EHang Holdings Limited (EH) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the EHang First Quarter 2023 Earnings Conference Call. As a reminder, we are recording today's call. Now I will turn the call over to Anne Ji, EHang's Senior Director of Investor Relations. Ms. Anne, please proceed.

Hello, everyone. Thank you for joining us on today's conference call to discuss the company's financial results for the first quarter of 2023. The earnings release is available on the company's IR website. Please note the conference call is being recorded and an audio replay will be posted on the company's IR website. On the call today, we have Mr. Huazhi Hu, our Founder, Chairman and the Chief Executive Officer; Mr. Xin Fang, Chief Operating Officer; and Mr. Richard Liu, Chief Financial Officer. The management team will successively give prepared remarks. Remarks delivered in Chinese will be followed by English translations. All translation is for convenience purposes only. In the case of any discrepancy, the management's statement in the regional language will prevail. A Q&A session will follow afterwards. Before we continue, please know that today's discussion will contain forward-looking statements made pursuant to the safe harbor provisions 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 this and other risks and uncertainties is included in the company's public filings with the SEC. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Also, please note that all numbers presented are in RMB and are for the first quarter of 2023, unless stated otherwise. With that, let me now turn the call over to our CEO, Mr. Huazhi Hu. Please go ahead, Mr. Hu.

[Interpreted] This is the English translation of Mr. Hu's remarks. Hello, everyone. Thank you all for joining our conference call today. Since the beginning of this year as the pandemic has eased, we have seen encouraging signs of recovery in the tourism industry. As a result, the demand for our AAVs from the clients in this sector has been growing. However, our EH216-S is currently undergoing a process of obtaining airworthiness certification and we are fulfilling customer orders with discernment. In Q1 2023, we delivered a total of 11 EH216 series of AAV, resulting in a revenue of RMB 22.2 million. This represents an increase of 42% compared with the previous quarter, and an increase of 283% year-over-year. Along with the considerable surge in revenue, our gross margin remains strong, maintaining a high level of 64% in the first quarter. Meanwhile, our operational performance has shown significant improvement. Both the adjusted operating loss and the adjusted net loss has significantly narrowed, representing an improvement of 44% compared with Q4 last year. Additionally, EHang's cash position remains healthy, and a strategic investment of USD 10 million by Qingdao West Coast New Area was closed in the first quarter. So far, the EH216-S airworthiness certification has been at the last phase of demonstration and verification of compliance and we have completed over 90% of the compliance test. We entered into the final sprint in late April. Even so, our dedicated EHang team remains tirelessly committed to providing a flawless performance report as soon as possible. I would like to extend my sincere gratitude to the CAAC for their unwavering support to EHang, their commitment throughout this process day and light and their prompt approvals for the completion of each subject. EHang is not only an industry pioneer, but also an advocate for low-altitude air mobility. Against a macro policy background of a comprehensive national transport network, we have seen that China has established a range of favorable policies regarding the low-altitude economy since the beginning of this year. Per the report of the National Low Altitude Economy Integration and Innovation Research Center, 16 provisional governments has included specific provisions relating to do the low-altitude economy in the year 2023 government work reports. These government initiatives focus on unmanned aviation industry within the 20 designated experimental zones across China, demonstrating vigorous policy support and creating an environment conducive to further exploration of the AAV market across China. During this period, we're also relentlessly broadening our international collaborations and delivering products. We are glad to explore urban air mobility alongside our customers and partners from more countries. Next, I will hand over the call to our Chief Operating Officer, Mr. Xin Fang.

