理想汽車 (LI) 2022 Q2 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for Li Auto's Second Quarter 2022 Earnings Conference Call. At this time, all participants are in listen only mode. Today's conference call is being recorded. I will now turn the call over to your host, Janet Zhang, Investor Relations Director of Li Auto. Please go ahead, Janet.

Thank you, Jason. Good evening and good morning, everyone. Welcome to Li Auto's Second Quarter 2022 Earnings Conference Call. The Company's financial and operating results were published in the press release earlier today and were posted on the Company's IR website.

On today's call, we have our President, Mr Kevin Yanan Shen, and our CFO, Mr Johnny Tie Li begin with prepared remarks. Our founder and CEO, Mr Xiang Li, will join for the Q&A discussion.

Before I continue, please be reminded that today's discussion will contain forward-looking statements made under the safe harbor provisions of the US 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 views expressed today.

Further information regarding risks and uncertainties is included in certain filings of the Company with the US Securities and Exchange Commission and the Hong Kong Stock Exchange. The Company does not assume any obligation to update any forward-looking statements except as required under applicable law.

Please also note that Li Auto's Earnings Press Release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial matters. Please refer to Li Auto's disclosure documents on the IR section of our website, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our President. Please go ahead, Kevin.

Thank you, Janet. Hello, everyone, and thank you for joining our call today. I will review the key highlights of the second quarter and discuss our Flagship Smart SUV, Li L9, which has received highly positive feedback from family users for its best-in-class combination of drivability, safety, comfort and intelligence.

We witnessed the continued consumer adoption of EVs in the second quarter. China's retail sales of new energy passenger vehicles surpassed 1.17 million during this quarter, more than doubled year over year according to the China Passenger Car Association, with penetration rates climbing to 27.1% from 21.8% in the first quarter. We believe it will continue to rise, supported by more NEV model launches, continuous iterations of smart features and the increasing user preference for clean mobility.

We remain focused on offering state-of-art product to our family users. Despite the challenges posed by the COVID-19 resurgence across cities nationwide from March to May, we delivered 28,687 vehicles during the second quarter, representing a 63.2% year-over-year increase. These strong delivery results contributed to a 73.3% year over year increase in total revenues, which totaled RMB8.73 billion. Our deliveries in July reached 10,422, up 21.3% year over year.

On August 1, we proudly rode the 200,000th Li ONE off the production line at our Changzhou manufacturing base. It took us just 986 days to reach this production milestone, once again setting a record speed among China's emerging EV manufacturers, following our historic speed in reaching the 100,000th unit mark. Li ONE is also the first domestic branded premium model priced above RMB300,000 to achieve this production milestone.

Moving to our supply chain, the COVID-19 resurgence severely affected the auto supply chain in the second quarter. Currently, there are remaining disruptions and difficulties, but they moderated as the pandemic became more contained. Although we are cautiously optimistic that our supply chain will normalize in the second half of the year, we should highlight that potential volatility remains and will require us to constantly stay on high alert, especially given the ongoing pandemic.

As we navigate the continuous unpredictability, we focus on reinforcing our supply chain system, strengthening our partnership with past suppliers to tackle parts shortage and cost inflation and at the same time redouble our emphasis on auto parts quality control.

Moving to profitability, in the second quarter we continued to see that the power of our product, our execution consistency and our operational resilience enabled us to mitigate the cost inflation that we have been experiencing along with the rest of the industry. As a result, our second quarter gross margin remained relatively solid at 21.5%, up 2.6% year over year. As we remain devoted to R&D and network expansion to fuel our future growth, our operating expense increased by 91.9% year over year.

Meanwhile, we continued to optimize our cost structure and manage our cashflow effectively. Despite the pandemic's impact, we achieved another quarter of positive operating cashflow of RMB1.13 billion and free cashflow of RMB451.7 million.

