理想汽車 (LI) 2023 Q4 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for Li Auto's fourth quarter and full year 2023 earnings conference call. At this time, all participants are in listen-only mode. Today's call is being recorded. I will now turn the call over to your host, Kobe Wang, the Head of Capital Markets of Li Auto. Please go ahead, Kobe.

Thank you, Operator. Good evening and good morning, everyone. Welcome to Li Auto's fourth quarter and full year 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, begin with prepared remarks. Our President, Mr. Donghui Ma, and Senior VP, Mr. James Liangjun Zou 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 US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risk 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 Company filings with the US SEC 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 discussion of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. Please refer to Li Auto's disclosure documents on our IR 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 finishes all his remarks. With that, I will now turn the call over to our CEO. Mr. Xiang Li, please go ahead.

(Interpreted) Welcome to today's earnings conference call. 2023 was a year of accelerated growth for Li Auto. We delivered a total of 376,000 vehicles for the entire year, exceeding our target set at the beginning of 2023 and also making us the first emerging new energy automaker in China to exceed the 300,000 annual deliveries mark.

Our total deliveries for the fourth quarter reached 131,805 vehicles, an increase of 184.6% year over year. In December, we reached another significant milestone of 50,000 monthly deliveries, setting a new record for Chinese premium car brands.

According to China Automotive Technology & Research Centre's insurance registration data, in China's NEV market of RMB200,000 and higher, Li Auto's market share increased from 10.9% in Q1 2023 to 16.0% in Q4, making us a leading Chinese automotive brand by market share.

The growth will continue in 2024. I would like to take this opportunity to express our sincere gratitude to all of our family users, business partners and our team, for your unwavering trust, support and tireless efforts.

Moving on to our financial performance. Our scale expansion, effective cost control and increasing operating efficiency have continuously improved our financial performance.

Q4 total revenues reached RMB41.73 billion and annual revenues surpassed the RMB100 billion mark at RMB123.85 billion.

Additionally, we achieved full year profitability for the first time in 2023, recording a healthy net income of RMB11.81 billion. By the end of 2023, our cash position reached RMB103.67 billion.

In 2024, the virtuous cycle of our business growth will solidify our long-term profitability, cash generating capability, and capital base. This trajectory will further deepen our R&D efforts across products, platforms and systems, ensuring consistent delivery of exceptional products and services to our users in the long run.

2024 will be an unprecedented year of new product launches for Li Auto, beginning in March with the launch of our high-tech flagship family MPV, Li MEGA. Developed on a pure BEV platform, Li MEGA integrates the latest technological advancements in 5C BEV technology, smart space and autonomous driving. We also plan to begin mass delivery of 2024 model year Li L7, L8 and L9 models, starting in March.

You're all welcome to tune in to our Li Auto 2024 Spring Product Launch event this Friday, March 1, where we'll be unveiling more exciting details about Li MEGA and our 2024 model year L series.

Furthermore, we'll introduce several new models over the course of the year, including Li L6, to broaden our product lineup even further. By the end of 2024, we will have eight models on the market, featuring four EREVs and four BEVs, forming a highly competitive product matrix and satisfying the diverse needs of our family users.

New vehicle launches are only the starting point. Since the initial delivery of our L series, we have released over 20 over-the-air updates, upgrading over 700 features. Notably, the official release of our OTA 5.0 upgrades in December last year further enhanced product competitiveness of our vehicles.

Moving to autonomous driving, with the latest release of AD Max 3.0 full scenario NOA now covers all highways and city ring roads nationwide, as well as urban roads across over 110 cities. We anticipate to offer city NOA independent of HD Map in all of China by the end of the second quarter this year, and it will be delivered to all AD Max vehicles by NOA.

As of today, our users have accumulated around 560 million kilometers on NOA. During the 10-day Chinese New Year holiday, from February 8 to 17, over 220,000 users enjoyed the convenience of NOA, covering close to 50 million kilometers on NOA.

In terms of smart space, OTA 5.0 integrated Mind GPT into Li Xiang Tong Xue. Mind GPT is a full scenario multimodal large model, with real-time connectivity. This development has significantly increased Li Xiang Tong Xue's understanding, generating, memorizing and reasoning capabilities. Since its release, there's a notable increase in user engagement in giving instructions and seeking text-based information and services through natural conversation. During the 10-day Chinese New Year holiday, the percentage of such natural conversations amongst all effective communications reached 7.2%, twice the level before OTA 5.0.

