Li Auto Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 10, 2023

There are 10 speakers on the call.

Operator

Hello, ladies and gentlemen. Thank you for standing by for Li Auto's First Quarter 2023 Earnings Conference Call. At this time, all participants are in the listen only mode. Today's conference call is being recorded. I will now turn the call over to your host, Janet Tsang, Investor Relations Director of Li Auto.

Operator

Please go ahead, Janet.

Speaker 1

Thank you, operator. Good evening and good morning, everyone. Welcome to Li Auto's Q1 2023 earnings conference call. The company's financial and operating results were published in the press release earlier today and are posted on the company's IR website. On today's call, we have our Chairman and CEO, Mr.

Speaker 1

Xiang Li and our CFO, Mr. Johnny Tier Li to begin with prepared remarks. Our President, Mr. Dong Hui Ma and other senior management will join for the Q and A discussion. Before I continue, please be reminded that today's discussion will contain forward looking statements made under the Safe Harbor provisions of the U.

Speaker 1

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 uncertainties is included in certain in company's filings with the U.

Speaker 1

S. Securities and Exchange Commission and the Hong Kong Stock Exchange. The company does not assume any obligation to update any forward looking statements Please also note that Aauto's earnings press release and this conference call include to comparable GAAP measures. Our CEO will start with his remarks in Chinese. There will be translation after he finish all his remarks.

Speaker 1

With that, I will now turn the call over to our CEO, Mr. Xiangling. Please go ahead.

Speaker 2

Hi, everyone, and welcome to today's earnings call. In the Q1 of 2023, China's NEB market continued to grow, In the Q1, we achieved our best quarterly delivery results to date. With continued user recognition of the L8 and L9, We as well as strong order intake for L7 and its rapid production ramp up, we delivered 52,584 vehicles this quarter, representing a year on year increase of 65.8%. This achievement placed us among the top 3 NEV Brands priced over RMB 200,000 in China with a market share of approximately 11%, far surpassing any other emerging automakers and once again showcasing our ability to design and build blockbuster models. It also demonstrates the strength and the collaborative efficacy of our supply chain, manufacturing and sales and servicing network.

Speaker 2

We'll continue to do our best to grow rapidly and strengthen our market leadership. In April, our monthly deliveries hit a new high, Reaching 25,681 units with cumulative deliveries exceeding 335,000, LEE L7, L8 and L9 all performed outstandingly in their respective market segments. According to the insurance registration data Of CIRI Auto Technology Institute, L7 became the sales champion in the large SUV market in China after it started delivery in early March. In April, its 1st full month of delivery, Elf7 hit the 10,000 vehicle mark, becoming our 1st 4th model to reach this milestone. In the meantime, the L8 has maintained its sales leadership in the 6 seater sub segment.

Speaker 2

And in the full size SUV market, the L9 has consistently topped the sales chart ever since its delivery started at the end of August last year. Driven by our strong deliveries and relentless pursuit of operating efficiency, our financial metrics improved across the board. In the Q1, our total revenues reached RMB18.79 billion, representing a year over year increase of 96.5%. At the same time, we delivered positive operating profit and positive net profit And our free cash flow reached a record high of RMB6.7 billion. A healthy profitability and cash flow will fund our R and D and products, Platforms and systems, creating a solid foundation for long term development.

Speaker 2

With the launch of L7 and L8 Air models in April, We further expanded our price range and user coverage. We expect our user market share in the NDB market at over RMB 100,000 and above to expand further in the next quarter with expected deliveries to be between 76,081,000 units. Physical product delivery is just the beginning. In order to continuously improve the experience of family users, we will enhance our products through OTAs. Since the beginning of this year, we have delivered 2 OTA updates for our ALTH series, OTA 4.34 and 4.4, updating more than 100 features in total.

Speaker 2

New features include Path Master, which allows users to create customized combinations of functions of seats, drive settings, navigation applications and more. We also rolled out LKA Plus, the first feature of its kind in China, which can autonomously overtake on highways and urban expressways when not in navigation mode. Additionally, we will officially launch OTA 3.3 for Lee 1 in the middle of this year. For family users, safety is always the top priority. Every model of Li Auto is developed to meet the most stringent safety standards and has undergone comprehensive safety tests.

