EHang Holdings Ltd

NASDAQ:EH

Earnings Call Analysis

EHang Reports Record Revenue Growth, Strong Demand for eVTOL Aircraft

In Q3 2024, EHang achieved a remarkable revenue of RMB 128.1 million, up 347.8% year-over-year, powered by the delivery of 63 EH216 units—surpassing last year’s 13 units. The gross margin slightly decreased to 61.2%. The company anticipates Q4 revenue to reach RMB 135 million, representing a 138.5% increase. Importantly, EHang is close to securing its first operational certificate by year-end, enhancing its market position as demand for pilotless aircraft continues to grow. Positive operating cash flow has been maintained for four consecutive quarters, building a solid financial foundation for future growth.

A Strong Third Quarter Performance

EHang reported impressive results for the third quarter of 2024, achieving a total revenue of RMB 128.1 million, demonstrating a staggering 347.8% year-over-year growth and a 25.6% increase from the previous quarter. This remarkable performance was primarily driven by soaring sales of the EH216 series products. In this quarter, EHang delivered 63 units of the EH216, a significant rise compared to only 13 units in the same period last year and 49 units in the previous quarter. The company's solid performance reinforces its competitive position in the urban air mobility (UAM) market, fueled by increasing market demand.

Margin Trends and Cost Management

Even with this explosive growth, EHang's gross margin slightly declined to 61.2% from 64.6% year-over-year and down from 62.4% sequentially. While the gross margin remains healthy, the decrease can be attributed to increased operating expenses, which rose by 60.9% year-on-year to RMB 86.9 million, largely due to expanded sales-related expenses and higher employee compensation. However, the company reported an adjusted operating income of RMB 9 million, a turnaround from an adjusted operating loss in the same quarter last year of RMB 34.2 million. This indicates a trend towards improved operational efficiency and stronger profitability.

Positive Cash Flow and Strategic Investments

EHang has also maintained positive operating cash flow for the fourth consecutive quarter, ending Q3 2024 with a cash balance of RMB 1,077.6 million. Recently, the company announced a USD 22 million investment from strategic partners, bringing total year-to-date financing to nearly USD 100 million. These funds will be utilized to advance next-generation eVTOL technology, scale production capacity, and support overall company expansion.

Operational Highlights and Certifications

During this quarter, significant progress has been made regarding regulatory compliance. EHang is on track to receive its Operating Certificate (OC), expected by the end of this year. This will significantly enhance the safety assurance and operational readiness for the EH216-S in China. Additionally, EHang is actively working to assist its customers in preparing their OC applications to expedite commercial operations nationwide.

Enhanced Product Offerings and R&D Investments

To strengthen its competitive edge, EHang has been working with the Hefei Municipal Government to establish the EHang Aerial Vehicle Manufacturing Industrial Park. Furthermore, the company is collaborating with Inx Energy to develop advanced solid-state batteries, which significantly improve flight endurance—from 48 minutes currently to a projected 60 minutes next year. This advancement highlights EHang's commitment to innovation and market leadership in eVTOL technology.

Guidance and Future Projections

Looking ahead, EHang has provided optimistic guidance, projecting Q4 2024 revenues to reach RMB 135 million, indicating a year-over-year increase of 138.5%. Full-year revenue is expected to hit RMB 427 million, reflecting a remarkable increase of 263.5%. This growth trajectory, coupled with ongoing improvements in supportive low-altitude policies and increased government backing, further emphasizes the company's potential for sustained growth in the evolving UAM landscape.

New Manufacturing Facilities and Capacity Expansion

EHang is also planning to ramp up production capacity by upgrading its existing factory and constructing new sites. The existing Yunfu factory will undergo technical upgrades, and new factories are slated to be established in locations like Guangzhou and Hefei by 2025. This expansion aims to meet growing demand, with existing orders exceeding 1,000 units.