Amidst our remarkable sales growth in 2023, we accelerated the expansion of our direct sales network. In Q4 2023, we opened 106 new retail stores, or over one store per day, creating the largest automobile direct sales network in China. As of January 31, 2024, we have 474 retail stores across 142 cities nationwide.

In 2024, we aim to further expand our direct sales and servicing network, targeting 800 retail stores by year-end. While expanding our presence in first- and second-tier cities, we also plan to broaden our coverage in third- and fourth-tier cities.

Turning over to our supercharging network. To date, we have over 340 supercharging networks in operation. Starting from the Chinese New Year holiday, throughout the entire holiday we provided family users with free access to Li Auto's supercharging services. We delivered 57,000 free charging sessions to Li Auto's users and over 120,000 sessions to all EV users, delivering over 2.81 million kilowatt hours of electricity. Facing the exceptionally high demand during the holiday season, our superchargers maintained an online rate of over 99.3%, providing uninterrupted access to high quality and efficient charging experience to all users.

In 2024, we will continue to accelerate our supercharging network expansion across highways and cities nationwide, targeting 2,000 supercharging stations by year-end.

On the production front, Li Auto's Beijing green intelligent manufacturing base went into production towards the end of 2023, ready for volume production of Li MEGA and subsequent BEV models. With volume production delivery of Li MEGA and 2024 model year Li L7, L8 and L9, we expect our total vehicle deliveries for Q1 2024 to range between 100,000 units to 103,000 units, with March delivery exceeding 50,000 units.

In 2024, we'll continue to learn from the best enterprises, iterate ourselves and surpass expectations as we create mobile home and create happiness. With that, we'll 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 fourth quarter financials. Due to time constraints, I will address financial highlights here and encourage you to refer to our earnings press release for further details.

Total revenue in the fourth quarter were RMB41.73 billion or US$5.88 billion, up 136.4% year over year and 20.3% quarter over quarter. This included RMB40.38 billion or US$5.69 billion from vehicle sales. Our margin grew 33.8% (sic -- see press release "133.8%") year over year and 20.1% quarter over quarter.

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

Cost of sales in the fourth quarter was RMB31.95 billion or US$4.5 billion, up 126.8% year over year and 18.2% quarter over quarter.

Gross profit in the fourth quarter was RMB9.79 billion or US$1.38 billion, up 174.4% year over year and 28% quarter over quarter.

Vehicle margin in the fourth quarter was 22.7% compared with 20% in the same period last year and 21.2% in the prior quarter. Excluding the impact of inventory provision related to Li ONE in the fourth quarter of last year and the true-up adjustments of warranty reserve in the fourth quarter of 2023 based on updated estimate of costs of further claims, the vehicle margin remained relatively stable over the fourth quarter of 2022. The increase in vehicle margin over the third quarter of 2023 was mainly due to the aforementioned true-up adjustments of warranty reserve in the fourth quarter.

Gross margin in the fourth quarter was 23.5% compared with 20.2% in the same period of last year and 22% in the third quarter.

Operating expenses in the fourth quarter were RMB6.75 billion or US$950.8 million, up 82.4% year over year and 27.2% quarter over quarter.

R&D expenses in the fourth quarter were RMB3.49 billion or US$491.7 million, up 68.6% year over year and 23.9% quarter over quarter, primarily driven by increased expense to support our expanding product portfolios and technologies, as well as increased employee compensation as a result of our growing number of staff.

SG&A expenses in the fourth quarter were RMB3.27 billion or US$460.5 million, up 100.6% year over year and 28.5% quarter over quarter, 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 fourth quarter was RMB3.04 billion or US$427.7 million, compared with RMB133.6 million loss from operations in the same period last year and up 29.8% quarter over quarter.

Operating margin in the fourth quarter was 7.3%, compared with negative 0.8% in the same period last year and 6.7% in the third quarter.

Attributable to the increase of income from operations and the recognition of noncash tax benefit for the release of valuation allowance on certain deferred cash assets, net income in the fourth quarter was RMB5.75 billion or US$810.2 million, representing an increase of 2,068.2% year over year and increasing by 104.5% quarter over quarter.

Diluted net earnings per ADS attributable to ordinary shareholders was RMB5.32 or US$0.75 in the fourth quarter, compared with RMB0.25 in the same period last year and RMB2.67 in the prior quarter.

Turning to our balance sheet and cash flow, our cash position remained strong and stood at RMB103.67 billion or US$14.6 billion as of 31 December 2023. Net cash provided by operating activities in the fourth quarter was RMB17.29 billion or US$2.44 billion, up 251.1% year over year and 19.2% quarter over quarter. Free cash flow was RMB14.64 billion or US$2.06 billion in the fourth quarter, up 349.4% year over year and 10.7% quarter over quarter.

