理想汽車 (LI) 2023 Q1 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for Li Auto's first quarter 2023 earnings conference call. At this time, all participants are in the 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, Operator. Good evening and good morning, everyone. Welcome to Li Auto's first quarter 2023 earnings conference call. The Company's financial and operating results were published in the press release earlier today and are posted on the Company's IR website.

On today's call we have our Chairman and CEO, Mr. Xiang Li, and our CFO, Mr. Johnny Tie Li, to begin with prepared remarks. Our President, Mr. Donghui Ma, and other senior management will join for the Q&A discussions.

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 - in Company filings 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 contain a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures.

Our CEO will start with his remarks in Chinese. There will be translation after he finish all his remarks. With that, I will now turn the call over to our CEO, Mr. Xiang Li. Please go ahead.

(Interpreted) Hi, everyone, and welcome to today's earnings call. In the first quarter of 2023, China's NEV market continued to grow. The market competition intensified, triggering a wait-and-see sentiment among consumers. Nevertheless, we firmly believe that true winners will emerge from competition.

In the first quarter, we achieved our best quarterly delivery results to date, with continued user recognition of the L8 and L9, as well as strong order intake for L7, and its rapid production ramp up, we delivered 52,584 vehicles this quarter, representing a year-on-year increase of 65.8%. This achievement placed us among the top three NEV brands priced over RMB200,000 in China, with a market share of approximately 11%, far surpassing any other emerging auto maker, and once again, showcasing our ability to design and build blockbuster models.

It also demonstrates the strength and the collaborative efficacy of our supply chain, manufacturing and sales and servicing networks. We'll continue to do our best to grow rapidly and strengthen our market leadership.

In April, our monthly deliveries hit a new high, reaching 25,681 units, with cumulative deliveries exceeding 335,000. The L7, L8 and L9 all performed outstandingly in their respective market segments. According to the insurance registration data of CIRI Auto Technology Institute, L7 became the sales champion in the large SUV market in China, after it started delivery in early March.

In April, its first full month of delivery, L7 hit the 10,000-vehicle mark, becoming our fourth model to reach this milestone. In the meantime, the L8 has maintained its sales leadership in the six-seater subsegment, and in the full-size SUV market, the L9 has consistently topped the sales charts ever since its delivery started at the end of August last year.

Driven by our strong deliveries and relentless pursuit of operating efficiency, our financial metrics improved across the board. In the first quarter, our total revenues reached RMB18.79 billion, representing a year-over-year increase of 96.5%.

At the same time, we delivered positive operating profit and positive net profit, and our free cash flow reached a record high of RMB6.7 billion. The healthy profitability and cash flow will fund our R&D in products, platforms and systems, creating a solid foundation for long-term development.

With the launch of L7 and L8 Air models in April, we further expanded our price range and user coverage. We expect our market share in the NEV market at RMB200,000 and above to expand further in the next quarter, with expected deliveries to be between 76,000 and 81,000 units.

Physical product delivery is just the beginning. In order to continuously improve the experience of family users, we will enhance our products through OTAs. Since the beginning of this year, we have developed two OTA updates for our L series, OTA 4.3 and 4.4, updating more than 100 features in total. New features include Task Master, which allows users to create customized combinations of functions of seats, drive settings, navigation applications and more.

We also rolled out LKA Plus, the first feature of its kind in China, which can autonomously overtake on highways and urban expressways when not in navigation mode. Additionally, we will officially launch OTA 3.3 for Li One in the middle of this year.

For family users, safety is always the top priority. Every model of Li Auto is developed to meet the most stringent safety standards and has undergone comprehensive safety tests. In April 2023 the China Insurance Automotive Safety Index, C-IASI, released its latest batch of its evaluation results. The L8 received a G rating, the highest rating in occupant protection, pedestrian protection, and driver assistance system. It also received the G rating in the 25% offset frontal impact test on both the driver and passenger side. The L9 also received a five-star rating with a weighted score of 91.3% in the C-NCAP assessment test.

