EHang Holdings Limited (EH) Earnings Call Transcript & Summary

[Audio Gap] welcome, everyone to the Morgan Stanley eVTOL/Urban Air Mobility Summit. It's very exciting to have you all here and be a part of what seems to be a pretty revolutionary [ inflection ] in the future of transportation. We're very excited to have a number of very cool sessions for you today, but kicking off with EHang. Before we take off with the content, I do need to read some disclaimers. This webcast is not for members of the press. If you're a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Now before we kick off with the content of EHang, I'd like to introduce my colleague, Tim Hsiao in Asia, who will introduce the company to us. Tim, over to you.

Thank you, Ravi. Hello, everyone. My name is Tim, I'm from China [ autonomous ] shared mobility team in China. So for today's speakers, it's our great privilege to invite EHang's senior management; Mr. Edward Xu, Chief Strategy Officer, to kick start the first meeting of the event. EHang is a major autonomous aerial vehicle players in China. The company targets to make safe, autonomous and ecofriendly air mobility solution to everyone worldwide. The company provides customers in various industries with AAV products, and there was a commercial solution for air mobility for smart cities. And also the city traffic management and [ all class ] aerial media solutions. So please note that this meeting is 35 minute long. We will have good time for Q&A session later. [Operator Instructions] So without further ado, I'll now hand over to the management team, Edward, Chief Strategy Officer of EHang. Edward, you may start now. Thank you.

