Li Auto Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 8, 2023

There are 10 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by for Lee Auto's Second Quarter 2023 Earnings Conference Call. At this time, all participants are in listen only mode. Today's conference call is being recorded. I will now turn the call over to your host, Janet Zhang, Investor Relations Director of Li Auto. Please go ahead, Janet.

Speaker 1

Thank you, Sarah. Good evening and good morning, everyone. Welcome to Li Auto's Q2 2023 earnings conference call. The company's financial and operating results were published in a press release earlier today and are posted on the company's IR website. On today's call, we have our Chairman and CEO, Mr.

Speaker 1

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

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 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, except as required under applicable law. Please also note that Li Auto's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non GAAP financial measures. Please refer to Li Auto's disclosure documents on the IR section of our website, which contain a reconciliation of the unaudited non GAAP measures to comparable GAAP measures.

Speaker 1

Our CEO will start his remarks in Chinese. There will be English translation after he finish all his remarks. With that, I will now turn the call over to our CEO, Mr. Xiang Li. Please go ahead.

Speaker 2

In the Q2 of 2023, We reached multiple milestones in deliveries. We delivered over 30,000 vehicles in June, taking our Q2 deliveries to 86,000 533 vehicles, tripling the volume from the same period last year. We delivered more vehicles in the first half of this year than all of twenty twenty two. Furthermore, in early July, we delivered our 400,000 Lee Auto vehicle, taking just 42 months to reach this important milestone Since we commenced deliveries in December 2019, setting a record for Chinese emerging NEV OEMs. Going from 300,000 cumulative deliveries $400,000 took less than 4 months.

Speaker 2

Finally, our July deliveries hit a new high of 34,000 1 100 and 34 units, bringing our total cumulative vehicle deliveries over 430,000. With our strong product lineup and comprehensive improvements, organizational processes and operating capabilities, our 3 models continue to lead in their respective market segments With cumulative deliveries exceeding 200,000 units since their successive launches starting in June last year. According to the insurance registration data of China Automotive Technology and Research Center, in this past quarter, Li L7 consistently topped China's large SUV monthly sales chart. The L8 also remained customers' favorite 6 seater SUV priced over RMB300000. The All9 continued to dominate the full size SUV sales chart in China.

Speaker 2

Li Auto has the highest sales I'm on domestic premium automotive brands in China and we remain one of the top 3 NEV brands priced over RMB 200,000 in China. With market share increasing from approximately 11% in the first quarter to about 14% in the second quarter. Driven by our delivery growth and stronger operational capabilities, our financial performance continued to improve. In the Q2, the company achieved record breaking results across revenue, net income and free cash flow. During the quarter, our revenue reached RMB28.65 billion, up 228.1 percent year over year, While net income and free cash flow increased from RMB2.31 billion and RMB9.62 billion, respectively, We're confident that our outstanding cash generation capability and ample cash reserve will support our unwavering commitment to invest in R and D, Business expansion and building long term competitive barriers.

Speaker 2

We expect our Q3 deliveries to be between 100,000 to 103,000 units. For the full year 2023, we're confident to beat the internal delivery target we set at the beginning of this year by 10% to 20%, but annual revenue exceeding RMB100 1,000,000,000. We aim to hit the 40,000 Monthly delivery milestone by the end of this year. To achieve our delivery target, we will continue to foster coordination across production, supply chain and sales, while continuing to expand production capacity, enhance supply chain management processes and capabilities. We made rapid progress in autonomous driving this year.

Speaker 2

In June 2023, we started test drives for China's First, NOA and commute NOA, which do not rely on high definition maps in Guangdong, known as one of the most complicated traffic zones in Beijing. We also rolled out our Citi NOA to early bird users in Beijing and Shanghai. On the perception front, Traffic rules. While utilizing occupancy network to identify common obstacles, we also utilize imitation learning and control algorithms to make judgments more akin to human drivers. Test drivers and media have spoken highly of driving safety, Efficiency and comfort demonstrated by Lee Auto ADMAX.

Speaker 2

In the second half of twenty twenty three, We will continue to release City NOA and Commute NOA to more early bird users, bringing City level autonomous driving to more families. Meanwhile, users are increasingly accustomed to convenience and ease the convenience and ease of highway NOA during their journey. As of today, we have provided highway NOA to over 380,000 families, covering more than 230,000,000 kilometers. With respect to BEV models, we introduced our 800 volt high power charging solution at our first ever Family Tech Day in June 2023. With optimized battery and thermal management systems, Our B EVs can fully leverage the battery's 5C charging rates with peak charging power of over 500 kilowatts 500 kilometers of driving range from a 12 minute charge.