In the first quarter of 2023, we continued to enhance our commercial capabilities by upgrading and expanding our integrated online and offline direct sales and servicing networks, to support the expanding product offering and provide better services to our users, while spreading our brand vision and increasing brand awareness.

With respect to our retail sales network, we continue to add physical stores, while accelerating the upgrade and expansion of our existing stores to support multiple vehicles.

Since L9's launch in late June last year, we have relocated and expanded close to 50 existing stores and opened over 50 new stores. As of April 30, 2023, we have 302 retail stores in 123 cities, as well as 318 service centers and authorized body shops in 222 cities.

As our business accelerates, sustainability has always been deeply ingrained in our products, services and corporate governance. On April 21 we released our 2022 ESG report, detailing our continued exploration and progress in ESG. We received an MSCI ESG AA rating for two consecutive years. In the future, we will continue to improve our ESG governance, promote the harmonious development of our brand, the environment, and our society, and create value for our users, partners, employees and other stakeholders.

As we enter the next phase of the development, we will execute our autonomous driving and BEV roadmap, unveiled on April 18 Shanghai Auto Show. City NOA will make the beginning of autonomous driving 3.0 for our Company. Meanwhile, we will also enter a new chapter in terms of powertrain platforms and products, with EREVs and HPC BEVs being developed in parallel.

In terms of autonomous driving, our highway NOA feature has served over 280,000 families, accumulating over 140 million kilometers of highways NOA mileage. In this quarter, we'll bring the NOA features to urban driving scenarios, we will release city NOA for beta testing on Li AD Auto Max 3.0, and target to roll out the feature in 100 cities across the country by the end of 2023.

Moving forward, with the application of Transformer models in autonomous driving, we believe we will be the biggest beneficiary since we have the largest dataset in China.

With respect to EREVs and HPC BEVs, we will adhere to our parallel development strategy. For EREVs, we will focus on enhancing the efficiency of the range extenders, allowing users to drive on battery power on urban commutes and on range extender during long-distance travel, a much better experience than driving ICE vehicles.

For HPC BEVs, we will continue to improve our technology to offer a rapid charging experience comparable to filling up gasoline vehicle, so the users can make intercity trips without range anxiety.

By 2025, our portfolio will consist of one supermodel, a flagship model, five EREVs and five HPC BEVs, 11 models in total, which will allow us to further expand our user base and expand to new markets.

This year, we will redouble our efforts in fast charging network deployment. Our 4C fast chargers can reach peak power output of 480 kilowatts, adding 400 kilometers of driving range with a 10-minute charge. We plan to build 300 charging stations in highway service areas by the end of 2023, covering four major economic zones, including the Beijing-Tianjin-Hebei region and the Yangtze River Delta region and the Great Bay area, and the Chengdu-Chongqing region. We expect to further expand to 3,000 charging stations by the end of 2025, covering 90% of highway mileage nationally and all major tier 123 cities.

In the future, we will continue to refine our operations, build organizational capabilities to support the scaling of our business and maintain healthy sales growth. As we continue to strengthen our autonomous driving and smart cockpit capabilities and simultaneously implement our EREV and HPC BEV dual product strategy, we are confident we will also continue to strengthen our market leadership in the NEV market, creating more and better choices for family users, to create mobile homes and create happiness.

With that, I will l turn it over to our CFO, Tie Li, for a closer look at our financial performance.

Thank you, Li Xiang. Hello, everyone. I will now review some of our 2023 first quarter financials. Due to time constraints, I will address our financial highlights here and encourage you to refer to our earnings press release for further detail.

Total revenues in the first quarter of 2023 were RMB18.79 billion or $2.74 billion, increasing 96.5% year over year and 6.4% quarter over quarter. This included RMB18.33 billion or $2.67 billion from vehicle sales, which was up 96.9% year over year and 6.1% quarter over quarter.

