EHang Holdings Limited (EH) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the EHang Second Quarter 2022 Earnings Conference Call. As a reminder, we are recording today's call. Now I will turn the call over to Julia Qian, Managing Director of Blueshirt Group of Asia. Ms. Qian, please proceed.

Hello, everyone. Thank you all for joining us on today's conference call to discuss the company's financial results for the second quarter of 2022. The earnings release is available on IR website as well as from Newswire services. Please note, the conference call is being recorded and the audio replay will be posted on the company's IR website. Today, EHang management team, which includes Mr. Huazhi Hu, Chief Executive Officer; Mr. Xin Fang, Chief Operating Officer; and Mr. Richard Liu, Chief Financial Officer, will successfully give the prepared remarks. Remarks delivered in Chinese will be followed by English translation. All translation is for convenience purpose only. In the case of any discrepancy, management's statement in our original language will prevail. A Q&A session will follow afterwards. Before we continue, please note that today's discussion will contain forward-looking statements made in pursuit to the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company's public filings with SEC. The company does not assume any obligation to update any forward-looking statements, except as required under capable law. Also please note that all the numbers presented are in RMB and are for the second quarter of 2022, unless stated otherwise. With that, let me now turn the call over to CEO, Mr. Huazhi Hu. Please go ahead, Mr. Hu.

[Interpreted] Thank you, operator, and Julia. Hello, everyone. Thanks for joining our earnings call today. In Q2, we have actively adapted to the macro environment at home and abroad. The world was gradually recovering from the continued impact of the COVID pandemic. We were able to achieve excellent results. In such environment, we not only spend more time and efforts to strengthen ourselves, but also continue to expand our orders, preorders, deliveries and customers, especially in China and Southeast Asia. This drove up our total revenue in Q2 by a significant increase of over 150% from Q1. We continue to expand our strategic partnerships with business and finance partners, such as the CP Group, one of the largest commercial companies in Thailand and the Agricultural Bank of China. These partnerships will be of strong support to EHang's long-term business development in the future. Our COO and CFO will elaborate on that later. The most important thing for us at present is the EHang 216-S airworthiness certification, and the process has progressed into new faces since this year. It is based on our full understanding of the comprehensive setup a witness concept that has been summarized by the Western countries with their experience in recent century. This set of concepts has been embedded in the entire process of making an aircraft from design to mass production, which has an essential and profound influence on the safe production and operation of aviation products. Here, I would like to express my sincere admiration and appreciation to the pioneering predecessors who contributed their available experience with tremendous efforts. However, before the CEC issued special conditions, there had not been any available airworthiness certification standards applicable to this new type of aircraft, like EHang 216. In the early days, RAVs conform to our own safety standards based on which we explore to start productization and production. As there was no precedent, we had closely worked with the CEC to further develop this new type of airworthiness standards together according to the relevant airworthiness concept and principles in the past several months. We had established the aircraft design and production management systems, which not only meet the requirements of the aviation industry, but also are compatible with our own management system. With that, every member of our team can work in line with this concept and conforming to the scientific management and design methods so as to enable every process in confound and regulated manner from design to production of EHang 216. In this regard, we finally reached a consensus with the CEC expert team in Q2 on our project specific certification plan and the certification basis as well as the certification plan, respectively. In respect of the worthiness process for this unique MN aircraft system, we have now only referred the CCER-23 airworthiness regulation and internationally recognized the standards such as the ASTM, SAE, RTCA, MIL, et cetera. And they learned from the configuration management and witness experience of conventional aircraft OEMs, but also made innovation exploration on new topics in MN aircraft systems, including the MN system, Datalink and ground control system. We worked out 13 minutes of compliance applicable to EHang216. Based on our previous experience, we are continuing carrying out internal tests according to the worthiness standards and the planning activities for the demonstration of compliance. Based on the CEC and Guangdong provincial government's strategic corporation framework agreement for civil aviation development in Guangdong, they recently emphasized on speeding up developing the aviation manufacturing industry and new business forms of general aviation. Both the CEC and Guangdong government have clearly put pushing forward relevant UEM pilot project and strongly pushing forward the EHang216-S AV type certification process as their key tasks in 2022. It encouraged us and further enhanced our confidence to obtain the tap certificate. Moreover, in June, the CEC newly established an aircraft airworthiness branch center in Guangzhou, where our headquarters is located to be in charge of the airworthiness certification work for a small aircraft nationally. Currently, the VT-30 one of the products in our retail aircraft series is at the stage of the product design and with its preparation and component verification. We believe that these favorable conditions and policy support in Guangdong can lay a solid foundation for Vt-30 design, test flights, and airworthiness certification. Next, I will turn the call over to our Chief Operating Officer, Mr. Xin Fang, for business highlights in Q2.

