Li Auto Inc

HKEX:2015

Earnings Call Transcript 2022-Q2

[Operator]

Hello, ladies and gentlemen. Thank you for standing by for Li Auto’s Second Quarter 2022 Earnings Conference Call. I will now turn the call over to your host, Janet Chang, Investor Relations Director of Li Auto. Please go ahead, Janet.

[Janet Chang;Director,Investor Relations, executive]

Good evening and good morning everyone. Welcome to Li Auto’s Second Quarter 2022 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 begin with prepared remarks. Our Founder and CEO, Mr. Xiang Li will join for the Q&A discussion. Before we continue, please be reminded that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve incurrent risks and uncertainties. As such, the conflicts 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 U.S. Securities and Exchange Commission and the Hong Kong Stock Exchange.

The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that Li Auto's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to Li Auto’s disclosure documents on the IR section of our website 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.

[Yanan Shen, executive]

Hello everyone and thank you for joining our call today. I will review the key highlights of the second quarter and discuss our flagship smart SUV Li L9, which has received highly positive feedback from family users for its best-in-class combination of drivability, safety, comfort and intelligence. We witnessed the continued consumer adoption of NEVs in the second quarter. China's retail sales of new energy passenger vehicle surpassed $1.17 million during this quarter more than doubled year-over-year according to the China Passenger Car Association, with penetration rates climbed to 27.1% from 21.8% in the first quarter.

We believe it will continue to rise supported by more NEV model launches, continuous iterations of smart features and increasing user preference for clean mobility. We remain focused on offering state-of-art products to our family users. Despite the challenges posed by the COVID-19 resurgence across cities national wide from March to May. We delivered 28,687 vehicles during the second quarter representing a 63.2% year-over-year increase. This strong delivery results contributed to a 73.3% year-over-year increase in total revenues which totaled RMB 8.73 billion. Our deliveries in July reached 10,432 up 21.3% year-over-year.

On August 1, we proudly wrote the 200,000 Li ONE after production line at our Changzhou manufacturing base. It took us just 986 days to reach this production milestone. Once again setting a record speed among China's emerging NEV manufacturers following our historic speed in reaching the 100,000 unit mark. Li ONE is also the first domestic branded premium model priced above RMB 300,000 to achieve this production milestone. Moving to our slide. The COVID-19 resurgence severely affected the auto supply chain in the second quarter.

Currently, there are remaining disruption and difficulties but we moderated as the pandemic became more contained. Although we are cautiously optimistic that our supply chain will normalize in the second half of the year. We should highlight that potential volatility remains and require us to constantly stay on high alert especially given the ongoing pandemic. As we navigate the continuous unpredictability, we focus on reinforcing our supply chain system strengthening our partnership with part suppliers to tackle part shortage and cost inflation and at the same time redoubled our emphasis on auto part quality control.

Now moving to profitability. In the second quarter, we continued to see that the power of our product, our execution consistency and our operational resilience enable us to mitigate the cost inflation that we have been experiencing along with the rest of the industry. As a result, our second quarter gross margin remained relatively solid at 21.5% up 2.6% year-over-year as we remain devoted to R&D and network extension to fuel our future growth. Our operating expense increased by 91.9% year-over-year. Meanwhile, we continued to optimize our cost structure and manage our cash flow effectively.

Despite the pandemics impact, we achieved another quarter of positive operating cash flow of RMB 1.13 billion and free cash flow of RMB 451.7 million. As part of our efforts to accelerate growth and accommodate additional user demand with new model launches, we continued to expand our direct sales and service network. As of July 31, we had 259 retail stores covering 118 cities as well as 311th servicing center and the Li Auto authorized body and paint shops operating in 226 cities. While the pace of our sales network expansion have been challenged by the COVID-19 resurgence we will strive to further extend our reach to users by upgrading our existing stores.

In order to optimize charging experience for our users we also rolled out the [ charging ] map function in our Li Auto application on August 17. The map covers over 30,000 charging stations and 300,000 charging post in 31 provinces and over 300 cities. From the 6 main charging station operators including State Grid, Star charge and others providing convenient energy replenishment options for our users. On June 21, we unveiled Li L9 our flagship smart SUV reflecting our intense focus on family users. We developed Li L9 to create a mobile home create happiness. Thanks to our relentless R&D efforts and outstanding product definition capabilities. Li L9 boosts cutting-edge premium features to provide outstanding handling and ultimate comfort and safety. Every Li L9 comes standard with our flagship full stack self-developed autonomous driving system Li AD Max. It's enhanced the functionality bolstered by upgraded perception and vehicle control capability was highly recognized by users in the test drives.

