理想汽車 (LI) 2021 Q4 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for Li Auto's fourth and full year 2021 earnings conference call. At this time, all participants are in a listen-only mode. Today's conference call is being recorded. Li Auto. Please go ahead, Janet.

Thank you, Amber. Good evening and good morning, everyone. Welcome to Li Autos' fourth quarter and full year 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, Mr. Xiang Li, will join for the Q&A discussions.

Before I continue, please be reminded that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the Company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in certain filings of the Company with the US Securities and Exchange Commission, and announcements 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 interim results announcement, and the fourth quarter and full year 2021 results announcement, which contain 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. 2012 was a pivotal year for new energy vehicle sales in China. During this year, China's auto industry witnessed a notable substitution of EVs for ICE, internal combustion engine vehicles, evidenced by EVs' rapid growth, in contrast to the sluggish sales trend of ICE vehicles.

This led to growing penetration of EVs in overall passenger vehicle sales. According to China Passenger Car Association, in 2021 the retail sales of new energy passenger vehicles increased by 169% year over year, to nearly 3 million, while ICE vehicle retail sales decreased by 5.6%.

The transition rate for retail sales of new energy passenger vehicles rose substantially to 20.8% in the fourth quarter of 2021, versus 12.6% and 5.8% for the first nine months of 2021 and the full year of 2020.

With mobility transformation trend pointing to increased smart electric vehicle use, we are proud to forge ahead as pioneer. As an industry leader, we are ready to serve more families with continuing product and technological innovations.

We achieved deliveries of 35,221 units in the fourth quarter of 2021, up 143.5% year over year, driving total revenue to RMB10.6 billion, or US$1.7 billion, growing 156.1% year over year. The robust fourth quarter performance took our full year deliveries to 90,491, up 177.4% year over year, and the total revenues to RMB27 billion, or US$4.1 billion, up 185.6% year over year.

Li ONE was the first domestic branded premium model priced above RMB300,000 in China to achieve the 10,000 monthly deliveries. In January 2022, we have delivered over 10,000 Li ONEs for the third consecutive month, achieving a new record. We believe this is another milestone for Li ONE to qualify as blockbuster model and will be a benchmark for all our future models.

We are excited to see Li ONE awaken the premium passenger vehicle market in China, targeting family users and emerge as one of the best choices. We attribute our vehicle's success to our outstanding product definition capabilities. The extended range six-seater SUV has gone from being questioned to mainstream, while our four screen, full vehicle interactive voice system has set a new industry benchmark.

This further proved our users' recognition of Li ONE's pioneering energy replenishment solution of adopting battery power for urban commuting and the recharge with range extender during long distance travelling and highlights our users' endorsement of the brand new in-vehicle driving and riding experience Li ONE offers in this autonomous era.

Our product definition capabilities are built on the shared vision in our organization and the solid foundation of comprehensive capability including technological strengths, profound consumer insights and systematic execution. And we are confident we can apply this to our future models and continue to provide our users with solutions beyond what they have demanded.

We aim to grow our model lineup significantly in the coming years while advancing our R&D efforts as products provide the competitiveness moat for business and technology for the moat for product.

While production and the deliveries improved as most of our chief supply chain partners resumed normal operations, challenges to the overall NEV supply chain will likely become long-lasting, affecting chips, batteries and potential other auto parts, given the accelerating development of the smart electric vehicle industry. Going forward, together with our supply chain partners, we will continue to work multiple measures, such as advanced planning and the diversified supply chain to mitigate supply chain risk.

In light of the ongoing industry-wide semiconductor shortage, we expect the total deliveries in the first quarter of 2022 to be between 30,000 to 32,000 vehicles.

Turning to the financial side, we maintained strong performance with a robust and steady gross margin of 22.4% in the fourth quarter, growing 4.9% year over year. This was driven by our strong vehicle sales performance and consistently effective cost management measures. Even as we accelerated the pace of RMB spending to 11.6% of revenue and grew our sales network by adding 53 retail stores in the fourth quarter, we achieved profitability, as well as a record-breaking RMB3.8 billion operating cash flow, which is a significant reflection of our operating excellency.

