Li Auto Inc

HKEX:2015

Earnings Call Transcript 2023-Q2

[Operator]

Hello, ladies and gentlemen. Thank you for standing by for Li Auto's Second Quarter 2023 Earnings Conference Call. [Operator Instructions]Today's conference call is being recorded.I'll now turn the call over to your host, Janet Zhang, Investor Relations Director of Li Auto. Please go ahead, Janet.

[Janet Zhang, executive]

Thank you, Sarah. Good evening and good morning, everyone. Welcome to Li Auto's second quarter 2023 earnings conference call. The company's financial and operating results were published in the -- in a press release earlier today and are posted on the company's IR website.On today's call, we have our Chairman and CEO, Mr. Xiang Li; and our CFO, Mr. Johnny Tie Li to begin with prepared remarks. Our President, Mr. Donghui Ma and other senior managements will join for the Q&A discussion.Before we continue, please be reminded that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding risks and the uncertainties is included in certain filings with the U.S. Securities and Exchange Commission and the Hong Kong Stock Exchange. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that Li Auto's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial 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.Our CEO will start his remarks in Chinese. There will be English translation after he finished all his remarks.With that, I will now turn the call over to our CEO, Mr. Xiang Li. Please go ahead.

[Xiang Li, executive]

[Interpreted] In the second quarter of 2023, we reached multiple milestones in deliveries. We delivered over 30,000 vehicles in June, taking our second quarter deliveries to 86,533 vehicles, tripling the volume from the same period last year. We delivered more vehicles in the first half of this year than all of 2022.Furthermore, in early July, we delivered our 400,000 Li Auto vehicle, taking just 42 months to reach this important milestone since we commenced deliveries in December 2019 setting a record for Chinese emerging NEV OEMs. Going from 300,000 cumulative deliveries to 400,000 took less than 4 months. Finally, our July deliveries hit a new high of 34,134 units, bringing our total cumulative vehicle deliveries over 430,000. With our strong product line of comprehensive improvements, organizational practices and operating capabilities, our 3 models continue to lead in their respective market segment with cumulative deliveries exceeding 200,000 units since their successive launches starting in June last year.According to the insurance registration data of China Automotive Technology and Research Center, in this past quarter, Li L7 consistently topped China's largest SUV monthly sales chart. The L8 also remained customers' favorite 6-seater SUV priced over RMB 300,000. The L9 continued to dominate the full-size SUV sales chart in China.Li Auto has the highest sales among domestic premium automotive brands in China and we remain one of the top 3 NEV brands priced over RMB 200,000 in China with market share increasing from approximately 11% in the first quarter to about 14% in the second quarter.Driven by our delivery growth and stronger operational capabilities, our financial performance continued to improve. In the second quarter, the company achieved record-breaking results across revenue, net income and free cash flow. During the quarter, our revenue reached RMB 28.65 billion, up 228.1% year-over-year while net income and free cash flow increased from RMB 2.31 billion and RMB 9.62 billion respectively.We're confident that our outstanding cash generation capability and ample cash reserves will support our unwavering commitment to invest in R&D, business expansion and building long-term competitive barriers. We expect our third quarter deliveries to be between 100,000 to 103,000 units. For the full year 2023, we're confident to beat the internal delivery target we set at the beginning of this year by 10% to 20% with annual revenue exceeding RMB 