理想汽車 (LI) 2021 Q2 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for Li Auto's Second Quarter of 2021 Earnings conference call. (Operator instructions). Today's conference call is being recorded. I will now turn the call over to your host, Janet Zhang, Director of Investor Relations of the Company. Please go ahead, Janet.

Thank you, Annie. Good evening and good morning everyone. Welcome to Li Auto's Second Quarter 2021 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 President, Mr. Kevin Yanan Shen, and our CFO, Mr. Johnny Tie Li, to begin with prepared remarks. Our founder and CEO, Xiang Li, and our CTO, Mr. Kai Wang, 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 risks and uncertainties. As such, the Company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in certain filings of the Company with the US Securities and Exchange Commission and announcement published on the website of the Hong Kong Stock Exchange and the Company. 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 measures. Please refer to Li Auto's press release and interim results announcement which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our President. Please go ahead, Kevin.

Thank you, Janet. Hello, everyone, and thank you for joining our call today. First of all, we are proud that our Class A ordinary shares started trading on the main board of the Hong Kong Stock Exchange on August 12, opening a new chapter for our Company. We are honored and also humbled by the support we received from all investors.

With the Hong Kong dual primary listing, we significantly strengthened our equity base with over US$1.5 billion of net proceeds raised. This will provide strong financial support for our R&D initiatives and the direct sales and servicing network expansion, as well as enhanced protection for our shareholders.

We will continue to take the responsibilities associated with being a publicly traded company seriously, work to build out our long-term vision and create value for our users, shareholders and our employees alike.

Next, moving to the key highlights of our second quarter result. Our 2021 Li ONE has been an exceptional performer since its debut on May 25. Our 2021 Li ONE boosts and enhanced the NEDC range of 1080 kilometers, optimized the mobility comfort, and a more intelligent cockpit. It has received rave reviews and strong user endorsement for its outstanding feature and performance.

Our second quarter deliveries achieved 17,575 units, increasing 166% year over year. Our July deliveries reached 8,589, hitting a new record. In July, Li ONE topped sales charts in the new energy SUV and the large SUV categories, according to new car insurance registration data reported by China Automotive Technology and the Research Center. It is a powerful testament to Li ONE's highly competitive product features, making us a leading domestic [EV] manufacturer in China.

While these rankings and the Li ONE's strong performance and popularity are exciting achievements, yesterday's home run do not win today's game. We will continue to be disciplined and dedicated and we will strive to constantly surpass ourselves in products and services to earn the support, trust and the loyalty from our users. Our record high deliveries would not have been possible without the cooperation and the assistance of our supply chain partners. They have been helping us navigate the ongoing semiconductor shortages.

Turning to the profitability, our gross margin reached 18.9% this quarter, up 5.6 percent points year over year, and 1.6% quarter over quarter. Our operating cash flow was RMB1.4 billion or $218 million during the second quarter, demonstrating our consistent high operating capability.

In the second quarter, we aimed to further broaden and deepen city coverage to address increasing demand from prospective users across China and prepare ourselves for our new model launches in 2022 and beyond. Thus, we accelerated the expansion of our direct sales and servicing network. As of July 31, 2021, we had 109 retail stores covering 67 cities and 176 servicing centers and the Li Auto authorized body and paint shops operating in 134 cities. We are on track to reach our year-end target of 200 retail stores. We have expanded our footprint through lower tier cities in China.

In August, we opened a retail store in Lhasa, Tibet. This has taken our direct sales and servicing network geographical coverage of provinces, autonomous regions and centrally administered municipalities in mainland China to 100%.

The industry-wide semiconductor shortage has affected our monthly deliveries in recent months, resulting in undelivered backlogs as our new order exceeded 10,000 in June. We tried our best to utilize alternative solutions to enhance our flexibility and acquire industry sources. Going forward, we'll continue to collaborate closely with our supply chain partners to mitigate the semiconductor shortage and minimize the impact on our production.

Given the proven success of our Li ONE catering to the needs of families, we are working to diversify our product portfolio to appeal to an even broader family user base. We have three platforms under development - the X platform for our next generation EREV with the first model to be released in 2022 and the Whale and the Shark platform for our BEV models to be launched in 2023. The development of these new platforms are progressing smoothly and we are confident to launch new vehicle models on time.

