-making milestone in the global UAM industry.

What is worth mentioning other than EHang being the eVTOL industry leader is the large Chinese market we are rooted in and its huge potential for the UAM development. According to Morgan Stanley's forecasts, China is expected to account for about 30% of the global UAM market.

In recent years, Chinese central and local governments have introduced a series of supportive policies for emerging sectors related to unmanned civil aviation, electric aviation, low-altitude economy, urban three-dimensional transportation, aviation tourism and so on. These have provided us with beneficial policies, a favorable market environment and a growing demand from government and enterprise customers. Our COO, Mr. Xin Fang, will talk more about it later.

On the other hand, China has been a leader in the global UAV industry. It has accumulated profound expertise in the aspects of the upstream and downstream industry chain and professional talents. Besides, China has supply chain advantages of higher cost-effectiveness and delivery efficiency. These lay a solid foundation for our product R&D, manufacturing and product delivery.

In overseas market, we are committed to actively engaging in the Asian market and participating in multiple air mobility projects in Europe as an eVTOL pioneer. We will continue collaborating with local customers, partners and governments to jointly explore a safe, intelligent, efficient and sustainable UAM operational system.

To date, the EH216 series AAVs have successfully completed over 34,000 autonomous flights across 12 countries in Asia, Europe and Americas, which is the top flight record in the global eVTOL industry. Looking ahead, we will remain dedicated to expanding our reach and bringing our AAV solutions and flight experiences to more customers, partners and passengers worldwide.

In December last year, we are thrilled to welcome Mr. Nick Yang join our board of directors as an independent director. Although he is a new member of the board, he is also our old friend as one of EHang's early investors, who has been following the Company's growth and the development of the UAM industry for many years. With over 20 years of capital markets experience and entrepreneurial experience in multiple listed companies, I believe that Nick will bring strong support to EHang's growth in our new stage. Today, we also have Nick with us on the call, and he will be available to communicate with everyone in the Q&A session later.

Next, I will turn over the call to our Chief Operating Officer, Mr. Xin Fang. Thank you.

[Interpreted] This is the English translation of Mr. Fang's remarks. Thank you, Mr. Hu, and hello, everyone. Since the fourth quarter of last year, our top priority remained the TC project. We are pleased to report that we are now in the final sprint. In preparation for post-certification sustainable long-term growth, we are capitalizing our leading first-mover advantages to explore both domestic and overseas markets. We have been expanding our business and cooperation opportunities throughout the entire industry chain related to air mobility and the low-altitude economy. By building up order demand, enhancing our partnership and collaborations, we are laying a solid foundation for commercial delivery and operational services following certification.

In China, the tourism industry, which had seen heavy impact from COVID, has rapidly recovered this year as the control policies were lifted. The China Tourism Academy predicts that in this year, the number of domestic tourists will reach 4.55 billion, up 80% compared to last year, and domestic tourism revenues will reach RMB4 trillion (about US$580 billion), an increase of 95% compared to last year. This presents excellent development opportunities for the low-altitude tourism, the first market where we plan to launch commercial operations after certification, as well as for our tourism industry customers.

Since last year, we have been dedicated to developing our domestic market in China. Against the backdrop of macro policies promoting low-altitude tourism and economy, building a modern integrated transportation system, and developing new smart cities, we have continued extensive and deep business cooperations and industry layout with local governments, tourism and aviation enterprises in many provinces and cities, such as Guigang in Guangxi, Jishou and Changsha in Hunan, Huangshan in Anhui, Qingdao in Shandong, Ganzhou and Jiujiang in Jiangxi, Xi'an in Shaanxi, Hechi in Guangxi, Xinjiang, Shenzhen in Guangdong, etc.

To date, we have received orders for over 100 units of the EH216 series AAVs in China. These orders are expected to be fulfilled within 1 to 3 years after the TC process is completed. Additionally, with the approach of TC completion, there has been a significant growth in our customers' inquiries and demand for new orders from all over China.

For example, most recently, Xiyu Tourism, a leading tourism company in Xinjiang and listed on the Shenzhen Stock Exchange, announced its intention to sign a cooperation framework agreement with us. It plans to establish a joint venture, and operates a minimum of 120 units of EH216-S or our comparable passenger-grade AAVs in 5 years, for conducting low-altitude sightseeing tourism projects in key scenic locations in Xinjiang such as the Heavenly Lake of Tianshan.