In 2021, we significantly extended our direct sales and servicing network, almost quadrupling our number of retail stores to 206 in 102 cities from 52 in 41 cities as of the end of 2020. By the end of January, we had 220 retail stores in 105 cities, as well as 276 servicing centers and Li Auto authorized body and paint shops operating in 204 cities.

We aim to provide our users with more convenient, efficient, and pleasant purchasing and user experience by strengthening our online operations, as well as continually adding physical touchpoints close to our users.

We plan to further enlarge our foot point [sic - footprint] and target reaching 400 retail stores by the end of this year, to meet the growing market demand for AEB national wide, supported by consumers' rising NEV adoption, and our upcoming new model launches in 2022, and onward.

Moving to our product optimization and R&D efforts. In December 2021, we released the OTA 3.0 update to all our Li ONE users, further enhancing the in-car experience for both drivers and passengers. This upgrade includes the navigation ADAS and automatic emergency braking, AEB, features, making us the third automotive OEM globally to develop its own full-stack NOA capability.

As of January 31, 2021, we have provided NOA to more than 70,000 family users, and during the spring festival holiday, we accumulated over 2 million kilometers of NOA knowledge. With an ADAS-equipped user base at the leading scale in China, we will continue to increase the R&D of ADAS-related technology and we believe we are well positioned to push the boundaries of assisted driving technologies. The upgraded AEB, with vision perception algorithm enables Li ONE to identify roadworks and highway traffic accident sites, and prompts users in advance to avoid major accidents.

Li ONE was awarded 2021 Car of the Year by D Car [spoken in Chinese], a renowned auto information platform in China, due to its outstanding AEB performance, exhibited in the D Car AEB test, known as the most strict vehicle test in China by automotive professionals. During the test, Li ONE was the only assessed model in the final round capable of accurately identifying crossing vehicles and two-wheelers. This further reflects our full-stack self-development capabilities.

The OTA 3.0 update also included an upgraded version of the Li ONE smart in-car voice assistant, Li Xiang Tong Xue, which now recognizes and executes more voice instructions for in-car entertainment, navigation and the vehicle setting. We will continue to conduct R&D to develop safer cars with smarter product features that can be helpful for all members of the family, young and old, as we remain steadfast in our commitment to creating homes on the move that bring happiness to the entire family.

We are also happy to share that we have been added to the Hang Seng Cap Index under the index's newly added category of autonomous technology. The inclusion will take effect on 7 March this year. We have also been included in the Hang Seng Compositive Large Cap Index since August 2021.

As a technology leader in smart mobility, our addition to the Hang Seng Cap Index endorses the strength of our full-stack self-developed ADAS and smart cabin technologies, as well as recognizes our capability to create value for our investors. We look forward to bringing more families our Li ONE premium experience that offers safer, simpler driving with all the amenities and technologies people want in a premium vehicle.

In the second quarter of 2022, we will unveil our next mass-produced vehicle model, a full-size premium extended range electric SUV. Deliveries of this model will start in the third quarter of this year. In 2023, we plan to launch two BEV models that support ultra-fast charging. By then our ultra-high voltage charging solution will be readily available to our users, effectively shortening the charging time and addressing mileage anxiety.

As we remain committed to developing new models, autonomous driving, smart cockpit and others, our R&D expense for 2021 tripled year over year to RMB3.3 billion or US$515.7 million, accounting for 12.2% of revenue. We will continue to expedite our R&D progress with the support of our expanding R&D team, which is comprised of more than 3400 personnel as of the end of 2021, representing 139.8% year-over-year growth. We target to maintain our R&D investment at the level of 10% of revenue and above going forward.

Turning to our production capacity, we are extending our capacity at the Changzhou factory and constructing our Beijing manufacturing base. Once the expansion and construction are completed, the designed production capacity at these two manufacturing sites will reach 500,000 units annually in 2023 and around 750,000 with double shifts.

Meanwhile, we are excited to share that in December 2021 we entered into a strategic cooperation framework with the Chongqing municipal government for establishing our new manufacturing base. We will make relevant disclosure of the Chongqing manufacturing base when appropriate. The enhanced production capacity, together with our enriched product lineup, will position us well to capture an increasing share of the booming EV market, laying a solid foundation for our strong growth in the years to come.