As part of our effort to accelerate growth and accommodate additional user demand with new model launches, we continued to expand our direct sales and servicing network. As of July 31, we have 259 retail stores covering 118 cities as well as 311 servicing centers and Li Auto's authorized body and paint shops operating in 226 cities.

While the pace of our sales network expansion has been challenged by the COVID-19 resurgence, we will strive to further extend our reach to users by upgrading our existing stores. In order to optimize charging experience for our users, we also rolled out the charging map function in our Li Auto application on August 17.

The map covers over 30,000 charging stations and 300,000 charging posts in 31 provinces and over 300 cities, from six main charging station operators, including State Grid, Star Charge and others, providing convenient energy replenishment options for our users.

On June 21, we unveiled Li L9, our Flagship Smart SUV. Reflecting our intense focus on family users, we developed Li L9 to, Create a Mobile Home, Create Happiness. Thanks to our relentless R&D efforts and outstanding product definition capabilities, Li L9 [boasts](corrected by company after the call) cutting-edge premium features to provide outstanding handling and automated comfort and safety.

Every Li L9 comes standard with our flagship full-stack self-developed autonomous driving system, Li AD Max. Its enhanced functionality bolstered by upgraded perception and vehicle control capability was highly recognized by users in the test drives. As the first volume production vehicle with redundancy design applied to its powertrain, steering system, braking system and the power supply system for the computing platform, it offers enhanced reliability and safety. Supported by a computing platform composed of two Qualcomm Snapdragon automotive-grade 8155 chips and our inhouse deep-learning-based [multimodule](corrected by company after the call) interactive technology, Li L9 provides a smart interior space featuring five-screen, three-dimensional interactions for family members of all ages.

We have received positive feedback along with very strong order intake for Li L9, particularly from our target family users. We will commence delivery of Li L9 by the end of August.

While we forge ahead with our new model launches, we also continued to pursue our optimization for our existing products. In June, we released the OTA 3.1 update for Li ONE, taking the Li ONE user experience to the next level. This update features a highly anticipated remote vehicle control function, allowing users to move the vehicle forward and backward in a straight line through our mobile application. This remote capability greatly increases users' convenience and improves their ability to park in narrow spaces.

The update also includes an audio equalizer function and further optimization of our fully self-developed NOA function with enhanced accuracy for recommended lane change and ramp entry or exit.

Furthermore, we are steadily working on our plan of launching high power charging BEV model next year. We're also working on deploying our HPC network to support our HPC BEV.

Li L9 will be the first model in the industry to adopt the NVIDIA Orin platform to deliver advanced autonomous driving features, including NOA function, showcasing our strong R&D capability with high efficiency.

Our self-developed autonomous driving algorithm has won much public recognition internationally. For example, we ranked first in the 2021 NuScenes 3D vision detection and tracking tasks and also won first place in the ICCV 2021 workshop INTERPRET Challenge.

We also have the largest number of autonomous driving users in China. As of July 31 this year, users with access to NOA function exceeded 130,000. The technology, knowledge and insights accumulated through Li ONE give us the advantage by helping us enhance our R&D efficiency during Li L9's development process, refine products and further optimize the safety and performance of autonomous driving.

In summary, we will continue to create happiness and value for our family users by honing our existing products and expanding our model line up while enhancing our brand recognition for family users. We will also execute on our technology roadmap to solidify our lead in EREVs and advance our HPC BEV development.

With that, I would like to turn it over to our CFO, Johnny, for a closer look at our financial performance. Please go ahead.

Thank you, Kevin. Hello, everyone. I will now go over some of our financial results for the second quarter of 2022. To be mindful of the length of this call, I will address our financial highlights here and encourage you to refer to our earnings press release, which is posted online for additional details.

Total revenues in the second quarter of 2022 were RMB8.73 billion or US$1.3 billion, representing an increase of 73.3% from RMB5.04 billion in the second quarter of last year. This included RMB8.48 billion or US$1.27 billion of vehicle sales in the second quarter of 2022, representing an increase of 73% from RMB4.9 billion in the second quarter of 2021.

