EHang Holdings Ltd (EH) 2021 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the EHang Fourth Quarter 2021 and Fiscal Year 2021 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 fourth quarter and fiscal year of 2021. 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. 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 provision 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 full year of 2021, unless stated otherwise. With that, let me now turn the call over to CEO, Mr. Hu Huazhi. Please go ahead, Mr. Hu.

(foreign language)

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

[Interpreted] Hello, everyone. Thanks for joining our earnings call today. I'm very delighted to share EHang's operating performance for the fourth quarter and fiscal year of 2021 as well as our recent developments.

Despite challenges at home and across the globe in the past year, EHang has always focused on exploring the vast market of the urban mobility ("UAM") as an innovative and technology-driven enterprise. We are committed to creating value for our industry, partners and shareholders while making significant progress in the following key areas.

First, obtaining the airworthiness certification of the EH216-S has always been placed as our top priority, and the past year has seen remarkable progress on this project. Notably, we worked with the Civil Aviation Administration of China, in short CAAC, to develop the Special Conditions for the EH216-S type certification, the first for passenger-carrying autonomous aerial vehicles in the world, which was formally adopted and issued by the CAAC in February this year. This means that the type certification of the EH216-S has the certification basis for further implementation. At present, the certification of EH216-S is in the Compliance Review phase, and we are grateful for the CAAC's support to EHang.

Next, turning to our "100 Air Mobility Routes Initiative", we are the frontrunner of the industry and carried out operational trial flights in China during the certification process.

We are developing UAM pilot projects in multiple cities in China to continuously accumulate real flight experience in various scenarios. In the near future, we will disclose the first group of Chinese cities that will have our commercial UAM services and flight routes after we secure the airworthiness certification.

Moving on to sales and marketing, we are pleased to gradually open up a greater Asian market. Following our significant achievements in South Korea, Japan, Indonesia and Malaysia, we will continue close cooperation with more partners in Southeast Asian countries. More importantly, the orders and the pre-orders of our passenger-grade AAVs in the past few years have accumulatively surpassed 1,000 units, forming a solid foundation for our future revenue growth.

Moreover, I'd like to address our product and technological developments.

First about the VT-30. EHang has accumulated years of considerable experience and technical reserves in aircraft manufacturing and aircraft control in the field of UAM. For the product of VT-30, we maintained the principle of safety first without impatience or rash ventures.

At the beginning of the process of designing, R&D as well as testing for this product, we had been establishing its airworthiness system already. So far, we have added a larger number of aircraft component tests and conducted a larger number of flight tests after ensuring the overall safety of the aircraft. As of March 25, the test flight time of VT-30 has exceeded 50 hours.

Secondly, with regard to [logistics] (corrected by the company after the call), in the past few years, we have never stopped to research and development of aircraft for logistic uses. Our main target air logistics use cases are for inter-provincial air logistics and long-range air logistics over islands and mountains. Currently, we have developed 5 aerial logistic models that can fly autonomously in the automatic dispatching system. These 5 models have been tested with loads ranging from 2kg to 200kg.

We are conducting a large number of operational trial flights under island logistic scenarios in coastal areas. It's worth noting that our inter-provincial air logistics route between Hezhou and Guangzhou City is about to open soon, which will be a significant step forward to our future operation for inter-provincial long-range air logistics.

Next, let's turn to our team. Our staff has gradually increased in the past year, with a key focus on the expansion of our technical R&D team. We established a special team for the EH216-S airworthiness certification project to address our top priority and also built up an experienced UAM operations team.

Additionally, I'm very thrilled that Mr. Xin Fang joined our company in February as our Chief Operating Officer. Today is also the first time for him to join our earnings call. Mr. Fang has more than 20 years of experience in corporate management, sales of technology products and solutions, and tourism project development and operations. I believe he will bring us significant strength to our future business 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. I'm Edward Xu, Chief Strategy Officer of EHang. Now let me summarize the operational results of the year of 2021.