With the launch of our second major vehicle just around the corner and the continued strength in orders for our Li ONE, we expect 2022 will be another pivotal year of growth for Li ONE, for Li Auto. Our pioneering spirit tells us to keep pushing the boundary of what is possible and that's what we are doing.

The market is ripe for advancement and we are in the right place, at the right time, with the right strategy, the right skillsets, the right business model and the right vehicle to drive us to the next destination. In 2022, we expect the NEV market to see its greatest number of drivers yet and we are all ready for it.

Now I will turn this call over to our CFO, Mr. Tie Li, to review our financial performance in the fourth quarter.

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

Our total revenues in the fourth quarter of 2021 were RMB10.62 billion or US$1.67 billion, representing an increase of 156.1% from RMB4.15 billion in the further quarter of 2020 and an increase of 36.6% from RMB7.78 billion in the third quarter of 2021. This included RMB10.38 billion or US$1.63 billion from vehicle sales, which increased 155.7% year over year and 40.5% quarter over quarter. The increase over the fourth quarter of 2020 and the third quarter of 2021 was mainly due to the increase of vehicle deliveries in the fourth quarter.

Revenues from other sales and services were RMB244.7 million or US$38.4 million in the fourth quarter of 2021, representing an increase of 174.5% year over year and a decrease of 37.1% quarter over quarter. The year-over-year increase in revenue from other sales and services was mainly attributable to increased sales of charging stalls, accessories and services in line with higher accumulated vehicle sales. The decrease in revenue from other sales and services over the third quarter of 2021 was due to the sales of automotive regulatory credits in the third quarter, which didn't recur in the fourth quarter.

Costs of sales in the fourth quarter of 2021 was RMB8.24 billion or US$1.29 billion, representing an increase of 140.8% year over year and an increase of 38.2% quarter over quarter.

Gross profit in the fourth quarter of 2021 was RMB2.38 billion or US$373.5 million, growing 228.5% compared with the fourth quarter of 2020 and 31.3% compared with the third quarter of 2021.

Vehicle margin in the fourth quarter of 2021 was 22.3%, compared with 17.1% in the fourth quarter of 2020 and 21.1% in the third quarter of 2021. The increase in vehicle margin over the fourth quarter of 2020 was primarily driven by higher average selling price attributable to the increase of vehicle deliveries of our 2021 Li ONE since its release in May.

Our gross margin in the fourth quarter of 2021 was 22.4%, compared with 17.5% in the fourth quarter of 2020 and 23.3% in the third quarter of 2021.

Operating expenses in the fourth quarter of 2021 were RMB2.36 billion or US$369.7 million, representing an increase of 193.2% year over year and an increase of 23.4% quarter over quarter.

Research and development expenses in the fourth quarter of 2021 were RMB1.23 billion or US$193 million, representing an increase of 228.7% year over year and an increase of 38.4% quarter over quarter. The increase in research and development expenses over the fourth quarter of 2020 and the third quarter of 2021 was primarily driven by increased employee compensation as a result of growing number of research and development staff, as well as increased costs associated with new product developments.

Selling, general and administrative expenses in the further quarter of 2021 were RMB1.13 billion or US$176.6 million, representing an increase of 162.2% year over year and an increase of 10.2% quarter over quarter. The increase over the fourth quarter of 2020 was primarily driven by increased employee compensation as a result of growing number of staff, as well as increased marketing and promotion activities and rental expenses associated with the expansion of the Company's distribution network.

Income from operations in the fourth quarter of 2021 was RMB24.1 million or US$3.8 million, compared with RMB78.9 million loss from operations in the fourth quarter of 2020 and RMB97.8 million loss from operations in the third quarter of 2021.

Net income in the fourth quarter of 2021 was RMB295.5 million or US$46.4 million, compared with RMB107.5 million net income in the fourth quarter of 2020 and RMB21.5 million net loss in the third quarter of 2021.