100 billion. We aim to hit the 4 40,000 monthly delivery milestone by the end of this year. To achieve our delivery target, we will continue to foster coordination across production, supply chain and sales while continuing to expand production capacity, enhance supply chain management processes and capabilities.We made rapid progress in autonomous driving this year. In June 2023, we started test drives for China's first NOA and commute NOA, which do not rely on high-definition maps in Wangjing known as one of the most complicated traffic zones in Beijing. We also rolled out our city NOA to early bird users in Beijing and Shanghai. On the perception front, we use BEV models enhanced by innovative NPN features and TIN network to perceive complex road structures in real-time and comprehend traffic rules.While utilizing the occupancy network to identify common obstacles, we also utilize imitation learning and control algorithms to make judgments more akin to human drivers. Test drivers and media have spoken highly of driving safety, efficiency and comfort demonstrated by Li Auto AD Max. In the second half of 2023, we'll continue to release city NOA and commute NOA to more early bird users, bringing city-level autonomous driving to more families. Meanwhile, users are increasingly accustomed to convenience and ease of highway NOA during their journey. As of today, we have provided highway NOA to over 380,000 families covering more than 230 million kilometers.With respect to BEV model, we introduced our 800-volt high-power charging solution at our first-ever Family Tech Day in June 2023. With optimized battery and thermal management systems, our BEVs can fully leverage the battery's 5C charging rates with the peak charging power of over 500 kilowatts and 500 kilometers of driving range from a 12-minute charge. In conjunction with our own 5C charging network, our BEV can offer a very compatible energy replenishment experience to ICE vehicles.We will unveil our super flagship 5C BEV Li MEGA by the end of this year and we're confident that we'll emerge as a new top seller among all vehicles priced over RMB 500,000. Meanwhile, we're actively deploying our 5C supercharging network. As of now we have built and commenced operation of 37 Li Auto 5C supercharging stations. Going forward, we'll accelerate the rollout aiming to establish over 300 5C supercharging stations by the end of this year and over 3,000 by the end of 2025 to offer our BEV users a fast and reliable charging experience.We firmly believe our dual energy strategy is the best solution to replacing ICE vehicles at scale. The dual energy strategy composes of EREV technologies that center on high-capacity batteries and highly efficient range extenders as well as a high voltage BEV technology that can truly address pain points in charging speed and charging on long trips.To support the rapid sales growth, we accelerated the expansion and upgrade of our internal integrated online and offline direct sales and servicing network. While we continue to open online -- retail stores in shopping malls, we have increased the proportion of our retail stores located in automotive retail parts to cater to different users purchasing habits in Li, further improving user acquisition and sales conversion.In the second quarter, we opened 32 new retail stores and upgraded 18 existing stores through relocation and expansion. As of July 31, 2023, we operated 337 retail stores in 128 cities as well as 323 service centers and Li Auto-authorized body and paint shops operating in 222 cities. Looking ahead, driven by our pursuit of continuous growth and we will relentlessly explore, train and learn to refine our 2 most critical products, namely our smart electric vehicles for family users and organizational processes to serve our internal talents and teams better supporting our trip or journey from 1 to 10.With that, I will turn it over to our CFO, Johnny for a closer look at our financial performance.

[Tie Li, executive]