Basically, we followed our strategic positioning as a UAM platform operator and prioritized the airworthiness certification of the EH216-S AAVs throughout the year. We invested significant resources in the certification project by working closely with CAAC experts since the beginning of the year. With EHang's diligent and solid contributions, in December, the CAAC finally published the world's first Special Conditions for the EH216-S type certification, which set the foundation for airworthiness certification for all the AAVs. We believe this is a new milestone not only in the certification project, but in the history of human aviation. While the type certification process for the EH216-S is still ongoing, we have added strength in our efforts to obtain the Type Certificate as soon as possible.

On the other hand, we accelerated the test operations of EH216 AAVs with the aim to fully roll out commercial operations soon after obtaining the Type Certificate.

As we have positioned ourselves as "the world's leading UAM platform operator", it defines our innovative business model as a hybrid one of "sales + operation", which is a combination of OEM and AAV operations.

As we have highlighted in our previous calls, we believe this new model has strategic importance because AAV sales should be boosted by real commercial operations. This is especially true when our self-developed autonomous flight technologies make the hybrid model possible and necessary to ensure absolute safety and maximum market acceptance of our products.

Specifically, our ongoing "100 Air Mobility Route Initiative" was launched in mid-2021, under the guidance of the CAAC. With a focus on the Guangdong-HK-Macau Greater Bay area, we launched 9 operational spots in cities of Guangzhou, Shenzhen, Hezhou, Zhaoqing and Sanya, etc. So far, we have completed more than 4,000 trial flights.

Notably, we collaborated with Guangzhou Development District Communications Investment Group in the fourth quarter of 2021 to add a new "5G Intelligent Air Mobility Experience Center" in Guangzhou. Through such activities, we were able to accumulate necessary data and gain relevant experiences for future UAM operations.

On sales and promotion of our products and services, we have expanded our efforts by acquiring new customers and partners. Specifically, since fourth quarter of 2021, we highlighted the partnerships with major SOEs, including Shenzhen Expressway, the Guangzhou Development District Communications Investment Group and Guangxi Guigang Qintang District Urban Construction Investment Group.

In the overseas market, we have built new partnerships with Prestige Aviation in Indonesia, the MASC and AirX in Japan, AEROTREE Group in Malaysia, etc. We believe the expanded partnerships will help us in our future business operations within the next 6 to 12 months, especially upon receiving the official grant of Type Certificate from the CAAC.

Now let me turn the call to our COO, Mr. Fang, to address our operational plan for 2022. Mr. Fang, please go ahead. Thank you.

(foreign language)

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

[Interpreted] Thank you, Edward. Hello, everyone. I'm Xin Fang. First, I would like to thank Mr. Hu for inviting me to join EHang as COO. After joining the company, I was deeply impressed by the energy, dedication to innovation and relentless efforts of everyone at EHang. Safety and security are at the heart of every member of EHang team, and they strive for innovative AAV technology research and development.

We expect to obtain the Type Certificate of the EH216-S AAV around the middle of 2022, which will lay a solid foundation for its commercial operations.

Meanwhile, we are accelerating our arrangement for operating the EH216 AAVs to ensure that our commercial services can be launched gradually after obtaining the Type Certificate.

We plan to upgrade the production line at the same time. This way, we can quickly and steadily increase production based on the highest standards of the aviation industry after obtaining the Type Certificate. Close attention to high quality will also be strictly implemented in order to ensure that we will deliver safe, reliable and compliant products to the market.

For the fiscal year 2022, we expect total revenues to be in the range between RMB 190 million and RMB 210 million, with most of revenues are expected to be generated in the second half of the year upon receiving the EH216-S AAV Type Certificate and launching commercial operational services.

From the perspective of application scenarios, we expect our revenues in 2022 will mainly come from air mobility uses, including aerial sightseeing, aerial firefighting, and aerial logistics, as well as smart city management area, etc.