Speaker 2

In conjunction with our own 5C charging network, Our BEV can offer a very comparable energy replenishment experience to ICE vehicles. We will unveil our super flagship 5C BEV lean mega by the end of this year, And we're confident that we'll emerge as the new top seller among all vehicles priced over RMB 500,000. Meanwhile, we're actively deploying our 5 c supercharging network. As of now, we have built and commenced operation of 37 vauto 5 c supercharging Going forward, we'll accelerate the rollout, aiming to establish over 305C supercharging stations by the end of this year and over 3,000 by the end of 2025 to offer our BEV users a fast and reliable charging experience. EREV Technologies that center on high capacity batteries and highly efficient range extenders as well as a high voltage BEV technology And I can truly address pain points in charging speed and charging on long trips.

Speaker 2

To support the rapid sales growth, We accelerated the expansion and upgrade of our internal integrated online and offline direct sales and servicing network. While we continue to open online retail stores in shopping malls, we have increased the proportion of our retail stores located in automotive retail parts to cater to different users purchasing cabins and meet, further improving user acquisition and sales conversion. In the second quarter, We opened 32 new retail stores and upgraded 18 existing stores through allocation and expansion. As of July 31, 2023, We operated 3 37 retail stores in 128 cities as well as 3 23 service centers And Lee Auto, Auto authorized body and paint shops operating in 2 22 cities. Looking ahead, Driven by our pursuit of continuous growth, and we will relentlessly explore, train and learn to refine our 2 most critical products, namely our smart electric vehicle for family users and organizational processes to serve our internal talents and teams, better supporting our With that, I will 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 walk you through some of our 2023 Q2 financials. Due to time constraints, I will address financial highlights here and encourage you to refer to our earnings press release for further details. Total revenues in the Q2 of 2023 were $28,650,000,000 or $3,950,000,000 increasing 220 8.1% year over year 52.5 percent quarter over quarter.

Speaker 3

This included RMB27.97 billion or US3.86 billion dollars from vehicle sales, which was up 229.7% year over year and 22.6 percent quarter over quarter. The year over year increase was mainly due to the Increased vehicle deliveries. The quarter over quarter increase was mainly due to the increase in vehicle deliveries, partially offset by the lower average selling price as a result of different product mix between the two quarters. Revenues from other sales and services were RMB688.8 million on US93.9 million dollars in the Q2 of 2023, Growing 173.4 percent year over year and 48.1 percent quarter over quarter. The increase was mainly due to the increase of sales of Accessories and provision of services in line with higher accumulated vehicle sales as well as increased sales of charging stores in line with higher vehicle deliveries.

Speaker 3

Cost of sales in the Q2 of this year was RMB22.42 billion or US3.09 billion dollars Up 227.1 percent year over year and 49.9 percent quarter over quarter. Gross profit in the Q2 of this year was RMB6 point $24,000,000,000 or US859,900,000 growing 232 percent 62.8% compared with the 2nd quarter of 2022 and the Q1 of this year. Vehicle margin in the Q2 of 2023 was 21% compared with 21.2% in the Q2 of last year and 19.8% in the Q1 of 2023. Excluding the impact of Li ONE, The vehicle margin of the Lee Series, Lee L Series remained stable over the first quarter of 2023. Gross margin in the Q2 of 2023 was 21.8% compared with 21.5% in the 2nd quarter of 202220.4 percent in the Q1 of 2023.

Speaker 3

Operating expenses in the Q2 of 2023 were RMB4.61 billion of US635.7 million dollars growing 61.4 percent year over year and 34.6 percent quarter over quarter. Research and development expenses in the Q2 of 2023 were RMB2.43 billion or US334 point US5 $1,000,000 UP 58.4 percent year over year and 31% quarter over quarter. The increase was primarily driven by increased employee compensation as a result of our growing number of Staff as well as increased expenses to support our product portfolio expansion and technology advancements. Selling, general and administrative expenses in the Q2 of 2023 were RMB2.31 billion or US318.5 million dollars up 74.3% year over year and 40.4% quarter over quarter. The increase was mainly driven by increased employee compensation as a result of our growing number of staff as well as increased rental expenses associated with our sales and service network expansion.