Thank you, Alishan. Hello, everyone. I will now walk you through some of our 2023 second quarter financials. Due to time constraints, I will address financial highlights here and encourage you to refer to our earnings press release for further details.Total revenues in the second quarter of 2023 were RMB 28.65 billion or USD 3.95 billion, increasing 228.1% year-over-year and 52.5% quarter-over-quarter. This included RMB 27.97 billion or USD 3.86 billion from vehicle sales, which was up 229.7% year-over-year and 22.6% quarter-over-quarter. The year-over-year increase was mainly due to the increased vehicle deliveries.The quarter-over-quarter increase was mainly due to the increase in vehicle deliveries partially offset by the lower average selling price as a result of different product mix between the 2 quarters. Revenues from other sales and services were RMB 680.8 million or USD 93.9 million in the second quarter of 2023, growing 173.4% year-over-year and 48.1% quarter-over-quarter. The increase was mainly due to the increase of sales of accessories and provision of services in line with higher accumulated vehicle sales as well as increased sales of charging stalls in line with higher vehicle deliveries. Cost of sales in the second quarter of this year was RMB 22.42 billion or USD 3.09 billion, up 227.1% year-over-year and 49.9% quarter-over-quarter.Gross profit in the second quarter of this year was RMB 6.24 billion or USD 859.9 million, growing 232% and 62.8% compared with the second quarter of 2022 and the first quarter of this year. Vehicle margin in the second quarter of 2023 was 21% compared with 21.2% in the second quarter of last year and 19.8% in the first quarter of 2023. Excluding the impact of Li ONE, the vehicle margin of the Li L series remained stable over the first quarter of 2023.Gross margin in the second quarter of 2023 was 21.8% compared with 21.5% in the second quarter of 2022 and 20.4% in the first quarter of 2023. Operating expenses in the second quarter of 2023 were RMB 4.61 billion or USD 635.7 million, growing 61.4% year-over-year and 34.6% quarter-over-quarter. Research and development expenses in the second quarter of 2023 were RMB 2.43 billion or USD 334.5 million, up 58.4% year-over-year and 31% quarter-over-quarter. The increase was primarily driven by increased employee compensation as a result of our growing number of staff as well as increased expenses to support our product portfolio expansion and technology advancements.Selling, general and administrative expenses in the second quarter of 2023 were RMB 2.31 billion or USD 318.5 million, up 74.3% year-over-year and 40.4% quarter-over-quarter. The increase was mainly driven by increased employee compensation as a result of our growing number of staff as well as increased rental expenses associated with our sales and service network expansion.Income from operations in the second quarter of 2023 was RMB 1.63 billion or USD 224.2 million compared with RMB 978.5 million loss from operations in the second quarter of last year and growing 301.3% from RMB 405.2 million income from operations in the first quarter of this year. Net income in the second quarter of 2023 was RMB 2.31 billion or USD 318.6 million compared with RMB 641 million net loss in the second quarter of last year and more than double the RMB 933.8 million net income in the first quarter of 2023.Turning to our balance sheet and cash flow. Our balance of cash and cash equivalents, restricted cash, time deposits and short-term investments totaled RMB 73.77 billion or USD 10.17 billion as of June 30, 2023. Net cash provided by operating activities in the second quarter of 2023 was RMB 11.11 billion or USD 1.53 billion. Free cash flow was RMB 9.62 billion or USD 1.33 billion in the second quarter of 2023.And now for our business outlook. For the third quarter of 2023, the company expects the deliveries to be between 100,000 and 103,000 vehicles, representing an increase of 277% to 288.3% from the third quarter of 2022. The company also expects the third quarter total revenues to be between RMB 32.33 billion and RMB 33.3 billion or USD 4.46 billion and USD 4.59 billion, representing a increase of 246% to 256.4% from the third quarter of last year. This is -- this business outlook reflects the company's current and preliminary view on its business situation and market condition, which is subject to change.That concludes our prepared remarks. I will now turn the call over to the operator to start our Q&A session. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Tim Hsiao with Morgan Stanley.

[Tim Hsiao, analyst]

[Foreign Language] So my first question is about vehicle delivery because the orders of third quarter volume guidance of around 100,000 implies the vehicle supply constraints that have persisted throughout the whole quarter. So could you please elaborate a bit more about the key bottleneck to your production? Is that due to supply constraints of any specific components or anything else? And how confident are you in the company's ability to remove the bottleneck and to deliver like around 40,000 units per month in fourth quarter? In the meantime, should we be concerned about a similar challenge might relapse when launching the BEV models on the new platform and at the new plant? That's my first question.

[Xiang Li, executive]

[Interpreted] First, I'll take the question on production capacity. We currently operate 2 production lines in Changzhou for L8, L9 and L7. The total capacity of we're running at 2 shifts is around 50,000 units per month. The current bottleneck is still with component supply, mostly because of a very strong demand for this year, which led us to increase our target compared to what we said at the beginning of the year. To cope with the additional demand, we actually have a production expansion plan made in Q2, but it's taking some time for us to test the production lines and verify those. So the new capacity will be released in due time. We are still confident that on a annual basis, we will be able to reach our delivery targets. And in addition, to prepare for our growth in '24 and '25, we have started early to make production and capacity plans to satisfy the needs for another 2 years.

