EHang Holdings Ltd

NASDAQ:EH

Earnings Call Transcript 2023-Q2

[Operator]

Good day ladies and gentlemen, and thank you for standing by. Welcome to EHang's Second Quarter 2023 Earnings Conference Call. As a reminder, we are recording today's call.

I will now turn the call over to Anne Ji, EHang's Senior Director and Investor Relations. Ms. Anne, you may begin.

[Anne Ji, Senior Director of Investor Relations]

Hello, everyone. Thank you for joining us on today's conference call to discuss the company's financial results for the second quarter of 2023. The earnings release is available on the company's IR website. Please note the conference call is being recorded. An audio replay will be posted on the company's IR website.

On the call today, we have Mr. Huazhi Hu, our Founder, Chairman and Chief Executive Officer; Mr. Xin Fang, Chief Operating Officer; and Mr. Richard Liu, Chief Financial Officer. The management team will successfully give prepared remarks. Remarks delivered in Chinese will be followed by English translations. All translation is for convenience purpose only. In case of any discrepancy, the management's statement in the original language will prevail. A Q&A session will follow afterwards.

Before we continue, please note that today's discussion will contain forward-looking statements made pursuant to 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 its expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company's public filings with the SEC. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law.

Also, please note that all numbers presented are in RMB and are for the second quarter of 2023, unless stated otherwise.

With that, let me now turn the call over to our CEO, Mr. Huazhi Hu. Please go ahead, Mr. Hu.

[Huazhi Hu, Founder, Chairman and Chief Executive Officer]

[Foreign Language] [interrupted] Below is the English translation of Mr. Hu's remarks.

Hello, everyone. Thank you all for joining our conference call today. Today, I'm thrilled to share an exciting news with you about our Type Certification of EH216-S Unmanned Aerial Vehicle system that we have successfully completed all the planned test and trial flights in the last phase of demonstration and verification with compliance and also completed the definitive test certification Flight Test by the CAAC. This is the last milestone before obtaining the Type Certificate and also the result of the unwavering efforts of EHang team.

Since the time when the CAAC officially accepted the EH216-S TC application in January 2021, our [indiscernible] effort has spanned over 30 months. Throughout this journey, we have overcome various challenges and finally successfully completed all the substantive tasks, ranging from battery, environment, material, strength, electronics, short wear, data link to ground control stations. We have sufficiently proved that EH216-S meet the safety standards and airworthiness requirements by the CAAC. Through scientific approaches, [indiscernible] demonstrations, rigorous testing and continuous optimization. This marks a significant achievement not only for EHang, but also indicated an unprecedented advancement in airworthiness certification for the entire eVTOL industry. Furthermore, unlike other ongoing TC projects of a piloted eVTOL aircraft, to our knowledge, ours is the world's first TC program for an Unmanned Aerial Vehicle.

I would like to express my gratitude to the CAAC officials and the review team, as well as the company's airworthiness certification team for their unwavering efforts and perseverance spirits. It is their professionalism, exceptional technological expertise and collaborations that have led us to our impressive achievement today. Also, I would like to thank our investors and so many supporters for their patience throughout the process. I believe the remaining procedures will be finished very soon. Before the official authorization of the Type Certificate, it will pave the way for our commercial operations in the next stage.

In the second quarter, taking into consideration of internal and external advices, we managed our product deliveries in a controlled manner before the upcoming Type Certificate. Five unit of EH216-S AV products were delivered in Q2. Total revenues were RMB10 million, gross margin stayed around 60%. I believe we will have an excellent financial performance after the certification. During the certification period, we secured around over $23 million through strategic investment in July. Following the $10 million strategic investment from Qingdao West Coast New Area in the first quarter of this year. This has further enhanced our liquidity.

Finally, I'm glad to take this opportunity to announce that Conor Yang, director of our Company's Board and Chairman of the Audit Committee will take over the position of CFO of the company, effective on September 1. He served as the CFO at several listed companies, including our media, Dangdang, Tuniu, et cetera. And he also serves as a director at several well-known companies such as [indiscernible] Tongcheng Travel, et cetera. Conor has more than 30 years of extensive experience in financial management, Investor Relations, capital markets and corporate governance. During the three years he served as a Director of our Board, he has profound understanding and confidence in the company. We warmly welcome Conor to join our management team. I believe he will definitely take EHang into a new level.