In July, we also signed an MOU with a local company for collaboration in reconstruction and expansion project of an automobile manufacturing plant in Beijing. This will further extend our production capacity and support increasing vehicle sales volume with future models.

On August 27, 2021, we also signed an investment agreement with a wholly owned subsidiary of Xinchen China Power Holding Limited to form a new company in Mianyang, Sichuan Province, China, to develop and manufacture our next generation range extension system. We firmly believe that smart EREVs will be a superior replacement to ICEV vehicles and the increased overall EREV penetration rate in the medium to long term. We continue to view it as one of our core strategic development directions. The cooperation will leverage the R&D and the production capabilities of both companies to provide high quality products and further extend the market share of smart EREVs in the domestic market.

With respect to international market, we will keep our strategy to always make plans before taking actions as we want to be a winner, not just a mere participant in the global market. To win market share overseas, a car company has to develop the right product to attract customer with tastes and requirements that are different from domestic customers. We have set up a team dedicated to the overseas market, and we are meticulously working on the plans to find a winning formula.

As a corporate citizen, we are proud to have passionately engaged in social relief activities to help people in need. In July, in response to the floods in Henan Province, we organized the emergency relief with donations to support the affected people, including our users. We also mobilized [all trailers] we have access in the adjacent provinces to join the rescue efforts.

In addition, we provide our users with service such as warranty extension for replacement parts, free replacement of flood-damaged charging poles and free vehicle inspections for all disaster-stricken vehicles. We made our effort to reassure them and help in any way possible for a smooth transition back to normalcy.

Lastly, we achieved a AA MSCI ESG rating in April, making us a leader in ESG among 40 rated automotive companies. Going forward, we will continue to undertake social responsibilities, and build this as an integral part of our vision to build smart electric vehicles that make families happier. Now, I will turn this call over to our CFO, Mr. Tie Li, to review our financial performance in the second quarter.

Thank you, Kevin. Hello, everyone. I will now walk you through some of our financial results for the second quarter of 2021. Due to the time constraints, I will address our financial highlights here, and I encourage you to refer to our earnings press release for further details.

Total revenues in the second quarter of 2021 were RMB5.04 billion, or US$780.4 million, representing an increase of 40.7% (sic - see press release "40.9%) from RMB3.58 billion in the first quarter of 2021. This included RMB4.9 billion, or US$759.4 million from vehicle sales, which increased 41.6% quarter over quarter. This increase in vehicle sales was mainly driven by the increase in delivery of the 2021 Li ONE since its release on 25 May 2021.

Revenues from other sales and services were RMB135.7 million or US$21 million in the second quarter of 2021, representing an increase of 21.7% quarter over quarter. The increase in revenue from other sales and services over the first quarter was mainly due to the increased sales of charging stalls, accessories and services in line with higher accumulated vehicle sales.

Cost of sales in the second quarter was RMB4.09 billion, or US$632.9 million, representing an increase of 38.2% quarter over quarter. Gross profit in the second quarter of 2021 was RMB952.8 million, or US$147.6 million, growing 54.5% compared with the first quarter of 2021.

Vehicle margin in the second quarter was 18.7%, compared with 16.9% in the first quarter of 2021. The increase in vehicle margin from the first quarter was primarily driven by higher average selling price in the second quarter of 2021, due to our launch of the 2021 Li ONE in late May.

Gross margin in the second quarter of 2021 was 18.9%, compared to 17.3% in the first quarter of 2021, which was mainly attributable to the increase of vehicle margins.

Operating expenses in the second quarter of 2021 were RMB1.49 billion, or US$230.6 million, representing an increase of 45.3% quarter over quarter. Research and development expenses in the second quarter of 2021 were RMB653.4 million, or US$101.2 million, representing an increase of 27% quarter over quarter.

Excluding share-based compensation expenses, non-GAAP research and development expenses were RMB543.7 million, or US$84.2 million, increasing 36.6% quarter over quarter. The increase in research and development expenses over the first quarter of 2021 was primarily attributable to the increased headcount, and the increased research and development activities for the Company's future vehicle models.

Selling, general and administrative expenses in the second quarter of 2021 were RMB835.3 million, or US$129.4 million, representing an increase of 63.8% quarter over quarter. Excluding share-based compensation expenses, non-GAAP selling, general and administrative expenses were RMB780.9 million, or US$120.9 million, increasing 73.6% quarter over quarter. The increase over the first quarter of 2021 was primarily driven by increased marketing and promotional activities, as well as increased headcount and rental expenses with the expansion of the Company's distribution network.