[Tim Hsiao, analyst]

[Foreign Language] So my second question is about organization restructure because we noticed that over the past 12 months, quite a lot of EV industry peers have come to organization restructure where we had a management reshuffle. We recall that Li Auto also announced an organizational upgrade last December to prepare for its future growth. So could you share with us the latest progress of the restructuring efforts and should we expect any changes to the management team in the next 6 to 12 months amid such upgrade? In the meantime, the operational and financial metrics, could you monitor more closely to quantify the improvement, for example, the lower cost, higher margin for a faster model upgrade in upcoming quarters? So that's my second question.

[Xiang Li, executive]

[Foreign Language][Audio Gap]

[Operator]

Our next question comes from Bin Wang with Credit Suisse.

[Janet Zhang, executive]

Operator, can you hear us? So we have some technical problems.

[Operator]

Yes, you're coming through.[To translate the previous question -- answer to the previous question.]

[Xiang Li, executive]

[Interpreted] On the matrix organization upgrade, it's something we have invested a significant amount of resources in manpower. Our business team at the beginning of the year had set a annual delivery target of 360,000 units. But considering 2 factors we had, in fact, earlier this year, downgraded the target to 300,000 units. One is the overall economic environment and the other is considering many of the enterprises while they are carrying out organization upgrades, their growth in fact has stagnated for 2 to 3 years.However, in hindsight, the actual results from the first half of this year, we -- our operating efficiency has not only not declined, but actually -- we actually saw a very significant increase. We have beaten our target every single month and the overall coordination and cooperation efficiency is very high. The benefits from a organizational upgrade has significantly exceeded our expectations. The organizational upgrade has really allowed us to find a trench war as a army group in the smart electric vehicle industry, which is known for having very long product cycles and long value chains.Once we have achieved certain milestones in terms of market share, we are able to defend it very steadily and continue to build on top of it. So we can see, as a result, we have displayed a very steady growth curve over this first half, but also in the second half of this year. And that is the real benefit of our organizational upgrade. In terms of the matrix organization, there are really 3 types of specific benefits.First of all, from our -- what we describe ourselves as a guerrilla in our early days to being a actual formal armed forces, the company is really building highways for its core businesses so that every person can -- on the value chain can run very efficiently. Even though there are more traffic rules on highways, overall, the efficiency of highways is much higher and there are much fewer accidents. And secondly, the organizational upgrade has allowed us to build a very robust training structure for our employees and business practices. The working -- the working mechanism is very similar to artificial intelligence from perception and observations to setting goals and planning activities and finally, through execution and collaboration and after-action reviews to really build in at the company's capability.So even for a fresh graduate, he or she doesn't need to start as a business assistant, but rather can really get into real battles and grow quickly. And thirdly is what we call interlocking and it's really a contractual relationship between our different teams and talents. Compared to the OKR mechanism, our matrix organization changed from what we used to call alignment to interlocking, which is essentially a contract between teams and our different individuals.So when people set their goals, they can challenge each other and when they execute, they can work very closely and collaborate to deliver the best results. And so the -- by going from alignment to interlocking, we're really setting a contract between the different teams. And the targets become more and more challenging, but we're able to achieve these targets at a higher -- with higher and higher confidence.So overall, we believe that the most critical ingredient to a successful organizational upgrade is great culture which includes putting customers' value first, taking the right path but not easy path and building everything on collaboration, which is our core value. The organization and process is really the best product that we can build for our employees. It's simple yet sophisticated and it brings the best practices from each business area and build them into products so that the organization can grow along the line -- along the way. So without great culture, the business processes are going to be rigid and complicated. So this is the biggest learnings from upgrading our matrix organization and processes.So basically, product upgrades bring more margins or value to the company and organizational upgrade bring more efficiency for the company. [Foreign Language]

[Operator]

Our next question comes from Bin Wang with Credit Suisse.

