理想汽車 (LI) 2023 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by for Li Auto's second quarter 2023 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, Sarah. Good evening and good morning, everyone. Welcome to Li Auto's second quarter 2023 earnings conference call. The Company's financial and operating results were published in a press release earlier today and were posted on the Company's IR website.

On today's call, we will 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 discussion.

Before we continue, please be reminded that today's discussion will contain forward-looking statements made under 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 views expressed today. Further information regarding risks and uncertainties is included in certain filings with the U.S. 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 his remarks in Chinese. There will be English translation after he has finished all his remarks. With that, I will now turn the call over to our CEO, Mr. Xiang Li. Please go ahead.

(Interpreted) In the second quarter of 2023, we reached multiple milestones in deliveries. We delivered over 30,000 vehicles in June, taking our second quarter deliveries to 86,533 vehicles, tripling the volume from the same period last year.

We delivered more vehicles in the first half of this year than all of 2022. Furthermore, in early July we delivered our 400,000th Li Auto vehicle, taking just 42 months to reach this important milestone since we commenced deliveries in December 2019, setting a record for Chinese emerging NEV OEMs. Going from 300,000 cumulative deliveries to 400,000 took less than four months. Finally, our July deliveries hit a new high of 34,134 units, bringing our total cumulative vehicle deliveries to over 430,000.

With our strong product lineup and comprehensive improvements in organizational processes and operating capabilities, our three models continue to lead in their respective market segments, with cumulative deliveries exceeding 200,000 units since their successive launches starting in June last year.

According to the insurance registration data of China Automotive Technology and Research Center, in this past quarter, Li L7 consistently topped China's large SUV monthly sales chart. The L8 also remained customers' favorite six-seater SUV priced over RMB300,000. The L9 continued to dominate the full-size SUV sales chart in China.

Li Auto has the highest sales among domestic premium automotive brands in China, and we remain one of the top three NEV brands priced over RMB200,000 in China, with market share increasing from approximately 11% in the first quarter to about 14% in the second quarter.

Driven by our delivery growth and stronger operational capabilities, our financial performance continued to improve. In the second quarter, the Company achieved record-breaking results across revenue, net income and free cash flow. During the quarter, our revenue reached RMB28.65 billion, up 228.1% year over year, while net income and free cash flow increased from RMB2.31 billion and RMB9.6 billion, respectively.

We are confident that our outstanding cash generation capability and ample cash reserve will support our unwavering commitment to invest in R&D, business expansion, and building long-term competitive barriers.

We expect our third-quarter deliveries to be between 100,000 to 103,000 units. For the full year 2023, we are confident to beat the internal delivery target we set at the beginning of this year by 10% to 20%, with annual revenue exceeding RMB100 billion. We aim to hit the 40,000 monthly delivery milestone by the end of this year. To achieve our delivery target, we will continue to foster coordination across production, supply chain and sales, while continuing to expand production capacity and enhance supply chain management processes and capabilities.

We made rapid progress in autonomous driving this year. In June 2023, we started test drives for China's first NOA and commute NOA, which do not rely on high-definition maps, in Wangjing, known as one of the most of complicated traffic zones in Beijing. We also rolled out our city NOA to early-bird users in Beijing and Shanghai.

On the perception front, we use BEV models enhanced by innovative NPN features and TIN network to perceive complex road structures in real-time and comprehend traffic rules.

While utilizing occupancy network to identify common obstacles, we also utilized imitation learning in control algorithms to make judgments more akin to human drivers. Test drivers and media have spoken highly of driving safety, efficiency and comfort demonstrated by Li Auto AD Max.

In the second half of 2023, we will continue to release city NOA and commute NOA to more early-bird users, bringing city-level autonomous driving to more families. Meanwhile, users are increasingly accustomed to the convenience and ease of highway NOA during their journey. As of today, we have provided highway NOA to over 380 thousand families, covering more than 230 million kilometers.

With respect to BEV models, we introduced our 800-volt high-power charging solution at our first ever Family Tech Day in June 2023. With optimized battery and thermal management systems, our BEVs can fully leverage the battery's 5C charging rates with a peak charging power of over 500 kilowatts and 500 kilometers of driving range from a 12-minute charge. In conjunction with our own 5C charging network, our BEVs can offer a very compatible energy replenishment experience to ICE vehicles.

