Li Auto - Q1 2024

Transcript

Operator (participant)

...standing by for Li Auto's first quarter 2024 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, Ms. Janet Zhang, Investor Relations Director of Li Auto. Please go ahead, Janet.

Janet Zhang (Director of Investor Relations)

Thank you, Kim. Good evening and good morning, everyone. Welcome to Li Auto's first quarter 2024 earnings conference call. The company's financial and operating results were published in a press release earlier today and were posted on the company's IR website. On today's call, we will have our Chairman and CEO, Mr. Xiang Li, and our CFO, Mr. Johnny Tie Li. To begin with prepared remarks, our President, Mr. Donghui Ma, and our Senior Vice President, Mr. James Liangjun Zou, will join for the Q&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 US 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 company filings with the U.S. Securities and Exchange Commission and the Stock Exchange of Hong Kong Limited. 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 matters. 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. Our CEO will start his remarks in Chinese. There will be English translation after he finishes all his remarks. With that, I will now turn the call over to our CEO, Mr. Xiang Li. Please go ahead.

Xiang Li (Chairman and CEO)

[Foreign language]

Speaker 12

Now translating for Mr. Li. First, we'll begin with a review of Li Auto's first quarter performance. In the first quarter, we delivered over 80,400 vehicles, up 52.9% year-over-year. According to China Automotive Technology and Research Center, the NEV market priced over CNY 200,000 grew by 24.8% year-over-year during the first quarter. While our great growth rate far exceeds that of the market, making us the leader among all premium NEV brands. Driven by the vehicle delivery growth, our total revenue for the first quarter reached CNY 25.6 billion, a year-over-year increase of 36.4%. Our gross margin for the first quarter remained healthy at 20.6%, despite the launch of Li MEGA, the changeover of the L Series, and the following price adjustments.

In the long run, our robust balance sheet with cash reserves of nearly CNY 100 billion will continue to support us to focus on user value creation and firmly invest in R&D as we continue to offer products and services for families that exceed their expectations. Nevertheless, we have admittedly encountered multiple challenges since the start of the year, from both internal operations and changes in the external environment. Our performance this quarter fell short of our expectations made at the beginning of this year. In response, we immediately took action and swiftly implemented adjustments across our business, including an organizational restructure and workflow optimization. We're confident that these initiatives will enhance our internal operating efficiency and improve the quality of our decision making going forward, allowing us to focus more on creating and delivering user value.

Turning over to products, we released Li MEGA on March 1, our first HPC BEV model and a high-tech flagship MPV for large families. Built on our latest 800-volt battery electric platform and equipped with Qilin 5C battery, Li MEGA is one of the fastest charging, mass-produced vehicle, passenger vehicle in production today. During China's Labor Day holiday, the average charging time for Li MEGA users at our supercharging stations was only 12.8 minutes, significantly alleviating energy anxiety. On April 18, we launched the L6, a five-seat premium family SUV that offers young families who are seeking family vehicles priced below CNY 300,000. Li L6 offers a spacious interior and superior configurations, and can support a CLTC range of 1,390 kilometers.

In terms of safety, Li L6 vehicle body is designed to meet the most stringent safety testing standards in the industry. Combined with its ever-improving full scenario AEB systems that comes standard on the vehicle, Li L6 offers robust safety for families on the road. With the official launch of Li MEGA and Li L6, as well as the 2024 model year Li L7, L8, and L9, we now offer a product portfolio that caters to a wide range of family users at price points ranging from CNY 200,000-CNY 600,000. Facing challenges in the competitive market landscape in late April, we swiftly responded to evolving user needs with the introduction of a new pricing scheme that received very positive feedback and resulted in a substantial increase in store visits.

During the Labor Day holiday, weekly order growth hit an all-time high. In particular, Li L6 received over 41,000 orders within its initial launch sales period, from April 18 to May 5. We're sparing no effort to ensure a robust supply and production ramp-up for Li L6 to drive a rapid increase in deliveries. Along with the release of our new models, we continue to make improvements in our autonomous driving platform. In mid-May, we began releasing Li AD Pro 3.0 to all of our users, with an upgrade to a large model-based BEV architecture, with improved functionalities, including Highway NOA, with driver takeover mileage of over 1,000 kilometers. City LCC, capable of identifying traffic lights in real time to autonomously stop and go at intersections, and automated parking that can manage complex parking spaces.