Loss from operations in the second quarter of 2021 was RMB535.9 million, or US$83 million, representing an increase of 31.4% compared with the first quarter. Excluding share-based compensation expenses, the non-GAAP loss from operations was RMB365.5 million, or US$56.6 million, representing an increase of 62.6% quarter over quarter.

Net loss was RMB235.5 million, or US$36.5 million in the second quarter of 2021, compared with RMB360 million net loss in the first quarter of 2021. Non-GAAP net loss was RMB65.1 million, or US$10.1 million in the second quarter of 2021, compared with RMB177 million net loss in the first quarter of 2021.

Turning to our balance sheet and cash flow, our cash and cash equivalents, restricted cash, time deposits and short-term investments total RMB36.53 billion, or US$5.66 billion as of 30 June 2021. Operating cash flow in the second quarter of 2021 was RMB1.41 billion, or US$218 million. Free cash flow was RMB982.1 million, or US$152.1 million in the second quarter.

Now for our business outlook. For the third quarter of 2021, the Company expects deliveries to be between 25,000 and 26,000 vehicles, representing an increase of approximately 188.7% to 200.2% from the third quarter of 2022 (sic - see press release, "2020").

The Company also expects the third quarter total revenue to be between RMB6.98 billion and RMB7.25 billion, or US$1.08 billion and US$1.12 billion, representing an increase of 177.8% to 188.9% from the third quarter of 2022 (sic - see press release, "2020").

This business outlook reflects the Company's current and preliminary view on the business situation and market condition, in particular, the ongoing industry-wide semiconductor shortage due to the global COVID-19 pandemic, which are all subject to change. I will now turn the call to the operator to facilitate our Q&A session. Thank you.

Thank you. (Operator Instructions) The first question is from the line of Fei Fang of Goldman Sachs. Your line is open, please go ahead.

Great, thanks for the opportunity, congratulations on the results. Can management talk a little bit about competition and regulation? On competition, some of your incumbent peers have really sped up launching new products, Great Wall, Geely, BYD, for instance. The frequency of their launches has increased, and the hit rate seems to also increase. I just wonder if you have refreshed thoughts on their progress, and also, the potential for them to enter into the premium segment. That's the first question.

Second is about regulation. What are your thoughts on regulatory risk around autonomous driving and assisted driving development? Do you think, if there is any regulatory intention to slow down things a bit in order to perfect the safety and customer experience? (Spoken in Mandarin)

This is Kevin, thank you for the question. I think for the product development cycle, we have our own strategy and schedule to launch new product. Basically, we are accelerating our development of our next generation of EIV platform, and also, the HVC-PD platform. As we shared before, we will roll out our brand new EIV models based on our next generation EIV platform next year. In 2023, we will have EREV platform next year. The 2023 will be a big year for us. We'll have two new models on the X platform and another two HPC BEV model launch. Yes.

For the regulation, in fact we have been closely communicating and engaging with the authorities. I think the intention from the [MIIP] is to standardize the overall smart electrical vehicle industry and reach the technology requirement for the ADAS solution.

I think overall this is a good thing. This will ensure the healthy development of this industry. Yes.

I think the impact to us is basically, in the future, we need to be more cautious when we launch the product with ADAS solution. I think it will take us more effort to fully develop a function, yes, before the launching to the market.

That was our (inaudible), so there is no change of our strategy. But overall, I think our focus on ADAS will not change. Yes.

This is very helpful color. Thank you, Kevin.

Thank you.

Thank you. Our next question is from the line of Tim Hsiao of Morgan Stanley. Line is open. Please go ahead.

Thanks for taking my question and congratulations on a solid result. I have two questions. The first question is could the management team shed some light on what components or type of chips are currently in short supply for Li Auto? Because if you look at the numbers, I think Li Auto's production seems more resilient than peers. How can we manage the supply disruption better than our peers? Is there any alternative sources? Li Auto could secure the component and the support, likely more than 12,000 monthly run rate into fourth quarter. This is the first question about the supply.

My second question I think Johnny touched briefly on during the presentation. What's the progress in our new plans for capacity expansion in Beijing? What's the nameplate capacity and when will the contribution from the new capacity start to kick in?