We will unveil our super flagship 5C BEV, Li MEGA, by the end of this year, and we are confident that it will emerge as the new top seller among all vehicles priced over RMB500,000.

Meanwhile, we are actively deploying our 5C super charging network. As announced, we have built and commenced operation of 37 Li Auto 5C super charging stations. Going forward, we will accelerate the rollout, aiming to establish over 300 5C super charging stations by the end of this year and over 3,000 by the end of 2025, to offer our BEV users a fast and reliable charging experience.

We firmly believe our dual-energy strategy is the best solution to replacing ICE vehicles at scale. The dual-energy strategy composes of EREV technologies that center on high-capacity batteries and highly efficient range extenders, as well a high-voltage BEV technology that can truly address pain points in charging speed and charging on long trips.

To support the rapid sales growth, we accelerated the expansion and upgrade of our integrated online and offline direct sales and servicing network. While we continue to open retail stores in shopping malls, we have increased the proportion of our retail stores located in automotive retail parks to cater to different users' purchasing habits and needs, further improving user acquisition and sales conversion.

In the second quarter, we opened 32 new retail stores and upgraded 18 existing stores through relocation and expansion. As of July 31, 2023, we operated 337 retail stores in 128 cities, as well as 323 service centers and Li Auto-authorized body and paint shops operating in 222 cities.

Looking ahead, driven by our pursuit of continuous growth, we will relentlessly explore, train and learn to refine our two most critical products, namely, our smart electric vehicles for family users and organizational processes to serve our internal talent and teams better supporting our journey from one to 10.

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

Thank you, Li Xiang. Hello, everyone. I will now walk you through some of our 2023 second 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 details.

Total revenues in the second quarter of 2023 were RMB28.65 billion or $3.95 billion, increasing 228.1% year over year and 52.5% quarter over quarter. This included RMB27.97 billion, or $3.86 billion, from vehicle sales, which was at 229.7% year over year and [52.6%] (corrected by company after the call) quarter over quarter.

The year-over-year increase was mainly due to the increased vehicle deliveries. The quarter-over-quarter increase was mainly due the increase in vehicle deliveries, partially offset by the lower average selling price as a result of different product mix, between the two quarters.

Revenues from other sales and services were RMB680.8 million, or $93.9 million in the second quarter of 2023, growing 173.4% year over year, and 48.1% quarter over quarter. The increase was mainly due to the increase of sales of accessories and provision of services, in line with higher accumulated vehicle sales, as well as increased sales of charging stalls in line with higher vehicle deliveries.

Cost of sales in the second quarter of this year was RMB22.42 billion, or $3.09 billion, up 227.1% year over year, and 49.9% quarter over quarter.

Gross profit in the second quarter of this year was RMB6.24 billion, or $859.9 million growing 232.0% and 62.8% compared with the second quarter of 2022 and the first quarter of this year.

Vehicle margin in the second quarter of 2023 was 21.0%, compared with 21.2% in the second quarter of last year, and 19.8% in the first quarter of 2023. Excluding the impact of Li ONE, the vehicle margin of the Li L series remained stable over the first quarter of 2023.

Gross margin in the second quarter of 2023 was 21.8% compared with 21.5% in the second quarter of 2022 and 20.4% in the first quarter of 2023.

Operating expenses in the second quarter of 2023 were RMB4.61 billion, or $635.7 million, growing 61.4% year over year and 34.6% quarter over quarter.

Research and development expenses in the second quarter of 2023 were RMB2.43 billion or $334.5 million, up 58.4% year over year and 31% quarter over quarter. The increase was primarily driven by increased employee compensation as a result of our growing number of staff, as well as increased expenses to support our product portfolio expansion and technology advancement.

Selling, general and administrative expenses in the second quarter of 2023 were RMB2.31 billion, or $318.5 million, up 74.3% year over year and 40.4% quarter over quarter. The increase was mainly driven by increased employee compensation as a result of our growing number of staff, as well as increased rental expenses associated with our sales and service network expansion.

Income from operations in the second quarter of 2023 was RMB1.63 billion, or $224.2 million, compared with RMB978.5 million loss from operations in the second quarter of last year, and growing 301.3% from RMB405.2 million income from operations in the first quarter of this year.