Richard Liu has tendered his resignation from the CFO position due to his personal reasons, which will be effective at the end of August, but he will serve as a Senior Adviser to the company, contributing his expertise to our continued success. On behalf of the Board of Directors and the management team, I would like to thank Richard for his tremendous contributions to EHan's development during his eight year tenure with us.

In addition, we have also welcomed Mr. Wing Kee Lau as a new Independent Director to the Board and also as the Chairman of the Audit Committee and a member of the Compensation Committee. Mr. Lau has over 30 years of experience and expertise in financial management and accounting and has served as the CFO and finance executive of various listed companies and industry-leading companies, including RoboSense, Perfect World, Ogilvy & Mather, et cetera. He also has 10 years of auditing experience at PWC. I look forward to working together with Conor and Mr. Lau to take EHang into a new stage.

Next, I will hand over the call to our Chief Operating Officer, Mr. Xin Fang. Thank you.

[Xin Fang, Chief Operating Officer]

[Foreign Language] [interrupted] Below is the English translation of Mr. Fang's remarks.

Thank you, Mr. Hu, and hello, everyone. During the second quarter, as we continue to make progress in the final stages of EH216-S Type Certification, we have also been actively exploring the new business opportunities and cooperation on both domestic and international fronts. So as to establish a solid groundwork for the upcoming poster certification operations. After the initial signing of a corporation framework agreement with Xiyu tourism, a Shenzhen listed leading tourism enterprise in China in March of this year. Our collaboration move forward in the second quarter. We have established a joint venture with Xiyu tourism and delivered the first batch of five minutes of EH216-S AAV's to this joint venture. The customers plan to develop low-altitude tourism and sightseeing projects with EHang AAVs in Heavenly Lake of Tianshan, a national 5A-class tourist attraction, and other scenic areas in Northwestern China, and plans to operate a minimum of 120 units of AAVs within the next five years.

Moreover, Shenzhen positioned as a pivotal gateway for propelling China's innovative low-altitude economy has committed to shaping itself into a national low-altitude economy development demonstration city. Against this backdrop, in July, we inked a memorandum of understanding for a strategic partnership with the government of Bao’an District, which is Shenzhen's aviation hub. This collaboration is dedicated to jointly establishing the first UEM operation demonstration center, names the Wings of the Bay Area at OH Bay, one of the Bao’an’s [indiscernible] tourism landmarks. We plan to develop the first ever commercial route, initiate the operation of EH216-S after obtaining its certificate and launch aerial tourism and sightseeing experience services.

As a company in the Greater Bay Area, our cooperation with Shenzhen Bao’an will serve as a crucial step in our post certification operational plans. We are pleased to see that in June of this year, the state council of China officially issued the interim measures for flight management of Unmanned Aerial Vehicle. The first special administrative regulation of this kind in China. This will gradually prepare the robust growth of the UAV industry, while expanding the market opportunities of the low-altitude economy market. It will also lay a good foundation for the commercial operations of our EH216-S after obtaining the certificate. As the EH216 Type Certification project is approaching the final line, our 100 Air Mobility Route Initiative trial operations also have achieved fruitful results. Along with our customers and partners, we have also derived a total of 20 trial operation sites across 18 cities in China within the two years by the end of July this year.

More than 9,350 secured operational trial flights for low-altitude tourism and aerial sightseeing have been conducted by EH216-S at these sites, which will pave the way for our commercial operations after the certification. Following obtaining the certificate of EH216-S, we will deliver the existing domestic other pipelines in a proper order, which have accumulated to more than 100 units. In the global market, we maintained a proactive engagement within the UMA industry in Asia and Europe, cultivating potential customers and partners, while conducting AAV test and demonstration flights. In April of this year, EHang was inducted as a member of Japan's Public and Private Committee for Advanced Air Mobility.

In June, we have successfully completed the test sites of EH216-S in Okinawa, making Japan's first [Alan Hawking] (ph) flights [indiscernible]. Recently, our EH216 Series AAVs successfully completed the test flights in Israel and Belgium extending our eVTOL flight footprint to as many as 14 countries around the world. We are confident that as our operations scale and the flight numbers steadily grow, an increasing number of our regulators, customers and passengers will know more about and appreciate EHan's unique AAV technologies and products, enabling more people to enjoy a safe, autonomous, eco-friendly and efficient air mobility experience. It will drive industrial innovations and changes and create more value for the society.