Global Expansion and Market Footprint

EHang's international presence continues to strengthen, having conducted demonstration flights in 18 countries, including Brazil, Thailand, and Japan. Recent experimental flight permits in Brazil signal favorable conditions for future operations there and are indicative of EHang's aggressive pursuit of market opportunities globally. This aligns with their aim of launching commercial flight operations, particularly in regions like Phuket and Samui by 2025.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the EHang Third Quarter of 2024 Earnings Conference Call. Please note that the management's prepared remarks and the subsequent Q&A session will be primarily conducted in Chinese and the corresponding simultaneous or consecutive interpretation can be accessed on the English line.



As a reminder, all translations are for convenience purposes only. In case of any discrepancy, the management statement in the original language will prevail. To listen to the original remarks by the management please join the Chinese line. Additionally both the Chinese and English lines are open for questions and today's call is being recorded.



I will now turn the call over to Anne Ji, EHang's Senior Director of Investor Relations. Ms. Anne, please proceed.

[Anne Ji, executive]

[Interpreted] Hello, everyone. Thank you all for joining us on today's conference call to discuss the company's financial results for the third quarter of 2024. The earnings release is available on the company's IR website. Please note, the conference call is being recorded, and the 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. Zhao Wang, Chief Operating Officer; and Mr. Conor Yang, Chief Financial Officer and Director of the Board.



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 the expectations expressed today.



Further information regarding this 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 third quarter of 2024, 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, executive]

[Interpreted] Hello, everyone. Thank you very much for joining EHang's earnings call. Since the third quarter of this year, our order deliveries and financial performance hit a record high again. We have also made exciting progress in multiple aspects, such as the air operator certificate application and certification review, the development of low-altitude ecosystem, R&D of next-generation technology and products as well as the expansion of overseas markets. All of these achievements underscore EHang's commitment and capabilities in accelerating our pace towards commercial urban air mobility operations.



We have become the world's first eVTOL company to obtain the 3 airworthiness certificates for pilotless aircraft, demonstrating we have the capabilities for mass production and deliveries. In July, the Civil Aviation Administration of China officially accepted the OC application submitted by Guangdong EHang General Aviation and Hefei Heyi Aviation. This is the world's first OC project for pilotless passenger carrying aircraft, signifying that the first related operational standards are about to be established, which will provide a safety assurance for the commercial operations of EH216-S in China.



Currently, the OC review is progressing well, and the first OC is expected to be issued by the end of this year. Simultaneously, we are actively assisting our customers and partners in Shenzhen, Guangzhou, Wuxi, Zhuhai and Wenzhou in preparing their OC applications as well. with the aim to speed up the commercial operations of EH216-S nationwide and promote the development of low-altitude economy demonstration zones across more cities.



Since Q3, China central and local governments have enhanced their support for the low-altitude economy industry, further highlighting its strategic role as an emerging economic growth engine. China's National Development and Reform Commission plans to establish a dedicated bureau for low-altitude economy, which will better coordinate resources across different segments for fostering the industry development.



In November, the Ministry of Industry and Information Technology convened another plenary meeting of the leadership group for low-altitude industry development, emphasizing the strategic importance of the industry's high-quality development and outlining key tasks for advancing pilotless electric and intelligent low-altitude equipment.



As a global leading UAM technology company, EHang actively aligns with national policies. Our product and development philosophy resonate closely with the government's advocacy for innovation in low-altitude equipment.



Under the broad and in-depth policy support, the domestic demand for pilotless aerial vehicles in China continues to grow. In Q3, our deliveries and revenues reached a record high again. We delivered 63 units of EH216-S, and our quarterly revenues reached RMB 128 million. This demonstrates the robust market demand and strong customer recognition of EH216-S. Of course, our focus extends beyond aircraft deliveries. Our top priority is to ensure operational safety as we're accelerating the establishment of a comprehensive operational support system, focusing on both sales and operations as well as enhancing the low-altitude ecosystem.



We have achieved a significant operational progress in the following 3 aspects. Firstly, on infrastructure. With strong support from the Hefei municipal government, the second UAM hub, Ascend was officially established in Luogang Park in Hefei, this hub is tailor-made for the EH216 pilotless passenger aircraft, and it also serves as a UAM hub model for pilotless passenger aircraft operations.