Net income in the second quarter of 2023 was RMB2.31 billion, or $318.6 million, compared with RMB641 million net loss in the second quarter of last year, and more than double the RMB933.8 million net income in the first quarter of 2023.

Turning to our balance sheet and cash flow, our balance of cash and cash equivalents, restricted cash, time deposits and short-term investments totaled RMB73.77 billion, or $10.17 billion as of 30 June 2023. Net cash provided by operating activities in the second quarter of 2023 was RMB11.11 billion, or $1.53 billion. Free cash flow was RMB9.62 billion, or $1.33 billion in the second quarter of 2023.

Now for our business outlook. For the first quarter of 2023 the Company expects the deliveries to be between 100,000 and 103,000 vehicles representing an increase of 277.0% to 288.3% from the third quarter of 2022. The Company also expects the third quarter total revenues to be between RMB32.33 billion and RMB33.3 billion, or $4.46 billion, and $4.59 billion, representing an increase of 246% to 256.4% from the third quarter of last year.

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

That concludes our prepared remarks. I will now turn the call over to the operator, to start our Q&A session. Thank you.

Thank you. (Operator Instructions) For the benefit of all participants on today's call, please limit yourselves to two questions, and if you have additional questions, you can re-enter the queue. If you're a Mandarin speaker, please ask your question in Chinese first, and follow with English translation.

Our first question comes from the line of Tim Hsiao of Morgan Stanley. Please go ahead.

(Spoken in Chinese) My first question is about the vehicle delivery, because Li Auto's third quarter volume guidance of around 100,000 implies the vehicle supply constraint were persistent throughout the whole quarter, so, could you please elaborate a bit more about the key bottleneck to your production? Is that due to supply constraint of any specific component, or anything else? How confident are you in the Company's ability to remove the bottleneck, and deliver around 40,000 units a month in fourth quarter?

In the meantime, should we be concerned about a similar challenge might relapse in launching the BEV models on the new platform and at the new production line? That's my first question. Thank you.

Donghui Ma: (Interpreted) First, I'll take the question on production capacity. We currently operate two production lines in Changzhou for L8, L9 and L7. The total capacity, if we're running the two shifts is around 50,000 units per month. The current bottleneck is still with component supply, mostly because of a very strong demand for this year, which led us to increase our target, compared to what we said at the beginning of the year.

To cope with the additional demand, we actually have a production expansion plan made in Q2, but it's taken some time for us to test the production lines and verify those, so, the new capacity will be released in due time.

We're still confident that, on an annual basis, we will be able to reach our delivery target, and in addition, to prepare for our growth in '24 and '25, we have started early to make production and capacity plans to satisfy the needs for those two years.

(Spoken in Chinese). My second question is about organization restructure, because we noticed that over the past 12 months quite a lot of EV industry peers have gone through organizational restructure or had a management reshuffle. We recall that Li Auto also announced organization upgrades last December to prepare for its future growth. So could you share with us the latest progress of the restructuring efforts and should we expect any changes to the management team in the next six to 12 months amid such upgrade?

In the meantime, the operational or financial metrics could be monitored more closely to quantify the improvement. For example, the lower cost, higher margin, or faster model upgrades in upcoming quarters, so that's my second question, thank you.

To translate the previous question - answer the previous question on the matrix organization upgrade, it's something we have and that's a significant amount of resources and manpower. Our business team at the beginning of the year had set an annual delivery target of 360,000 units, but considering two factors we had in fact earlier this year downgraded the target to 300,000 units.

One is the overall economic environment and the other is considering many of the enterprises while they're carrying out organization upgrades, their growth in fact had stagnated for two to three years. However, in hindsight, the actual results from the first half of this year, our operating efficiency has not only not declined but actually we actually saw a very significant increase. We have beaten our target every single month and the overall coordination and cooperation efficiency is very high.

The benefit from an organizational upgrade has significantly exceeded our expectations. The organizational upgrade has really allowed us to fight trench wars as an army group in the smart electric vehicle industry, which is known for having very long product cycles and long value chains. Once we have achieved certain milestones in terms of market share, we are able to defend it very steadily and continue to be built on top of it. So we can see as a result we have displayed a very steady growth curve on this first half, but also the second half of this year and that is the real benefit of our organizational upgrade.