As the first volume production vehicle with redundancy design applied to its [indiscernible] steering system, breaking system and the power supply system for the computing platform. It offers enhanced reliability and safety. Supported by a computing platform composed of 2 Qualcomm Snapdragon automotive grade 8155 chips and our in-house deep learning-based multi-mode interactive technology. Li L9 provides a smart interior space featuring 5 swing, 3-dimensional interactions for family members for all ages. We have received a positive feedback along with very strong order intake for the Li L9, particularly from our target family users. We will commence delivery of Li L9 by the end of August.

While we forge ahead with our new model launches we also continue to pursue optimization for our existing products. In June, we released the OTA 3.1 update for Li ONE taking the Li ONE user experience to the next level. This update feature a highly anticipated remote vehicle control function, allowing users to move the vehicle forward and backward in a straight line through our mobile application. This remote capability greatly increases users' convenience and improve their ability to park in narrow spaces. The update also includes an audio equalizer function and further optimization of our fully self-developed [ NOA ] function with enhanced accuracy for recommended lane change and the ramp entry or exit.

Furthermore, we are steadily working on our plan of launching high-power charging BEV model next year. We're also working on deploying our HPC network to support our HPC BEV. Li L9 will be the first model in the industry to adopt the Nvidia Orin platform to deliver advanced alternative driving features, including NOA function showcasing our strong R&D capability with high efficiency. Our self-developed autonomous driving algorithm have won much public recognition internationally. For example, we ranked the first in the 2021 [indiscernible] 3D Vision detection and tracking parks and also own first place in the ICCV 2021 workshop [indiscernible]. We also have the largest number of autonomous driving users in China. As of July 31 this year, users with access to NOA function exceeded 130,000. The technology knowledge and insights accumulated through Li ONE gives us the advantage by helping us enhance our R&D efficiency during Li L9 development process. Refined products and further optimize the safety and performance of autonomous driving.

In summary, we will continue to create happiness and value for our family users by honing our existing products and expanding our model line up while enhancing our brand recognition for family users. We will also execute on our technology road map to solidify our lead in EREVs and advance our HPC BEV development. With that, I would like to turn it over to our CFO, Johnny for a closer look at our financial performance. Please go ahead.

[Tie Li, executive]

Hello everyone. I will now go over some of our financial results for the second quarter of 2022. To be mindful of the length of this call, I will address financial highlights here and encourage you to refer to our earnings press release, which is posted online for additional details. Total revenues in the second quarter of 2022 were RMB 8.73 billion or USD 1.3 billion, representing an increase of 73.3% from RMB 5.04 billion in the second quarter of last year. This included RMB 8.48 billion or USD 1.27 billion of vehicle sales in the second quarter of 2022 representing an increase of 73% from RMB 4.9 billion in the second quarter of 2021.

The year-over-year increase in vehicle sales was mainly attributable to the increase in vehicle deliveries in the second quarter of this year. On a quarter-over-quarter basis, affected by supply shortage due to the COV-19 in the second quarter of 2022 total revenues and vehicle sales decreased by 8.7% and 8.9%, respectively. Revenues from other sales and services were RMB 249 million or USD 37.2 million in the second quarter of 2022 representing an increase of 83.6% from RMB 135.7 million in the second quarter of 2021 and a decrease of 1.7% from RMB 253.4 billion in the first quarter of 2022.

The increase in revenue from other sales and services over the second quarter of 2021 was mainly attributable to the increased sales of charging stores, accessories and services in line with higher accumulated vehicle sales. Cost of sales in the second quarter of 2022 was RMB 6.85 billion or USD 1.02 billion representing an increase of 67.7% year-over-year and a decrease of 7.4% quarter-over-quarter. Gross profit in the second quarter of 2022 was RMB 1.8 billion or USD 280.4 million representing an increase of 37.1% year-over-year and a decrease of 13.2% quarter-over-quarter. Vehicle margin in the second quarter was 21.2% compared with 18.7% in the second quarter of last year and 22.4% in the first quarter of 2022.

The increase in vehicle margin over the second quarter of 2021 was primarily driven by a higher average selling price attributable to the increase of vehicle deliveries of 2021 since its release in May 2021. Gross margin in the second quarter of 2022 was 21.5%. Compared with 18.9% in the second quarter of last year and 22.6% in the first quarter of 2022. Operating expenses in the second quarter of 2022 were RMB 2.86 billion or USD 426.5 million representing an increase of 91.9% year-over-year, an increase of 10.9% quarter-over-quarter. Research and development expenses in the second quarter of 2022 were RMB 1.53 billion or USD 228.7 million, representing an increase of 134.4% year-over-year and an increase of 11.5% quarter-over-quarter.