Speaker 2

In April 2023, the China Insurance Automotive Safety Index, Siase, released its latest batch of evaluation results. The L8 received a GE rating, the highest rating in occupant protection, pedestrian protection and driver assistance system. It also received a G rating and a 25% offset throttle impact test on both the driver and passenger side. The L9 also received a 5 star rating with a weighted score of 91.3% in the CNCAP assessment test. In the Q1 of 2023, we continue to enhance our commercial capabilities by upgrading and expanding our integrated online and offline direct sales servicing network to support the expanding product offerings and provide better services to our users, while spreading our brand vision and increasing brand awareness.

Speaker 2

With respect to our retail sales network, we continue to add physical stores while accelerating the upgrade and expansion of our existing stores to support multiple vehicles. Since L9's launch in late June last year, we have relocated and Expanded close to 50 existing stores and opened over 50 new stores. As of April 30, 2023, We have 302 retail stores in 103 cities as well as 3 18 service centers and authorized body shops in 2 22 cities. As our business accelerates, sustainability has always been deeply ingrained in our products, services and corporate governance. On April 21, we released our 2022 ESG report detailing our Continued exploration and progress in ESG.

Speaker 2

We received an MSCI ESG AA rating for 2 consecutive years. In the future, we will continue to improve our ESG governance, promote the harmonious development of our brand, the environment and the and create value for our users, partners, employees and other stakeholders. As we enter the next phase of the development, We will execute our autonomous driving and BEV roadmap unveiled on April 18, Shanghai Auto City NOA will mark the beginning of autonomous driving 3.0 for our company. Meanwhile, We will also enter a new chapter in terms of powertrain platforms and products with eREVs and HPC BEVs being developed in parallel. In terms of autonomous driving, our highway NOA feature has served over 280,000 families, accumulating over 140,000,000 kilometers of highway NOA mileage.

Speaker 2

In this quarter, we'll bring the NOA feature to urban driving scenarios. We'll expand we'll release city NOI for beta testing on Lee AD Automax 3.0 and target to roll out the feature in 100 cities across the country by the end of 2023. Moving forward, with the application of transformer models in autonomous driving, We believe we will be the biggest beneficiary since we have the largest data set in China. With respect to eREVs and HPC B EVs, we will adhere to our parallel development strategy. For eREVs, We'll focus on enhancing the efficiency of the range extenders, allowing users to drive on battery power on urban commute and on range extender during long distance travel, a much better experience than driving ICE vehicles.

Speaker 2

For HPC BEVs, We'll continue to improve our technology to offer a rapid charging experience comparable to Filament gasoline vehicles, so that users can make intercity trips without range anxiety. By 2025, our portfolio will consist of some models with It consists of 1 super model, flagship model, 5 eREVs and 5 HPC BEVs, 11 models in total, which will allow us to further expand our user base and expand to new markets. This year, we'll redouble our efforts in fast charging network Our 4C fast charters can reach peak power output of 480 kilowatts, adding 400 kilometers of driving range within 10 minute charge. We plan to build 300 charging stations in highway service areas by the end of 2023, carving 4 major economic zones, including The Beijing Tianjin Hebei region, the Yangtze River Delta region and the Great Bay Area and the Chengdu Chongqing region. We expect to further expand to 3,000 charging stations by the end of 2025, covering 90% of highway mileage nationally and all major Tier 1, 2, 3 states.

Speaker 2

In the future, we will continue to refine our operations, build organizational capabilities to support the scaling of our business and maintain healthy sales growth. As we continue to strengthen our autonomous driving and smart cockpit capabilities and simultaneously implement our eREV and HPC BEV dual product strategy, We're confident we will also continue to strengthen our market leadership in the NME market, creating more and better choices for family users to create mobile homes and create happiness. With that, I'll turn it over to our CFO, Johnny, for a closer look at our financial performance.