We launched public beta testing for Li AD Max 3.0 in May, where approximately 1,000 users tested our latest and City NOA feature, which does not require high-definition maps and covers all roads nationwide. We plan to deploy the City NOA in all AD Max vehicles through OTA in third quarter this year, after we complete the initial nationwide testing. Looking at our charging network, we currently have 404 supercharging stations in operation, with 1,770 charging stalls. During the May Day holiday, we provided over 54,000 complimentary charging sessions and waived charging fees for users across our models. At the same time, we provided over 96,000 charging sessions to NEV users across the country, across different brands.

We will continue to expand and accelerate investments in our supercharging network and aim to have over 10,000 charging stalls in operation on highways and cities in China by the end of this year, continually improving the ultra-fast charging experience for all of our Li users. With respect to our sales network, we have established a presence across all first-tier, new first-tier, and second-tier cities, as well as 89% of third-tier cities nationwide. This year, we'll steadily expand our reach into additional cities to boost the penetration rate of NEVs in China. Moreover, our service network is also expanding very rapidly, ensuring high-quality services to our users.

As of April 30, 2024, we have 481 retail stores covering 144 cities, as well as 361 service centers and Li Auto authorized body shops operating in 210 cities across the country. Looking ahead to the second quarter, we expect vehicle deliveries to be between 105,000 and 110,000, driven by robust market demand and our new products and recovery in orders. By fine-tuning the pace of our operations and upgrading our matrix organization, I'm confident that we will further enhance operating efficiency, increase user value, and pursue healthy growth. Next, I will turn it over to our CFO, Johnny.

Tie Li (CFO)

Thank you, Zhang. Hello, everyone. I will now walk you through some of our 2024 first quarter financials. Due to time constraints, I will address financial highlights here and encourage you to refer to our earnings press release for further details. Total revenues in the first quarter were RMB 25.6 billion, or $3.6 billion, up 36.4% year-over-year and down 38.6% quarter-over-quarter. This includes RMB 24.3 billion, or $3.4 billion, from vehicle sales, up 32.3% year-over-year and down 39.9% quarter-over-quarter.

The year-over-year increase was mainly attributable to higher vehicle deliveries, partially offset by the lower average selling price due to the different product mix and pricing strategy change between the two quarters. The sequential decrease was mainly due to decreased vehicle deliveries, which were affected by seasonal factors related to Chinese New Year holidays and lower than expected order intake in March. Cost of sales in the first quarter was RMB 20.3 billion, or $2.8 billion, up 36.1% year-over-year and down 36.3% quarter-over-quarter. Gross profit in the first quarter was RMB 5.3 billion, or $731.9 million, up 38% year-over-year and down 46% quarter-over-quarter.

Vehicle margin in the first quarter was 19.3%, versus 19.8% in the same period last year, and 22.7% in the prior quarter. The vehicle margin remained relatively stable year-over-year. The sequential decrease was mainly due to lower average selling price as a result of pricing strategy changes in the first quarter, and true-up adjustments of warranty reserve in the prior quarter based on updated estimates of costs of future claims. Gross margin in the first quarter was 20.6%, versus 20.4% in the same period last year, and 23.5% in the prior quarter.

Operating expenses in the first quarter were RMB 5.9 billion, or $812.9 million, up 71.4% year-over-year, and down 13.1% quarter-over-quarter. R&D expenses in the first quarter were RMB 3 billion, or $422.3 million, up 64.6% year-over-year, and down 12.7% quarter-over-quarter. The year-over-year increase was primarily due to increased employee compensation as a result of growth in number of staff, as well as increased expense to support the expanding product portfolios and technologies. The sequential decrease was mainly in line with timing and progress of new vehicle programs. SG&A expenses in the first quarter were RMB 3 billion, or $412.4 million US dollars, up 81% year-over-year, and down 8.9% quarter-over-quarter.

The year-over-year increase was primarily due to increased employee compensation as a result of the growth in number of staff, as well as increased rental and other expenses associated with the expansion of sales and servicing network. The sequential decrease was mainly due to lower vehicle deliveries. Loss from operation in the first quarter was RMB 584.9 million, or $81 million, versus income from operations of RMB 405.2 million in the same period last year, and RMB 3 billion in the prior quarter. Operating margin in the first quarter was negative 2.3%, versus positive 2.2% in the same period last year, and positive 7.3% in the prior quarter.

Net income in the first quarter was RMB 91.1 million, or $81.9 million, down 36.7% year-over-year, and 89.7% quarter over quarter. Diluted net earnings per ADS attributable to ordinary share was RMB 0.56, or $0.08 in the first quarter, versus RMB 0.89 in the same period last year, and RMB 5.32 in the prior quarter. Turning to our balance sheet and cash flow. Our cash position remains strong, and stood at RMB 98.9 billion, or $13.7 billion, as of March 31, 2024.