Secondly, on talent training, we have formed a strategic partnership with the Civil Aviation Flight University of China to jointly carry out the training of talents related to operations, maintenance and management of EHang's pilotless aircraft and to establish a standardized system.



Thirdly, we are building an aftersales maintenance and repair system to support the upcoming extensive operational work. We believe that in a future of a flourishing low-altitude economy, only truly competitive products can attract a sustained market interest. EHang will continue to increase our R&D investment to maintain our leadership. We will focus on the enhancement of EH216-S performance and the commercialization of a long-range product on the following aspects.



Regarding EH216-S performance enhancements, we have entered into a strategic partnership with Enpower, a pioneer in new energy vehicle power systems to co-develop electric motors and motor controllers tailored for EHang's eVTOL. This new solution features an integration of a lighter weight and higher power density.



Meanwhile, we have strategically invested in Inx and achieved a significant breakthrough in the joint development of a high-energy solid-state battery technology. With this solid-state battery, our EH216-S completed a continuous flight test exceeding 48 minutes, significantly improving the flight endurance by 90%. Next year, we aim to improve the flight endurance even further to 60 minutes. This milestone achievement is critical in broadening the application and operational scope for our eVTOL products.



Moving on to the development of our long-range product. Building on the VT-30 prototype, we have conducted a commercial design and upgrade for our Lift-and-Cruise eVTOL model to VT-35. This long-range product complements our existing product portfolio by targeting application scenarios like inter-city, cross-bay, and cross-mountain routes. Extending beyond the EH216-S's intra-city UAM coverage. With the 2 categories of EH216 Series and VT-35, we will achieve full scenario coverage for low-altitude flights.



In the overseas markets, in Q3, we have conducted demo flights in Brazil, Japan and Thailand, extending our footprint to 18 countries across the globe. We're also making strides in overseas airworthiness certification for the EH216-S. In September, EH216-S was granted an experimental flight authorization certificate from Brazil's National Civil Aviation Agency, and we plan to conduct more in-depth test flights in Brazil to facilitate the local airworthiness certification. The Civil Aviation Authority of Thailand also plans to open flight tests for certified eVTOLs in multiple areas of Thailand. We're planning to expand our flight range in Thailand with the aim to launch commercial flight operations in some regions of Phuket and Samui by 2025.



Reflecting on our progress over the past decade, EHang has launched the world's first pilotless passenger aircraft EH184 in the United States, becoming a pioneer of the global urban air mobility industry. We have driven and pioneered breakthroughs in pilotless area vehicle technology and airworthiness certification. With the launch of operational hubs such as the Hefei UAM Hub and others, EHang's long-held dream of urban air mobility will truly come to fruition.



Moving forward, we will steadily advance ensuring safety as the top priority to achieve sustainable industry development. We also strive to create greater value for our shareholders, partners and the society.



Next, I'll turn the call over to our COO, Mr. Wang, to elaborate more on our Q3 operational performance. Thank you.

[Zhao Wang, executive]

[Interpreted] Thank you, Mr. Hu, and hello, everyone. Let me first provide an overview of our product delivery status for the third quarter. In Q3, we received repeat orders from existing customers as well as new customers. Specifically, we completed the deliveries of 40 units to the Shanxi client in the third quarter, reaching a total of 50 unit deliveries to this client. We also delivered 3 units to our Wencheng client in Wenzhou, Zhejiang province in the third quarter, reaching a total of 30 units delivered.



Additionally, we delivered 5 units to each of Shenzhen Boling and Hefei Heyi customers for their repeat orders in the third quarter to be deployed in their expanded site at the UAM operations center in Luohu District, Shenzhen and the newly established UAM hub at Luogang Park in Hefei. Furthermore, we also secured new orders and completed deliveries for clients in Fujian, Chongqing, Tianjin, Guizhou, Shanxi and Zhuhai this quarter. In summary, we delivered a total of 63 units of the EH216-S series in the third quarter. Currently, our domestic order book is more than 1,000 units.