The year-on-year increase was mainly due to the increase of vehicle deliveries and higher average selling price contributed by the Li L series. The quarter-over-quarter increase was mainly due to the increase in vehicle deliveries, partially offset by the lower average selling price due to different product mix between the two quarters.

Revenues from other sales and services were RMB459.7 million or $66.9 million in the first quarter of 2023, growing 81.4% year over year and 20.5% quarter over quarter. The increase was mainly attributable to increased sales of accessories and services, in line with higher accumulated vehicle sales.

Cost of sales in the first quarter was RMB14.96 billion or $2.18 billion, representing an increase of 102.2% year over year and an increase of 6.2% quarter over quarter.

Our gross profit in the first quarter of 2023 was RMB3.83 billion or $557.5 million, growing 77% compared with the first quarter of last year and 7.4% versus the fourth quarter of 2022.

Vehicle margin in the first quarter of this year was 19.8% compared with 22.4% in the first quarter of 2022 and 20% in the fourth quarter of 2022. The year-over-year decrease was mainly due to the different product mix between the two quarters.

Gross margin in the first quarter of 2023 was 20.4% compared with 22.6% in the first quarter of last year and 20.2% in the fourth quarter of last year.

Operating expenses in the first quarter of 2023 were RMB3.42 billion or $498.7 million, increasing 32.9% year over year and decreasing 7.4% quarter over quarter.

Research and development expenses in the first quarter of 2023 were RMB1.85 billion or $269.7 million, up 34.8% year over year and down 10.5% quarter over quarter. The year-over-year increase was primarily driven by increased expenses to support our expanding product portfolios as well as increased employee compensation as a result of our growing number of staff. The quarter-over-quarter decrease was mainly in line with timing and progress of new vehicle programs.

Selling, general and administrative expenses in the first quarter of 2023 were RMB1.65 billion or $239.6 million, representing an increase of 36.8% year over year and an increase of 0.9% quarter over quarter. The year-over-year increase 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 our sales and servicing network.

Income from operations in the first quarter was RMB405.2 billion or $59.0 million, compared with RMB413.1 million loss from operations in the first quarter of 2022 and RMB133.6 million loss from operations in the fourth quarter of 2022.

Net income in the first quarter of 2023 was RMB933.8 million or $136 million compared with RMB10.9 million net loss in the first quarter of 2022 and more than triple the RMB265.3 million net income in the fourth quarter of 2022.

Turning to our balance sheet and cash flow, our balance of cash and cash equivalents, restricted cash, time deposits and short-term investments was RMB65 billion or $9.46 billion as of March 31, 2023.

Net cash provided by operating activities in the first quarter of 2023 was RMB7.78 billion or $1.13 billion. Free cash flow was RMB6.7 billion or $975.9 million in the first quarter of 2023.

Now for our business outlook. For the second quarter of 2023, the Company expects the deliveries to be between 76,000 and 81,000 vehicles, representing an increase of 164.9% to 182.4% from the second quarter of 2022.

The Company also expects the second quarter total revenues to be between RMB24.22 billion and RMB25.86 billion or $3.53 billion and $3.77 billion, representing an increase of 177.4% to 196.1% from the second quarter of last year.

This business outlook assumes supportive macroeconomic conditions, no significant disruption in the supply chain, and reflects the Company's current and preliminary view on the business situation and market condition, which is subject to change.

I will now turn the call over to the operator to start our q-and-a session.

(Operator Instructions). For the benefit of all participants on today's call, please limit yourself to two questions, and if you have additional questions, you can re-enter the queue. If you are a Mandarin speaker, please ask your questions in Chinese first, then followed by the English translation. The first question comes from Tim Hsiao from Morgan Stanley. Please go ahead.

(Spoken in Chinese) So my first question is about gross profit margin, so first quarter gross profit margin was adversely affected by the inferior product mix and the lower utilization rate. So how should we think about the margin trajectory in the following quarters, given the interplay of the multiple factors?

So on the bright side, the scale will rise in component costs, including the battery prices would fall. On the flipside, we expect the rising mix of L7 and the Air models might cause greater margin dilution. So any chance in the following quarter we could see the gross profit margin bounce back to a previous peak level, more than 22%? So that's my first question.