And now turning to our balance sheet and cash flow. Our cash and cash equivalents, restricted cash, time deposits and short-term investments totaled RMB50.16 billion or US$7.87 billion as of December 31, 2021. Operating cash flow in the fourth quarter of 2021 was RMB3.84 billion or US$602.1 million. Free cash flow was RMB1.62 billion or US$253.5 million in the fourth quarter of 2021. As of December 31, 2021, we had a total of 11,901 employees. For more of our 2021 full year financial results please refer to our earnings release for further details.

Now for our business outlook. For the first quarter of 2022 the Company expects the delivery to be between 30,000 and 32,000 vehicles, representing an increase of 138.5% to 154.4% from the first quarter of 2021. The Company also expects the first quarter total revenues to be between RMB8.84 billion and RMB9.43 billion or US$1.39 billion and US$1.48 billion representing an increase of 147.2% to 163.7% from the first quarter of 2021.

This business outlook reflects the Company's current and preliminary view on its situation and market conditions including the ongoing industry-wide semiconductor shortage which are all subject to change.

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

Thank you. We will now begin the question-and-answer session. 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 withdraw your request, please press the pound or hash key. For the benefit of all participants on today's call, please limit yourself to two questions and if you have additional questions, you can re-enter the queue. If you are going to ask the questions in Chinese, please follow with English translation. So once again it's star one for questions. Our first question comes from the line of Fei Fang from Goldman Sachs. Please ask your question.

Great thank. Let me ask my questions in Chinese first and I will translate into English. (Spoken in Chinese). Now let me just quickly translate into English. The Chinese new energy vehicle industry had various product launches in the past 12 months, some were successful, some didn't really quite work out. So what have you learnt from the industry and what do you think are the critical factors for a product to succeed?

The second question is on manufacturing capacity and store openings to 750,000 units production capacity by the end of 2023, 400 stores by the end of this year. These are ambitious targets, it's a large number from where you are at right now so does it mean now you are ready to scale up new products after unveiling those in the rest of the year. Thank you.

Xiang Li: (Spoken in Chinese). First of all, this is Li Xiang. I am translating for Li Xiang. I would like to answer this question as a product manager myself. In fact, in the industry there is a very established product logic. We start with the users. The users care about two things and first of all is their own need and there are three levels of need. Starting with the first level which is their superficial need and then going down further there is the hidden need and eventually the need that the users don't even know themselves.

So first of all, we need to understand these needs very well and the second point is the price point that they are willing to buy our products at. With these things we can basically draw a circle and as the product manager our goal is to build products that will overlap as much as possible with this circle of user needs. The product really focuses on five different things.

The first one is product performance. You need to deliver a product that performs well on many different levels, and secondly, the safety and security, third is quality, fourth is price, and fifth is supply. Especially in an industry that has been growing so rapidly, supply is especially important as has been seen in the industry in the past few years.

So overall if we can build a product that can balance these five factors and match with the circle of user needs then the bigger the overlap, the greater the sales. On the contrary, if the overlap is very small no matter what the vision is from the Company's standpoint, sales will always suffer. So we believe a good product performance is never a coincidence. It is based on very established and solid product capabilities of the Company. Thank you.

Okay, this is Kevin, let me take the second question about our preparations for the coming years. Actually, we have very strong confidence in our new products that we are going to launch in this year and next year. Therefore, we are very aggressive in terms of getting our capacity prepared. Right now, from the sales side, as mentioned, we have 400 stores planned by the end of this year and we will have more next year.

Also, not only stores but also human resources of the sales force we are also preparing. From the capacity perspective, actually not only our own capacity, we are working with our supply chain partners to add in capacity in their factories also. Also, as we should all know that the [IC] supply is constrained so therefore we are already starting to secure upstream IC resources by giving advanced planning to our supply chain partners. Thank you.

Thank you for your question. Our next question comes from Tim Hsiao from Morgan Stanley. Please ask your question.

(Spoken in Chinese) So just two quick questions. The first question is about our ecosystem strategy. We notice several stores appeared, stores were planned to expand the operation scope into non-vehicle business, for example, like smartphone manufacturing or (inaudible) vehicles in order to grow them and enhance the user ecosystem of the smart EV. So from Li Auto's perspective how should we think about the Company's (inaudible) system development.