EHang is now seeking partnerships with leading companies in the industries with the application potentials by leveraging our existing technologies. Through the leading advantages in their original fields and UAM platform and Command-and-Control center provided by EHang, we will jointly conduct derivative development of AAV platforms to address the specific industry needs. Through our partners industry expertise, favorable channels and reputation, we can quickly open up additional applications and sales for our air mobility business.

Urban air mobility is EHang's core strategy and we actively seek related strategic cooperation with partners such as domestic mainstream helicopter general aviation companies. By leveraging their original airlines and ensuring infrastructures such as airports, we plan to gradually promote operations of low and medium-altitude air mobility routes in China. We also expect to bring EHang's AAVs to the market in the following 3 areas.

First, in the tourism sector, we've started carrying out in-depth aerial sightseeing layouts and actively cooperate with target tourism operators to explore innovative tourism revenue growth opportunities. We plan to launch EH216 aerial sightseeing operational services after obtaining the Type Certificate, through collaborations with multiple domestic tourist attractions and the continuous expansion of commercial operation scenic spots such as Forest Lake in Zhaoqing City in Guangdong Province, and Qintang in Guigang City in Guangxi Province.

Secondly, we will partner with leading integrated firefighting solution providers in China. For the needs of emergency management departments in firefighting and emergency response, we will leverage our partners' existing channels to promote efficient and tailored aerial firefighting solutions that address the difficulties and pain points of high-rise building firefighting. As an innovative enterprise, EHang not only develop our own businesses, but also undertake our social responsibilities to bring values to the people and the community.

Thirdly, we are also communicating with several leading logistics companies to jointly develop proper air logistics use cases combining EHang's self-developed AAVs and Command-and-Control platform with the ample operation experiences from our logistics partners, we can create cost-effective and efficient air logistics solutions and operating models.

Meanwhile, we plan to utilize our technological advantages of the self-developed Command-and-Control system platform for further productization as well as strengthening its promotion and operation in the urban management fields, such as smart city and smart transportation.

We will gradually establish an operational ecosystem with the integration of the hardware and software that combines fleet management and air traffic management when AAVs enter the mass market.

As a result, flights will be safer and more efficiently conducted, and the ecosystem will also be evolving in a healthy way with an increasing fleet in the sky.

EHang is continuously improving our trainings and post-sales service system. Moreover, EHang partners with professional international and domestic institutions to swiftly establish a more sophisticated training and post-sales service system based on our partners' existing system and experience.

We firmly believe that with the joint efforts of EHang and all the authorities and partners concerned with the UAM industry, we will be able to accelerate to provide everyone with a safe, autonomous and eco-friendly air mobility.

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, and hello, everyone. Before I go into details, please note that all numbers presented are in RMB and are for the fourth quarter of 2021, 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.

2021 was a unique year as we initiated a strategic upgrade and transition to implement our strategic positioning as an urban air mobility platform operator and migrate our sales model from a product-sales-centric model towards a more operating platform-oriented and integrated model.

As discussed earlier, in 2021, we had been focusing on the ongoing certification project and preparation for the "100 Mobility Routes Initiative" in China. And we believe this will lay the essential foundation for our next stage revenue growth with increased sales and deliveries and operational services after obtaining the certification.

As such, in Q4, total revenue were RMB 8.7 million compared with RMB 13 million in Q3. The EH216 series of AAV deliveries in Q4 were 4 units, compared with 8 units in Q3. For the fiscal year 2021, total revenues were RMB 56.8 million, compared with RMB 180.1 million in 2020. The EH216 series of AAV deliveries in 2021 were 30 units, compared with 70 units in 2020.

Gross margin was 60.1% in Q4, a minor decrease of 1.7 percentage points from 61.8% in Q3, mainly due to the changes in revenue mix. I'm glad that our margin continued to be kept at a relatively high level, demonstrating our solid competitiveness. We even achieved a year-over-year increase of 4.4 percentage points in 2021, a record high gross margin of 63.4% with the contribution from a Command-and-Control system delivered in 2021.