Speaker 3

Thank you, Liqiang. Hello, everyone. I will now review some of our 2023 Q1 Financials. Due to time constraints, I will address our financial highlights here Total revenues in the Q1 of 2023 were RMB $18,790,000,000 or $2,740,000,000 increasing 96.5% year over year and 6.4% quarter over quarter. This included RMB18.33 billion or 2 point US67 $1,000,000,000 from vehicle sales, which was up 96 0.9% year over year and 6.1% quarter over quarter.

Speaker 3

The year over year increase was mainly due to the increase of vehicle deliveries and higher average Siding price contributed by the Li L Series. The quarter over quarter increase was mainly due to the increase in vehicle deliveries, partially offset by the lower average selling price due to different product mix between the two quarters. Revenues from other sales and services were RMB459.7 million or US66.9 million dollars in the Q1 of 2023, growing 81.4% year over year and 20.5% quarter over quarter. The increase was mainly attributable to increased sales of accessories and services, in line with higher accumulated vehicle sales. Cost of sales in the Q1 was RMB14.96 US96 billion dollars or US2.18 billion dollars representing an increase of 102.2 percent year over year and an increase of 6.2% quarter over quarter.

Speaker 3

Gross profit in the Q1 of 2023 was RMB3.83 billion of US557.7 million dollars growing 77% Compared with the Q1 of last year and 7.4% versus the Q4 of 2022. Vehicle margin in the Q1 of this year was 19.8% compared with 22.4% in the Q1 of 2022 And 20% in the Q4 of 2022. The year over year Decrease was mainly due to the different product mix between 2 quarters. Gross margin in the Q1 of 2023 was 20.4% compared with 20 2.6% in the Q1 of last year and 20.2% in the Q4 of last year. Operating expenses in the Q1 of 2023 were RMB3.42 billion of US498.7 million dollars increasing 32.9 Research and development expenses in the Q1 of 2023 were RMB1.85 RMB85 billion or US269.7 million dollars up 34.8 percent year over year and down 10.5% quarter over quarter.

Speaker 3

Year over year increase was primarily driven by increased expenses to support our expanding Product portfolios as well as increased employee compensation as a result of our growing number of staff. The quarter over quarter decrease was mainly in line with timing and progress of new vehicle programs. Selling, general and administrative expenses in the Q1 of 2023 were RMB1.65 billion or US239.6 million dollars representing an increase of 36.8 percent year over year and an increase of 0.9% quarter over quarter. The year over year increase was primarily driven by increased employee Compensation as a result of our growing number of staff as well as increased rental expenses associated with the expansion of our Sales and Servicing Network. Income from operations in the Q1 was RMB 405.2 Compared with RMB413.1 million loss from operations in the Q1 of 2022 and RMB133.6 million loss from operations in the Q4 of 2022.

Speaker 3

Net income in the Q1 of 2023 was US6 $1,000,000 compared with RMB10.9 million net loss $5,300,000 net income in the Q4 of 2022. Turning to our balance sheet and cash flow. Our balance of cash and cash equivalents, restricted cash, time deposits And the short term investment was RMB65 1,000,000,000 or US9 point US46 $1,000,000,000 as of March 31, 2023. Net cash provided by operating activities in the Q1 of 2023 was RMB Free cash flow was RMB6.7 billion or US975.9 million dollars in the Q1 of 2023. And now for our business outlook.

Speaker 3

For the Q2 of 2023, the company expects The delivery to be between 76,000 and 81,000 vehicles, representing an increase of 164.9 percent to 100 82.4 percent from the Q2 of 2022. The company also expects the 2nd quarter total revenue to be between RMB24.22 billion and RMB25. US86 billion dollars or US3.53 billion dollars and RMB3.77 billion, representing an increase of RMB177.4 percent to 196.1 percent from the Q2 of last year. This business outlook assumes the positive Macroeconomic conditions, no significant disruptions in the supply chain and reflects the company's current and preliminary view on its business situation and market condition, which is subject to change. I will now turn the call over to the operator to start our Q and A session.

Operator

Thank Please pick up the handset to ask your question. And if you have additional questions, you can re enter the queue. If you are a Mandarin speaker, please ask your questions in Chinese first, Then followed by the English translation. The first question comes from Tim Hsiao from Morgan Stanley. Please go ahead.