The increase in R&D expenses over the second quarter of 2021 and the first quarter of 2022 was primarily driven by increased employee compensation as a result of our growing number of R&D staff as well as increased expenses associated with new models to be introduced in the future. Selling, general and administrative expenses in the second quarter of 2022 were RMB 1.33 billion or USD 197.8 million, representing an increase of 58.6% year-over-year and an increase of 10.2% quarter-over-quarter.

The increase in selling, general and administrative expenses over the second quarter of 2021 and the first quarter of 2022 was primarily driven by increased employee compensation as a result of our growing number of stocks as well as increased rental expenses associated with the expansion of the company's sales network. Losses from operations was RMB 978.5 million or USD 146.1 million in the second quarter of 2022, representing an increase of 82.6% year-over-year an increase of 136.9% quarter-over-quarter. Net loss was RMB 641 million or USD 95.7 million in the second quarter of 2022 representing an increase of 172.2% year-over-year and compared with RMB 10.9 million net loss in the first quarter of 2022.

Turning to our balance sheet and cash flow. Our cash and cash equivalents restricted cash, time deposits and short-term investments totaled RMB 53.65 billion or USD 8.01 billion as of [indiscernible] 2022. Operating cash flow in the second quarter of 2020 was RMB 1.13 billion or USD 168.6 million. Free cash flow was RMB 441.7 million or $67.4 million in the second quarter of 2022. Now for our business outlook for third quarter of 2022, the company expect the deliveries to be between 27,000 to 29,000 vehicles representing an increase of 7.5% to 15.5% from the third quarter of 2021. The company also expects the third quarter total revenues to be between RMB 8.96 billion and RMB 9.56 billion or USD 1.34 billion and USD 1.43 billion, representing an increase of 15.3% to 22.9% from the third quarter of 2021. This business outlook reflects the company's current and preliminary view on the business situation and market condition which is subject to change. I will now turn the call over to our operator and start the Q&A session.

[Operator]

Our first question comes from Fei Fang from Goldman Sachs.

[Fei Fang, analyst]

The second quarter performance was impressive despite COVID and L9 has outstanding traction for its price point. So congratulations on those that were well done. My question is about your guidance. So the third quarter is in question. For the 27,000 to 29,000 unit guidance that you provided it, can you break it out by Li ONE and L9? And also as you ramp the production of the [ high-sp L9 ], will gross margin improve? So that's the first question. My second question is about L9’s retail traction. So the company disclosed in early August that L9 has received 30,000 confirmed orders. So just wonder if we can have a refreshed discussion in terms of its latest retail trend, feedback, especially competition with the other new energy SUVs and MPVs that some of your EV peers have put in the market. [Foreign Language]

[Yanan Shen, executive]

Thank you for the question. So your first question, for the guidelines actually, we still stick to our previous projection that for September we're going to ship more than 10,000 L9. Yes. And for your second question, for the gross margin L9 will be higher since it's a high-end product. Your second question about the traction right now, although last month we already kind of received almost 30,000 order of L9. Today in the past 2 weeks, we still see a strong demand coming for L9.

[Fei Fang, analyst]

So part of my second question was to ask Kevin, if you can comment on sort of L9 in the context of this competition with the other SUVs and MPVs, that some of your competitors have put in the market [indiscernible] and so on and so forth. Are you seeing competitive threat from them sort of cause you to change your strategy or introduce more marketing incentives in front of customers?

[Yanan Shen, executive]

Yes. In fact, the L9 has a very unique product positioning. Actually, in this price band with this kind of size and smart features we don't see they have a kind of a product proposition close to our L9. So right now, it's more about how much we can convert our customers to place orders on our L9 when they have the budget between 400,000 to RMB 500,000.

[Operator]

[Operator Instructions] And our next question comes from Tim Hsiao from Morgan Stanley.

[Tim Hsiao, analyst]

[Foreign Language] So my first question, I just want to follow up on the third quarter guidance because I think third quarter volume guidance of 27,000 to 29,000 looks a little bit conservative. So considering the launch of L9 and improving supply dynamic, should we attribute the conservative sales out to the transition of Li ONE only? Or if the production ramp up of L9 can ensure their expectation or if there is any other reason we should take into consideration? So it's just simply due to the hiccup or Li ONE? How long should we expect this [indiscernible] will last? And my second question is about the sales mix of EREV, the plug-in hybrid and BEV next year. How should we think about the mix in 2023? And could you provide some updates regarding the numbers of new models? If the mix of the BEV is going to increase substantially next year, should be concerned about the potential dilution to our margin? Or could that hurt our cash flow? So these are my 2 questions. Thank you.