Thank you, Tim. Thank you, Ravi, and thank you for Morgan Stanley to give me this opportunity. My name is Edward Xu, Chief Strategy Officer at EHang. It is nice to join many of my older friends, clients and ex-colleagues here again at Morgan Stanley eVTOL Summit. Having been a transportation analyst for the past 15 years, I decided to change my career track into the UAM, an emerging industry which is reshaping the future of transportation and will ultimately change the lives of you and me. So let's get started and flip to page -- Slide 3. Okay. So with the UAM, city traffic will no longer be 1 or 2 dimensional, but 3 dimensional. Traffic congestions will be alleviated. Accident rates will decrease. So millions of lives will be saved. Air pollution will be reduced, as green energy will replace fuel to ensure more sustainable and ecofriendly city life. So what is UAM? The concept was defined by NASA as safe and efficient transportation operations for manned and unmanned aerial vehicle system in cities. This is a fairly new concept, starting in just a few years ago, but it has experienced a few rounds of evolution already. So on Slide 4. Basically, we determine the level of a UAM system from 2 angles: From the hardware and from the software. Hardware here refers to equipment or the vehicle itself, which can be either a conventional helicopter, electric aircraft or autonomous aerial vehicle, AAV. The software refers to the command-and-control system behind the UAM, which is a brain for the system that orders and coordinates the operations of the whole system. A conventional call center, online booking platform or more intelligent command-and-control platform especially designed for AAVs fall into this category. Now let's turn to page -- Slide 5. Here, we believe the future UAM system should possess the following characteristics. First, it is network based. So in another word, it should be a real case of Internet of Things or with using 5G applications. And second, it should be automation, which is enabled by autopilot and cluster management techniques. And three, electric power. That means we use electricity to ensure eco-friendliness, with zero emission. And moreover, electric power makes the vehicle more maneuverable. And fourth is a vertical takeoff and landing. This is important because in a crowded city area, we don't have much space. And so we need to use vertical in takeoff and landing to provide easy landing among the crowded cities. And finally, intelligent, which will further ensure the safety and the efficiency of the system. Now let's just look at a few examples of the UAM evolution. So Slide 6. Actually, UAM was started by most conventional way, where conventional helicopters are used without any online platforms. Just like this, we call this UAM 1.0. Next slide, Slide 7. As the new equipment model, such as electric aircraft or eVTOLs were introduced, it's greatly upgrading the hardware. But with the lack of online platform, we can call this UAM 1.5. So on the Slide 8. Here, we see the application of online platform to upgrade the functions of UAM systems. Uber and Airbus launched the Uber Elevate and Voom in 2016, the 2 online platforms for air service booking to enable conventional helicopters to perform UAM services. However, we still call this UAM 1.5, given the lack of advanced equipment. Slide 9. So on Slide 9, with the combination of online platform and new aircraft equipment, we see the upgrades in both software and hardware, which we call this UAM 2.0. However, human pilots are still needed, as this is still a manned aviation. So if you turn to Slide 10, based on how the 5G network, cluster management and a centralized command-and-control platform, autonomous aerial vehicles are used to drive the UAM into the version 3.0, so far the highest level in its evolution. EHang 216 passenger AAVs have completed more than 10,000 trial flights in more than 40 cities and 8 countries. So far -- on next page, Slide 11. Among all the key factors for model UAM, safety remains the first priority. We believe safety can be warranted by the following. From the equipment side, power redundancy with a full system backups ensure the vehicle can land safely when 1 or 2 components for parts fail. So for example, our EHang 216 AAV. We've got a total 16 propellers. So during our tests, 4 of them failed. We artificially closed down 4 propellers, we can still land safely with the AAV. So this will mean the power redundancy. And second is from the flying mode. Full autonomous flying can eliminate the risk caused by human errors. So according to some statistics, the helicopter accidents was caused by -- 90% of the helicopter accidents was caused by human errors made by the pilots. So by using full autonomous flight, we can eliminate these human errors. And thirdly is about this route planning. Rigorous point-to-point flight route planning with earlier surveys can eliminate the risk of collisions of the AAV in the air. And finally, intelligent platform behind the UAM system can further enhance safety through the real-time internet connection between the AAV fleet and the ground center. So in another words, our AAVs are real Internet of Thing or the aircraft of the Internet, so which is connected in real time. On the next slide, from an industry perspective, we positioned UAM in 2 geographical areas: the intra-city transportation, which is 20 to 30 kilometers of range, and intercity transportation, which is 50 to 400 kilometers of range. For large crowded cities, such as New York, Hong Kong and Shanghai, et cetera, small [ limber ] AAVs like our EHang 216, are perfect solutions to city congestions for city clusters, such as China's Big Bay Area, the PRD and YRD areas. Larger eVTOLs are needed to provide longer-range transportation. In terms of value chain, we see the development of both upstream suppliers, OEM manufacturers and relevant infrastructure investors in the near future. So this is how we look at the industry position. So we believe that -- because some of people are saying that our EHang 216 is quite short-ranged. But as we mentioned, this is especially designed for intra-city transportation. Because our AUV is small in size and with a very flexible requirement of the space, it is very suitable for intra-city transportation. A recent report by a Chinese organization show that the average commute time in major Chinese cities is only 8 to 9 kilometers, but it will take about more than 40 minutes for the people. So our AAVs are right solution for this type of needs. So on the next slide. From the regulation perspective, it is good to see UAM is gaining serious attention from various governments, including China, U.S.A., Japan and Korea, which are making UAM as their national strategies. Especially, the General Office of the State Council issued the notification on the opinions and suggestions of the Seventh State Council Supervision and Collection of Transfer Parts, pointing out that the strategic layout and the standard formulation of urban air mobility development should be accelerated, and the development of UAM should be included in the national strategy. So this is a very positive messages from the government authorities to emphasize the importance of UAM and also to prepare relevant regulations for the future application for UAM. And also, we see that in both Korea and Japan, the government adopted the strategies to add -- to elevate UAM into their national strategy. Then next slide, please. So here, I would like to do a comparison of UAM development to the old auto industry, which started as early as 18th century with the first steam car that can run at only 3 to 4 kilometer per hour. We believe our UAM is at the very early stage of its life cycle, as our EHang 216 can now only fly 21 minutes in range. Moreover, we see the arrivals of internet and green power energy are reshaping the auto industry in the past 10 years. For example, Tesla and NIO and Xiaopeng, et cetera. So these are the new automakers that are adopting the new strategy -- the new technologies to innovate the auto industry, which redefine the future trend of transportation. On the next slide, based upon the history of auto industry, we believe UAM is at the early stage, close to the tipping point for an upward swing towards a steep growth curve, which redefine -- which we believe this upward curve could last into 2080. Yes. As you can see, now from now to 2024, we are at an early stage. So with the potential government regulation approvals, we expect an explosive growth period from 2025 to 2030, and then gradually moving into the maturity stage from 2031 to 2080. So we think that based upon the Morgan Stanley's estimate, the market potential is huge. It's a trillion-dollar market globally, and China will account for about 1/3 of this market. On the next few slides. Because as a veteran transportation analyst, I like to draw comparisons between UAM and conventional airlines, airports and general aviation, which you can find in the financial details in these 3 tables. My conclusion is that the UAM platform operators can prove to be more lucrative and attractive business, given superior profitability with a relatively short payback period. For example, if you look at the airline industry, a huge Capex burden is usually CNY 10 billion to CNY 20 billion per year, and it is affected by the high fuel cost and the high depreciation and the leasing cost and takeoff/landing and high labor cost, et cetera. So which means that you can see, for most of the Chinese airlines, the GP margin is only in low single-digit or many of them have a loss. For the airports, the huge infrastructure investment has a very long payback period, and it is also very labor-intensive. So you -- reality in China, over 70% of the civil airports reported in losses. For the General Aviation, it is also affected by the high fuel price and high labor costs and depreciation of aircraft with a low utilization rate as well. So we can see the best margin for Citic Helicopter is at 11.9% in 2019. We also made a comparison between our EHang 216 AAV with conventional helicopter, which shows significant advantages of AAVs over the helicopters, including safety, flexibility, noise level, energy efficiency, and especially the economics. Because of auto piloting techniques, our AAVs has much lower operating cost than the normal helicopters. And also for the unit price, it's well below the normal helicopters. So on our estimate, the operation cost for AAV is -- well, it's as much as only 1/3 or even lower than the conventional helicopters. So we believe that the future trend is for the AAVs to gradually replace the helicopter in the long term. In terms of safety, because of our power redundancy and the multiple backups, our AAVs proved to be much safer than helicopter. So far, we have conducted more than 10,000 trial flights all over the world with zero accident rate. So on next Slide 20. Our conclusion is that the intelligent UAM operation project have attractive investment prospects. In the UAM world -- in another world, Boeing and the United Airways can be combined into one business. We see attractive outlook led by high profitability, low investment burdens, short payback period and high investment returns. On the next slide. So what makes the future UAM platform operator. It is a network plus AAV fleet plus infrastructure management. We believe this is achievable, led by the technologies of network, auto piloting, simple infrastructure and low space requirement for landing spots. Finally, as a veteran analyst, I'm just giving this brief comp sheet for everyone's own reference. Okay. This concludes my presentation today. Thank you.