Net cash used in operating activities in the first quarter was RMB 3.3 billion, or $462.9 million, versus net cash provided by operating activities of RMB 7.8 billion in the same period last year, and RMB 17.3 billion in the prior quarter. Free cash flow was negative RMB 5.1 billion, or negative $700.1 million in the first quarter, versus positive RMB 6.7 billion in the same period last year, and a positive RMB 14.6 billion in the prior quarter. Now for our business outlook. For second quarter of 2024, the company expects the deliveries to be between 105,000 and 110,000 vehicles, representing a year-over-year increase of 21.3%-27.1%.

...The company also expects second quarter total revenues to be between CNY 29.9 billion and CNY 31.4 billion, or $4.1 billion and $4.3 billion, representing a year-over-year increase of 4.2% to 9.4%. This business outlook reflects the company's current and preliminary view on its business situation and market conditions, which is subject to change. That concludes our prepared remarks. I will now turn the call over to the operator to start our Q&A session. Thank you.

Operator (participant)

Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. For the benefit of all participants on today's call, please limit yourself to two questions, and if you have an additional question, you can reenter the queue. If you are a Mandarin speaker, please ask your questions in Chinese first, then follow with English translation. Your first question comes from Bin Wang with Deutsche Bank.

Bin Wang (Director and Head of China Offshore DCM)

The first question is about the volume. Basically, you guide second quarter will be 105,000 units to 110,000 units, which means the second half, you need to sell 360,000 units, which means monthly volume will be close to 60,000 units. Because MEGA volume is quite small and the M9 will be late, so just the EREV, the monthly volume, will go to the 60,000 units level, which looks challenging. So if you have some pressure to achieve this number, would you further revise on the pricing to fight for volume? Or actually, you just want to compromise the profit and give up the volume target? My second question is about the gross margin. Previously, you guided full year gross margin will be 20%.

If you want to maintain a 20% gross margin after your pricing cut, what's the key driver for the margin? Is it because the volume increase when the monthly volume go to 60,000 units or other driver for maintain a 20% gross margin? Thank you.

James Liangjun Zou (SVP)

Okay. This is James. I will take the first question. First of all, the L6 series has been widely recognized by users for its product strength and price point. During the initial sales period from 18th April to 5th May, the cumulative orders of L6 reached over 41,000 units, which was excellent sales performance. The order intake of L6 series has maintained strong growth momentum post the initial sales period. Additionally, after we implemented the new pricing strategy for Li Auto L7, L8, and L9, their order flow has also showed ongoing improvements. In summary, our sales momentum has gradually improved, and we are optimistic about the continued ramp up of the monthly sales going forward. I will hand over to our CFO for the second question.

Tie Li (CFO)

Hello, this is Johnny. I think, to us, the most important task after Q1's challenge, as Tim Hsiao mentioned, especially after March first, the... I think the most important task at the current stage is sales recovery. I think it's also everyone's primary concern, and I own the company. And, as we all know, the auto industry has a significant economies of scale. So as strong sales can come back, I believe, the gross margin pressure will be somehow released. So, and also with the L6, additionally, outside the sales growth, product mix optimization will be another factor which can impact... market.

As Tim Hsiao mentioned, we implemented a lot of several actions to control the organization efficiency, and which will help the margin to come back. In fact, to remind you, I think we faced those challenges since March. So the second quarter will be the most difficult for the company in this year. Thank you.

Operator (participant)

Your next question comes from Tim Hsiao with Morgan Stanley.

Tim Hsiao (VP and Equity Research Analyst)

[Foreign language]

Speaker 12

in terms of pricing strategy, in fact, after the price adjustment in April, we've received consistent feedback that the current pricing is very competitive in the market, and it's also been very well received by our customers, as shown in continued order intake growth since April. So we don't have any further plans for price cuts. In terms of growth margin, we always believe that as a for a healthy company, sales and growth margin are the two most important operating metrics. And as a company, as a nine-year-old car company, Li Auto has continually held ourselves against these two important metrics.

Tim Hsiao (VP and Equity Research Analyst)

[Foreign language]

Tie Li (CFO)

Hi, Tim, this is Johnny. I think given the new year, new sales growth target, the company has adjusted very quickly in the last less than two months to adjust resource allocation across various aspects to better align with this year's operating objectives.