As an aircraft manufacturer, EHang is not only responsible for the production and sales of the aircraft. We are also providing customers with maintenance, repair and related consulting services. Due to the special nature of the aircraft, we are also assisting our customers from various regions in preparing for their operational certification applications, striving to obtain approvals from the CAAC as soon as possible.



Before that, we are also assisting customers with services, including operational site design, route planning and business process planning. For those operation companies that have submitted their OC applications and are under regulatory review, we provide full technical support to assist them in safety improvements to meet the safety operation requirements of the CAAC.



Our company's focus moving forward will be to place greater emphasis on service quality. We aim to proceed steadily and diligently, serving our customers well, building a robust UAM operational system and improving talent training mechanisms. This will enable our customers to operate their aircraft continuously and stably, achieve commercial returns and also lay a solid foundation for the company's long-term development. In terms of personnel training, with the aim to assist our clients in better operating and maintaining the aircraft, we have trained a total of 47 operators and 22 maintenance personnel for our customers.



Regarding infrastructure construction, we have signed strategic cooperation agreements with several infrastructure service providers. These partners will take the initiative to undertake the construction of low-altitude infrastructure such as takeoff and landing platforms and hangars in some cities. We will use these infrastructure facilities through cooperation or leasing agreements.



Since the second quarter, we have visited numerous domestic production bases for new energy vehicles and new energy batteries. Additionally, in October, we visited some European manufacturing facilities specializing in safety aviation components. We are currently in discussions with some of these factories about potential cooperation. Our goal is to integrate various production facilities and management expertise to provide ideas and solutions for the integration and upgrade of our production lines and manufacturing technique in order to improve quality and reduce costs.



Currently, all of our delivered aircraft are produced in our [indiscernible] production facility in Yunfu. Starting from Q4, we will strengthen industrial cooperation and plan to expand our industrial layout in Anhui, Shanxi, Guangxi and Beijing through joint ventures and contract manufacturing. For instance, in Hefei, Anhui, where our East China headquarters is located, we are collaborating with the local government to establish the EHang Aerial Vehicle Manufacturing Industrial Park and have already completed the site selection for the first phase of the factory in flight test area.



In the North China, leveraging our cooperation with Xishan Tourism, we plan to establish a low-altitude economy industrial park and the North China delivery center in Taiyuan. In the capital Beijing, we are actively exploring cooperation on the R&D and testing, manufacturing, education and training and demonstration applications in areas like emergency response, firefighting and rescue missions. And we have already begun environmental research work. As for our existing Yunfu factory, we'll start technical upgrades to the production line and flight test area in the fourth quarter. By 2025, with the commissioning of new factories, our overall aircraft production capacity and component supply will continue to expand.



Since the third quarter, we have visited a number of overseas customers, investors, partners and media. Additionally, we have actively participated in various domestic and international industry exhibitions, including the China International Aviation and Aerospace Exhibition, the China International Import Expo, [indiscernible] Italy in [indiscernible] and Smart City Expo World Congress, GTAX Global and the Thailand Drone Expo, among others. These activities have further enhanced EHang's international reputation and allowed us to connect with a large number of potential customers.



In China, we have also actively participated in activities and conferences organized by various ministries and commissions, such as the Ministry of Industry and Information Technology, the National Development and Reform Commission and the CAAC, including the Low Altitude Economy Innovation and Development Conference, the China International Small and Medium Enterprises Fair and the Urban Air Mobility Forum. Through these conferences and forums, EHang has actively communicated its thoughts on the development of the low-altitude economy and future operational strategies, resonating with attendees and earning recognition from many industry experts.



EHang has been invited to almost every low-altitude economy-related conferences and forum with expectations to bring our aircraft for display or fly demonstrations. Our international reputation has also significantly improved. Since the third quarter, we have obtained special flight permits in Brazil and Thailand and have carried out demo flights. To date, the EH216 series has completed flights in 18 countries.