(Spoken in Mandarin)

Thank you, Tim. This is Kevin. I will answer the first question about the shortage. Right now, the single biggest shortage we are facing is an industry-common shortage due to the COVID-19 situation in Malaysia, especially from [FT], so this is an industry-common shortage. In the past several months, we have been fighting every day for the supply. I don't think our situation is better than the other competitors. Yes.

But the outlook for the next quarter, if the COVID-19 situation will getting better, we believe overall the industry supply will become more balanced. But the COVID-19 situation is not predictable, so it's still a risk for us. Yes.

Johnny, you want to comment on this?

Oh, yes. For the Beijing [plant], I think we will release more details, yes, in the future. One thing we can make sure is on track to get ready for the BEV launch in 2023. Tim, thank you.

Great. Thanks for sharing.

Thank you. Our next question is from the line of Ming-Hsun Lee of BofA Securities. Please go ahead. Line is open.

Thank you. (Spoken in Mandarin)

My first question is regarding the gross margin improvement trend. Especially in the second quarter, your SP is increasing but also your cost of goods sold per car is also decreasing, so could you elaborate more and also comment on the third quarter and the fourth quarter trend? This is my first question.

Second question, could you give us more details regarding your collaboration with Xinchen Power and the collaboration of EREV? Thank you.

Lee, thank you. This is Kevin. Very quickly your first question, besides our sales price increase of the new Li ONE, from the cost perspective, primarily we had - partially due to the [bond] cost reduction from some of our suppliers and also because of the sales volume increase. Therefore, the amortization will reduce, so that results in the gross margin increase.

I think for the third quarter and the fourth quarter, we'll continue to see the gross margin will gradually improve also, yes. We still see that overall for this year blended gross margin will be somewhere between 19% to 20%. Yes.

Your second question is about our joint venture with Xinchen [Donghi]. Yes. Actually, Xinchen Donghi is the leading engine company in China. Especially they have been a long-term partner with BMW. Yes. We have this joint venture, jointly develop and manufacture our next-generation EREV engine with Xinchen. For this, our joint venture, we have 51% of the share. Thank you, Lee.

Thank you.

Thank you. Our next question is from the line of Bin Wang of Credit Suisse. Line is open. Please go ahead.

Thank you. I've got two questions. Number 1 about long-term borrowing. We found out in the second quarter our long-term borrowing actually got to RMB5.6 billion. Given you have [plenty] cash on hand, can you explain why that had a big jump in the end of June? That's number 1 question.

Number 2 is about the volume guidance. You actually used to be guiding the September number can go to 10,000. But if you [unclear] third quarter guidance, it seems that if we maintain that 10,000 guidance for September, then that August should be a very low number. How should we think about the third quarter guidance? You also actually had at [1.5 million] units by 2025 and [in prior to maybe] next year thought about 150,000 units. [Unclear] next year, 2022, the volume should be 150,000 units?

Thank you.

(Spoken in Mandarin)

First of all, our long-term borrowing because of the long term was [CB] in April. Yes, it's a CB on the long-term borrowing.

Yes. Yes, this is Kevin. Thank you, Wang Bin, for the question. I think when we give out the guidance for third quarter, we have already taken into consideration of the potential risk of the impact of the COVID-19 in Malaysia. Yes, so therefore we don't want to be too aggressive. I think today is already the 30th, so in next two days, you will see our August number. Yes.

For the next year, I think your estimation is within the range of our plan, yes. Yes. Of course, we want to further increase the monthly delivery of our Li ONE.

Thank you.

Thank you. Our next question is from the line of Chang Liu of CICC. Please go ahead. Line is open.

(Spoken in Mandarin)

My first question is about our financial expenses. Could you give us some details on the acceleration of SG&A in second quarter and any guidance on the full-year R&D and SG&A expenses?

My second question is on our [unclear] models to be launched in 2023. Could you give us some update on its development, especially some key [inaudible] price pressure? Thank you.

Yes, for the SG&A - this is Johnny. For the SG&A, as I just mentioned, it's [orientated] to the network expansion and also the marketing and the promotion activities in the second quarter and also the increased [head costs] and the rental expenses. In the second half of this year, we will continue to expand our retail stores, towards our target of 200.

And for R&D, we still want to keep our -- the whole year guidance, which is around RMB3 billion. Yes.

The second question, Kevin?