The year-over-year increase in vehicle sales was mainly attributable to the increase in vehicle deliveries in the second quarter of this year. On a quarter-over-quarter basis, affected by supply shortage due to the COVID-19 in the second quarter of 2022, total revenues and vehicle sales decreased by 8.7% and 8.9% respectively.

Revenues from other sales and services were RMB249 million or US$37.2 million in the second quarter of 2022, representing an increase of 83.6% from RMB135.7 million in the second quarter of 2021 and a decrease of 1.7% from RMB253.4 million in the first quarter of 2022.

The increase in revenue from other sales and services over the second quarter of 2021 was mainly attributable to the increased sales of charging stalls, accessories and services in line with higher accumulated vehicle sales.

Cost of sales in the second quarter of 2022 was RMB6.85 billion or US$1.02 billion, representing an increase of 57.7% year over year and a decrease of 7.4% quarter over quarter.

Gross profit in the second quarter of 2022 was RMB1.88 billion or US$280.4 million, representing an increase of 97.1% year over year and a decrease of 13.2% quarter over quarter.

Vehicle margin in the second quarter was 21.2% compared with 18.7% in the second quarter of last year and 22.4% in the first quarter of 2022. The increase in vehicle margin over the second quarter of 2021 was primarily driven by a higher average selling price attributable to the increase of vehicle deliveries of 2021 Li ONE since its release in May 2021.

Gross margin in the second quarter of 2022 was 21.5% compared with 18.9% in the second quarter of last year and 22.6% in the first quarter of 2022.

Operating expenses in the second quarter of 2022 were RMB2.86 billion or US$426.5 million, representing an increase of 91.9% year over year and increase of 10.9% quarter over quarter.

Research and development expenses in the second quarter of 2022 were RMB1.53 billion or US$228.7 million, representing an increase of 134.4% year over year and an increase of 11.5% quarter over quarter. The increase in R&D expenses over the second quarter of 2021 and first quarter of 2022 was primarily driven by increased employee compensation as a result of our growing number of R&D staff as well as increased expenses associated with new models to be introduced in the future.

Selling, general and administrative expenses in the second quarter of 2022 were RMB1.33 billion or US$197.8m, representing an increase of 58.6% year over year and an increase of 10.2% quarter over quarter. The increase in selling, general and administrative expenses over the second quarter of 2021 and the first quarter of 2022 was primarily driven by increased employee compensation as a result of our growing number of staff, as well as increased rental expenses associated with the expansion of the Company's sales network.

Losses from our operations was RMB978.5 million or US$146.1 million in the second quarter of 2022, representing an increase of 82.6% year over year and an increase of 136.9% quarter over quarter. Net loss was RMB641 million or US$95.7 million in the second quarter of 2022, representing an increase of 172.2% year over year and compared with RMB10.9 million net loss in the first quarter of 2022.

Turning to our balance sheet and cashflow. Our cash and cash equivalents, restricted cash, time deposits and short-term investments totaled RMB53.65 billion or US$8.01 billion as of June 30, 2022.

Operating cashflow in the second quarter of 2022 was RMB1.13 billion or US$168.6 million. Free cashflow was RMB451.7 million or US$67.4 million in the second quarter of 2022.

Now, for our business outlook. For third quarter of 2022, the Company expects the deliveries to be between 27,000 to 29,000 vehicles, representing an increase of 7.5% to 15.5% from the third quarter of 2021.

The Company also expects the third quarter total revenues to be between RMB8.96 billion and RMB 9.56 billion, or US$1.34 billion and US$1.43 billion, representing an increase of 15.3% to 22.9% from the third quarter of 2021.

This business outlook reflects the Company's current and preliminary view on the business situation and the market condition, which is subject to change.

I will now turn the call over to our operator and start the Q&A session. Thank you.

(Operator Instructions). All right, our first question comes from Fei Fang from Goldman Sachs. Please go ahead.