My second question is about the cost management. There is - we expect a general inflation or price hikes of the batteries and other key materials to continue this year so how should we gauge the potential impact, any quantitative information that we can take as a reference when we assess the potential impact? Thank you.

(Interpreted) As the founder of the Company, we have been focused from day one on the smart electric vehicle market, and we believe that we've just finished our zero to one stage, and there are still way too many things for us to focus on, than to extend into other sectors. There are many things that we can do on a product, application, technology and system level that I believe will take the next five to 10 years for us to complete, and we will be very focused on this market going forward, for at least the next 10 years. We believe that in 10 years, we can reach the level where Apple is in smartphones and smart devices. That's our overall strategy.

Then speaking about space, the in-car space, there are so many things to do. We're not talking about expanding into other types of space, because we believe that even for the space in-car, there are still many things to do. One of the opportunities is the experience - for activities where the experience is still not as perfect. In other space, we believe there's an opportunity to move them into cars, and because of our integration capabilities, and because we can fully control many of the hardware and software, we can provide a much better experience than the way it is elsewhere, including content and hardware. These are all big opportunities to tackle that we will continue to focus on in the foreseeable future.

Tim, this is Kevin. Let me take the second question about the cost challenge. In fact, when we planned for this year's financial budget, actually, we already took into consideration of the potential cost increase, especially as we are - should all know that the battery is going to - the cost will increase. On the other hand, actually, with the volumes substantially increased this year, also we will achieve more economies of scale. Therefore, overall, although we have many challenges, but we still target to achieve a higher margin, gross margin, than last year.

Thank you. Our next question comes from Bin Wang from Credit Suisse. Please ask your question.

(Spoken in Chinese) Actually, I have several small questions. Number one is about, you just mentioned, in the March statement, you actually got eligible for the Hang Seng Technology Index. That means you could be eligible for the Shenzhen-Hong Kong Stock Connect [to get a source for money]. That's number one.

Number two is about NEV credit. You're actually booking around 200 million revenue for NEV credit in '21. Can you guess what's the rough amount in '22 because you have almost more than 100% growth in '21. That is also help for the margin and the profit.

The last one is [you had] an announcement that the CTO is leaving. Can you explain what's the reason behind the CTO leaving? Thank you.

This is Johnny. Thank you, Wang Bin. First of all, for the Connect, according to the [listing] press release by this index, we have been included in the Large Cap Index, and also to be included in the Connect, we need to meet the relevant requirements on market cap and transaction volume. We expect to be included in the Connect in middle March, after we are listed for six months and plus 20 transaction days, it will be around that time.

For the NEV credit, for 2021, we have over 223 times of our NEV scores, compared with 2022 that we got from the sales volume. As everyone made aware, the per score price will be lower than last year. We are still negotiating with the potential buyer of those NEV scores. Hopefully, that will come out around the third quarter, just like last year.

For the CTO's [press], I think we can just refer to the press release. Thank you.

Thank you.

Thank you. Our next question comes from the line of Ming Hsun Lee from Bank of America. Please ask your question.

(Spoken in Chinese) I have two questions. The first question is how do you see the supply chain management and also the chip supply situation in 2022?

The second question, just OTA, the NOA, last year, and what do you think, what is the most important function for the next step for you to offer to your customers to enhance the experience? (Spoken in Chinese)

Hi Lee, this is Kevin. Let me take the first question. In fact, we are also impacted by the (inaudible) supply this month, and also last month. Not only the IC shortage from ST, but also the COVID-19 hit Suzhou. Going forward, in the coming months, actually, we see the situation will get improved, but still, supply will be very tight. We'll continue to do what we have been doing. First, qualify more suppliers. Second, give advanced planning to our supply chain planners. Third, basically, to increase our own production flexibility, so that whenever the supply is available, we can very quickly turn it into final product to deliver to our customers. Second question.

(Interpreted) Since we've started delivering the NOA feature on our 2021 model year Li ONE, we completed the full feature release on the model by the end of last year. Our goal has always been to deliver a good experience for the customers, and there is actually large amounts of work for us to deliver this good experience, including adapting HD map, and continue to fine tune.