Another example, in March this year, Xi'an Aerospace Investment Company signed a strategic partnership agreement and indicative purchase order with us. They plan to buy 20 units of EH216 aircraft within 3 years, in order to develop a smart air city and a low-altitude flight demonstration area in the Northwest China.

Meanwhile, we welcome partnerships with strategic investors who are willing to cooperate with EHang for long-term growth. For example, last December, Qingdao West Coast New Area reached a long-term strategic partnership with us over investment and business. It has not only provided US$10 million investment, but will also facilitate the local governments' applications of our entire product portfolio, which is expected to generate product demand worth of RMB100 million (about US$15 million) within the next 2 years. They will also provide full support to our local business operations, sales and services, production and infrastructure construction among other things, with the goal of building Qingdao city into an outstanding world-class pilot zone for UAM demonstration and applications.

In the future, we plan to adopt an integrated business strategy by both selling products and providing operational services for government and enterprise customers. Based on our principles of safety first, high standard, low costs, and high efficiency, we will utilize a complete set of AAV command and control system platform and UAM operation system to support our 3 major businesses, which are air mobility, smart city management and aerial media. Therefore, we are able to meet our customers' demand for diversified applications in low-altitude tourism, urban transportation, aerial logistics, firefighting emergency, medical rescue, smart city management and aerial media, etc.

In the past 2 years, under the CAAC's guidance, we have been taking a lead in carrying out trial operations while conducting type certification. To date, we have developed 18 operation spots for aerial sightseeing in 16 Chinese cities. More than 8,200 safe operational trial flights have been completed with EH216 AAVs. During this process, we have cultivated a professional and well-trained AAV operation team, developed a digital platform for AAV operation management and services, and accumulated rich feasible and replicable trial operation experience. All of these give us ample confidence and ability to create considerable UAM flight service values together with our customers and partners in the future upon obtaining certification and beginning commercial operations. This is also our first-mover advantages and operation benchmarks that we have built over the long term and are ahead of other companies in the industry.

Additionally, we have been actively working on expanding cooperation across the UAM upstream and downstream industry chains as well as building the ecosystem. For example, we were very pleased to partner with HAECO Group, a subsidiary of Swire Group, in last October. This partnership plans to build an after-sales maintenance service system for EHang AAVs to provide our customers worldwide with more high-quality and efficient maintenance services while empowering our continued airworthiness following certification.

In overseas markets such as Asia, last year we actively explored markets in Japan, Malaysia, Indonesia and Thailand, secured more than 200 units of pre-orders for EH216 series and established cooperations with local partners to carry out local trial flights surrounding AAV application scenarios such as low-altitude sightseeing tours, island-hopping mobility, and logistics transportation. This February we successfully conducted the first passenger-carrying EH216 demo flight in an open airspace overseas in Japan. This is also the first ever passenger-carrying flight of an autonomous eVTOL in Japan with approval.

In Europe, in the fourth quarter of last year, we completed EH216's first flight in Spain, under EU's AMU-LED project to successfully verify the UAM Concepts of Operations. We also joined the EU's SAMVA project to explore unmanned aircraft system traffic management. In addition, we assisted the Spanish National Police to complete EH216's maiden flight for trial operations.

As noted by Mr. Hu, 2023 is a crucial year for us. As the turning point of airworthiness certification approaches, EHang and even the entire UAM industry are about to enter into commercialization. We are prepared, confident, and feel responsible to be a pioneer for commercialization in the global eVTOL industry. We plan to provide earnings guidance after certification.

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

Thank you, Xin. Hello, everyone. Before I go into details, please note that all numbers presented are in RMB and for the fourth quarter and the fiscal year 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.

Despite numerous uncertainties and challenges in 2022, we not only moved to the final phase of type certification, but also achieved significant progress in developing business and building an AAV ecosystem for post-certification growth. Meanwhile, we further enhanced our cost management, operational efficiency and financial soundness. And we are optimistic to see a turning point for the expected expansion of our commercial operations and a new era for our company and the UAM industry.