Speaker 3

Income from operations in the Q2 of 2023 was RMB 1.6 3,000,000,000 or $224,200,000 compared with RMB900 $78,500,000 loss from operations in the Q2 of last year and growing 301.3 percent from RMB 405.2 million Income from operations in the Q1 of this year. Net income in the Q2 of 2023 was RMB2.31 billion or US318.6 billion dollars Compared with RMB641 1,000,000 net loss in the Q2 of last year And more than doubled the RMB933.8 million in Q1 of 2023. Turning to our balance sheet and cash flow. Our balance of cash and cash equivalents, Restricted cash, time deposits and short term investments totaled $73,770,000,000 or US10.17 billion dollars As of June 30, 2023, net cash provided by operating activities in The Q2 of 2023 was RMB11.11 billion or 1 point US5 $3,000,000,000 Free cash flow was RMB9.62 billion of US1.33 billion dollars in the Q2 of 2023. And now for our business outlook.

Speaker 3

For the Q3 of 2023, the company expects the deliveries to be between 100,000 and 103 1,000 vehicles representing an increase of 277 percent to 200 88.3 percent from the Q3 of 2022. The company also expects the 3rd quarter total revenues to be between RMB32.33 billion And RMB33.3 billion or US4.46 billion dollars and US4.59 billion dollars representing an increase of 246 percent to 256.4 percent from the Q3 of last year. This business outlook reflects the company's current and preliminary view on its business situation and the market condition, which is subject to change. That concludes our prepared remarks. I will now turn the call over to the operator to start our Q and A session.

Speaker 3

Thank you.

Operator

Thank Please ask your question in Chinese first and follow with English translation. Our first question comes from Tim Klau with Morgan Stanley, please

Speaker 4

go ahead.

Speaker 2

So my first question

Speaker 4

is about vehicle delivery because VIA Auto's Q3 volume guidance of around $100,000 implies the Vico supply constraints. We have persisted throughout the whole quarter. So could you please elaborate a bit more about the key bottleneck to your production? Is that due to supply constraint of any specific components Were there anything else? And how confident are you in the company's ability to remove the bottleneck and to deliver Like around 40,000 units per month in Q4.

Speaker 4

In the meantime, should we be concerned about the similar challenge might relapse We are launching the BB models on the new platform and at the new plan. That's my first question.

Speaker 2

First, I'll take the question on production capacity. We currently operate 2 production lines in Changyou for L8 and L9 and L7. The total capacity of running the 2 ships is around 50,000 units per month. The current bottleneck is still with component supply, mostly because of a fair strong demand for this year, which led us to increase our target compared to what we said at the beginning of the year. To cope with the additional demand, we actually have a production expansion plan made in Q2, But it's taking some time for us to test the production lines and verify those.

Speaker 2

So the new capacity will be released in due time. We are still confident that on an annual basis, we will be able to reach our delivery targets. In addition, To prepare for our growth in 2024 and 2025, we have started early to make production and capacity plans to satisfy the needs for those 2 years.

Speaker 4

So my second question is about optimization and restructure, because we noticed that over the past 12 months, Quite a lot of EV industry peers have gone through organization restructure or had management reshuffle. We recall that Lioto also announced organization Great last December to prepare for its future growth. So could you share with us the latest progress As of the restructuring efforts and should we expect any changes to the management team in the next 6 to 12 months I missed such an upgrade. In the meantime, operational and financial metrics, could we monitor more closely to quantify the improvement, For example, the lower cost, higher margin or faster module upgrades in upcoming quarters? So that's my second question.

Speaker 4

Thank you.

Operator

Our next question comes from Ben Wang with Credit Suisse. Operator, can you hear us? Sorry, we have some technical problems. Hi, yes, you're coming through.

Speaker 2

Yes, clear. To translate the previous question answer to the previous question, On the Matrix organization upgrade, it's something we have invested a significant amount of resources and manpower. Our business team at the beginning of the year had set an annual delivery target of 360,000 units. But considering 2 factors, we had in fact earlier this year downgraded the target to 300,000 units. One is the overall economic environment and the other is considering many of the enterprises, while they are carrying out Organization upgrades, their growth in fact had stagnated for 2 to 3 years.