Looking forward, EHang will continue to promote and lead the commercialization of the low-altitude economy while expanding our industry footprint. We will stay committed to our due focus on sales and operations fueled by innovation and collaboration as we support the sustainable growth and commercialization of this emerging initiative.



Now I'll hand it over to our Chief Financial Officer, Conor, to walk you through the financial performance for the third quarter. Thank you.

[Chia-Hung Yang, executive]

Thank you, Mr. Wang. Hello, everyone. This is Conor. Before I dive into the details, please note that all numbers presented are in RMB and are for the third quarter of 2024, unless otherwise stated. Detailed analysis are available in our earnings press release on our IR website.



I will now highlight some key points. In Q3, our efforts have once again delivered robust results. We exceeded our revenue guidance by 4%, recorded adjusted net income for the second quarter in a row and maintained positive operating cash flow for the fourth consecutive quarter. We're also making steady progress on the OC front as we gear up for upcoming commercial operations.



Turning to the specifics for Q3, our total revenues were RMB 128.1 million, representing a 347.8% year-over-year increase and a 25.6% increase from the prior quarter. This is primarily driven by the higher sales volume of EH216 Series products. In this period, we delivered 63 units of EH216 series products, achieved a new record high for quarterly deliveries compared to 13 units in Q3 2023 and 49 units in Q2 2024.



Q3 gross margin was 61.2% compared to 64.6% in Q3 2023 and 62.4% in second quarter this year. Despite a modest decrease, our gross margin remained high, reflecting our competitive advantage in the eVTOL sector. Adjusted operating expenses, which exclude share-based compensation, were RMB 86.9 million and a 60.9% increase from RMB 54 million in Q3 2023 and up 23.1% from RMB 70.6 million in the prior quarter. The increase were mainly due to expanded sales-related expenses, higher employee compensation, expansion of sales channels and increased investments in various eVTOL models.



The quarter's adjusted operating income was RMB 9 million compared to an adjusted operating loss of RMB 34.2 million in third quarter 2023 and an adjusted operating loss of RMB 4.7 million in the prior quarter. We recorded adjusted net income for the second consecutive period in Q3 2024, reaching RMB 15.7 million. This marks a significant improvement from an adjusted net loss of RMB 31.3 million in Q3 last year and also an impressive increase over the RMB 1.2 million achieved in the prior quarter.



Furthermore, we continue generating positive operating cash flow for the fourth consecutive quarter. At the end of Q3, our cash balance, including cash, cash equivalents, short-term deposits, restricted short-term deposits and short-term investment balances was RMB 1,077.6 billion.



On top of that, last week, we announced an over USD 22 million pipe investment from strategic investors, including Enpower and a strategic institutional investor from the Middle East. This strategic investment brings our total year-to-date financing to nearly USD 100 million, enhancing our financial position for our next phase of development and growth. The financing proceeds will be used to advance our next-generation eVTOL technology and products, scale production capacity, expand our team, establish new headquarters and operating sites and support the general corporate activities.



As we move into the fourth quarter, with the OC certification process nearly complete and final approval within reach, we are focusing on fine-tuning our commercialization model to enhance our customers to achieve safe and stable operations as quick as possible. This is expected to further boost market demand for our pilotless eVTOL aircraft, driving steady growth in both orders and sales.



At the same time, ongoing improvement in low-altitude policies and increased government support for the low-altitude economy are adding even more momentum to the market. Given these trends, we are expecting our revenue in Q4 is RMB 135 million, representing a year-on-year increase of 138.5%. The total revenue for the full year of 2024 is expected to reach RMB 427 million with a year-on-year increase of 263.5%.



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



[Audio Gap]

[Operator]

[Operator instructions] Your first question comes from Cindy Huang from Morgan Stanley.

[Cindy Huang, analyst]

Congratulations on remarkable 3Q results. My first question is regarding to solid-state battery. Could management share more details on battery development with Inx? And what's the key hurdle for solid-state battery to commercialize now? And when do we expect to mass produce it?