As of 31 December 2023, we had a total of 31,591 employees. For more information and details of our 2023 full year financial results, please refer to our earnings press release.

Now for our business outlook. For the first quarter of 2024, the Company expects the deliveries to be between 100,000 and 103,000 vehicles, representing an increase of 90.2% to 95.9% from the first quarter of 2023. The Company also expects first quarter total revenues to be between RMB31.25 billion and RMB32.19 billion, or US$4.4 billion and US$4.53 billion, representing an increase of 66.3% to 71.3% from the first quarter of last year.

This business outlook reflects the Company's current and preliminary review 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. If you wish to ask a question, please press star-one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star-two. For the benefit of all participants on today's call please limit yourself to two questions and if you have additional questions, you can reenter the queue. If you are a Mandarin speaker please ask your questions in Chinese first, then follow with English translation.

Your first question comes from Bin Wang with Deutsche Bank. Please go ahead.

(Spoken in Chinese) Congratulations for a great result. I've actually got two questions. Number one is that you previously mentioned you want to deliver 100,000 units sales target this year and the per unit for single products actually can reach 30,000 units. Under the present market condition, you'll change your guidance? If no, when do you think you can reach this 100,000 units and can you provide a breakdown of this 100,000 units by model?

My second question is that the Company's previous guidance was you'd be the first tier in the self-driving technology in China. Can I ask what's the difference or gap between the leading players in China such as Huawei and XPeng and when you think you can catch up and exceed their positions, thank you.

Okay, I will take the first question. This is James Zou Liangjun from Li Auto, the SVP of the Sales and Service. Very good question, Mr. Wang Bin. Our guidance remains unchanged, so we are still [talking] to sale over 100,000 models by end of this year. Starting from 2024 March we will commence delivery of the Mega and also 2024 year model L9, L8 and L7 models, making our ranges into a brand new product cycle.

With the launch and delivery of more competitive new products we anticipate our monthly deliveries to exceed 50,000 vehicles in March, which is next month and 70,000 in June, so the first half year. When we hit the 70,000 monthly deliveries milestone in June, the market will have a better understanding of all of our Company's assumptions and dedication. We encourage you to watch our performance in the coming months.

I will hand over to Mr. Ma to answer your second question.

(Interpreted) We released our OTA 5.0 around the end of 2023 and NOA - full scenario NOA is now available in over 110 cities around China. Based on our statistics two months after the release, the daily active usage for NOA has increased 50% compared to before the OTA and we have accumulated over 100 million kilometers on NOA since the release and NOA has helped our users with over 3 million parking maneuvers. AEB has avoided over 30,000 accidents for our users. All this data and all the positive feedback from users and media are great testament to our product competitiveness.

In the second quarter of 2024, our AD Max models will be delivering mapless capability city NOA in all cities in China and will not be constrained by number of cities and will be delivered to all cars equipped with AD Max through OTA.

In terms of AD Pro, cars equipped with AD Pro, we will also be deploying the EV big - large model to upgrade highway NOA features, increasing the ramp experience and lane change experience. We are very confident to say that 2024 in terms of our AD products and R&D capabilities, we're among the top in China.

Thank you.

Your next question comes from Tim Hsiao with Morgan Stanley. Please go ahead.

(Spoken in Chinese) My first question is about the production and potential bottleneck because Li Auto first quarter volume guidance of 100,000 to 103,000 units implies a very significant ramp in March to 50,000 units or more. Considering several new models are coming to the market at around the same time, including Mega, L6 and the new models of whole L series, will there be any risk of supply bottleneck into March and April? What has the Company done so far to ensure the smooth production run, deliveries, while keeping the inventory? That's my first question.

(Interpreted) First of all, we have a lot of great experience in new product launches and ramp up to achieve volume shortly after product launch. In the first calendar month after the launch of L7 and L9 respectively, we have been able to successfully produce and deliver over 10,000 units for each model and we have collected all these best practices and lessons learned and put them into our system. So, whether it's new factories or new employees, they are all able to very easily replicate the success in the past.

In terms of new models, on the R&D front, all the new vehicle lines are being developed on schedule. In terms of production, we have already completed the construction of our factory ahead of time and recruited and trained the relevant blue-collar workers.

On the supply front, we have already built the supply capabilities and completed the risk analysis and have created plans and strategies based on the risks identified.

On the planning front, using our new integrated planning system, we have connected supply and demand end to end and have locked down all of the necessary requirements from end to end.