Speaker 2

However, in hindsight, the Actual results from the first half of this year, we our operating efficiency has not only not declined, but actually We actually saw a very significant increase. We have beaten our target every single month and the overall coordination and cooperation efficiency It's very high. The benefits from an organizational upgrade have significantly exceeded our expectations. The organizational upgrade has really allowed us to fight a trench wars as an army group In the smart electric vehicle industry, which is known for having very long product cycles and long value chains. Once we have achieved certain milestones in terms of market share, we are able to defend it very steadily and continue to build on top of it.

Speaker 2

So we can see as a result, we have displayed a very steady growth curve over this First half, but also the second half of this year. And that is the real benefit of our organizational upgrade. In terms of the Matrix organization, there are really 3 types of specific benefits. First of all, from our what we We describe ourselves as a gorilla in our early days to being an actual formal armed forces. The company is really building highways for its core businesses, so that every person can on the value chain can run very efficiently.

Speaker 2

Even though there are more traffic rules on highways, overall, the efficiency of highway is much higher and there are much fewer accidents. And secondly, the organizational upgrade has allowed us to build a very robust training structure for our Employees and Business Practices. The working mechanism is very similar to Artificial Intelligence from perception and observations to setting goals and planning its activities And finally, to execution and collaboration and after action reviews to really build it in as the company's So even for a fresh graduate, he or she doesn't need to start as a business assistant but rather can really Get into real battles and grow quickly. And thirdly is what we call interlocking, and it's really a contractual Relationship between our different teams and talents. Compared to the OKR mechanism, our matrix organization Change what we used to call alignment to interlocking, which is essentially a contract between teams and our different individuals.

Speaker 2

So when people set their goals, they can challenge each other. And when they execute, they can work very closely and collaborate And so by going from alignment to interlocking, we're really setting a contract Between the different teams and the target become more and more challenging, but we're able to achieve these targets at a higher with higher and higher confidence. So overall, we believe that the most critical ingredient to a successful organizational upgrade is great culture, which includes putting customers' value first, taking the right path, but not the easy path and building everything on collaboration, Which is our core value. The organization and process is really the best product that we can build for our employees. It's simple, yet sophisticated, and it brings the best practices from each business area and build them into products so that the organization can grow along the way.

Speaker 2

So without great culture, the business processes are going to be rigid and Complicated. So this is the biggest learnings from upgrading our matrix organization and processes. So basically product upgrades bring more margins or Value to the company and organizational upgrade bring more efficiency for the company.

Operator

Our next question comes from Bin Yang with Credit Suisse. Please go ahead.

Speaker 5

I got two questions. Number 1 is about the margin. What's your outlook in the Q3 and the Q4 this year? Because previously you've highlighted that Niwa has been checked down about 2% gross margin, now you have a better volume in the second half this year. You assume the second half margin will be above 23% increased by 2 percentage?

Speaker 5

That's the number one question about the margin. And second thing about the self driving technology, right now you're doing the early bird program for some customers. I know when the self driving can go out to every single car buyer when they purchase the car they can enjoy. So do you have a timetable for 2024? Thank you.

Speaker 3

Hi, Womit. This is Johnny from the company. Our 2nd quarter gross margin has reflect our Sales and marketing team's efforts, so you can see the improved SG and A Percentage as total revenue and also some A positive improvement on the bond pipe from our supply chain team. And we will continue to improve on that, but for the whole year, because we still got 6 months 5 months to the end, so we still want to keep the whole year gross margin guidance

Speaker 2

On City NOA and Commute NOA, we will continue our original plan to roll them out in batches in different cities. And the rollout plan is going to be largely based on the number of vehicles or owners in the specific cities. The more owners, The more mileage accumulated, more test data, the more likely the cities will get city NOI and communally early. In addition to that, we're also taking into consideration the NPM features of complex intersections And the amount of data coverage that we have. So as more and more early bird users join into our pilot program, We'll be opening up our NOA features in more cities.

Speaker 2

Overall, the development and testing for NOA features are Going on track. And in June 2023, we've offered test drive of our city NOA in Wangjin, which is known as one of the Most complicated traffic builds in Beijing, using the first China's first city, solution that doesn't rely on high definition maps and media gave very nice reviews about the features. In July, in Beijing and Shanghai, we've opened up City of NOI to the early bird users and users feel very highly of the comfort and safety of our solution. And this year, we will be releasing our City NOA and Commuter NOA for large scale testing. And the plan to release it in 100 cities remains unchanged.