Great. Yes, thanks for taking my question. The second quarter performance was impressive despite COVID and L9 has outstanding traction for its price point, so congratulations on those. They were well done. My question is about your guidance. So, the third quarter is in question for the 27,000-to-29,000-unit guidance that you provided, can you break it out by Li One and L9 and also, as you ramp the production of the high ASP L9, will growth margin improve? So, that's the first question.

My second question is about L9's retail traction. So, the Company disclosed in early August that L9 has received 30,000 confirmed orders, so just wondering if we can have a refreshed discussion in terms of this latest retail trend feedback, especially competition with the other new energy SUVs and MPVs that some of your EV peers have put in the market. (Spoken in Chinese).

Fang Fei, this is Kevin. Thank you for your questions. So, your first question for the guidelines, actually we still stick to our previous projection that for September, we are going to ship more than 10,000 L9 and for the second question, actually, for the growth margin, L9 will be higher. It will be higher since it's a high-end product.

Your second question about the traction. So, right now although last month we already kind of received almost 30,000 orders of L9, today in the past 2 weeks we still see a strong demand coming in for L9.

Okay, got it. So, a part of my second question was to ask Kevin if he can comment on sort of L9 in the context of this competition with the other SUVs and MPVs that some of your competitors have put in the market, such as Huawei, BYD and so forth. Are you seeing competitive threat from them that sort of you know cause you to change your strategy or introduce more marketing incentives in front of customers?

Yes. In fact, the L9 has a very unique product positioning. Actually, in this price band with this kind of size and smart features, we don't see there are any product that has a kind of a product proposition close to our L9. So, right now it's more about how much we can convert our customer to place order on our L9, when they have the budget between RMB400,000 to RMB500,000.

Okay, that's helpful. Thank you.

(Operator Instructions). Our next question comes from Tim Hsiao from Morgan Stanley. Please go ahead.

(Spoken in Chinese). So, my first question, I just want to follow up on the third quarter guidance because I think third quarter volume guidance of 27,000 to 29,000 looks a little bit conservative. So, considering the launch of L9 and improving supply dynamic, should we attribute the conservative sale volume to the transition of Li One only or if the production ramp up of L9 can (inaudible) the expectation or if there's any other reason we should take into consideration? So, it's just simply due to the hiccup or Li One? How long should we expect this kind of impact will last?

My second question is about the sales mix of EREV, the plug-in hybrid and the BEV next year. How should we think about the mix in 2023 and could you provide some updates regarding the numbers of new models? If the mix of the BEV is going to increase substantially next year, should we concern about the potential dilution to our margin or could that hurt our cashflow? So, those are my two questions. Thank you.

Tim, this is Kevin. Thank you for your questions. About your first question, in fact when we give out this guidance, of course we have seen some slowdown of the Li One order intake. I think primarily the issue right now is that when we have the new product into our retail stores, a lot of attention has been attracted by the new product, rather than the old product.

Actually, we are working with our sales team to regain the attention from our potential customers for Li One. So, on the other hand about the potential launch of the new product, actually the only comment I can give right now is that it will come in soon and will come in sooner than the expectation. That's the only comment I can give.

And for...About the new BEV model we're going to launch, we plan to launch it next year. In fact, as you can expect that for any new model we launch into the market, we have the intention to increase the revenue, also to improve our cashflow, improve our profitability. So, therefore with the new BEV model, in our plan we plan the reasonable profitability, of course, so it won't hurt our cashflow, it won't hurt our growth margin next year.

That's perfect. Thank you very much, Kevin.

The next question comes from Bin Wang from Credit Suisse. Please go ahead.

(Spoken in Chinese). Okay, basically I've got one question about Li One because investor [told me that] three things. Number 1, we hear that in the Li One's waiting time has been reduced to two or three weeks. Secondly, from this month, Li One start to offer around RMB7000 per unit, kind of a promotion for the insurance. Number 3, L8, which will be the next generation (inaudible) Li One, will launch in November this year. Can you confirm those three things from investors? Thank you.