We will continue this work to continue to make improvements in safety, and our goal is to increase safety standards across the entire driving experience, not just when the car is in NOA mode, which is the reason why we started to develop many of the technologies in house, and our ultimate goal is to increase safety by decreasing accidents by 80% across the entire lifecycle of our vehicles, which is why we make the features standard, and continue to iterate the feature over time.

The (inaudible0 is about the current solution on our Li ONE, which runs on two Horizon J3 chips, and speaking of X01, which will be launched this year, there will be significant improvements not only in sensors, but also in computing power and safety and redundancies. It will bring the safety of the entire vehicle over the lifecycle to a whole new level, and it will make the drivers and their families safe, not only when the car is in NOA mode, but also when the driver is driving themselves.

Great, thank you. Our next question comes from Paul Gong from UBS. Please ask your question.

(Spoken in Chinese) Two questions. The first one is regarding the future differentiation. Right now, there are several EV start-ups or have the [uniqueness]. How do you think going forward, when everyone is working on the autonomous driving, everyone is going to use LiDAR, everyone is going to produce a BEV as well so what would be the key competitiveness? Is it further innovation? Is it revolution of the technology, or is it more focused on the efficiency of the operation?

The second question is regarding the globalization. We have observed that some peers have already expanded to European markets. What does Li Auto think of globalization both in the near-term plan as well as in the long one?

(Interpreted) By the end of 2021, we pretty much validated ourselves and completed the 0-to-1 stage as a Company. We've been validating ourselves in the family [new] buyers' market and pretty much established the industry ceiling as the number one seller in the medium-to-large-sized SUV market.

Our key recipe for this success is our focus on the family market, our efficiency, our R&D capabilities and our software R&D capabilities. This is validated through sales while having a very low SG&A expense level.

In the next couple of years, we'll be completing our 1-to-10 stage, as many of you are well aware of 2025 goals in volume and margins. To reach this goal, we will continue to play to our strengths, which is two things. One is, we understand the family market very well, and will expand our product line across the RMB200,000 to RMB500,000 price range by providing our products to more families in more segments and markets.

The second one is our efficiency and R&D capabilities. As you can see, our R&D and new store opening pace has been on par with many of our competitors, but in the meantime, we're still delivering very healthy and profitable financial results.

In the meantime, which we admit, we have many weaknesses, which is what we will be working on over the next few years. First of all is R&D. We have already made many improvements. We've brought our autonomous driving and voice recognition inhouse by building a very strong, talented team. In the meantime, we've established R&D capabilities in zonal controllers like e-architecture. All of these are brought inhouse today.

We believe that we will continue to build these R&D capabilities in the technical area. In the meantime, the other weakness or area we want to work on is supply. Given the growth in the market, we'll be working on supply as well as manufacturing capabilities.

Finally on the topic of intelligent technologies, we believe that there is no shortcut in the market. One thing we've observed with intelligent technology is that it has three characteristics. First of all, users have no particular feeling of the technology when they buy the product. Secondly, if the experience is bad after they buy the product, they will very easily give up the product and lose all their confidence. And thirdly, if the product is good, they will very quickly find out that they cannot live without the product.

To make sure that we can deliver a competitive product in the intelligent technology area, we will focus on three capabilities, which we believe the Company has very well established. First of all is the product capability. It's very important to understand the user needs and continue to deliver products that will exceed their needs.

The second one is software and AI capabilities, which ultimately is the competition on talents, the bench of talents. We believe the most successful companies are the ones that can attract the best talents, are the ones where the best talents will most prefer to work.

The third one is safe systems capabilities, and more specifically is the ability to develop operating systems. We believe with these three capabilities we will be able to maintain our core competency in both autonomous driving and intelligent cockpit. Thank you.

Paul, let me take the second question about globalization. For our long-term strategy, we believe we are ultimately competing in a global market, that's for sure. For the very near future, very near term, we are focused on the China market for now.