[Bin Wang, analyst]

[Foreign Language] I've got 2 questions. Number one is about the margin. What's your outlook in the third quarter and the #4 quarter this year because previously, you guided that Li ONE has been checked down about 2% gross margin. Now you have a better volume in the second half of this year. Can I assume the second half margin will be above 23%, increased by 2 percentage? That's the number one question about the margin. And secondly, about the self-driving technology. Right now you're doing the early bird program for some customers. Can I know when the self-driving can go out to every single car buyer? When they purchase the car, they can enjoy. So do you have the timetable to share for 2024?

[Tie Li, executive]

This is Johnny from the company. Our second quarter gross margin has reflected our sales and marketing teams' effort. So you can see the improved SG&A percentage as the total revenue. And also some positive improvement on the bottom side from our supply chain here. And we will continue to improve on that. But for whole year because we still got 6 months -- 5 months to the end, so we still want to keep the whole year gross margin guidance just above 20%, yes. Thank you.

[Xiang Li, executive]

[Interpreted] On city NOA and commute NOA, we will continue with our original plan to roll them out in batches in different cities. And the rollout plan is going to be largely based on the number of vehicles and owners in the specific cities. The more owners, the more mileage is accumulated, more test data, the more likely the cities will get city NOA and commute NOA early. In addition to that, we're also taking into consideration the NPN features of complex intersections in those cities and the amount of data coverage that we have. So as more and more early bird users join into our final program, we'll be opening up our NOA features in more cities.Overall, the development and testing for NOA features are -- work is going on track. And in June 2023, we offered test drives of our city NOA in Wangjing which is known as one of the most complicated traffic zones in Beijing using the first -- China's first city NOA solution that doesn't rely on high-definition maps. And media gave very nice reviews about the features.In July, in Beijing and Shanghai, we've opened up city NOA to early bird users and users feel very highly of the comfort and safety of our solution. And this year, we will be releasing our city NOA and commute NOA for large-scale testing and the plan to release it in 100 cities remains unchanged. Internally, we are continuing to accelerate the R&D testing of our city NOA solutions.

[Operator]

The next question comes from Yingbo Xu with Citic.

[Yingbo Xu, analyst]

[Foreign Language] I have 2 questions. The first one is about the quarter's -- the third quarter's sales. How do we see the sales elasticity for the third quarter expectation? My second question is about Mind GPT. Could you give us more color about how Mind GPT is going?

[Xiang Li, executive]

[Interpreted] First of all, on guidance, the guidance we have given earlier today is really built around our production capacity, the maximum of our production boundaries for Q3. For Q4, with increased production capacity, we'll be able to reach or surpass the 40,000 per month mark. And another important point to note is we're very confident that we will be able to challenge the leadership position of Mercedes, BMW and Audi in China, meaning that we will exceed their sales in China and become the top-selling luxury brand in China.And second question on Mind GPT. In terms of technology, we released our internal big model, Mind GPT. And we have built -- since built a full stack in-house development capability of large-life models. And the R&D really falls into 4 areas. First is data and second is big model training algorithms and third is assessment and security and lastly, application deliveries. On the training algorithm front, we've stayed in line with mainstream algorithms in the industry, including the foundational model training, which utilizes 1.3 billion tokens and to command fine-tuning and reinforces -- reinforce learning.And in order to make sure that the Mind GPT model can have accurate knowledge and be able to personalize based on the users, we've also introduced search and recommendation algorithms, which are also built in-house. Mind GPT is now on Version 1, which uses 16 billion parameters. And based on the foundation model, we can better suit the user scenarios of our users and to make Li Xiang Tong Xue more interactive with our users. On the product front, the big model-based Mind GPT is really going to -- is going to power our first-generation multi-modal human-machine interface operating system. And it can allow every single person of our user family to use AI with ease and make Li Xiang Tong Xue a new member of the family and can be an expert on the car and can be a teacher, it can be a tour guide, it can be everything.In terms of progress, we'll be sharing more details about the progress of R&D. And so far, we have already opened up Mind GPT for internal dock footing. And after these tests, we will be releasing the models to a small number of early bird users through OTAs.