[Yanan Shen, executive]

Thank you for your questions. About your first question, in fact when we give out this guidance, of course, we have seen some slowdown of the Li ONE’s order intake. I think primarily the issue right now is that when we have the new product into our retail stores a lot of attention has been attracted by the new products rather than the old product. Actually, we are working with our sales team to regain the attention from our potential customers for the Li ONE. So on the other hand about the potential launch of the new product actually, the only comment I can give right now is that it will come in soon and will come in sooner than the expectation That's the only comment I can give. And about the new product BEV model we plan to launch next year. In fact, as you can expect that for any new model we launch into the market we have intention to increase the revenue also to improve our cash flow, improve our profitability. So therefore, with the new BEV model in our plan, we plan a reasonable profitability of cost. So it won't hurt our cash flow. It won't hurt our gross margin next year.

[Operator]

The next question comes from Bin Wang from Credit Suisse.

[Bin Wang, analyst]

[Foreign Language] Basically, I got one question about Li ONE because investor told me 3 things. Number one, we hear that Li ONE’s waiting time has been reduced to 2 or 3 weeks. And secondly, for this month Li ONE [indiscernible] 7,000 [indiscernible] promotion for the insurance. Number 3, [indiscernible] which will be the next generation Li ONE we launched in November this year. Can you confirm 3 things from investors?

[Unknown Executive]

First of all about the waiting time. Actually, the waiting time right now is, of course, shorter than last month. As I already explained the order intake is slower right now. So therefore, we can turn over the delivery faster. And about the RMB 7,000 kind of a promotion. Actually, yes, you got the information very updated that we kind of released this policy just this Sunday. So yes. And about the new product you're asking about I think the same answer I already provided that it will come soon and sooner than our expectation.

[Operator]

The next question comes from Paul Gong from UBS.

[Paul Gong, analyst]

[Foreign Language] So just translate my 2 questions. The first question is regarding the cannibalization of L9 versus Li ONE. How much of the recent weakness of the Li ONE orders is due to the cannibalization of the new model? And how much of it do you think is due to the weakening macro environment as well as the weakening demand for the cars in general? My second question is regarding the features or the key highlights of the BEV. I think management previously mentioned that the BEVs and [indiscernible] should be on different models, they have different features. And can you give us a little bit of color on how should we think about the uniqueness or the attractiveness of your BEV in view of such a clouded market in the BEV market already?

[Yanan Shen, executive]

I will take your first question, and Xiang Li will address the second question. The first question, the thing is that before we put in the car L9 into our retail stores, before people start to test drive it, actually we see no change of the order intake pattern of Li ONE. But it's to a certain extent to our surprise that when we have the customer coming into the stores to test drive, some of the customer our original plan was to test drive Li ONE. But when they see L9 and when after they test drive the L9, especially the customer with enough budget we see a lot of them converted to L9 customers. So right now as I just explained, that's why one of the reasons why we also have some more promotion plans for Li ONE. And I think but on the other hand we still have confidence that Li ONE is still a very competitive product because if we compare it with the existing product other than L9, other products in the same price band RMB 300,000 to RMB 400,000 price spend, Li ONE is still one of the most competitive products in the market.

[Xiang Li, executive]

[Foreign Language] So maybe 2 angles of differentiation. The first one is around charging. In fact, we already have a prototype running right now that can charge 400 kilometers of range in 10 minutes. And the goal here is very similar to a range extended vehicle which is to replace all internal combustion and vehicle for customers and have no anxiety in terms of range. Our data shows that among our L9 customers, 80% of them have home charging and 100% of them have stable charging either at home or in the office. So home charging or office charging is really not the key here. The key challenge is to enable customers to travel freely within key economic zones within China. For example, the Yangtze Delta River region, the Beijing-Tianjin region, Wuhan, [indiscernible] these big mega city areas we will support with high-power charging so that customers can drive long distances with no range in anxiety even if they're driving electric vehicles.

So the second advantage when it comes to electric vehicles is space because of the engineering possibility enabled by electric vehicles and new architectures and new body types, we can provide a lot more space in our electric vehicles compared to range-extended vehicles with the same footprint.

[Paul Gong, analyst]

[Foreign Language] If the L9 cannibalization of Li ONE is higher than expected how much of the capacity saving we prepare for L9?

[Unknown Executive]

The capacity is 15,000 for L9.