Speaker 4

So my first question is about gross Profit margin. So Q1 gross profit margin was adversely affected by the in sterile product mix and the lower utilization rate. So how should we think about the margin trajectory in the following quarters given the interplay of multiple factors? So on the bright side, the scale will rise and component costs, including the battery prices would fall. And on the flip side, We expect the rising mix of L7 and the air models might cause greater margin dilution.

Speaker 4

So any chance in the current quarter we could see the gross profit margin bounce back to like a previous peak level more than 22%? So that's my first question.

Speaker 3

Thank you, Tim. This is Johnny. Basically, we are In the Q1, the LiWAN sales impact 1.6% on the gross margin negative, If we excluding that, so we will both out all the levers In the first half, and yes, there will be some room on this Only was a negative impact. And with the ramp up of our Our 7 series and also the Air series, there will be some room on that. Yes, we still There will be some other Our ultimate stress, so we still keep our 20% full year guidance.

Speaker 3

Thank you.

Speaker 4

Got it. Thank you very much, Johnny. So my second question is about the CTLA. Lioto plans to push through the CTLA to a small group of users for early testing. So what's the size of the user group at the initial stage?

Speaker 4

And when are you going to Activate the function to all ADMAX users. Separately, when the company think about the Leotos, the targeted customers, Hi, the family users. What's the value proposition of CTOa or a high level time driving function? What does that mean to them? And how important is it when the family users make the decision to buy the cars and to enhance their user experience.

Speaker 4

So that's my second question. Thank you.

Speaker 2

Overall, we're making good progress in terms of City in LA, both on a system testing level as well as real world testing. Our plan is still to release early bird testing in June. And the policy specific policy as to who do we release it to is still being created. But generally, our rule of thumb is we will try to cover more frequent users of high wind NOIs, which are users who have more willingness and ability to use NOI. They also have higher tolerance and level of understanding of the NOI feature.

Speaker 2

By year end, we still plan to launch City NOI in 100 Cities. And as to which specific cities we will cover first is mostly dependent on the number of our existing vehicles End of Cities, because as you know, our City NOA solution doesn't rely on high definition map, which means as long as we have navigation data for the city, as long as there's enough drivers driving our MAX models, We will be able to accumulate enough data to allow users to use it in a way, especially When it comes to complex intersections, as long as we achieve good coverage on those scenarios, we will be able to accumulate more data and open those Open up those cities and locations for our users. Speaking of family users, As we've always believed, they care a lot about safety and also comfort, especially when it comes to, mimicking human drivers to be able to drive Smoothly and give the entire family a good experience. So to make that happen, we're running shadow testing Our existing vehicles are ready to try to improve the behavior of our NOA features So that when they are launched, they can provide the best experience for our family users.

Speaker 4

Thank you very much for the detailed share. Thank you.

Operator

Thank you. The next question comes from Bin Wang with Credit Suisse. Please go ahead.

Speaker 5

I actually got 2 questions all about the volume. If you see in last conference call, you mentioned you actually maybe try to do monthly 30 The units of mass, what's your expectation which mass will deliver still in the Q2 or in the future? The second thing about QEV, in your mid year interview, it seems that you have said that the EV has been postponed to next year. You confirm that if yes, what's the reason behind the postponed to next year? Thank you.

Speaker 2

So first question, in Q2, we will Gradually ramp up our delivery numbers and our current goal is to reach the $330,000 monthly mark by June this quarter. And talking about the BEV flagship, our plan is still to release it in Q4 and after which we will be delivering the vehicles to retail stores For static viewing and test drives, which will follow a similar pace as you see observed with

Operator

Thank you. The next question comes from Paul Gong with UBS. Please go ahead.

Speaker 6

So my first question is regarding the expense. It seems that both R and D and SG and A seems to be Having either flattish quarter over quarter or even slightly decline and below our budget, especially in terms of SG and A, even with the Expanded network, it still seems to be well within control. So can you please give an update of the full year and the spending guidance as well as SG and A expense ratio? Thank you.

Speaker 3

Hi, Paul. This is Johnny. I will take the first one. For the R and D, we will still keep our full year guidance, Which is over from RMB10 1,000,000,000 to RMB12 1,000,000,000 for the full year. And for the SG and A as a percentage of revenue, We will still improve starting from the Q4 of last year's ratio.