[Operator]

Our next question comes from Paul Gong with UBS.

[Paul Gong, analyst]

[Foreign Language] So my first question is regarding the MEGA, regarding its capacity preparation as well as sales expectation. Does the Z car L9, the only pure electric MPV currently in the market provide a benchmark? And after MEGA, what is our latest thought on the product pipeline for the BEV?

[Xiang Li, executive]

[Interpreted] First on MEGA sales target, we're confident that MEGA will become the top seller in the market at about RMB 500,000 across all different energy forms and body types. Just like we've seen from L7 and L8, which are respected market leaders in their segments, they've also won over market share from sedans and other segments.

[Paul Gong, analyst]

[Foreign Language]

[Xiang Li, executive]

[Interpreted] Next year, we're planning to release 4 vehicles, 1 range extender vehicle and 3 pure electric vehicles, not including MEGA, which we just talked about. For specific product details, we'll be sharing on our product release next year when the time is appropriate.

[Paul Gong, analyst]

[Foreign Language] So the second question is regarding the parallel exports. We realize that there are some informal trading of the auto products into other countries. How big is this in terms of scale? And do you have any plan to formalize it from guerrilla into formal army and expand our sales volume as well as our global influence of the branding?

[Tie Li, executive]

Paul, this is Johnny. I think we want to, yes, to say again, we won't do any globalization after we become dominant in China because China is a very big market, as we just mentioned. So yes, the answer is no. We want to -- and also our product was designed and was available for sale only for China Mainland. So that's, yes, basically.

[Operator]

Our next question comes from Jing Chang with CICC.

[Jing Chang, analyst]

[Foreign Language] A follow-up question about gross margin for -- as Mr. Li Tie just mentioned, some total sectors on our gross vehicle margin in the second half of the year. So we still maintain the guidance of 20% for the whole year guidance. So is there any potential net impact you can see and what might that be? Looking into 2024, our BEV model on the -- in the factory, they'll start to put into operation. So because we can see the current BEV models relatively have a very low gross profit margin. So how can we achieve our BEV model to drive a higher gross profit margin compared to the industry?

[Tie Li, executive]

Yes, I'll take this question. This is Johnny. And as I just mentioned in the earlier question, the current gross margin has to reflect our -- the effort of -- from our supply chain team and we keep improving on the bond side and to help us to improve our gross margin to the 25% designed gross margin continuously. And for the BEV, I think every time we launch a new product, we will welcome some questions about the margin and because there are some core product offering in the market, but we still want to reinforce our statements. The product gross margin was from the first day new-defined customer and new-defined the product. So we -- what we want to say is that we -- overall, we want to keep 25% for the whole company with different product offerings, yes. Thank you.

[Jing Chang, analyst]

[Foreign Language] My second question is about autonomous driving. So we planned to release city LT -- NOA function to 100 cities by the end of this year, which is a very aggressive target. Is there any great challenge as you can see at present? So can you share more about our outstanding capabilities in different aspects of our autonomous driving to support us in achieving such a challenging target?