In Q4, our adjusted operating expenses, which are operating expenses, excluding share-based compensation expenses, increased by 46.2% quarter-over-quarter to RMB 90.4 million from RMB 61.8 million in Q3. The adjusted operating expenses was RMB 246.6 million in 2021, up 62.6% from RMB 151.6 million in 2020.

We continued to maintain significant R&D expenditures for the development of AAV models, including the EH216 Series, VT-30 and the other new models along with their related operating systems with enhanced functionalities as well as for the growing R&D team. This reflects our commitment to strengthening our product development and certification efforts in order to drive future sales growth and commercial operations. Continuous and advanced R&D is a cornerstone of our business, and we will remain dedicated to R&D to propel future business growth. Furthermore, there were additional provisions for receivables due to the impacts of the continuous COVID-19 pandemic and related prevention and control measures in China.

As a result, our adjusted operating loss in Q4 was RMB 83.8 million, compared with RMB 48.9 million in Q3. Adjusted net loss in Q4 was RMB 82.2 million compared with RMB 47.8 million in Q3. For the fiscal year, adjusted net loss was RMB 192.8 million in 2021, compared with RMB 37.2 million in 2020.

Nevertheless, our balance sheet remains healthy. As of the end of Q4, we had RMB 312.1 million of cash, cash equivalents, restricted cash and short-term investments, compared with RMB 357 million as of the end of Q3 and RMB 189.4 million a year earlier. We will continue to maintain effective operational expense and cost management.

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

(Operator Instructions) Your first question comes from the line of Tim Hsiao from Morgan Stanley.

This is Tim from Morgan Stanley. I've got 2 questions. The first one is about the impact from the rising pandemic in China. In light of rising, the tightening COVID control measures in China, especially in the first quarter, have we seen any potential hiccup to our supply chain management, TC certification progress and also the order delivery, especially largely into second quarter this year?

In the meantime, how do we think about this kind of margin trend this year, given the impact from the pandemic and, of course, the cost inflation? That's my first question.

My second question is about the Urban Air Mobility operation. We saw pretty strong progress, but could you please share a little bit more about the quantitative updates about business development. It would be great if the management can elaborate a little more about the fleet size, the volume rules in terms of numbers that have been implemented and also our current operational situation.

Thank you, Tim, for your questions. This is Edward Xu, Chief Strategy Officer of EHang. Let me answer your first question and our CFO, Richard, can elaborate more on the margin trend.

On your first question, basically regarding the ongoing COVID-19 pandemic in China, so far, we [don't see a] (corrected by the company after the call) material impact on our supply chain because our suppliers are mostly distributed in South China, in Dongguan area. We noticed that the recent closedown of Shenzhen, but it didn't have much impact so far. And also, we did some preparation by prepare the inventories for our products beforehand.

So far, we see our inventories at a satisfactory level. So we don't see any major impact so far. On TC certification progress, we think it is still on the right track. So far, our special team is working very closely with CAAC experts which is not disrupted by the pandemic as well. That's all for this and Richard can elaborate more on the margin trend.

Tim, this is Richard. I will take the second part of your first question regarding the margin trend. As Edward just said, we have not seen any material impact from the increased situation of recent pandemic in China. In addition, there are some recent price increases of raw materials due to the changes of the world political landscape.

We have so far seen some impacts from this aspect. As such, we have been trying to stock up some key components and materials as our stock reserves. Along this line, it is expected that our overall gross margin might be brought to the average levels of previous years, roughly in the range from 55% to 60%. Having said that, in our revenues, as you know, there are revenues from selling our proprietary Command-and-Control systems on which the price increases of raw materials and supplies would be limited. Therefore, if the percentage of the revenues from this in the total revenues will go up in the year, it will actually help enhance our overall gross margin, as you can see. In sum, we will continue to pay close attention to the development of the cost conditions as a result of the recent development and take a proper measure to minimize such impacts on our gross margin.