As I mentioned several times, we already have a dedicated team for the globalization strategy. They are doing three things. First, to identify the potential market for our product; second, to analyze what will be the right product mix for this product; and third, how to develop a business model so that we can achieve meaningful market share when we enter this market. Right now, this dedicated team is still developing the overall strategy.

Thank you. Our next question comes from Yingbo Xu from CITIC. Please ask your question.

(Spoken in Chinese) I have two questions about the product. One is about, we see the penetration rate of EV goes higher than similar like 20%. That means more consumers understand more about electronic vehicles or smart vehicles. What kind of change would that take for the users? Also, could you please give us more color about X01?

The second question is about the BEV product that will be launched next year. We're thinking that from EREV to BEV is a huge change. Could you please give us some discussion on expectations of this new product? Thank you.

(Interpreted) On the first question, as we reach higher penetration in the new energy vehicle market, this is actually good news for the Company. The same product methodology will continue to apply.

As I said earlier, as we observe our users, there are three levels of demand. The first level are the explicit demands. The second level are the implicit demands, many of which are their pain points. The third level are demands that they don't even know exist.

The way we observe these demands is we analyze and observe the users on rational and emotional levels and understand what they want and build products that will exceed their needs.

Talking about X01, our core theme has been two things. One thing is to upgrade things that users really wanted on Li ONE and wanted to add to their Li ONE products. Secondly, we're delivering on new demands that are not yet met in the market today. These are things that users do not even realize that they want, but the moment that they see their products they realize, this is what I actually wanted.

The methodology will continue to remain the way it is, although the user needs are changing, and we will continue to follow that very closely.

These are some comments on the next new vehicle on range extended vehicle platform. I'll make a few comments on the electric vehicle product. The electric vehicle will focus on three different things. First of all is a 4C charging capability. The most important component will be the battery. We've spent a lot of effort to co-develop the battery with our key supplier, because the entire architecture and sales and charging capability heat management system will all be different. We've done extensive work in this area to ensure that the mass production of this battery will be successful.

The second component of our high-voltage platform is the 850-volt EV platform, which includes many different things, ranging from electric motors, integrating [PCBC] of rising voltage, lowering voltage, a heat management battery management system. All these things have never been provided before as a company.

The third thing is a 400-kilowatt charging station and charging poles. We've done a lot of work to develop these charging poles to ensure that we can provide seamless experience for our user which connects the battery, the vehicle platform and the charging station.

With these products, we'll be able to charge the cars in 10 minutes and deliver 400 kilometers of range.

Our next question comes from Jiong Shao from Barclays. Please ask your question.

(Spoken in Chinese) So thank you, management, for taking my question. My question is really about strategic positioning and product positioning. Management talked about the focus, having the best product for the family, is the family use case still the focus, remain the focus for the new products, including the BEV product? If it is, would that be enough for the longer-term sustainable growth and strategical positioning for the Company? Thank you.

(Interpreted) So the answer is yes, we will continue to focus on this market because we previously only validated ourselves at one particular price point in this market. But if you look at the entire market, when we defined the Li ONE product in 2016, the market size was only about 2 million units annually and last year the market has grown to 6 million. And we expect that by 2025, the market size will reach 10 million units per year.

So this is a very healthy market for three reasons. (1) It has very big growth, as we talked about earlier and secondly is that there's enough BM or build materials in the market for us to deliver good experience for the users. And thirdly, it can still deliver very healthy gross margin for us as a company. So we believe this is a very attractive market that we'll continue to focus on.

So far, we've only really taken a very small scoop from the market, accounting for about 2% of market share in the market. Here we're talking about all passenger vehicle market, not just NEV, because we believe Li ONE not only competes with new energy vehicles, but we have the potential to replace all existing passenger vehicles above a RMB200,000 price point.

So there's still much work to do and our goal is to eventually reach at least 20% of the market, which is the time by which we will have finished our one to 10 stage as a company.

Thank you. So as we've reached the end of our conference call, I'd like to turn the call back to the Company for closing remarks. Ms. Janet Chang, please go ahead.

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

Thank you, that does conclude our conference for today. Thank you for participating, you may all disconnect.

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

an interpreter present on the live call. The interpreter was provided by the

Company sponsoring this Event.