Bill, thank you for your question. First of all, about the waiting time. Actually, the waiting time right now is of course shorter than last month. As I already explained, the order intake is slower right now so therefore we can turn over the delivery faster. About the RMB7000 kind of a promotion, actually yes, you got the information very updated. We kind of released this policy just this Sunday. About the new product you are asking about, I think the same answer I already provided, that it will come soon and sooner than our expectation.

Okay, thank you. Thanks so much.

The next question comes from Paul Gong from UBS. Please go ahead.

(Spoken in Chinese). So, just translating my two questions. The first question is regarding the cannibalization of L9 versus Li One. How much of the recent weekly softness of the Li One orders is due to the cannibalization of the new model and how much of it do you think is due to the weakening macro environment as well as the weakening demand for the cars in general?

My second question is regarding the features or the key highlights of the BEV. I think management previously mentioned that the BEVs and EREVs, they should be based on different models. They have different features. Can you give us a little bit of color on how should we think about the uniqueness or the attractiveness of your BEVs in view of such a crowded market in the BEV market already?

Paul, this is Kevin. I will take your first question and Li Xiang will address the second question. The first question, the thing is that before we're putting the car L9 into our retail stores, before people start to test drive it, actually we see no change of the order intake pattern of Li One.

But to a certain extent it's to our surprise that when we have the customer coming into the stores to test drive, some of the customers' original plan was to test drive Li One but when they see L9 and after they test drive the L9, we see -- especially the customer with enough budget -- we see a lot of them converted to L9 customer. So, right now as I just explained, that's one of the reason why we also have some more promotion planned for Li One.

And I think...But on the other hand, we still have a confidence that Li One is still a very competitive product because if we compare it with the existing products other than L9, other products in the same price band, RMB300,000 to RMB400,000 price band, Li One is still one of the most competitive products in the market.

(Spoke in Chinese) So maybe two angles of differentiation, the first one is around charging. In fact, we already have a prototype running right now that can charge 400 kilometers of range in 10 minutes and the goal here is very similar to a range extended vehicle, which is to replace all internal combustion engine vehicles for customers and to have no anxiety in terms of range.

Our data shows that among our L9 customers, 80% of them have home charging and 100% of them have stable charging either at home or in the office. So home charging or office charging is really not the key here. The key challenge is to enable customers to travel freely within key economic zones within China.

For example, the Yangtze Delta River region, the Beijing-Tianjin region, Wuhan, Sichuan, these big megacity areas, we will support with high power charging so that customers can drive long distances with no driving range anxiety, even if they're driving electric vehicles.

So the second advantage when it comes to electric vehicles is space. Because of the engineering possibility enabled by electric vehicles and new architectures and new body types, we can provide a lot more space in our electric vehicles compared to range extended vehicles with the same footprint.

(Spoken in Chinese). If the L9 cannibalization of Li ONE is higher than expected, how much of the capacity saving will prepare for L9?

The cap, that is 15,000 for L9.

Thank you very much, thank you. (Spoken in Chinese)

The next question comes from Ming Lee from Bank of America. Please go ahead.

(Spoken in Chinese). My first question is regarding the gross margin trend and also the battery cost trend for second half this year. (Spoken in Chinese).

The second question is regarding the competitive landscape. Recently we also see Aito brand volume sales has grown steadily and besides that, also how do we expect the new Li ONE or L8 product competitiveness versus the current Li ONE? Thank you.

This is Kevin, thank you for your question. The first question about the battery cost, actually as we all know that in the recent months the raw material for batteries has come down a little bit. But we would expect that for the coming months this year, the raw material costs will again fluctuate a lot.

So therefore, for the gross margin, outlook is a lot of time are based on the battery cost. So therefore, I can only comment that the battery cost will be a kind of fluctuation. For the new product competitiveness, I will ask Li Xiang to comment.