Tim, I would add one point. On the operational side, you're right, maybe there are some impacts on our operation because we do have a collaboration with a helicopter company in Shenzhen. Also, we plan to launch more operational spots in Zhuhai, for example, which was disrupted by the pandemic at the moment. So on the operational side, we do see some impact.

Next, regarding your second question, as updated in our earnings release, so far, under the "100 Air Mobility Routes Initiative", our UAM operating team has selected and developed 9 operational spots in Chinese cities, including Guangzhou, Hezhou, Shenzhen, Zhaoqing and Sanya, etc. At these 9 operational spots, so far we have conducted over 4,000 operational trial flight with our EH216 AAVs in real practical scenarios for aerial sightseeing.

So far, multiple flight routes can be developed at each operational spots. In the near future, we will be able to release the first group of cities in China as our target to launch our commercial operational services and flight routes at the local operation spots after we obtain the TC and also the commercial license from CAAC.

(Operator Instructions) Your next question comes from the line of Di Wu from TF Securities.

I have 2 questions as well. First, geographically speaking, can we say China is EHang's top priority regarding obtaining the Type Certificate and all the licenses? How should we think about other regions coming down on this, for example, in terms of licenses? Where will be EHang's next target, Korea or Europe?

And my second question is in terms of competitive advantages and the market share-wise, how does the management team view other competitors? Where does EHang stand among those foreign and domestic competitors?

Yes, thank you for your question. This is Edward again. Let me answer your questions.

First of all, regarding the geographic distribution, we believe that China appears to be our most prioritized market so far, given the following reasons.

First, it is our home market, where our firm is based. Second, we got the support from the regulator, i.e., the CAAC in respect of airworthiness certification for unmanned aircraft for low altitude passenger-carrying urban air mobility operations. Third, this is a huge market with a good potential. With the largest population and the prosperous major city clusters, such as the Pearl River Delta, the Yangtze River Delta and the Bohai Bay areas, etc which means that the huge urban population has a potential for this mobility market.

Meanwhile, we also keep our focus on the overseas market such as Asian countries, including Japan, Korea, Indonesia and Malaysia, etc. Those countries which we have made visible progress in client acquisitions, trial flights and regulator relationship construction, etc.

Finally, we think that some Western countries, including Europe and the U.S., but those markets, the regulations could be more conservative. So we are taking a more passive stance and we focus on China, and we believe that any success in China's certification could be a leverage for us to go into those markets.

Regarding your second question, we have kept a close watch on the global UAM market, especially on the development of the peer group as well. We believe we are a leading player in terms of product design and a real flight record so far.

For example, our EH216 AAV is by far the world's leading aerial vehicle product that is able to complete autonomous flights. We noticed that from the peer group, most of them are still focused on manned flight. Autonomous flight is definitely something that is on their next steps, and we have built the world's first centralized AAV platform to manage multiple AAV operations with cluster management technologies. So far, we have conducted over 20,000 autonomous trial flights in 11 countries.

Moreover, we have made the most progress in airworthiness certification with CAAC who published the world's first set of special conditions for the type certification for autonomous aerial vehicles like our EH216. That means we are leading in terms of the certification progress as well.

As we are targeting around the middle of the year for Type Certificate grant for our EH216-S AAVs, we aim to be the first firm to launch commercial operational service in the world, probably in the second half of the year. Given that, we believe that we do have the first-mover advantage over our peer group. Thank you.

As there are no further questions and the interest of time, I would now like to hand the conference back to the speakers for any closing remarks.

No further questions?

Thank you, operator.

We do have a question that has just come through. Are you happy to take this? Your question comes from the line of David Zazula from Barclays. Apologies. It looks like we are not taking no further questions.

Can you hear me?

I can hear you, yes.

So we can give the closing remarks, right?

Yes, please. Please go ahead.

Thank you all for participating on today's call. We will look forward to reporting to you in our next quarter. Thank you very much.

That does conclude 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.]