Speaker 3

Yes.

Speaker 6

So my second question is regarding the competition. I think Some other carmakers have announced similar size of the vehicle with also plug in hybrid system And so with even lower price than the L8, have we observed any impact in terms of new order intake? And how should we think about the rising competition in the same segment? Thank you.

Speaker 2

Looking at our actual order intake, the orders for L8 is actually increasing very steadily. In fact, we believe as more players enter the market, it's actually good for our L8, which is market leader because many users read about these competitors and they start Looking into this market segment and eventually they come over to L8 and order our products. So we don't generally don't think this to be a big threat. And Even when we look at the DEFEAT data for our L8 orders, this product you're talking about, this Product isn't even among the top competitors. Our top competitor is still the Tesla Model Y.

Speaker 6

Thank you so much.

Operator

Thank you. The next question comes from Ming Sun Lee from Bank of America. Please go ahead.

Speaker 5

Okay. Thank you.

Speaker 7

So my first question is regarding your business priority. At the current moment, is profitability and free cash flow More important for you or market share is more important for you? So and also how do you see the price competition in the second half this year, given the battery price already declined a lot? So will you consider to slightly give a little bit discount in order to maintain even higher market share? Welcome, Yigit.

Speaker 2

First of all, our top priority is going to be market share. In Q2, our goal is to increase our market share in the NEV market above RMB200000 in terms of MSRP from 11% to 13%. And we don't have any plans to offer discounts Because as we made our long term sales and product plans, we have already considered to price our products as the most competitive considering the size, segment and the price segment. So this is all taken into consideration and we have confidence not to offer discount.

Speaker 7

So my second question is regarding your battery EV plan. In April, you already disclosed your long term goal. By 2025, you will have 5 BEV and 5 EV models and also 5 ER EV models and 1 flagship models. So how do you think about the long term gross margin of your battery EV and also what is your CapEx related to the BEV business?

Speaker 3

I will take our questions. This is Johnny. And For this year's CapEx and in the last 3 years, our CapEx is about RMB10 1,000,000,000 and rolling 3 years starting from this year Based on our current estimate, including the HPC CapEx, it's about RMB 18,000,000,000, It may expand if our early test on the HPC Well, to speak, we will may adjust our pension plan on this.

Operator

Thank you. The next question comes from Yucian Ding with HSBC. Please go ahead.

Speaker 8

Two questions on the product map. First on the pure battery electric vehicle product strategy and profit outlook, as BEV might have a quite different bond structure versus range extender. For the coming EV models, big size and TV, will there be range extender version versus pure battery electric version? So far, we noticed that during the competition BYD's and D9 has been selling well, but 90% 70% is PHEV. And second, on the RMB 200 ks to 300 ks pricing range, larger TAM by more competition, how would Lioto differentiate itself in winning midsize and compact size segment, which already have crowded models in place.

Speaker 8

Thank you.

Speaker 2

So I'll answer this question from 2 angles. First of all, Even though we haven't launched our HPC BEV products, in fact, we have invested in R and D and supply chain, Especially developing in house parts very early on to prepare so that we can offer the fab products at a price point very close to our REV product And deliver very similar gross margin as well. All this is relying on our R and D efforts as well as in house parts of which is deployment in our Supply Chain. Without talking about specific models, whether it's BEVs or RUBs, Our goal has always been to massively replace ICE vehicles. And in order to do that, the top priority is to tackle range anxiety, so that our users can drive freely between cities and away from their homes.

Speaker 2

So our strategy for that product is to deploy charging stations, which are in charge very rapidly in service areas and highways So that it can provide a very similar experience even comparable to cars that are powered by traditional chemical fuels. So at the same time, as I mentioned earlier, with our strategy in R and D and in house development, we're able to offer all of this without Incurring additional costs for the users so that they can buy these products at prices very similar to our EVs.

Operator

Thank you. The next question comes from Yingbo Zhu with Citic Securities. Please go ahead.