Yes, this is Kevin. For the HPC BEV models, we are on track, in terms of R&D process. To share some of the milestones, we are, for example, we already have our 4C new battery example ready. Yes. So that's a big milestone. And also, for our HPC superfast charging pole design, we have already finished the concept design and we plan to have our first pilot charging station within this year.

Thank you.

Thank you. Our next question is from the line of [Sing Yu Fang] of UBS. Line is open. Please go ahead.

Hi. I'm not sure if this my line. This is Paul Gong, UBS. I have two questions. The first one is regarding your split of the BEV versus the [unclear] -- versus the

EREV in terms of positioning? Starting from 2023 you will have 12. How do you position the different segment, and the size of each segment? And how shall we think? Is it going to be the EREV is more focused on the larger vehicle or SUV, MPV et cetera, and the BEV more focused on the smaller vehicle, like the sedans, etc? How shall we think about the different positioning of the BEV versus the EREV?

My second question is regarding your R&D spending split, going forwards. For second half of this year, for next year, and going forwards, how much portion is going to be spent on the BEV? How much portion is going to be spent on the BEV? How much on the EREV and how much on the autonomous driving?

Let me translate my questions quickly.

(Spoken in Chinese).

Paul, yes, me take the first question. This is Kevin. In the future, when we have a BV and the EREV at the same time, actually, we are not differentiate these two, based on size of car form factor. So, basically, all these two are driving powertrains. We will, based on this, develop cars to cover the price band from RMB200,000 to RMB500,000, and they each will have a different size of cars, designed for family users.

I think the key difference between these two are based on the customer's preference. If they are more concerned about the BEV's range anxiety and that they don't have access to good charging infrastructure, they will choose, we believe, they will choose EREV. Yeah. If they have a good charging infrastructure, they will choose BEV. So that's our viewpoint.

Yes.

Yes. For the expenses, we still want to keep our original guidance from now to 2023, to US$1 billion. Yes. That will cover the vehicles - the coming models, and also the autonomous driving and also some area we want to do in-house, in the next two to three years. And also, with some investment on the R&D side for the future. Intelligent driving side.

Thank you, Paul.

Thank you.

Thank you. (Operator Instructions) Our next question is from the line of Ying Bo Xu of Citic. Please go ahead. Your line is open.

(Spoken in Chinese). My first question is how, what's our pricing strategy? Are we trying to maintain our high margin or maybe we have more flexibility in the pricing per item?

The second question is that considering a lot of newcomers in this sector, maybe 2023 is a period that a lot of newcomers join in, and they're launching new models. By the year 2025 maybe the market share is going to be concentrated again, so how will expansion after three- or five-years' competition, like technical products and also [actuals]? So, could you give us some colours? Thank you?

Yes. Thank you, Ying Bo. This is Kevin. First of all, about the pricing. From our point of view, for each of the products we design are based on a price point, and unless we see the competitiveness issue, otherwise we will not alter the price point of this product.

I think, to answer your question in another way, to gain more volume, definitely we will launch products to cover wider price span. Yes. So, as we mentioned, that in the future our products will cover between RMB200,000 to RMB500,000. That's not to say, we are going to reduce the price of some our products. It's we are going to design different products to cover different price point. Yes. That's our philosophy.

Also, by the way, the market size of between RMB200,000 to RMB50,000 is increasing. Yes, that's probably the only increasing segment in the -- yes, it's a segment, the volume is increasing.

About the future competition, starting from 2023, I think we will stick to our three key choices. The first one is that we compete in the overall PV market. Yes, that's why we designed -- that's why we believe we have to solve the range anxiety issue. That's one of the core value we want to deliver to our customer. That's why you see we already have a EREV solution, and we are going to have our next generation EREV solution to completely solve the range anxiety issue for our customer. And this is our mid-term long-term strategy. We'll continue to launch EREV products.

On the other hand, we also see the opportunity to solve the range anxiety issue with the high-power charging solutions, yes. That's why we have this new whale and shark 3platforms. This is the first choice.

The second choice is our target customer choice. We want to focus only on the family users. Yes. We see this is a growing demand segment, and when we design our car, we want to design the car catering the needs of all the family members, yes.

The third thing is that we will continue to focus on the autonomous driving solution development and also the smart cabin solution development.

So these three things are the fundamental building block of our product competitiveness. We don't think we'll -- we believe we'll stick to these three key things. Yes.

Thanks, Kevin, that's really helpful. Thank you.

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

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