[Audio Gap]

[Zhao Wang, executive]

[Interpreted] Thank you for your question. I am Wang Zhao. On your first question, our joint battery development with Inx began early on. Developing a new battery, especially one requiring significant technological breakthrough like a solid-state battery is a complex progress. It involves not only increasing battery capacity density, but also enhancing cycle life, maintainability and safety features, requiring significant R&D resources to perfect a new battery technology for mass production and commercialization. Currently, many companies are investing in the development of solid-state batteries, and it typically takes about 2 to 4 years for these technologies to mature and reach mass [indiscernible].



With support from the Hefei International Advanced Technology Application Promotion Center, we have collaborated with Inx Energy to develop our batteries, combining our strengths with impressive progress. We have significantly increased the EH216 as flight endurance to 48 minutes and 10 seconds. And this is just the beginning. We expect to further extend this to 60 minutes sometime next year. And additionally, the energy density of this battery has increased from 250 watt per kilogram to 480 watt per kilogram. And the temperature rise during the entire flight has been reduced from 60 degrees Celsius to 80 degrees Celsius.



I should let you know that currently, these solid-state batteries are only in small batch testing and its costs are twice that of existing batteries. But of course, the energy density has been doubled. I think the production costs will gradually decrease as we mass produce them. Our goal is to achieve certification and mass production of these solid-state batteries for the EH216-S sometime by the end of 2025.

[Cindy Huang, analyst]

And my second question is regarding the progress of operator certificate. As we enter into more in-depth review phase, can we expect that EHang still can receive OC by the end of this year?

[Huazhi Hu, executive]

[Interpreted] Well, in response to your second question, you should know that -- yes, of course, the progress of OC application is closely watched by the industry. However, there are no readily available standards that we can refer for the OC review. Therefore, it requires improvements and innovations on the current regulations. Therefore, the OC approval process is also a process of setting up standards.



And most of the work on the OC review has been completed. And also based on the feedback from the Civil Aviation Administration of China, we have recently submitted necessary adjustments, and we're still waiting for further feedback from them. Our company has been quick to respond and also make adjustments. So our goal is to meet the safety operational requirements of the Civil Aviation Administration as soon as possible.



If all goes well, the first OC is expected to be issued within this year. However, we also hope everyone understands that this is a process of certifying operational safety, which requires a lot of rigorous work and responsibility to the passengers. So please stay tuned for further updates.

[Operator]

Your next question comes from Laura Lee at Deutsche Bank.

[Laura Lee, analyst]

So my first question is about the production. So I think last quarter, we talked about there will be additional 1,000 units per year capacity by next year. So does that include the capacity from like the third-party manufacturer or partners, as you mentioned today or it's mainly on like the Yunfu factory? Also, is there any update on the CapEx of this next year?

[Huazhi Hu, executive]

[Interpreted] First, on your CapEx question. So this year, our CapEx is around USD 15 million, and it will be USD 20 million for the next year. And with your question on the production ramp-up, so we will start technical upgrades to our existing and only factory in Yunfu, Guangdong province in Q4. Meanwhile, we will also prioritize constructing new factories in Guangzhou, Hefei and Guangxi. These new factories may involve joint ventures. We may bring in new partners in the manufacturing industry to leverage their experience and management models with our products for better aircraft production and delivery.

[Laura Lee, analyst]

Okay. Got you. Just a quick follow-up. So think about the technical upgrades in the Yunfu factory in 4Q. Will that cause any kind of downtime or influence the delivery cadence for this year or no?

[Huazhi Hu, executive]

[Interpreted] I expect the impact or disruption to the production and delivery would be minimal. We actually have considered the potential impact of this technical upgrade on the deliveries from Q2 all the way to Q3. However, the -- we want to mitigate and minimize the impact as we upgrade the capacity. However, we believe the short-term disruption, if there were any to the production, actually may be offset by the increased production later on. Meanwhile, we are also considering scheduling the construction of other facilities. So with the synergies between the upgrade as well as additional production facilities, we might be able to minimize the impact and ensure future smooth deliveries.