Next, I will turn the call over to our CFO, Richard. Thanks.

[Richard Liu, Chief Financial Officer]

Thank you, Xing. Hello, everyone. Before I go into details, please note that all numbers presented are in RMB and are for the second quarter of 2023, unless stated otherwise. All percentage changes are on a quarter-over-quarter basis unless otherwise specified. Detailed analysis are contained in our earnings press release, which is available on our IR website.

I will now highlight some of the key points here. In Q2, the total revenues were $10 million compared with $22.2 million in Q1 primarily from the delivery of five units of EH216-S to the joint venture with a Shenzhen listed leading tourism operator in China, Xiyu tourism. In light that the TC process of EH216-S is approaching the end, some deliveries have been extended to be post TC as per customer's request.

Gross margin stayed at a high level, 60.2% in Q2, a slight decrease of 3.7 percentage points from 63.9% in Q1. Despite this minor fluctuation, our gross margin continued to be notably higher than the players of other types of electric transportation vehicles, such as those electric car companies. This is largely attributed to our unique advantages in the global UAM and eVTOL industries.

In Q2, our adjusted operating expenses, which are operating expenses excluding share-based compensation expenses were $58.1 million, compared with $50.1 million in Q1. The change was mainly because of increased expenditures related to the conforming aircraft and compliant tests and the final demonstration and verification phase of the EH216-S Type Certification process, Increased marketing activities to enhance our brand awareness, additional provisions for some long aging accounts receivable, etcetera. As a result, our adjusted operating loss in Q2 was $51.3 million compared with $34.3 million in Q1. Adjusted net loss was $51.8 million, compared with $33.6 million in Q1.

Furthermore, we have kept optimizing our balance sheet with a prudent approach to cash and liquidity management. As of the end of Q2, we had $160.7 million of cash, cash equivalents and restricted short-term deposits. In July, we have further strengthened our liquidity with a $23 million equity investment via a private placement from some long-term strategic investors. The funding will help enhance our liquidity and provide vital support for our execution of the post-certification commercial plans in our next phase of growth. This brings our cash reserve to $320.6 million as of the end of July.

And last, as Huazhi mentioned earlier, today is my last time joining the earnings conference call as the company's CFO. I would like to sincerely thank the Board and the investment communities for all your trust and support in the past eight years. It has been my great honor to be part of the force to drive EHang from an innovative technology startup into an industry-leading listed company in the past eight years. I believe Conor is an ideal successor as CFO to take EHang to a new stage. I will continue to serve as a Senior Adviser to the company and wish the company a continued greater success. Thank you.

That concludes our prepared remarks. Let's now open the call for questions. Operator, please go ahead.

[Operator]

Thank you. [Operator Instructions] Our first question comes from Verena Jeng with Goldman Sachs. Your line is now open. Verena, your line is open, you can ask your question. You can go ahead. Verena, your line is open, you can ask your question

[Verena Jeng, Goldman Sachs]

Hi. Sorry. Can you hear me now?

[Operator]

Yes, we can. Thank you.

[Verena Jeng, Goldman Sachs]

Okay. Thank you. My first question is about the time line for the TC, because we have finish all of the testing. So just wondering how long it will take for the production cycle. And after we gain the TC how soon that we can expect the full production of our factory? Thank you.

[Richard Liu, Chief Financial Officer]

Hi, Verena, this is Richard. Thank you for your question. So basically, our team have been continuing working with the CAAC team very closely to finish the remaining procedures, which are expected to be completed soon, and the TC will be issued accordingly. Once the TC is issued, this TC is expected to be the first of its kind in the eVTOL industry. And in terms of timing, we will make an announcement at that time. So please stay tuned.

In respect of production post TC, as you know that we have a production facility in Shenzhen City with an initial annual capacity of 600 units of EH216 Series products. So basically, after we obtained the TC, those capacities will be utilized to support the post TC deliveries in the future.

[Verena Jeng, Goldman Sachs]

Thank you, Richard. I have also another follow-up question here for the second half outlook, apart from the TC part, could you also share about the end market demand. For example, for the tourism market recovery, are we still seeing the recovery ongoing for the second half? Thank you.