Ed, thank you for that. That was an incredibly helpful introduction to the company, introduction to the business and overview. We have over a dozen client questions here. Before we dig into them, I did have a question of my own. I thought your distinguishing between UAM 1.0, 2 -- 1.5, 2.0 and 3.0 was very, very interesting. How much of -- how critical do you think that is going to be to the rollout of the industry and introduction to the customer base, if you will? I mean do you think the potential customer base for an eVTOL service is going to be ready to jump straight into 3.0? Or do you think they'll need more of a gradual introduction through 1.5, 2.0?

Well, I think -- thank you for your question. I think that's people's perception of the -- autonomous driving is just -- it would change because people -- just to take our AAV, for example. When we talk to the people, this is autonomous and without the pilots, people normally don't believe it. But when we present the AAV in front of them and ask them to take a ride, the attitude suddenly change. And after they took our flight, the normal comment is that it's as smooth as an elevator, right? So I think it is important to have the product and technology ready, because sometimes it may be too early to talk about autonomous driving or whatever. But once you have the technology ready and have your product here for the people to take a trial flight, the people's attitude will totally change, right? So I think, for us, we have already migrated into the stage of UAM 3.0. That's the reality. And we have conducted more than 10,000 of trial flights globally, and -- which was well received by most of our clients. So I think the next critical point is for the government regulation. Because I understand that in EASA or in FAA, the government -- the regulators are still very concerned on when they should launch this fully autonomous flight. But in China, we have been working very closely with CAAC in certifying our AAV. And hopefully, in the near future, we can get final certified, and so that we can launch the autonomous flight commercially in most of the cities in China.

Edward. So we've got a lot of questions in queue. So probably, I'll highlight some key ones and hope you can provide more details. So the first one -- first question from the investor online. Edward, did you look at making flying cars as opposed to eVTOLs, the electrical vertical takeoff and landings, because the later part -- later one apparently needs a huge infrastructure because the investors want to know the comparison between the flying cars and the eVTOLs.

In cars, well, how to say -- I think it's a good question. And the flying car by definition is still a car. It is not an aircraft, right? So by cars, it means that it's hard to reduce weight, right? And as a car, it can still drive on the ground. But my question is that if you can fly, why bother to drive on the road, right? So my understanding of the flying car that it is something invented by the automakers that can try to fly, but it has not totally given up the concept of automobiles. But to jump into the UAM world, we are talking about 3-dimensional transportation. We are talking about flying, right? So I think the emphasis should be on the flying rather than car. Because if you can fly, you are moving into the air, which is a 3-dimensional, and why bother the car? So I don't know whether I answer this question clearly.

Yes, that's clear. So the next question from investor online. I think we already touched a little bit about this. The investor want to know how about the type certification of EHang UAV in China? So could you provide more details about the certificate or permits in terms of the type and also the timetable?