Speaker 2

Internally, we're continuing to accelerate the

Operator

Our next question comes from Yingbo Zhu with Please go ahead.

Speaker 6

I have two questions. The first one It's about the quarter's the 3rd quarter's sales. How do we see the sales elasticity for the 3rd quarter expectation? My second question is about MindGPT. Could you give us more color about how MindGPT going?

Speaker 6

Thank you.

Speaker 2

First of all, on guidance, the guidance we've given earlier today is really built around our production capacity, The maximum of our production boundaries for Q3. For Q4, with increased production capacity, we'll be able to reach or surpassed the $40,000 per month mark. And another important point to note is we're very confident that We will be able to challenge the leadership position of Mercedes, BMW and Audi in China, meaning that when we Second question on Myndgpt. In terms of technology, we released our Internal big model MyGPT. And we have built since built a full stack In house development capability of large length models.

Speaker 2

And the R and D really falls into 4 areas. First is data and second is Big model of training algorithms and third is assessment and security and lastly application deliveries. On the Training algorithm front, we've stayed in line with mainstream algorithms in the industry, including the foundational model training, which Utilizes 1,300,000,000 tokens and to command fight and Reinforces reinforced learning. And in order to make sure that the MyGPT model can Have accurate knowledge and be able to personalize based on the users. We've also introduced search and recommendation algorithms, which are also built in house.

Speaker 2

MyGPT is now in version 1, which uses 16,000,000,000 parameters And based on the foundation model, we can better suit the user scenarios of our users and to make Li Xiaodongxue more interactive with our users. On the product front, the Big model based MyGPT is really going to power our 1st generation multimodal Human machine interface operating system. And it can allow every single person of our users' family to Use AI with ease and make Li Xiaotongxue a new member of the family and can be an expert on the car and can be A t shirt can be a tour guide, it can be everything. In terms of progress, we'll be sharing more details about the progress of R and D. And so far, we have already opened up myGPT for internal dogfooding.

Speaker 2

And after these tests, we will be releasing

Operator

The next question comes from Paul Zong with UBS. Please go ahead.

Speaker 7

So my first question is regarding the mega, regarding its capacity preparation as well as sales expectation. Does Z car 9, the only pure electric NPV currently in the market provides a benchmark? And after Mac, what is our

Speaker 2

First on Mega's sales target, we're confident that Mega will become the top seller In the market, about RMB 500,000 across all different energy forms and body types. Just like we've seen from L7 and L8, which are respected market leaders in their segments. They've also won over market share from sedans and other segments. Next year, we're planning to release 4 vehicles, 1 range extender vehicle and 3 pure electric vehicles, not including mega, which we just talked about. For specific product details, we'll be sharing on our product release next year when the time is appropriate.

Speaker 7

We realized that there are some informal trading of the Li Auto support us into other countries. How big is this in terms of scale? And do you have any plan to formalize it from Gorilla into formal army and expand our sales volume as well as our global influence of the branding.

Speaker 3

Hi, Paul. This is Johnny. I think we want to yes, to Steve, again, we want to I think globalization after we become dominant in China because China is a very big market, As we just mentioned, so yes, the answer is no. We want to and also our Product was designed and was available for sale only for China, mainline. So Yes, basically.

Speaker 3

Thank you.

Speaker 7

Okay. Thank you very much. Thank you.

Operator

Our next question comes from Jing Chen with CICC. Please go ahead.

Speaker 6

A follow-up Question about gross margin. As Mr. Yiqi just mentioned, some total factors On our gross profit margin in the second half of the year, we still maintain a guidance of 20% for the full year guidance. So is there any potential negative impact we can see and what might that be? Looking into 2024, Our BEV model and the new factory will start to put into operation.

Speaker 6

So because we can see the current BDV models aggressively have a very low gross profit margin. So how can we achieve our BDV model to drive and higher gross profit margin and territory inventory.

Speaker 3

Hello, yes, I'll take this question. This is Johnny. And as I just mentioned in the early question, The current gross margin has to reflect our the effort from our supply chain team, And we keep improving on the bond size and to help us to improve our Gross margin to the 25% design gross margin continuously. And for the BE, I think Every time we launch a new product, we will welcome some questions about the margin. And because there are some core product offerings in the market, but we still want to Reinforce our statements, the product's Gross margin was from the 1st day, you define your customer and you define your product.