[Richard Liu, Chief Financial Officer]

Okay. So basically, on the demand side, our existing order pipeline has accumulated to more than 100 units in China. And this pipeline is expected to continue to increase. To give you some examples, in our previous press release we announced our cooperation with Xiyu tourism and this cooperation will further lead to a potential order demand for about 120 units in the future five years. Additionally, our strategic partnership with the Bao’an district of Shenzhen City is not only a very important step for our post TC commercial operations, but also expected to help generate potential order demands gradually.

As far as the tourism market is concerned, it is the continuing recovery and increasing demands in the tourism market, for sure, are a very key driver for our ongoing revenue growth. Additionally, our innovative products are more in line with the customer needs in a scenario such as aerial sightseeing and flight experience, et cetera, compared to the traditional helicopter’s. Further, we are about to obtain the TC, which means commercial operation will be soon. And since the beginning of this year, more and more cities in China have been issuing preferential policies to promote the development of what is called low altitude economy and unmanned aerial vehicle applications, which mainly include UAM and eVTOL. So this has also created a very favorable policy environment to accelerate the development of this new industry.

To further give you an example, the Shenzhen City -- Shenzhen City is a [indiscernible] unmanned aviation pilot zone approved by the CAAC and Shenzhen City has been planning to issue policies such as regulation to promote low-altitude economy industries this year. This is expected to become China's first regulation to support the development of the low-altitude economy sectors and Shenzhen measures to support high-quality development of low-altitude economy are expected to provide strong support to the development of the industry.

Basically, both initiatives are expected to bolster our operations and revenue growth once we commence our projects in Shenzhen. Further, as a company based in the Greater Bay Area, we have abundant experience and resources in the area, which will make our collaboration with the local cities more practical and viable.

[Verena Jeng, Goldman Sachs]

Thank you, Richard. It’s very clear. Thank you.

[Operator]

Thank you. One moment for our next question please. Next question will come from the line of [Wei Wu] (ph) from Tianfeng Securities. Your line is now open.

[Unidentified Participant]

Hi. Can you hear my voice?

[Operator]

Yes, we can hear you. Thank you.

[Unidentified Participant]

Thank you. I have two questions. The first one is, we noticed recently China has published an enforcement stating that certain unmanned aircraft are facing some export prohibition. Will there be any implication for our aircraft or [indiscernible] TC process? And the second question is, can the management team shed more light on potential application scenario that could be implemented in the near future? Thank you so much.

[Richard Liu, Chief Financial Officer]

This is Richard again. I will take your question. So basically, for your first question, I would like to say, first of all, EHang as an internationally listed company, we have always been strictly following the [indiscernible] related loss and regulations in China and other countries where we do business and adhering to the principle of legality and the compliance in respect of [indiscernible] activities. In the recent new UAV-related [indiscernible] control policy in China basically has no significant impact on our business or our TC process, because we have already been complying with the relevant export licensing requirements for [indiscernible] products. It has been going smoothly.

In addition, the spokesperson of the Ministry of Commerce has stated that [indiscernible] control does not mean [indiscernible]. So as long as the UAV products exported are for legitimate civilian uses and the company follow the relevant procedures, it is understood that exporting activities can be conducted normally. And we are dedicated to leveraging our innovative technologies and products to serve the people around the world. The company had been taking strict and prudent measures in compliance management and customer restrictions in order to make sure our products are only used for legal civil users.

In respect to your second question, as you know, after our EH216-S gets its TC our first priority will be focusing on the so-called low-altitude tourism market. We will continue to team up with tourism operators and partners as many as possible in China for operations in scenarios like aerial sightseeing, flight experiencing, et cetera. Location-wise, initial ones, such as the [indiscernible] scenic areas, [indiscernible] scenic areas, The Lake of Heaven of Tianshan scenic area and our Shenzhen OH Bay area, which we announced previously.

Furthermore, we will continue to leverage our EH216 Series product platform to explore other use cases, such as aerial logistics, emergency response, medical deliveries, aerial firefighting, et cetera. Thank you.

[Unidentified Participant]

Thank you, Richard.

[Operator]

Thank you. There are no more questions in the queue at this time. Let me turn the call back to Ms. Anne for closing remarks.

[Anne Ji, Senior Director of Investor Relations]

Thank you, operator, and thank you all for participating on today's call. If you have further questions, please contact our IR firm. E-mail who are participating in our following investor events through the calendar information provided on our website. And we appreciate your interest and look forward to our next earnings call. Thank you.

[Operator]

Thank you all again. This concludes today's conference call. You may now disconnect. Everyone, have a wonderful day.