Thank you, Tim, this is Johnny. Basically, we are confident of improving the gross margin starting from Q1. First, in the first quarter the Li ONE sales impact was 1.6% on the gross margin negative if we excluding that. So we will sell out all the Li ONEs in the first half and there will be some room on the Li ONE's negative impact.

With the ramp up of our L7 series and also the Air series, there will be some room on that, yes. We still see there will be some other boom costs up stress so we still keep our 20% full year guidance. Thank you.

Got it, thank you very much, Johnny. (Spoken in Chinese) So my second question is about city NOA. Li Auto plans to push through the city NOA to a small group of users for early testing. So what's the size of the user group at the initial stage and when are you going to activate the function to all AD Max users?

Separately, when the Company thinks about Li Auto, the targeted customers, i.e. the family users, what's the value proposition of city NOA where a high level [in town] driving function, would does that mean to them? How important is it when family users make their decision to buy the cars and to enhance their user experience? So that's my second question, thank you.

(Interpreted) Overall we're making good progress in terms of city NOA, both on a system testing level and on real road testing. Our plan is still to release early bird testing in June and the policy, specific policy, as to who do we release it to is still being created. But generally, our rule of thumb is we will try to cover more frequent users of highway NOA, which are users who have more willingness and ability to use NOA. They also have higher tolerance and level of understanding of the NOA feature.

By year end, we still plan to launch city NOA in 100 cities and as to which specific cities we will cover first is mostly dependent on the number of our existing vehicles in the cities. Because as you know our city NOA solution doesn't rely on high definition map, which means as long as we have navigation data for the city, as long as there's enough drivers driving our Max models, we will be able to accumulate enough data to allow users to use city NOA. Especially when it comes to complex intersections, as long as we achieve good coverage on those scenarios, we will be able to accumulate more data and open up those cities and locations for our users.

Speaking of family users, as we've always believed, they care a lot about safety and also comfort, especially when it comes to mimicking human drivers to be able to drive smoothly and give the entire family a good experience. So to make that happen, we are running shadow testing in our existing vehicles already to try to improve the behavior of our NOA features, so that when they are launched they can provide the best experience for our family users.

(Spoken in Chinese) Thank you very much for the detailed sharing, thank you.

Thank you, the next question comes from Bin Wang with Credit Suisse. Please go ahead.

(Spoken in Chinese) Actually I've got two questions about the volume. In the last conference call, you mentioned you actually maybe try to do monthly 30,000 units per month. What's your expectation which will that deliver in the second quarter or in the future?

The second thing is about BEV. In a media interview you said that BEV has been postponed to next year. Do you confirm that? If yes, what's the reason behind that postponement to next year? Thank you.

(Interpreted) So first question, in Q2 we will gradually ramp up our delivery numbers and our current goal is to reach the 30,000 monthly mark by June of this quarter. Talking about the BEV flagship, our plan is still to release it in Q4 and after which we will be delivering the vehicles to retail stores for static viewing and test drives, which will follow a similar pace as you've observed with our L9 and L8.

Thank you.

Thank you, the next question comes from Paul Gong with UBS. Please go ahead.

(Spoken in Chinese) So my first question is regarding the expense. It seems that both R&D and SG&A seems to be having either flattish quarter over quarter or even slightly decline and below our budget. Especially in terms of SG&A, even with the expanded network, it still seems to be well within control. So can you please give an update of the full year and the spending guidance, as well as SG&A expense ratio? Thank you.

Hi Paul, this is Johnny, I will take your question. Paul, for the R&D, we will still keep our full year guidance, which is over RMB10 billion to RMB12 billion for the full year. For the SG&A as a percentage of revenue, we will still improve starting from the first quarter of last year's ratio. Yes, this is our plan, thank you.