(Spoken in Chinese) So right now, around L8 I can share a few things. One is that it will be delivered -- released much sooner than many people are expecting and the second thing is that the period from release to delivery will be shorter than L9. And when L8 is available, I think that will be a good time to compare the product competitiveness with newly released competitors and we have full confidence that we will dominate all these products with our L8.

The next question comes from Xu Yingbo from CITICS. Please go ahead.

(Spoken in Chinese). I have two questions. The first question is about the EREV product. What's our mid-term competitiveness strategy for EREV product? And the second question is about money raising, could you please talk a little bit more about ATM and the further capital reserve project? Thank you.

(Spoken in Chinese) So talking about range extended vehicles, if you look over the next five years we still believe that our EV is the best solution for SUVs, period. I'll give you one example, if you look at BYD, they have two main products above RMB200,000, there's the Han sedan and there's the Tang SUV.

So in terms of the Han, which is the sedan, the EV sells much better than DM-i, which is the hybrid vehicle, but for Tang the case is exactly the opposite, DM-i sells better than the EV. And the reason for that is when people buy cars you know in the RMB200,000 to RMB300,000 range, when they buy an SUV they have a very clear expectation that they want to go on longer trips, especially post-COVID.

So our EV is still the best solution up until today for SUVs that solves range anxiety. So under that consumption, within our EV our biggest goal is to solve the efficiency challenge and if you look at L9, there's many top media that have tested the L9, our energy consumption level's still leading in its class. Even with low SoC the fuel consumption is only around 60% of much smaller internal combustion engine vehicles and is much better than what many claim to the competitors, which are much smaller SUVs.

Because at the end of the day, our EV is an EV, it's not an internal combustion engine adding a battery to it. So that's the key difference between PHEV and our range extended electric vehicles. There shouldn't be any discussion of which one's more advanced or which one's more backward. For the user, range extended vehicle is an EV that happens to have an internal combustion or we call range extender, where PHEV is really more of an internal combustion engine vehicle with a battery.

I'll give you another example. Changan, which is a very you know established company with very capable technical skills and their latest vehicle, SL03, is an REV rather than PHEV. Despite the fact that Changan has all the PHEV technologies in the world, but they still built an REV as their most advanced solution. Because at the end of the day, again our EV is really an electric vehicle.

In the second question about the cash flow and ATM offering, I think first, Li Auto has very healthy operating cash flow and free cash flow, which can still fund our business every quarter. In the long run we are very clear we are still at the early stage of this industry in 10 to 15 years. So we still want to use the active market to secure more cash to further fund the Company's development, especially in the R&D and also the new model R&D side.

For the ATM offering, I think based on this year's market conditions, as I just mentioned, we still want to secure more cash from the equity offering, so we choose the ATM to do this. As most of the ATM are offering, we need to stop before we publish our earnings rate, so hopefully we can finish this ATM offering in the coming months. Thank you.

The next question comes from Jiong Shao from Barclays. Please go ahead.

(Spoken in Chinese). I have two questions. First question is about the -- for the new BEV cars, are those new cars still going to be family-oriented SUVs or something else? The second question is really about the guidance for the second half operating expenses, thank you.

(Spoken in Chinese). I refer to the answer for the first question, in terms of the body type for our electric vehicle I still want to keep it confidential before it's released, because it's a very unique design.

Also to add to Li Xiang's answer, we still serve our family customers (inaudible). For the operating expenses, I think we have a very clear roadmap for our product and our goal for this and next year's sales target. So we will keep going with that on the R&D side and also on the network expansion to better serve our family customers. Thank you.

As we are reaching the end of our conference call, I'd like to turn the call back over to the Company for closing remarks. Ms. Janet Chang, please go ahead.

Thank you once again for joining with us today. If you have any further questions, please feel free to contact Li Auto's Investor Relations team. Then that's all for today, thank you.