In terms of the matrix organization, there are really three types of specific benefits. First of all, from our - where we described ourselves as a guerilla in our early days, to being an actual formal armed forces, the Company is really building highways for its core businesses so that every person on the value chain can run very efficiently. Even though there are more traffic rules on highways, overall efficiency of highways is much higher and there are much fewer accidents.

Secondly, the organizational upgrade has allowed us to build a very robust training structure for our employees and business practices. The working mechanism is very similar to artificial intelligence, from perception and observations to setting goals and planning its activities and finally, to execution and collaboration and after action reviews to really build it in as the Company's capability. So even for a fresh graduate, he or she doesn't need to start as a business assistant, but rather can really get into a real battle and grow quickly.

Thirdly is what we call interlocking and it's really a contractual relationship between our different teams and talents. Compared to the OKR mechanism, our matrix organization changed what we used to call alignment to interlocking, which is essentially a contract between teams and our different individuals. So when people set their goals, they can challenge each other and when they execute, they can work very closely and collaborate to deliver the best results.

So by going from alignment to interlocking, we're really setting a contract between the different teams and the targets become more and more challenging, but we're able to achieve these targets with higher and higher confidence. So overall, we believe that the most critical ingredient to a successful organization upgrade is great culture, which includes putting customers' values first, taking the right path and not the easy path and building everything on collaboration which is our core value.

The organization and process is really the best product that we can build for our employees. It's simple and yet sophisticated and it brings the best practices from each business area and builds them into products so that the organization can grow along the way. So without great culture, the business processes are going to be rigid and complicated. So this is the biggest learning from upgrading our matrix organization and processes, so basically product upgrades bring more margins or value for the Company and organizational upgrades bring more efficiency for the Company.

(Spoken in Chinese).

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

(Spoken in Chinese). I've got two questions, number one is about the margin. What's your outlook in the third quarter and the fourth quarter this year? Because previously you've highlighted that Li ONE has been cut down about 2% gross margin, now you have a better volume in the second half of this year. Can I assume the second half margin will be above 23%, increased by 2 percentage? That's the number one question about the margin.

Secondly, about the self-driving technology, right now you're doing the early bird program for some customers. Can I know when the self-driving can go out to every single car buyer when they purchase [a car, they can start trying]? So do you have a timetable to share for 2024? Thank you.

Hi Wang, this is Johnny from the Company. Our second quarter gross margin has reflected our sales and marketing team's effort, so you can see the improved SG&A percentage as a total revenue. Also some positive improvement on the bottom side from our supply chain here and we will continue to improve on that but for full year, because we've still got six months or five months to the end. So we still want to keep the whole year's gross margin guidance just above 20%. Thank you.

(Interpreted) On city NOA and commute NOA, we will continue our original plan to roll them out in batches in different cities and the rollout plan is going to be largely based on the number of vehicles and owners in the specific cities. The more owners, the more mileage accumulated and more test data, the more likely the city will get city NOA and commute NOA early.

In addition to that, we're also taking into consideration the NPN features of complex intersections in those cities and the amount of data coverage that we have. So as more and more early bird users join into our pilot program, we'll be opening up our NOA features in more cities.

Overall, the development and testing for NOA features are going on track and in June 2023 we've offered test drives of our city NOA in Wangjing, which is known as one of the most complicated traffic zones in Beijing, using the first - China's first NOA, city NOA solution that doesn't rely on high-definition maps, and media gave very nice reviews about the features.

In July, in Beijing and Shanghai, we've opened up city NOA to early bird users and users spoke value highly of the comfort and safety of our solution. This year we will be releasing our city OA and commute NOA for largescale testing and the plan to release it in 100 cities remains unchanged. Internally we are continuing to accelerate the R&D and testing of our city solution.

Thank you, thanks so much.

Our next question comes from Yingbo Xu with CITIC. Please go ahead.

(Spoken in Chinese). I have two questions. The first one is about the third quarter's sales. How do we see the sales elasticity for the third quarter expectation?

My second question is about Mind GPT. Could you give us more color about how Mind GPT is going? Thank you.

First of all on guidance, the guidance we've given earlier today is really built around our production capacity, the maximum of our production boundaries for Q3. For Q4, with increased production capacity, we'll be able to reach or surpass the 40,000 per month mark. Another important point to note is we're very confident that we will be able to challenge the leadership position of Mercedes, BMW and Audi in China, meaning that we'll exceed their sales in China and become the top selling luxury brand in China.