Speaker 9

My question is how we plan our

Speaker 2

I'll answer this on three levels. First of all, as we build multiple vehicles in our product portfolio, we'll be upgrading stores which only house 1 or 2 cars Today, so that they can have a bigger part of our product offering. And secondly, we will change the format of In the cities where we have a very high market share, we'll change the format of some of our stores to be a sales complex, which will offer better test driving experience As well as drive higher conversion rates. And thirdly, in Tier 4 cities, we'll pretty much cover all we plan to pretty much cover all of the Tier 4 cities And the format will be very similar to what you see in auto complexes offering A comprehensive store offering services as well as sales in the same complex. So overall, as you look at our sales network, it will look very similar to what you see with Mercedes, BMW and Audi, both in terms of scale and format.

Operator

Thank you. The next question comes from Jing Chang with CICC. Please go ahead.

Speaker 9

We can see that our average second quarter's viewable guidance It's around 78,500 units, which means that by the end of the Q2, the mouthpiece sales volume will hit 30,000 units. And therefore, I want to ask whether the trend of new orders since May 1, we have already seen a significant improvement and The continuous improvement of delivery volume in May June. In addition, I want to ask whether the current Proportion of our version and also the proportion of sales volume in lower tier cities have already made greater incremental contribution And what do you think for the further state of our 3 existing models after their Quarterly sales volume has already reached 30,000 units, especially in the 3rd and 4th quarter this year. Can you expect a higher level? Thank you.

Speaker 2

Answering these questions in order. First of all, May have typically been a low season in terms of vehicle sales. But in for us, we have seen a strong Growth compared to April, both in terms of delivery numbers and order numbers. And as the Air models hit our stores and we begin to offer test drives, 20% of incremental sales. And secondly, we divide the cities by what we call new Tier 1s and Tier 2s.

Speaker 2

And we see the best performance in these so called new Tier 1 cities because these are strong drivers in terms of buying SUVs that are priced over RMB 300,000 and they will continue to be strong drivers. And our next steps, we will expand into Tier 3 and Tier 4 cities and we believe they will be a growth engine for our next stage of development.

Speaker 9

Thank you.

Operator

Please go ahead.

Speaker 9

My second question is we can see a number of our stores has expanded a lot And most of them will open in the lower tier cities and this is a major one of the major driving cost for our further sales volume growth. And we also can see that we are constantly adjusting our Distribution channels and organization methods. So can you share some detailed cases, especially for What difficulties do we see in Allorta cities and how we adjust to Make the improvement.

Speaker 2

I can't disclose too many details, but what I can share is that This quarter, we have started a comprehensive organizational upgrade on the commercial side. We have changed from a Regional organization structure to a province based organizational structure. So in terms of both Customer acquisition and conversion resources, we've changed from a centrally allocated model to a more regional, more frontline directed Allocation model, so that the resources can be allocated more efficiently. Compared to Q4 last year, actually our number of stores hasn't changed much, But the sales per store and sales per person have both increased very dramatically. Also the conversion rate from leads to order have also increased.

Speaker 2

As to our strategy in Tier 3 and 4 cities, what I can't share right now is that we will trust this new process and organizational structure And give the power to the frontline workers so that they can use their judgment and experience to decide what is the best strategy that best suits

Operator

Thank you. The next question comes from Jiang Xiao with Barclays. Please go ahead.

Speaker 2

First of all, in the Chengdu factory, we currently operate 2 production lines. The first line produced manufacture is L8 and L9 and we currently operate 2 shifts, which gives us a capacity of about 20,000 to 25,000 per month. The second line can makes L7 and L8 and currently operates on one shift delivering $10,000 to $12,000 per month. And L8 is actually used to balance with load of the two lines so that they can operate at optimal efficiency. And going forward based on demand, we can easily improve our production output with the current factory in So this year, this factory should be enough to support our sales targets.

Speaker 2

The phaging factory is dedicated to our BEV product line And it's designed to initially offer 100,000 units production capacity annually. And as we deliver more vehicles in the future, we will strategically increase the output of these production capacities

Operator

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

Speaker 1

Thank you all once again for joining us today. If you have any further questions, please feel free to contact Seattle's Investor Relations team.

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