[Operator]

Your next question comes from James [indiscernible] at UBS.

[Unknown Analyst]

My question is regarding that since the battery prices are lowering and our scale is growing up, when are we expecting our breakeven will be at what kind of scale or at what kind of time period?

[Chia-Hung Yang, executive]

[Interpreted] Yes, you can see that in the third quarter, we have. . .

[Huazhi Hu, executive]

[Interpreted] Sorry, Conor, I was on mute. Would you like to go for this bit or?

[Chia-Hung Yang, executive]

[Interpreted] I'm finished. Please go ahead.

[Huazhi Hu, executive]

[Interpreted] Yes. So as we ramp up production, the price of batteries as well as the key components will definitely come down, that's the trend. However, you should know that we are constantly iterating these models and also introducing new features. This will potentially push up some of the costs of these aircraft. But our gross profit margin is at a healthy level. Let me point to you that we have achieved a positive adjusted net profit for the past quarter, and we'll definitely see a faster growth in our revenue than our expense. So in other words, we are having better operational efficiency and stronger capacity for stronger profitability.

[Unknown Analyst]

My second question is regarding our supply chain strategy. What kind of investment and research and development strategy are we adopting in the electric motor and the solid-state battery?

[Huazhi Hu, executive]

[Interpreted] Thank you for your question. I'll take this one. So let me start by saying that in this emerging UAM industry, so air taxis are set to play a critical role in the future low-altitude economy. And for us, the key is to enhance the EH216-S based on its airworthiness certification, and we'll continually upgrade the core components and key technologies to maintain our product and technological leadership. And based on this strategy, we have chosen and focused on over 10 core areas, including batteries, motor, propellers, AI composite materials and communication technologies. And through collaborative development, strategic investments as well as a joint venture.



So we maintain active communication and cooperation with these top-level suppliers in this industry chain. We are constantly exploring new patents and also new technological directions. So perhaps in the future, we might even offer some key components that we developed to our peers in the industry to actually push forward innovation in this sector.



And for example, recently, we completed a 48-minute endurance flight test on the EH216S using high-energy solid-state lithium batteries developed with Inx Energy. This marks a significant breakthrough in the technology in this industry. We aim to extend this to 60 minutes in the future. Additionally, we are developing a new generation of power systems to improve efficiency. On the product side, other than the EH216 series, the VT-35 will also be a strong complement to our current product lineup.

[Operator]

Your next question comes from Gareth Zhao at Tianfeng Securities.

[Unknown Analyst]

So I have 2 questions. My first one is regarding the gross margin. So we saw there's a slight decline in the gross margin in this quarter. So how does the company view the potential for cost reduction in the future?

[Huazhi Hu, executive]

[Interpreted] In the third quarter, we are very delighted to see some repeat orders from our existing customers. However -- we actually sell them based on last year's contract prices. Therefore, it slightly affected our average selling price and therefore, caused a small minor decrease in our gross margin, but it remains still at over 60%. So the impact is minimal.



And on the cost side, as we scale up production, we expect some cost reductions due to economies of scale. At the same time, we will continue to enhance the performance of core components like motors and batteries, which could increase costs to some extent. These factors will likely balance each other out. So we anticipate maintaining a gross margin of around 60% in the future. That's my answer.

[Unknown Analyst]

Okay. So my second question is regarding the VTC progress. So could you provide more insights about the progress of VTC certification in overseas market?

[Huazhi Hu, executive]

[Interpreted] EHang has conducted flights in 18 countries worldwide and has engaged with various national aviation regulators across the world. We understand that the countries take a cautious approach to certifying new types of aircraft. And also in these areas, they lack experience and certification systems. Therefore, for us, while we were advancing our overseas certification process through bilateral airworthiness channels with the Civil Aviation Administration of China, we are also actively exploring some pilot programs abroad to get our eVTOL operational internationally, so as soon as possible.