Second question on Mind GPT, in terms of technology we released our internal big model Mind GPT and we have since built a full stack in-house development capability of large model. The R&D really falls into four areas. First is data and second is big model training algorithms and third is assessment and security and lastly, application delivery.

On the training algorithm front, we've stayed in-line with mainstream algorithms in the industry, including the foundational model training which utilizes 1.3 billion tokens and to command fine-tuning and reinforced learning. In order to make sure that the Mind GPT model can have accurate knowledge and be able to personalize based on the users, we've also introduced search and recommendation algorithms, which are also built in-house.

Mind GPT is out now in version 1, which uses 16 billion parameters and based on the foundational model we can better suit the user scenarios of our users and to make Lixiang Tongxue more interactive with our users.

On the product front, the big model-based Mind GPT is going to power our first-generation multi-mobile human machine interface operating system and it can allow every single person of our user's family to use AI with ease and make Lixiang Tongxue a new member of the family. It can be an expert on the car, it can be a teacher, it can be a tour guide, it can be everything.

In terms of progress, we'll be sharing more details about the progress of R&D and so far, we have already opened up Mind GPT for internally testing and after these tests we'll be releasing the model to a small number of early bird users through OTA.

(Spoken in Chinese).

Our next question comes from Paul Gong with UBS. Please go ahead.

(Spoken in Chinese) So my first question is regarding the MEGA, regarding its capacity preparation as well as sales expectation, as the Zeekr 009 are the only purely electric MPV currently in the market provides a benchmark and after MEGA, what is our latest thought on the product pipeline for the BEV?

(Interpreted) First on MEGA's sales target, we're confident that MEGA will become the top seller in the market above RMB500,000 across all different energy forms and body types, just like we've seen from L7 and L8, which are respective market leaders in their segments, they've also won over market share from sedans and other segments.

Next year we're planning to release four vehicles, one range extender vehicle and three pure electric vehicles, not including MEGA, which we've just talked about. For specific product details we'll be sharing on our product release next year when the time is appropriate.

(Spoken in Chinese). So the second question is regarding the parallel exports, we realize that there are some informal trading of the Li Auto export into other countries, how big is this in terms of scale and do you have any plans to formalize it from guerilla into formal army and expand our sales volume as well as our global influence of the branding?

Hi Paul, this is Johnny. I think we want to state again, we want to, I think globalization after we've become dominant in China because China is a very big market, as we just mentioned. Yes, the answer is no, we want to -- and also, our product is well defined and was available for sale only for China and mainland, so that's basically. Thank you.

Okay. Thank you very much. Thank you.

Your next question comes from Jing Chang with CICC. Please go ahead.

(Spoken in Chinese). A follow-up question about gross margin, as Mr. Li just mentioned some positive factors on our gross profit margin in the second half of this year, we still maintain the guidance of 20% for the whole year guidance. Is there any potential negative impact you can see and what that might be?

Looking through 2024 our BEV model on -- in the new factory will start to put into operation, so because we can see the current BEV models relatively have a very low gross profit margin, so how can we achieve our BEV model through enjoying higher gross profit margins compared to the industry.

I will take this question, it's Johnny. As I just mentioned in the earlier question, the current gross margin has reflect our effort from our supply chain team and we keep improving on the bottom side and to help us to improve our growth margin to the 25% designed gross margin continuously.

For the BEV, I think every time we launch a new product, we will have some question about the margin and because there are some poor product offerings in the market, but we still want to reinform our statement is that, the product gross margin was from the first day you define your customer, and you define your product. What we want to say is we overall, we want to keep 25% for the whole Company with different product offerings. Thank you.

(Spoken in Chinese). My second question is about autonomous driving, so we intend to release city NOA function to 100 cities by the end of this year, which is a very aggressive target. Is there any great challenge as you can see at present? Can you share more about our outstanding capabilities in different aspects of our autonomous driving to support us in achieving such a challenging target?

(Interpreted) As I mentioned earlier, we're still planning to release city NOA and commute NOA in batches, as opposed to releasing all the cities in one go. We're on track to delivering city NOA to 100 cities by the end of this year.