[Interpreted] Thank you, Mr. Hu. Hello, everyone. As the COVID situation in China have gradually stabilized since Q2 of this year, the tourism market has been recovering steadily. The post-pandemic era expediated the transformation of tourism, such as scenic spots by bringing innovative business models to scale up emerging consumption. In June this year, the CAAC issued the 14th 5 year special plan for general aviation development to promote the development of low altitude flight tourism by supporting related to authorities to expand aerial sightseeing in more scenic spots and to establish a low altitude by the tourism network, connecting scenic spots, resorts, theme parks, and other tourist destinations. And international policy of supporting integrated development of aviation and tourism; we formed a strategic partnership with Tianxingjian [indiscernible] tourism investment company and affiliated enterprise of the Jishou city government in China's Hunan province. With the plan to develop a scenic flight project at the Aizhai Wonder tourism area, a national 5 way level scenic spot in Jishou. In Q2, we delivered 5 units of EHang 216 AAVs for the customer's initial purchase order and initiated trial flight operations in Aizhai. The customer plans to purchase additional 25 units of EHang 216 in the future. This project creates a replicable public and private business cooperation model for low altitude light tourism, which is helpful for expanding our ongoing business projects in other regions. According to statistics, China has more than 300 5A level scenic spots and over 4,000 4A level scenic spots, indicating tremendous market potential for expanding low altitude flight tourism. Against this backdrop, we are making excellent progress in our 100 Air Mobility routes initiative. So far, more than 5,700 operational trial flights of EHang 216 have been conducted in practical aerial sightseeing scenario and 11 operations spots in China. After obtaining the airworthiness certificate, EHang 216 is expected to provide our tourism customers and end users with a unique, safe, technologically advanced, cost-effective, and present low altitude flight tourism solution and experience. In Southeast Asia, where the UAM market is also in high demand and has reached use cases. We are actively expanding our presence through the empowerment of local partners. In Q2, we received a preorder for 100 units of EHang 216 AAV's from an Indonesian aviation company, Prestige Aviation, which is the largest preorder we have received in Asia so far. We have also reached a strategic cooperation with CP Group, one of the largest conglomerates in Thailand with an intent to establish a joint venture for introducing EHang AAVs to Thailand. The 2 parties also intend to carry out comprehensive cross-sector cooperations in aero tourism, air logistics and transportation, urban mobility and smart city management in the future. We expect the size of a business recovery in the second half of this year. As we are actively adapting to the macro environment, continuing moving forward on EHang 216 certification, securing more product orders and expanding our original aero media business in the Europe market. We remain confident in our growth potentials and long-term outlook given our core values and unique advantages. I will now turn the call over to our CFO, Richard Liu, for financial results. Richard, please go ahead.

Thank you. Thank you, Xin, and hello, everyone. Before I go into details, please note that all numbers presented are in RMB and are for the second quarter of 2022, unless stated otherwise. All percentage changes are on a quarter-over-quarter basis unless otherwise specified. Detailed analyses are contained in our earnings press release, which is available on our IR website. I will now highlight some of the key points here. In the second quarter of 2022, our strategic shift towards an urban air mobility platform continued as we aim for a solution and operational service integrated model. The ongoing efforts are yielding positive results with increasing deliveries in China and orders or preorders in Asia, reflecting our solid business strength. As we continue to focus on the EHang 216 type certification process, we also made further development in our 100 Air Mobility routes initiative with continuously increased operational traits as well as expansion of operating spots in China. Additionally, we struck a strategic partnership with the Agricultural Bank of China Guangzhou Branch for RMB 1 billion indicated credit facilities to support our strategy execution and the business growth in the following years. In Q2 of 2022, total revenues were RMB 14.6 million, representing an increase of 152.5% from RMB 5.8 million in Q1. This was along with a 166.7% increase in EHang 216 AAV deliveries in Q2 to 8 units from 3 units in Q1. Demand for our AV products has been increasing both in China and internationally. One typical sample in China is that in Q2, we delivered 5 units of EHang 216 AAVs to a local governed -backed tourism operator in Hunan province for aerial sightseeing operational services. The customer plans to buy additional 25 units if the project progresses. Another example is that we have obtained preorders of up to 210 units from customers in Japan, Malaysia, and Indonesia since the beginning of this year, and we see the trend of further expansion in Southeast Asian markets. Additionally, we were able to further drive a 4.6 percentage points expansion in gross margin to 67.1% in Q2 from 62.5% in Q1. Even though our overall gross margin has already been at a high level compared to other new energy mobility product companies, such as electric car companies. This continued to show our competitive edge as the first mover in the global UAM and aviation industries. In Q2, our adjusted operating expenses, which are operating expenses, excluding share-based compensation expenses, were RMB 63.4 million compared with RMB 46.1 million in Q1. The increase was mainly attributed to continuous R&D of new AAV models and the ongoing EHang 216 certification process, both of which are progressing steadily and professional service fees related to annual report filing and other legal matters and additional provisions for accounts receivable in light of impact from the ongoing COV19 epidemic and control measures in China. With that in Q2, our adjusted operating loss was RMB 51.2 million compared with RMB 41.7 million in Q1. Our adjusted net loss was RMB 50.8 million in Q2 compared with RMB 40.9 million. Our balance sheet remains solid with RMB 240.7 million of cash, cash equivalents, restricted cash and short-term investments as of the end of Q2, even with a slight increase of RMB 3.8 million quarter-over-quarter. With that, we believe our business is on a good track. That concludes our prepared remarks. Let us now open the call for questions.