Just as Tim Hsiao just mentioned, we focus a lot on operating efficiency. I think you can read that in the last four years operation of the company. We expect this adjustment will have some initial impact on our results, but starting from Q2, most of them will impact the operating efficiency after the second quarter. Thank you.

Operator (participant)

Our next question comes from Tina Hou with Goldman Sachs.

Tina Hou (VP and Equity Research Analyst)

[Foreign language]

Speaker 12

So my first question is in terms of the new store sales network expansion plan. So previously we had a target of 400 new stores this year, so just wondering now with our new strategy, what is the target number there? And also among the stores, what's your split between the city center stores as well as like city maybe suburban stores? And in terms of different city tiers, what is your consideration there? Thank you.

James Liangjun Zou (SVP)

Hi, Tina, this is James. I will take your question. And so, regarding our stores expansion plan, and we will first of all, we will plan our sales and service networking at once, according to sales demands, while expanding our sales network in terms of quantity, we will also continuously optimize the quality of each retail store by offering more showroom vehicles and improving the store space. Considering we now have more and more different models. So this year we have already opened 43 new retail stores with more than half of them having the capacity to display over 9 showroom vehicles. In the meantime, we have closed some smaller ones. As of May 19, the number of total retail stores reached 488, so this is the latest number.

And by city tiers, and as you just asked, we have achieved 100% coverage of all first-tier cities, new first tier cities and the second-tier cities, and 89% coverage of third tier cities. We also had 215 showrooms across the country to broaden our coverage of more cities, which help us to penetrate to the tier three and tier four cities. Aligned with our new sales target, we are gradually changing our pace of market penetration in order to better suit the current business needs. As to the store types for our new stores, we have gradually increased the proportion of stores in automotive parks over the past year. In the long run, we will continue to increase the percentage of stores in automotive parks as we expand our model portfolio and improve our brand awareness and influence. Thanks for your question.

Operator (participant)

Your next question comes from Yingbo Xu with CITIC Securities.

Yingbo Xu (Research Analyst)

[Foreign language]

Speaker 12

So I have two questions, the first one is about NOA, about autonomous algorithm and the difference of this algorithm and how we see the future of this autonomous thing. The second question is about product, how we plan for the pure EV product, later this year and next year. Thank you.

Yingbo Xu (Research Analyst)

[Foreign language]

Speaker 12

First of all, on the question regarding City NOA, there are three major paths in this area: completely dependent on HD map, partially independent and simply independent of HD maps. And obviously, the completely independent solution is the most difficult path, because it doesn't rely on the coverage and update frequency of high HD maps. As long as there's navigation coverage, City NOA can work. So our plan is to release a completely independent HD map, independent AD Max solution to all users in Q3 this year for City NOA. And fundamentally, fully independent solutions is real artificial intelligence in terms of autonomous driving, and it uses data-driven models to use data to train models to mimic human behavior and in place for completely rule-based solutions.

Tesla's concept of end-to-end big model is similar concept, driven by data-driven model solution. It's very easy to reach consensus on this conceptual solution, but to implement it requires a lot of data and computing power, and this is not something that all car companies are capable of or have the resources of achieving. Therefore, we believe that different companies will select one of those three solutions based on their current situations and capability and resources. These different choices would result in different products and user value creation.

Yingbo Xu (Research Analyst)

[Foreign language]

Speaker 12

The second question on our later BEV products. First of all, we will not be releasing our BEV SUV later this year. The latest plan is to release it in the first half of next year, and for two reasons. The first reason is, we believe in order to sell premium BEV SUVs, a necessary requirement is to have enough branded charging stations. We believe a correct level is to get similar levels of Tesla in China, and that would be the perfect timing for releasing our next BEV product. And secondly, another constraint is the number of parking spots in stores, in-store parking spots, or display spots.

This is very critical for us to be able to sell multiple cars across multiple price points, and to supply a consistent sales of over 10,000 units per model. In order to achieve that, we need about an additional 500-600 display spots across the country. Otherwise, we will be only increasing the number of products rather than the number of sales volume. That was the exact issue that L8 ran into in the past few months, because we decreased the display spots of L8 by 40%. But that is being recovered by now, and we are adding more display spots for the L8.

So to summarize, enough charging stations and enough incremental display spots are two critical and necessary conditions for selling our BEV SUV product, and we believe we'll reach this point in the first half of next year.

Operator (participant)

Your next question comes from Paul Gong with UBS.

Paul Gong (Head of China Autos Research)

[Foreign language]

So, two questions for me.