In terms of technical capabilities, we think we have advantages in both perception and planning. On the perception side we have this innovative Neural Prior Network and also Traffic and Network to predict traffic light intentions in the end-to-end model. All of this is going to enhance our BEV model, which can perceive or sense complex road structure information in real time and understand traffic rules. Also using occupancy network, we are able to recognize general obstacles on the driver's route.

On the planning side we're utilizing impatient learning algorithms, which learn from a lot of human driver behavior and decisions to make sure that our city NOA can stay safe, on track, and also follow traffic rules and at the same time drive very similar to human behavior.

We have the biggest autopilot or NOA testing fleet in China and also have the most training mileage as well as a significant reserve of cloud assigned computing power, which we believe will be our path to competitive advantage.

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

(Spoken in Chinese) So my first question is regarding your sales channel. So right now, you have more than 330 retail stores that cover more than 120 cities. So in terms of your long-term goal, how many stores and how many cities do you want to cover? Besides that, could you also share what is the successful part of your sales channel management and also in what area do you want to improve, if there is any?

(Interpreted) On stores, we have a firm belief that good products and good channels work in tandem. We can't live without either of them. A metric we use internally is for a mature store which has been operating for six months, we think getting over 100 orders per month is a pretty healthy level of operating efficiency. But with that said, we'll still focus on not only short-term sales per store but also long term we'll be looking into investing in more stores and expanding our sales network. By 2025 we will by then have many models and much greater sales than today.

So we are still committed to opening more stores and covering more cities, covering more users. We really think there is some secret sauce in terms of where to open stores and how the stores should look like, because Mercedes, BMW and Audi, all of them have verified a very successful model in terms of user coverage and city coverage, so we don't really need to reinvent the wheels here. Our plan is really in the next few years to continue to expand to lower-tier cities and cover more users, just following their footsteps so that we can support our sales healthily by 2025.

(Spoken in Chinese). My second question is regarding your charging network, so do you have any plan regarding your expansion target? What's your potential CapEx? Will you build the charging station by yourself or you mainly let the third party to build and operate? Will all of those charging station be 5C grade or some will be a lower grade? (Spoken in Chinese).

(Interpreted) We're still on track to rolling out 300 super-charging stations by the end of this year. In 2023, our charging stations by the end of this year will cover mainly the four economic zones which include the Tianjin-Beijing-Hebie area, the Delta River Delta area and the Guangdong Bay area as well as the Chengdu-Chongqing area.

By 2025, we will have built 3,000 HPC charging stations which will cover over 90% of all the highway mileage as well as the major cities in China. We will make sure to achieve that goal, of course, with operating efficiency as well as a healthy free cash flow in mind. So far, we believe the financial burden is totally manageable. All of our highway HPC stations will be built and operated in-house, and all of the city stations will be working with a franchise model to accelerate the expansion of our charging stations.

(Spoken in Chinese).

Our next question will come from Yuqian Ding with HSBC. Please go ahead.

(Spoken in Chinese). I got two questions. The first is on the OpEx management. The Company's OpEx management has been quite good, especially in the first half. The R&D run rate is roughly 30%, 40% of the full-year guidance. Can we structurally revising down the guidance on R&D and SG&A? Or does it suggest second half, when we roll out NOA in 100 cities, that would require more intensity in terms of R&D and SG&A?

The second question is about breaking out into our current dominating zone. We're currently quite dominating in the big size, the family utility SUV at the pricing category above RMB300k. But in the future, we'll probably have model launch in a pricing category pertaining to RMB200k to RMB300k. Currently we're seeing a very intense competition and many new model supply over there. How do we potentially differentiate over there and maximize the volume impact that we're currently seeing in our dominating zone?

Hi. I will take the R&D question first. We will continue to invest in R&D, either for autonomous driving or other areas of the BEV if necessary. We still want to keep our full-year R&D expenses up above RMB10 billion. Thank you.

(Interpreted) We're confident on the overall product leadership of the L6. We believe that L6 will become the best-selling product across the L lineup. We will continue to invest in its competitiveness and we believe it will be the product of choice in its price range for family users.

(Spoken in Chinese).

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

Thank you once again for joining us today. If you have any further questions, please feel free to contact Li Auto's investor relations team. You may disconnect your line. Thank you.