2024 will be a big year in terms of new product launches, and we are very confident to maintain the consistency and timeliness of our supply.

(Spoken in Chinese) The second question is about product planning. After Li Auto's launch of L6 in April, the Group's model portfolio would comprehensively cover segment about RMB250,000 or around $35,000. Will Li Auto consider to tap into the sub $35,000 market any time soon? That presents a more sizeable market for NEV conversion.

Separately, is there any tech constraint or disadvantage likely preventing Li Auto from building compact or low-price EREV SUV models to compete with the local peers? That is my second question.

(Interpreted) If we look five years down the road, we have no plans to launch any vehicles below the RMB200,000 price point. If we think about long term, up to 2030, even if we only focus on the market over RMB200,000, just family users, if we were able to take one-third of that market in China, our total sales would already be more than RMB1 trillion.

If you consider overseas, by 2030, this market will create a business close to the revenue of all iPhones sold worldwide combined. This is a huge goldmine that we think we have only mined a very small portion of, so there is no need to distract ourselves at this point. Rather, we would like to focus exclusively on the over RMB200,000 family market globally, and our strategy is to continue to dive deep into this market, create a brand and expand our market share.

Thanks for sharing all the great color, and congratulations on a great result again. Thank you.

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

(Spoken in Chinese) I have two questions. The first question is about pricing and volume balance, and how we see the profitability and volume increase by adjustment of pricing in different periods.

My second question is about the following EV models. How do we plan after the MEGA model? Could you please give us some more color? Thank you.

This is Johnny. For the first question, when we set out the full-year sales target, we have already considered about competition and also the pace we launch our product. So when we consider that, we still -- what we want to say as before, we will maintain healthy gross profit margin of over 20%, and based on the market competition, the gross margin will fluctuate between 20% to 25% for different quarters.

Just like last quarter, I think everyone was worried about the competition in the fourth quarter, there would be some promotion. But for every quarter, there will be some other come up from the supply side and also from the material price side. So net-net you can see from our fourth quarter, even we have some promotion in the fourth quarter, we have more good news from the bottom side, even though our cost margin increased compared with the third quarter.

(Interpreted) For the first half of the year, we will be releasing in our March 1 spring event Li MEGA as well as 2024 model year Li L7, L8 and L9. Also in the first half, we'll be releasing the L6.

In the second half of the year, as we've communicated before, we will be releasing yet another three pure electric SUV models, all come standard with 5C charging and all-wheel drive. I would like to emphasize those cars are very competitive, and they will become the top choice for family users in their respective price segments.

2024 will be an unprecedented product year for Li Auto. By the end of the year, we will have four range extended models and four very competitive BEV models. These products are all very competitive, and they will together serve the needs of our family users.

Your next question comes from Tina Hou with Goldman Sachs.

(Spoken in Chinese) Thanks, management, for taking my questions, and congrats on the very strong result. I have two questions. The first one is in terms of the three BEV models in the second half of the year. Considering the battery price as well as 5C charging capability and then initially smaller volumes versus your EREV models, what kind of margin difference should we expect for the BEV models?

The second question is in terms of the overseas expansion. What is the management's latest thought for overseas sales volume target over the next three to five years? Thank you.

Tina, this is Johnny. For the gross margin, as we mentioned in the previous calls, both for the BEV and EREV series, the overall long-term blended gross margin will be 25% for both series. So when we start from MEGA and then the 9 series, the gross margin will start from higher to lower.

Also we want still to emphasize the product gross margin established when you define your product. Our products are designed to ensure a healthy gross margin and also balance the customers' demand for each car. Also from the material side, like the battery material, since the second half of last year, I think it's a good time to launch our BEV models starting from this year.

Okay, Tina. James. I will take your second question. First of all, the overseas market is very important to Li Auto. We are aiming to start to explore the overseas market and we are accelerating it.

Regarding our plan for overseas export, we remain committed to our direct sales model in the overseas market, focusing on building a robust sales network and comprehensive aftersales service offering infrastructure. With Li Auto's growing popularity globally, we are accelerating the development of product sales service networks and the spare parts supply chains to ensure outstanding service experience for our international customers.

By the way, we have successfully set up operations in the Middle East and initiated the recruitment of local sales and service teams in Dubai. In the first half year this year, we plan to establish a dedicated aftersales service network in central Asia and the Middle East.

By the first quarter of this year, we will commence overseas delivery, starting with the introduction of L9 and L7 models in local regions, by the way, which is also customized for the local environment and the political and local policies.