Speaker 3

So We what we want to say that we overall, we want to keep 25% for the whole company with different product

Speaker 6

My second question is about autonomous driving. So we plan to release 50 LOA plus LOA function to 100 cities by the end of this year, Well, which is very aggressive target. Is there any great challenge as you can see at present? So can you share more about our outstanding capabilities in different aspects of our autonomous driving to support us

Speaker 2

As we mentioned Earlier, we're still planning to release City NOA and commute NOA in batches as opposed to releasing all the cities in one go. And we're on track to delivering City of NOA to 100 cities by the end of this year. In terms of technical capabilities, We think we have advantages in both perception and planning. On the perception side, we have this innovative newer prior network And also traffic end to end network to predict traffic light intentions using this end to end model. All of this is going to enhance our BV model, which can perceive or sense the Complex road structure information in real time and understand traffic rules.

Speaker 2

And also using occupancy network, We were able to recognize general obstacles on the driver's rent. On the planning side, we're using utilizing inpatient learning algorithms, which Learn from a lot of human driver behavior and decisions to make sure our City of NOA can stay safe on track And also follow traffic rules and at the same time drive very similar to human behavior. We have The biggest autopilot or NOA training testing fleet in China And also have the most trading mileage as well as a significant reserve of Cloud aside computing power, which we believe will be our absolute competitive advantage.

Operator

Your next question comes from Ming Jin Lee with Bank of America. Please go ahead.

Speaker 8

So my first question is regarding your sales channel. So right now, you have more than 3 Retail stores cover more than 120 cities. So in terms of your long term goal, How many stores and how many cities do you want to cover? Besides that, could you also share what is the successful part of your sales channel management and also in what area do you want to improve if there is any?

Speaker 2

On stores, we have a firm belief that good products and good channel for Contanum, We can't live without either of them. A metric we use internally is for a mature store, which has been operating for 6 months. We think getting over 100 orders per month is a pretty healthy level of operating efficiency. But with that said, we'll still focus on not only short term sales per store, but also long term, we'll be Looking into investing in more stores and expanding our sales network. By 2025, we'll be by then have many models And much greater sales than today.

Speaker 2

So we will are still committed to opening more stores and covering more cities, Covering more users. And we really think there's not much secret sauce in terms of where to open stores and how the stores would look like because Mercedes, BMW and Audi have All of them have verified a very successful model in terms of user coverage and city coverage. So We don't really need to reinvent the wheels here. Our plan is really in the next few years to continue to expand to lower tier cities and cover more Users just following their footsteps, so that we can support our sales, healthily by 2025.

Speaker 8

So my second question is regarding your charging network. So do you have any plan regarding your expansion target? What's your potential CapEx? Will you build a charging station by yourself or you mainly let the 3rd party to build and operate? Will all of those charging stations be 5

Speaker 2

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

Speaker 2

All of our highway HPC stations will be Built and operated in house, and all the city stations will be working with the franchise models, so that to accelerate the expansion of

Operator

Your next question will come from Yucaine Ding with HSBC, please go ahead.

Speaker 9

I've got two questions. The first is on the OPEC Management, the company's OpEx management has been quite good, especially in the first half, the R and D run rate is roughly 30%, 40% of the full year guidance. So can we structurally revising down the guidance on R and D and SG and A? Or that suggests in the second half when we roll out NOA In 100 cities that would require more intensity in terms of R and D and SG and A. And the second question is about breaking out into our current Dominating zone.

Speaker 9

We're currently quite dominant in the big size, the family utility SUV at the pricing category above 300,000. But in the future, we'll probably have model launch in a pricing category between 200 ks to 300 ks. Currently, we're seeing a very intense Competition and many new model supply over there. So how do we potentially differentiate over there and maximize the volume impact that we currently see Now with dominating Zong.

Speaker 3

Hi. I will take the R and D question first. We will continue to invest in the R and D for auto prescribing either for auto subscribing or other areas that we I believe it's necessary. We still want to keep our full year R and D expenses above

Speaker 2

We're very confident on the overall product leadership of the L6. We believe that L6 will become the best selling product Across the all lineup, we will continue to invest in this competitiveness and we believe it will be the product of choice

Operator

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

Speaker 1

Thank you once again for joining us today. If you have any further questions, please feel free to

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