So far, we are quite optimistic, I should say. Because starting from the end of last year, we have officially submitted our application for a type certificate to the CAAC government. And the CAAC officials issued acknowledgment of the receipt of our application in January. And very soon, they have set up a national expert team with about 22 national experts. And so CAAC now has -- they are starting the whole process, and we had already 2 rounds of meetings already. And so, so far, the progress is quite good because one mutual understanding is that this is very innovative, without any precedent. So the attitude is that we should not take the old stereotype type of thinking to look at this. We should look forward, and we should be innovative. Innovative not only for our product, but also innovative in the way of certification. So this is repeated by the leader of the CAAC certification team. And so -- and yes, just tomorrow, we are going to have another delegation from the CAAC. So I think, so far, the certification process is going on, and is going on very well, but we cannot tell what the exact time we can get the final approval. But so far, I think the progress is a bit -- is better than our expectation. And so our target is to get the final approval by next year, but I do not exclude the possibility of any earlier approval. So that's all I can say.

Edward, that's [ pretty ] clear. I think the next question is also related to the certification and the permit. The investor want to know that, does EHang get VTC, i.e., Validation of Touch Certificate from EASA, the European Union Aviation Safety Agency?

For EASA, we -- according -- based upon my knowledge, we haven't got the EASA's validation yet.

Edward. So the next question is -- because investors that noticed EHang actually changed the business model, I guess, from the direct sales of the AAV to more like AAV fleet operation. So what's the background of this kind of business model changes, and what could be the impact to the financials probably to 2021 and 2022?

Okay. Thank you. So here, I want to clarify our strategy. So this is not a changing strategy because I don't know whether the investors are aware of, in our prospectus from the IPO, our target is to build ourselves into a UAM platform company, a platform operator. So our -- to put it simply, our target is to become a flying Uber or flying DiDi or something like that, right? So to operate as a platform operator, this is our original goal. And so -- but previously, our target -- our business model was very simple by selling the equipment itself and to get the money back, right? So that's the earlier stage, but with a very limited operation by ourselves. So moving into this year, we are going to transition from a simple sales model into more operational model. So the reason behind this is very simple because, first, we see the time is the right time because we have achieved a very positive progress in the certification with CAAC officials. And the CAAC's guidance is, they encourage us to do more operation, trial operation, right? So they are very tolerant, and they think that it is okay for us to try some operations. And second, it is very important for us to accumulate data and experience and also to build our team for good execution, right? And the third is that through all this trial operation, we are able to assess the critical points in our future commercialization, right? And also, as I mentioned, safety is our priority. So we cannot -- as our sales expand, we cannot always put the operation into -- in the hand of our customers. And so we need to ensure 100% safety because we have the technology, we have the centralized platform. So it is very important for us to do more operation in the future. But in terms of the financial impact, I can see that, obviously, in the short term, our financial -- especially our sales may fall short of expectation, because since you operate and you get paid by the operation, and which is a little more sustainable, more recurrent revenue, but it's less lump sum. If you sell the equipment, you get the one-off payment more quickly, right? But we understand that the value of platform is much greater than a simple OEM model. Because as you can see for a lot of these auto OEM automakers, right, so they simply [Technical Difficulty ] [build ] the cars, but the value cannot be achieved, right? So that's why Elon Musk once said that, if all the autos can be autonomous, they may consider operation instead of selling cars, right, something to the effect of that. So this is also our goal. We believe that the value of -- the long-term value of our network is far more attractive than selling AAVs right now.

Thanks, Edward. So we have a few minutes left. There are a bunch of questions, I don't think we're going to get through all of them. But there are a couple of questions on the technical specifications. You touched upon this in your presentation. But what about the noise level of the EHang 216? How is this compared to normal helicopters?

If I remember correctly, for the normal helicopter, the noise level is about over 120 DB. But for EHang, our noise level normally at 70 to 80 DB level. So much better than the helicopters.

Got it. And also, I believe the 216 is a 2-seater model. Is there a plan to launch a larger version that has like 4 seats and can be suitable for an entire family?

Yes, of course. We are always pursuing the innovation and the new models. And so because we started from a 2 seater, which is simpler. And is actually very good for -- as I said, for the intra-city transportation. People only need 2 passengers ride simultaneously. But, definitely, we are going to launch AAVs that cover longer range and with a bigger, higher capacity that have more seats. It's on the way.

Got it. And just very last question here and probably, a good way to wrap. Do you think you will see eVTOLs in the sky before you see fully autonomous Level 5 cars on the road?

I don't know. I think right now the reality is that we have seen -- we have done, as I said it again and again, we've done more than 10,000 trial flights already. In China now, I can tell you, Ravi, if you come to our company, I can promise you, I put you on our AAV right away, and you can enjoy your flight. But I don't know whether you can get a flight from any other eVTOL, if you go there. So this is what I can say.

Got it. I certainly will be looking forward to making a trip out there soon. Ed, thanks so much for joining us. Great session. And I'm sure we'll do many more of these soon.