For instance, in September, Brazil's aviation authority granted our EH216-S an experimental flight permit, allowing us to conduct flight tests and trials extensively in Brazil. So this would help us to gather data for future VTC certification. And also moving to Thailand, we are actively exploring a sandbox pilot model with the Thai Aviation Authority. We're aiming to begin commercial flight operations in some selected regions next year. Thank you.

[Operator]

Your next question comes from Ling Liu at Guosen Securities.

[Unknown Analyst]

[Interpreted] Congratulations on the strong results. We noticed the recent announcement of the Hefei Hub completion. Could management share some insights on the future operational plans in Hefei?

[Zhao Wang, executive]

[Interpreted] Thank you for your question. This is Wang Zhao. I'll take your question. The Hefei hub is a major operational site built to OC standards, complementing existing sites to pilot various air transportation operations. The Hefei municipal government has announced plans to build over 30 eVTOL takeoff and landing points in Hefei over the next 3 years. The operational plan is quite extensive in its size with existing sites integrated with operations at Luogang Park. So it will serve as an air transport hub. Once operational qualifications are obtained, ticketed operations will start very soon.

[Operator]

Your next question comes from Yiming Wang at China Renaissance.



[Audio Gap]

[Yiming Wang, analyst]

[Interpreted] My question is on the capacity ramp-up following the technical upgrades. How much do you think it is going to help increasing our capacity? And how much help or system is going to lend to our delivery to our existing orders?

[Huazhi Hu, executive]

[Interpreted] Current production capacity is being enhanced through means of supply chain optimization and improved worker skills as well as efficiency. However, the factory requires a technical upgrade to further increase capacity. Additionally, if we were to increase the capacity significantly, that means we need to build out new factories. It looks like the demand for our aircraft has exceeded our expectations. So we are in the process of selecting new sites and designing new factories.



Existing orders are right now being delivered at a stable pace. The testing of aircraft is relatively time-consuming and complex. So the current focus is on maintaining stability and thorough testing to ensure aircraft safety. Additionally, other infrastructures such as takeoff and landing points, operational centers and training for operators and maintenance personnel also require time. So once the new factories and test sites are operational next year, the infrastructure for operational centers in various locations is mature and delivery speed will pick up.

[Operator]

Your next question comes from [indiscernible] at Citic.

[Unknown Analyst]

I got 2 questions. One is regard on the future CapEx investment expectations in the solid-state battery. And the other one is what forms of collaboration we are taking in this collaboration in the solid-state battery. If new property rights were generated on this solid-state battery, so how are we going to split the ownership of it? So that's my first question.

[Huazhi Hu, executive]

[Interpreted] As early as July last year, we proactively participated in the strategic investment in Inx Energy. And over the past year, both technical teams have continued to collaborate on research and development with very good coordination and responsiveness, allowing us to achieve phased goals in a relatively short time.



The technical breakthrough is also supported by the Hefei Municipal Government. Last October, we reached a cooperation agreement with the Hefei Municipal Government, continuously implementing low-altitude projects in Hefei to promote the development of the local low-altitude economy. The Hefei government is also very supportive of these technical breakthroughs. And under the incubation of the National First Center Low-Altitude Economy Battery Energy Research Institute, we and Inx Energy have successfully completed the solid-state battery R&D breakthrough and installed it on the EH216-S and have successfully tested fluid.



And we'll continue to increase our R&D investment in fast charging and solid-state batteries. These expenses are primarily recorded as R&D costs and not included in the capital expenditures. And also, we are doing contract manufacturing. So there aren't any CapEx included for the production of these batteries. And also the intellectual property for the core technologies and components will be jointly owned by EHang and our partners.



Thank you. And that's the end of the Q&A session.

[Operator]

Thank you. That concludes the question-and-answer session. I'd like to hand the call back to Ms. Anne for closing remarks.

[Anne Ji, executive]

Okay. Thank you, operator, and thank you all for joining today's conference call. If you have any further questions, please contact our IR team by e-mail or participating in our following investor events through the current information provided on our company's IR website. We appreciate your interest and look forward to our next earnings call. Thank you.

[Operator]

Thank you all again. You may now disconnect. Thank you.



[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]