The first one is, sooner or later, we are going to have the full product line within the BEV. Do you consider building a dedicated brand or channel for the BEVs products? The second question, given the huge cash reserve and the share price performance recently, will you consider share buyback at certain point? Thank you.

James Liangjun Zou (SVP)

Okay, I, this is James. I will take your first question. Regarding the BEV and our EREV models. We will stick to our direct sales model in the domestic market, and we will strive to showcase all of our products in our retail stores and showrooms. In the meantime, we have initiated internal discussion on differentiated retail strategy, and we may launch some innovative pilot programs in the future. And we will share additional relevant details in due course. And I hand over to our CFO, Johnny, for your second question.

Tie Li (CFO)

Hi, Paul. For the share buyback, currently, we don't have such plan. We will periodically make some assessment based on company's financial position, capital market and other priority, more priority cash needs, on board meeting. Yeah. Thank you.

Operator (participant)

Your next question comes from Yuqian Ding with HSBC.

Yuqian Ding (Autos Research Head)

[Foreign language]

Speaker 12

I got two questions. The first is to ask about the growth conviction, especially our total addressable market is mainly hinged on the family users, that's largely middle class relevant, but it seems to be melting down. So is the growth coming from the increasing TAM or the relative competition versus the other peers offering, but we're seeing above CNY 200,000 above increasing model supply? And second question is whether the company will consider harvesting some low-hanging fruit in the overseas market with relevance to the development, the domestic market. It seems the pricing and competition is more favorable, and the global OEM are moving marginally towards hybrid. The range extender seems to be a good solution.

Tie Li (CFO)

[Foreign language]

James Liangjun Zou (SVP)

On the first question, our focus will remain on the market of NEV vehicles priced over CNY 200,000 for family users, and this will continue to be our focus in the mid to long run. Because we firmly believe that there's still much to be done in the market in terms of product, and there are many areas where we can improve to better serve our users and create value for them in the long term. Okay, I will take your second question. Regarding the overseas market strategy, so as Li Auto vehicle models become increasingly popular overseas, we will accelerate the establishment of our aftersales servicing networks in order to provide the best service experience for our overseas users. We will build an aftersales servicing network in international markets, where we already have an established user base.

We plan to start our own aftersales network, aftersales service network in Central Asia and in the Middle East this year, which is ongoing right now. We will select appropriate dealers for market expansion in overseas countries and regions outside Western Europe and North America. Given the adjustments of this year's sales target, we will focus our efforts in the domestic market this year. We will share more details in due course.

Operator (participant)

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

Ming-Hsun Lee (Managing Director and Head of Greater China Auto Research)

[Foreign langauge]

So, recently media reported company has certain reorganization, and in the future, what is your strategy for your reorganization and what department or what area you will input more resource to develop?

[Foreign langauge]

Tie Li (CFO)

So, in this most recent organization restructuring, one most important change is that we've established a new department called Quality Operations. The thinking behind this change is to allow our business units to really focus on high quality decision making and operating efficiency, instead of focusing on processes and operating these processes. Typically for an organization change, it takes about 12-24 months to see real results. So we think a good time to evaluate would be sometime in 2025 and 2026.

Ming-Hsun Lee (Managing Director and Head of Greater China Auto Research)

[Foreign language]

So, this year, we can see, Li Auto's development in NOA is speeding up. So, right now, for your client base, how important do you think the NOA for your customer base?

And after if Tesla open FSD version 12 in China, will at least change consumers behavior, and in the future, if some auto company they don't have NOA functions on the car, are they able to sell car well?

[Foreign language]

Speaker 12

First of all, we firmly believe that NOA makes it easier and more and safer for our users to drive. As we've seen in the latest release of our mapless NOA beta version in May, from the feedback from the first group of users, they drive over 65% of their total mileage using City NOA, and this penetration rate is a good testament to their...

to how widely accepted, our latest version of NOA is among our users. And in terms of, Tesla FSD V12, we believe that the next stage of competition across, for smart, electric vehicles, autonomous driving will be a primary reason, for our users as they consider in buying a car. FSD V12, after it becomes available in China, will only make users focus even more on autonomous driving functionalities as well as experience, which will further increase and enhance, the importance of, the creation of industry standards and the development of the technology in the industry, and again, in return, drive different, car companies to invest even further, in improving the performance of NOA features.

Operator (participant)

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. Miss Janet Zhang, please go ahead.

Janet Zhang (Director of Investor Relations)

Thank you once again for joining us today. If you have any further questions, please feel free to contact Li Auto's Investor Relations team. That's all for today. You may now disconnect your line. Thank you!