(Spoken in Chinese) So my second question is regarding the competition. I think some other carmakers have announced a similar size of the vehicle with also plugin hybrid system and with even lower price than the L8. Have we observed any impact in terms of Li Auto intake and how should we think about the rising competition in the same segment? Thank you.

(Interpreted) Looking at our actual order intake, the order for L8 is actually increasing very steadily. In fact, we believe as more players enter the market, it's actually good for our L8, which is the market leader, because many users read about these competitors and they start looking into this market segment and eventually they come over to L8 and order our products.

So we generally don't think this to be a big threat and even when we look at the defeated data for our L8 orders, this product you're talking about, this specific product, isn't even among the top competitors. Our top competitor is still the Tesla Model Y.

(Spoken in Chinese) Thank you so much.

Thank you, the next question comes from Ming-Hsun Lee from Bank of America. Please go ahead.

Okay, thank you. (Spoken in Chinese) So my first question is regarding your business priority at the current moment. Is profitability and free cash flow more important for you, or market share is more important for you?

Also how do you see the price competition in the second half this year, given the battery price already declined a lot? So will you consider to slightly give a little bit the discount in order to maintain an even higher market share?

(Interpreted) First of all, our top priority is going to be market share. In Q2, our goal is to increase our market share in NEV market above RMB200,000 MSRP from 11% to 13%. We don't have any plans to offer discounts because as we made our long-term sales and product plans, we have already considered to price our product as the most competitive, considering the size, the segment and the price segment. So this is all taken into consideration and we have confidence not to offer discounts.

Okay, thank you. (Spoken in Chinese) So my second question is regarding your battery EV plan. In April you already disclosed your long-term goal, by 2025 you will have five BEV models and also five EREV models and one flagship model. So how do you think about the long-term gross margin of your battery EV? Also what is your CapEx related to the BEV business?

I will take that question, this is Johnny. For this year's CapEx, in the last three years our CapEx is about RMB10 billion and rolling three-year starting from this year based on our current estimate, including the HPC CapEx, is about RMB18 billion. But it may expand if our early test on the HPC will succeed, we may adjust our present plan. Thank you.

Thank you.

Thank you. The next question comes from Yuqian Ding with HSBC. Please go ahead.

(Spoken in Chinese). Two questions on the product map. First, on the pure battery electric vehicle product strategy and profit outlook. As BEV might have a quite different bond structure versus range extender, for the coming EV models , will there be range extender version versus pure battery electric version? So far, we noticed that during the competition, BYDs and D9 have been selling well but 70% is PHEV.

Second, on the RMB200,000 to RMB300,000 pricing range. Largely compelled by more competition, how would Li Auto differentiate itself in winning mid-size and compact size segment which already have crowded model supply? Thank you.

(Interpreted) I'll answer this question from two angles. First of all, even though we haven't launched our HPC BEV product, in fact we have invested in R&D and supply chain, especially developing in-house parts very early on to prepare so that we can offer the best products at a price point very close to our EV product and deliver very similar gross margin as well. All this is reliant on our R&D efforts as well as in-house parts, which is deployment in our supply chain.

Without talking about specific models, whether it's BEVs or [EREVs], our goal has always been to massively replace ICE vehicles. In order to do that, the top priority is to tackle range anxiety so that our users can drive freely between cities and far away from their homes.

So, our strategy for that product is to deploy charging stations which can charge very rapidly in service areas and highways so that it can provide a very similar experience even comparable to cars that are powered by [traditional] chemical fuels.

At the same time, as I mentioned earlier, with our strategy in R&D and in-house development, we're able to offer all of this without incurring additional costs for the users so that they can buy these products at pricing very similar to our EVs.

Thank you. The next question comes from Yingbo Zu with CITIC Securities. Please go ahead.

Thank you. (Spoken in Chinese). My question is, how we plan our sales and service network in next two or three years to prepare for the large sales volume in future? Thank you.

(Interpreted) I'll answer this on three levels. First of all, as we build multiple vehicles in our private portfolio, we'll be upgrading stores which only house one or two cars today so that they can house a bigger part of our product offering.