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

(Spoken in Chinese) My first question is still related to gross margin trend in the first quarter and the second quarter. In the first quarter, because you are selling the 2023 version of L7, L8 and L9, will your gross margins be slightly lower than Q4?

In the second quarter, since you have a full quarter contribution from MEGA, do you expect the gross margin to recover? Also, how is the L6, to overall margin? (Spoken in Chinese),

Hi, this is Johnny. I think all the factors you mentioned are clear for the gross margin. The Company will maintain a healthy gross margin of about 20% for the first quarter. As we mentioned earlier, the Company will also maintain a healthy gross margin, which means always about 20% throughout the full year.

For the MEGA and 2024 model of the L series, it will be a positive factor for the gross margin, starting from March.

L6 will be negative if we want to say - to be for the over 20% gross margin, and with our volume growth, it will be a positive factor for the gross margin. For every quarter there are some positives and negatives, which is helpful for you.

(Spoken in Chinese) Li Auto plans to expand their charging stations to 2,000 by the end of this year. What do we expect total CapEx to be?

Previously, the Chairman mentioned that charging stations could be a profitable investment project. So when do you expect your charging stations can reach breakeven or break cash flow breakeven? Thank you.

I will take this question. James. By the end of 2024, the Company plans to build a total of 2,000 charging stations, as you just mentioned. By the end of this year, we will have built over 700 highway supercharging stations covering 70% of the highways in China as well as 90% of the highways in the four major economic zones.

With the successive launches of BEV models this year, we have also begun to simultaneously accelerate the expansion of charging stations in cities. We anticipate that by the end of this year, the number of charging stations in cities will exceed 1,300, so totaling 2,000.

The Company's cash reserves are ample, and we have allocated sufficient capital for the construction of charging stations. The Company has detailed operating models for the valuation of each charging station, and by the way, personally, I am looking after each and every charging station investment. Each station has its own profitability and ROI target.

From a long-term perspective, we are very confident in our charging stations profitability prospect. Thank you.

Your next question comes from Yuqian Ding with HSBC.

(Spoken in Chinese) Two questions. The first, we noticed the industry is going through a painful consolidation. While Li Auto booked record high earnings, many are struggling. How to look at the inflection point of the industry consolidation against the weak car demand and a continuous pricing war, including Li Auto? What is Li Auto's strategy priority list this year?

Second question is, management talked about OTA and NOA in more cities and scenarios. When would be the iPhone moment for the autonomous driving development from management's perspective and how to read, in spite of the technology progress, the current autonomous driving market offering might be running homogenous and lack of revenue model in the near-term?

(Interpreted). So, as we've always maintained before, we believe in the smart EV industry there will be a very clear massive effect as we'll see in the very near future. Here I'll make a prediction. By Q4 this year, in the market of RMB200,000 and above, the top three brands will command around close to 70% of market share, or in other words, CR3 will reach close to 70% and we can test this hypothesis by the end of this year.

In order to prevail in this competitive environment, we will continue to focus on user value creation, which will convert into our competitive advantage. So, on the product front, we will continue to focus on making all details perfect and delivering the full product experience to our users. On the R&D front, we will invest in our autonomous driving, smart space and high voltage and range extended EV platforms and convert all these investments into user value.

With that, our goal continues to be selling 800,000 units this year in 2024 and becoming the top 1 premium brand in China. The team is all lined up to be ready to achieve this goal this year.

(Interpreted) Personally, I believe the iPhone 4 moment for autonomous driving will come in two to three years. iPhone 4 completely changed people's perception of smartphones. The iPhone 4 itself may not be perfect, but it encompasses all the important factors for its success, including industrial design, user interaction, hardware, software, and business model.

Compare that to autonomous driving, with L2 and L3 reaching scale and being delivered in volume and data continues to accumulate, as well as the deployment of AI's large models. I believe that autonomous driving will reach an inflection point, reaching its iPhone 4 moment, and maybe all of a sudden, overnight, all of the cars equipped with the hardware, maybe hundred thousands of or even over a million will achieve autonomous driving.

So, for Li Auto, we continue to invest in making autonomous driving hardware standard for all of our vehicles and we have no plans for a subscription or extra charge at the moment. Making autonomous driving standard will bring us as many users as possible, collect as much data as possible and helps us to increase and improve our algorithms and improve the experience for our users. That creates a very positive cycle.

As we are reaching the end of our conference call now, I'd like to turn the call back over to Kobe Wang for any additional or closing comments.

Thank you once again for joining us today. If you have any more questions, please feel free to contact Li Auto's IR team. That concludes this conference call. You may now disconnect your line. Thank you. Bye.