[Xiang Li, executive]

[Interpreted] As I mentioned earlier, we're still planning to release city NOA and commute NOA in batches as opposed to releasing all the cities in one go. And we're on track to delivering city NOA to 100 cities by the end of this year. In terms of technical capabilities, we think we have advantages in both perception and planning. On the perception side, we have this innovative new prior network and also traffic and network to predict traffic lights intentions in this end-to-end model.All of this is going to enhance our BEV model, which can perceive or sense the complex road structure information in real-time and understand traffic rules. And also using occupancy network, we're able to recognize general obstacles on the driver's route. On the planning side, we're using -- utilizing imitation learning algorithms which learns from a lot of human driver behavior and decisions to make sure our city NOA can stay safe, on track and also follow traffic rules and at the same time, drive very similar to human behavior. We have the biggest autopilot or NOA training -- testing fleet in China and also we have the most training mileage as well as a significant reserve of cloud-side computing power, which we believe will be our absolute competitive advantage.

[Operator]

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

[Ming-Hsun Lee, analyst]

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

[Xiang Li, executive]

[Interpreted] On stores, we have a firm belief that good products and good channel for container, we can't live without either of them. A metric we use internally is for a mature store, which has been operating for 6 months, we think getting over 100 orders per month is a pretty healthy level of operating efficiency.But with that said, we'll still focus on not only short-term sales store but also long-term, we'll be looking into investing in more stores and expanding our sales network. By 2025, we will be -- by then have many models and much greater sales than today. So we will -- are still committed to opening more stores and covering more cities, covering more users. And we really think there's not much secret sauce in terms of where to open stores and how the stores would look like because Mercedes, BMW and Audi have -- all of them have verified a very successful model in terms of user coverage and city coverage.So we don't really need to reinvent the wheels here. Our plan is really in the next few years to continue to expand to lower-tier cities and cover more users just following their footsteps so that we can support our sales healthily by 2025.

[Ming-Hsun Lee, analyst]

[Foreign Language] So my second question is regarding your charging network. So do you have any plan regarding your expansion target? What's your potential CapEx? Will you build the charging station by yourself or you will mainly let the third party to build and operate? Will all of those charging stations be 5C grade or some will be lower grade?

[Xiang Li, executive]

[Interpreted] We're still on track to rolling out 300 supercharging stations by the end of this year. And in 2023, our charging stations by the end of this year will cover mainly the 4 economic zones, which includes the Tianjin-Beijing-Hebei area, the Yangtze River Delta area and Guangdong Bay Area as well as the Chengdu-Chongqing area. And by 2025, we will be -- have built 3,000 HPC charging stations, which will cover over 90% of all of the highway mileage as well as the major cities in China.We will make sure to finish -- achieve that goal, of course, with operating efficiency as well as a healthy free cash flow in mind. And so far, we believe the financial burden is totally manageable. All of our highway HPC stations will be built and operated in-house and all the city stations will be working with a franchise model so that to accelerate the expansion of our charging stations.

[Operator]

Our next question will come from Yuqian Ding with HSBC.

[Yuqian Ding, analyst]

[Foreign Language] I've got 2 questions. The first is on the OpEx management. The company's OpEx management has been quite good, especially in the first half, the R&D run rate is roughly 30%, 40% of the full year guidance. So can we structurally revising down the guidance on R&D and SG&A or that suggests in the second half when we roll out NOA in 100 cities, that would require more intensity in terms of R&D and SG&A? And the second question is about breaking out into our current dominating zone.We're currently quite dominant in the big size, the family utility SUV at the pricing category above RMB 300,000. But in the future, we'll probably have more to launch in a pricing category between RMB 200,000 to RMB 300,000. Currently, we are seeing a very intense competition and many new models supply over there. So how do we potentially differentiate over there and maximize the volume impact that we currently see in our dominating zone?

[Tie Li, executive]

I will take the R&D question first. We will continue to invest in the R&D for autonomous -- either for autonomous driving or other areas that we believe is necessary. We still want to keep our full year R&D expenses above RMB 10 billion. Thank you.

[Xiang Li, executive]

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

[Operator]

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

[Janet Zhang, executive]

Thank you once again for joining us today. If you have any further questions, please feel free to contact Li Auto's Investor Relations team. You may disconnect your lines. Thank you.[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]