Secondly, we will change the format in the cities where we have very high market share. We'll change the format of some of our stores to be a sales complex which will offer better test-driving experience as well as drive higher conversion rates.

Thirdly, in tier 4 cities we plan to pretty much cover all of the tier 4 cities and the format will be very similar to what you see in auto complexes, offering a comprehensive store offering services as well as sales in the same complex.

So, overall, as you look at our sales network, it will look very similar to what you see with Mercedes, BMW and Audi, both in terms of scale and format.

Thank you. The next question comes from Jing Chang with CICC. Please go ahead.

(Spoken in Chinese). We can see that our average second quarter delivery guidance is around 78,500 units, which means that by the end of second quarter, the monthly sales volume will hit 30,000 units and therefore I want to ask whether the trend of new orders since May 1 we have already seen a significant improvement and support the continuous improvement of delivery volume in May and June.

In addition, I want to ask whether the current proportion of Air version and also the proportion of sales volume in lower tier cities has already made a greater incremental contribution than before and what do you think for the further state of our three existing models after their quarterly sales volume has already reached 30,000 unit especially in the third and fourth quarter this year. Can you expect a higher level? Thank you.

(Interpreted) Answering these questions in order. First of all, May has typically been a low season in terms of vehicle sales but for us, we have seen a strong growth compared with April, both in terms of delivery numbers and order numbers. As the Air models hit our stores and we begin to offer test drives, we have also seen a greater share of Air models in both L8 and L7. Together, L8 and L7 Airs contribute about 20% of incremental sales thereafter.

Secondly, we divide a city by what we call new tier 1s and tier 2s and we see the best performance in these so-called new tier 1 cities because these are strong drivers in terms of buying SUVs that are priced over RMB300,000. They will continue to be strong drivers. In our next steps, we will expand into tier 3 and tier 4 cities and we believe they will be a growth engine for our next phase of development.

Thank you. Please go ahead.

(Spoken in Chinese). My second question is we can see the number of our staff has expanded a lot and most of they open in the larger cities and this is one of the major driving force of our further sales volume growth. We also can see that we are constantly adjusting our distribution channels and organization makeup so can you share some detailed cases, especially for what difficulties do we see in the lower tier cities and how we adjust to make the Li improvement?

(Interpreted) I can't disclose too many details but what I can share is that this quarter we have started a comprehensive organizational upgrade on the commercial side. We have changed from a regional organization structure to a province-based organizational structure so in terms of both customer acquisition and conversion resources, we've changed from a centrally allocated model to a more regional, more front line directed allocation model so that the resources can be allocated more efficiently.

Compared with Q4 last year, actually our number of stores hasn't changed much but the sales per store and sales per person have both increased very dramatically. Also, the conversion rate from leads to order has also increased.

As to our strategy in tier 3 and 4 cities, what I can share right now is that we will trust this new process and organizational structure and give the power to the front-line workers so that they can use their judgement and experience to decide what is the best strategy that best suits their city and region to achieve the best results.

(Spoken in Chinese).

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

(Spoken in Chinese).

(Interpreted) First of all, in the Changzhou factory, we currently operate two production lines. The first line manufactures L8 and L9 and we currently operate two shifts, which gives us a capacity of about 20,000 to 25,000 per month. The second line makes L7 and L8 and currently operates on one shift, still doing 10,000 to 12,000 per month. L8 is actually used to balance the load of the two lines so that they can operate at optimal efficiency.

Going forward, based on demand, we can easily improve our production output with the current factory in Changzhou so this year, this factory should be enough to support our sales targets.

The Beijing factory is dedicated to our [BEV] product line and it's designed to initially offer 100,000 units production capacity annually and as we deliver more vehicles in the future, we will strategically increase the output of the production capacities to meet our demand.

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

Thank you all once again for joining us today. If you have any further questions, please feel free to contact Li Auto's Investor Relations team. That's all for today. Thank you and have a good day.

Portions of this transcript that are marked (interpreted) were spoken by

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