In Q4, total revenues were RMB15.7 million, an increase of 90.7% from RMB8.2 million in Q3. The EH216 series of AAV deliveries in Q4 were 6 units, up 50% from 4 units in Q3. For the fiscal year 2022, total revenues were RMB44.3 million, compared with RMB56.8 million in 2021. The EH216 series of AAV deliveries in 2022 were 21 units, compared with 30 units in 2021.

Gross margin was 66.1% in Q4, a slight increase of 0.2 percentage points from 65.9% in Q3. Gross margin was 65.9% in 2022, representing an increase of 2.5 percentage points from 63.4% in 2021, mainly attributed to the higher average selling price of EH216 AAVs. These represent the continued high gross margin levels, compared to those of other electrically-powered mobility products such as electric vehicles, as a result of our competitive strengths and first-mover advantages in the global UAM and eVTOL industries.

In Q4, our adjusted operating expenses, which are operating expenses excluding share-based compensation expenses, were RMB73.2 million, compared with RMB59.7 million in Q3. The increase was mainly driven by the non-cash item of additional prudent provisions for receivables in response to the impact of COVID to customers, and more expenditures on aircraft conformity for EH216-S in its verification process for type certification, with reductions in travel and marketing expenses and professional service expenses, etc. On an annual basis, the adjusted operating expenses were RMB242.4 million in 2022, compared with RMB246.6 million in 2021.

As a result, our adjusted operating loss in Q4 was RMB61.3 million, compared with RMB52.9 million in Q3. Adjusted net loss in Q4 was RMB59.4 million, compared with RMB55.1 million in Q3.For the fiscal year, adjusted net loss was RMB206.2 million in 2022, compared with RMB192.8 million in 2021.

Moreover, our cash balance remains solid as we have been proactively managing our cash position and assessing our liquidity. As of the end of Q4, we had RMB249.3 million of cash, cash equivalents, restricted cash and short-term investments, compared with RMB208.8 million as of the end of Q3. In December, we formed a strategic partnership with Qingdao West Coast New Area, one of China's national new areas in Shandong province. This partnership comes with a US$10 million equity investment into the Company, and a potential additional investment of US$10 million in the future. This serves as additional liquidity support for our operations and growth.

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

(Operator Instructions) We are now going to proceed with our first question, and the questions come from the Verena Jeng from Goldman Sachs.

I have 2 questions. First of all, it's about the TC progress. Could you share when we expect to get the TC, and how should we think about the timeline for mass production, delivery and also booked as revenues? Is it like after 1 to 2 months, we get the TC and we will have revenues and also the cash inflow? Do we have enough time to hire the people for the mass production?

And the second question is about the responsibility. Could you share if failure happens, is there a clear line of who to take the responsibility? For example, the users, if they do not operate properly, or the component makers, if it is caused by certain component failure, or it could be really hard to prove what reasons caused the failure, and eventually we will need to take all the responsibility?

Yes, this is Nick. As Mr. Hu has mentioned earlier, the TC process has completed over 90%. So it's just a matter of time that we complete the entire process and it's near the end right now.

If you compare us to other eVTOL companies' progress, I think EHang is very far ahead. Most importantly, EH216-S is the only autonomous one among all eVTOL TC projects, as you know, while other ones are all piloted.

For details, EHang has published the illustration about the entire TC process and a checklist of key milestones it has accomplished. We want to bring clarity to the process, and we'll update it very timely. This will act as a status bar and it's available on the IR website.

Regarding the post TC production and delivery, I think it won't take much time or concern to generate revenue soon because the Company has prepared for it all along by collecting more and more pre-orders beforehand. And also getting the Yunfu production facility established and operational for almost 2 years, and procured stocks of key components from suppliers.

All these efforts can shorten our lead time to delivery. For cost control reasons, we have over 100 workers in our manufacturing facilities. That's enough for the near term. If needed, the company is very able to hire more local staff in the future.

The second question will be answered by our COO, Mr. Xin Fang and followed by English translation.

[Interpreted] Thank you for your questions. Firstly, on general occasions, aviation accidents are caused by multiple factors. Determining the safety responsibility for aircraft accidents requires specialized investigation by relevant regulatory authorities, which is a complex process. The investigation is required to identify various reasons and factors related to the accident, before a final liability determination can be made.