[Operator]

Next question comes from Ming Lee from Bank of America.

[Ming-Hsun Lee, analyst]

[Foreign Language] My first question is regarding the gross margin trend and also the battery cost trend for second half of this year. [Foreign Language] And the second question is regarding the competitive landscape. Recently, we also see [indiscernible] brand volume sales has grown steadily. And besides that, how do we expect the newly L8, it's product competitiveness versus the current Li ONE.

[Yanan Shen, executive]

Thank you for your question. The first question about the battery cost. Actually, as we all know that in the recent months the raw material for battery has come down a little bit but we would expect that for the coming months this year the raw material costs will again fluctuate a lot. So therefore, for the gross margin outlook is a lot of time are based on the best cost. So therefore, I can only comment on the battery costs will be kind of a fluctuation. And for the new product competitiveness, I will ask Xiang Li to comment.

[Xiang Li, executive]

[Foreign Language] So right now around L8, I can share 2 things. One is that it will be delivered, released much sooner than many people are expecting. And the second thing is that the period from release to delivery will be shorter than L9. And when L8 is available, I think that will be a good time to compare the product competitiveness with newly released competitors. And we have full confidence that we will dominate all these products with ourL8.

[Operator]

The next question comes from Yingbo Xu from Citic.

[Yingbo Xu, analyst]

[Foreign Language] I have 2 questions. The first question is about the EREV product. What are our midterm competitiveness strategy for EREV product? And the second question is about money rising. Could you please talk a little bit more about ATM and further capital reserve project?

[Unknown Executive]

[Foreign Language] Talking about a range-extended vehicles if you look at over the next 5 years, we still believe that REV is the best solution for SUVs, period. I'll give you one example. If you look at BYD they have 2 main products above RMB 200,000. There's a Han sedan and there's the Tang SUV. So in terms of Han which is the sedan the EV sells much better than DMI which is the hybrid vehicle. But for Tang the case is exactly the opposite. DMI sells better than EV. And the reason for that is when people buy cars in the RMB200 to RUB 300,000 range, when they buy an SUV they have a very clear expectation that they want to go on longer trips, especially post COVID. So REV is still the best solution up until today for SUV that solve range anxiety.

So under that consumption within REV our biggest goal is to solve the efficiency challenge. And if you look at L9, there's many top media that have tested the L9. Our energy consumption level is still leading in its class. Even with low SoC, the fuel consumption is only around 60% of much smaller internal combustion engine vehicles. And it's much better than what many claim to the competitors which are much smaller SUVs. Because at the end of the day our EV as an EV is not an internal combustion engine adding a battery to it. So that's the key difference between pHAv and our range extended electric vehicles. There shouldn't be any discussion of which one is more advanced or which one is more backwards. For the users, range-extended vehicles if an EV that happens to have an internal combustion or what we call range extender whereas pHAv is really more of an internal combustion engine vehicle with a battery.

I'll give you another example. Changan which is a very established company with very cable technical skills. And their latest vehicle, SL03 is an REV rather than pHAv. Despite the fact that Changan has all the pHAv technologies in the world but they still build an REV as their most advanced solution. Because at the end of the day again, our EV is really an electric vehicle.

Second question about the cash flow and the ATM offering. I think first Li Auto has very healthy operating cash flow and free cash flow which can still fund our business every quarter. But in the long run we were very clear, we are still at the early stage of this industry in 10 to 15 years. So we still want to use the active market to secure more cash to further on the company's development, especially in the R&D and also the new model R&D side. For the ATM offering, I think based on this year's market condition as I just mentioned, we still want to secure more cash from the equity offering so we choose pHAv to do this. As most of the ATM offering we need to stop before we published our earnings release. So hopefully, we can finish this ATM offer in the coming markets.

[Operator]

The next question comes from Jiong Shao from Barclays.

[Jiong Shao, analyst]

[Foreign Language] I have 2 questions. First question is about for the new BEV cars. Are those new cars still going to be family-oriented SUVs or something else? Second question is really about the guidance for the second half operating expenses?

[Xiang Li, executive]

[Foreign Language] So I [indiscernible] answer for the first question. In terms of the body type for electric vehicle, I still want to keep it confidential before its release because it's a very unique design.

[Unknown Executive]

And also to add to Xiang Li answer. We still serve family customers with our fee. And for all the operating expenses, I think we have a very clear road map on our product and our goal for this next year's sales target. So we will keep going to invest on the R&D side and also on the network expense to better serve our family customers. Thank you.

[Operator]

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 Chang, please go ahead.

[Janet Chang;Director,Investor Relations, executive]

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