[Operator Instructions] We have the first question from Tim Hsiao.

I actually have 2 quick questions. The first one is we saw EHang having been making some good progress in terms of customer acquisitions, especially in Asia over the past few quarters. Just wondering how many preorders we have got so far and when do you plan to start the delivery. In addition, could you also get some updates regarding to our collaborations with the government? And what kind of size of the contribution should we expect? And when do we think is going to kick in. And my second question is about the funding, the investments because we noticed that we have the partnership with the Agricultural Bank of China, and that entitle us to around a billion dedicated credit facilities. Just wondering how we are going to use that and are you going to accelerate the investments in upcoming months? And what kind of cash burn rate do you have does it look right now? So could you share a little bit more information about our investment plan in the upcoming quarters?

[Interpreted] Hi, team. This is Xin Fang. Let me take your first question about orders. Since the beginning of this year, we have received a total of 210 units of preorders for passenger-grade AAVs in the Asian market. More than 200 units of preorders in Asia are expected to be delivered in about 3 years, subject to customer needs and our obtaining the type certificate in China or other relevant certifications in the local market? In addition to the preorders, we also have received some customer orders, both enhanced oriented discussions, which I am able to be quickly delivered in the short time based on the customers' demands. For example, in Q2, we received the orders from the customer in Jishou and also completed the deliveries for the first batch of 5 units, which have already been put into trial operations. At present, we are in talks with some local governments regarding potential cooperation and plans to set up operational centers in different regions. In order to actively prepare for the commercial operations once we obtain the type that we have already signed a strategic cooperation agreement with certain governments. Upon this agreement, there will be some purchase orders, which plans to be completed successfully within this year and expect to make a notable contribution to our full year results.

Hi, Tim. This is Richard. I will take your second question. Basically, this partnership is the first time that Agricultural Bank of China is one of the largest commercial bank to partner with and grant such indicated credit facilities to us as an innovative eVito technology company. This represents a traditional financial institutions have started to tap into this type of new industry. So it is a good sign, not only for EHang, but also belief for the industry. Basically, the RMB 1 billion indicated credit facilities cover comprehensive banking products and services of Agricultural Bank of China to support our operations and business development. Over the following years, including regular credit loans, financial leasing, supply chain financing, etcetera. So as a starter, they have tended to us a RMB 30 million credit loan. Further, we have been discussing the financial leasing option to facilitate our business growth after the TC is obtained. Thus, in the near term, money will be used more towards supporting operations and the sales growth. In respect of investment in terms of CapEx investment as we have an existing production facility, we will see how the sales would grow to plan for any future CapEx needs. Regarding the cash plan, as you know, EHang has been running a lean operation in China, and this is somewhat EHAM's unique style if compared to others. You probably can get a feeling from our cash flow statement. If you ask for current level, to give you a rough idea, the current average monthly cash burn rate of our operations is around RMB 17 million or roughly USD 2.5 million. If annualizing it, you would get around RMB 200 million or roughly USD 30 million. As it is expected that sales would increase after the TC is obtained. The operational cash flow or the cash burn situation is expected to be further improved following that. Hope this answers your question.

Yes. Thank you very much, Mr. Fang and Richard for a detailed sharing.