In order to ensure safety and prevent accidents, we have adopted the redundancy method in the type design, structural safety and communication of the EH216-S AAV. This ensures that there is no single point of failure. And since our AAV is autonomous, passengers onboard don't need to pilot it. As a result, there is no safety hazard caused by passenger mis-controlling the vehicle during the flight.

We will also create operation rules and provide safety instructions to passengers to ensure their safety. In terms of production and manufacturing, we strictly manage our suppliers and production procedures with high-quality standards in accordance with the requirements of the CAAC, ensuring that we can trace the original sources while determining the safety responsibility.

In terms of operations, we'll also set out standards for operators and conduct personnel training, so as to ensure operation safety throughout the process. And last, we provide liability insurance coverage for our aviation products and passengers as well as the relevant third parties. That is the answer to your second question. Thank you.

(Operator Instructions) We are now going to proceed with our next question. The next questions come from the line of Di Wu from TF Securities.

I have 2 questions as well. First is as EHang is more focusing on China market and you talked about an increasing customer demand in China, could you share more color over the total revenue in your EH216 pipeline orders, can you deliver these orders without type certificate obtained?

And my second question is our company has secured a significant number of pre-order in Asia, I mean, excluding China. Do these pre-orders also need type certification in respective countries or your progress of type certification in China help these foreign type certification? Or is it like a whole new process all over again?

This is Richard. Let me take the questions. First of all, as discussed earlier, we currently have an order pipeline of 100+ units of EH216 in China. And this order pipeline has been growing with increasing inquiries, discussions from more potential customers in China, especially from the tourism sector.

The related total contract value would amount to around RMB200 million or more. And if you back out the VAT in China, we can get the corresponding revenue estimate roughly around RMB177 million. So as put in our earnings release, most of these pipeline orders in China are conditional upon the TC and are expected to be fulfilled in 1 to 3 years after that.

However, there are indeed some customers in China, who are more sophisticated and understand that the TC is to be obtained soon and thus, do not require that before deliveries.

In respect of your second question, those pre-orders in other Asian countries usually require the local TCs. We have been working with our local partners in communicating with local aviation authorities. What we have been experiencing is that the authorities in those Asian countries are open-minded to this type of innovative aerial vehicles, and especially interested in the uses in tourism, which is an important industry in their respective economy. So after we obtain the certification in China, it would provide a base for us to apply for the local certifications with the local aviation authorities, and we would not have to go from zero. To give you an example, in those Southeast Asian countries like Indonesia, we could apply for the local TCs through a VTC process, namely Validation of Type Certificate with the local aviation authorities, and it is expected to be a simplified process. Given so, it would help shorten the time and be more efficient for us to establish and further expand our market presence in those countries.

The questions come from Cindy Huang from Morgan Stanley.

I only have 1 question on margin. EHang currently has quite good gross margin at around 60%. How should we think about the gross margin this year and over time, especially after we kick off our commercial operations?

Thank you. I will take the questions. The current 60%+ GP margin is actually a comprehensive margin covering our vehicle hardware and software products and services. At the core of the Company, the technology advantage actually lies in our software. To some extent, EHang can be regarded as a software-based technology company that integrates intelligent aerial vehicle products and software products usually entail high GP margins. In addition, as the TC for EH216-S is expected to be obtained soon, after that, we will probably be the only eVTOL company with a TC in the market, especially in China for quite some time.

So as you can tell, we would have some more pricing power on the market end. Further, as our sales are expected to scale up after TC and it is anticipated that we would also have more negotiation power with our suppliers to control our procurement costs. Therefore, it is expected that we will continue to maintain this 60% GP margin level.

Due to time constraint, we will end the Q&A session here. And I would like now to turn the call back to Ms. Anne for closing remarks.

Thank you, operator, and thank you all for participating on today's call. If you have further questions, please contact our IR team by e-mail or participate in the following investor events through the calendar information provided on our IR website. We appreciate your interest and look forward to our next earnings call. Thank you.

Thank you all again. This concludes the conference call today. You may now disconnect your lines. Thank you.

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