[Interpreted] This is the English translation of Mr. Xing Fang's remarks. Thank you, Mr. Hu, and hello, everyone. During the first quarter, we continued to advance towards the final stage of airworthiness certification for the EH216-F. On the other hand, we're further expanding into new opportunities, both domestically and abroad with our cutting-edge AAV products, including signing up new customers and conducting flight demonstrations and tests. These endeavors are instrumental to pave the way for future commercial deliveries and our operations once the certification process is successfully completed. Following the lifting up of epidemic restrictive policies, we were delighted to see a strong recovery in the domestic tourism market. A noteworthy example is, according to the data from China's Ministry of Culture and Tourism, a year-on-year increase of 51% in domestic tourism trips during the Labor Day holiday period in May, reaching a total of 274 million trips, representing 119% of the pre-epidemic level in the same period of 2019. This trend is very beneficial to the commercial low-altitude tourism market that we are targeting as this allows for potential customers to have more capital and motivation to consider utilizing the AAVs at various attractions for higher growth. Considering its huge market growth potential, low-altitude tourism has become the primary target market we plan to tap into after obtaining certification. Our business plan is also supported by the guidelines and policies introduced by multiple governments to foster the development of the low-altitude tourism and economy. For example, Xinjiang included the low-altitude economy in its government work report for the first time this year, and made the Xinjiang Special Economic Zone low-altitude industry promotion regulations a key legislative project, committed to building the world's first urban air mobility demonstration city and boosting the high quality development of the low-altitude economy. We have been actively seeking cooperation opportunities with local domestic governmental departments or upstream and downstream partners for exploring prospects in the development of urban air mobility and low-altitude tourism. In the first quarter, we delivered EH216-F AAVs to Guangxi, Anhui. Jiangsu, Guangdong in China and Japan overseas. Among these deliveries, Fengshan's Sanmenhai has 4-A scenic area, renowned karst landscape tourist attraction located in Guangxi, purchased a total of 6 EH216-F units from us, all of which were delivered within the first quarter. The customer plans to launch low-altitude tours locally, creating the first low-altitude flying camp in Guangxi. This initiative aims to offer a unique and an innovative way for tourists to enjoy the breathtaking beauty of Fengshan from the sky, providing an exceptional experience of leisure and sightseeing. In addition, we have officially signed a cooperation framework agreement with Xiyu Tourism Development Company, a leading Xinjiang tourism company listed on the Shenzhen Stock Exchange. This cooperation compromised our plans for us to establish a joint venture in developing low-altitude sightseeing businesses in Xinjiang's majors scenic spots, like the Xinjiang Heavenly Lake. The cooperation is expected to operate at least 120 units of EH216-Fs or a comparable passenger carrying AAVs within the next 5 years. We're seeing an increasing number of cultural tourism customers who intend to actively integrate high technology with traditional services to bring vitality into the industry's development. Additionally, this March, we're entering into a strategic partnership with Xi'an Aerospace Investment Science and Technology Development Holdings Group for urban air mobility and smart city development. Under this partnership, we have received an indicative order for 20 units of EH216-F that is anticipated to be finalized by 2025. To summarize, the tourism revival is propelling a positive trend in domestic deliveries and potential orders. By seizing this momentum, we will continue to drive up commercial deliveries and operations after certification. Meanwhile, our trial operations in China are still ongoing. To date, we have developed 19 EH216-F trial operation spots in collaboration with our customers across 17 cities nationwide, primarily for low-altitude tourism scenarios. Our EH216-Fs have successfully completed around 8,800 safe trial flights. Internationally, Asia stands as our principal regional focus. Following our expansion and partnerships established across East and Southeast Asia last year, this February, our EH216-F AAV completed its first passenger-carrying autonomous flight demonstration within Japan, which also marks the first passenger-carrying flights in open air space outside China. The demonstration reflects the safety and the reliability of our AAVs and the recognition from international regulatory authorities. As of April, EHang became a member of the Public Private Committee for Advanced Air Mobility established by Japan's Ministry of Economy, Trade and Industry and the Ministry of Land, Infrastructure, Transport and Tourism. This committee aims to engage in a collaborative effort with global governments and corporate entities to advance the usage of aircraft within Japan, including at the Expo 2025, Osaka, Kansai, Japan. EHang as the only autonomous eVTOL company among 56 committee members is poised to leverage its pioneering AAV technology and the trial flight experience in 6 Japanese cities to capitalize the growth and the revolution of advanced air mobility in the country. Simultaneously, we are actively seeking out and fostering partnerships in overseas markets like Europe, the Middle East and South America. As of the end of May, the EH216 series AAV has conducted over 37,000 safe trial flights across 12 countries in Asia, Europe and Americas, which is among the highest flight records in the global eVTOL industry. We are willing to work with customers and partners from more countries to explore safe, intelligent and innovative UAM industry so as to bring unique environmentally friendly and efficient flight experience to more passengers. I like to note that EHang will participate in the upcoming Paris Air Show exhibition. At this world renowned aviation and aerospace exhibition, we will showcase our advanced EH216-S AAV and partake in a series of urban air mobility themed events to share our value and experience. We warmly invite global investors to join us for discussion during this event. Moving forward, we remain committed to the principle of conducting trial operation while going through the airworthiness certification process, thereby paving the way for a crucial pivot towards post-certification commercialization. As an industry first mover, we have harnessed our unique AAV-leading technology and our first-mover advantage to build a robust customer base and substantial trial operation experience. We remain optimistic about [ discovering ] as far as creating value in a growing UAM market. Next, our Chief Financial Officer, Richard, will shed light on our financial status.

Thank you, Xing. Hello, everyone. Before I go into details, please note that all numbers presented are in RMB and are for the first quarter of 2023, unless stated otherwise. All percentage changes are on a quarter-over-quarter basis, unless otherwise specified. Detailed analysis are contained in our earnings press release, which is available on our IR website. I will now highlight some of the key points here. Following the uplifting of China's Zero COVID policies, we have observed a robust resurgence in the tourism industry in China, attributable to the significant rise in demand for travel. Together with favorable policies, these have been driving up demands and inquiries for our AAVs recently. This phenomenon are in alignment with our current strategic business development focus on aerial tourism. As such, we are confident in our future growth prospects and capabilities in growing our post-certification AAV order pipeline going forward. In Q1, total revenues were RMB 22.2 million, up 41.6% from RMB 15.7 million in Q4, primarily driven by the increase in the sales volume of EH216 Series AAV products. The deliveries of EH216 Series AAVs in Q1 were 11 units, an 83% increase from 6 units in Q4. Gross margin was 63.9% in Q1, a slight decrease of 2.2 percentage points from 66.1% in Q4. Despite this minor fluctuation, our gross margin maintains at a high level compared to those of other electrically powered mobility products such as electric vehicles. This is a result that attests to our competitive strength and the first-mover advantages in the global UAM and eVTOL industries. In Q1, our adjusted operating expenses, which are operating expenses excluding share-based compensation expenses, were RMB 50.1 million compared with RMB 73.2 million in Q4. The decrease was mainly attributed to the noncash item of additional prudent provisions for receivables in response to the COVID impact on customers in Q4 last year, while there were increased expenditures for aircraft conformity and compliance tests in the final phase of the EH216-S Type certification this quarter. As a result, our adjusted operating loss in Q1 was RMB 34.3 million, a significant improvement of 44.1% from RMB 61.3 million in Q4. Adjusted net loss was RMB 33.6 million, a 43.5% improvement from RMB 59.4 million in Q4. Moving on to our balance sheet. We maintain a prudent approach in managing our cash position and assessing our liquidity. As of the end of Q1, we had RMB 217.6 million of cash, cash equivalents, restricted cash, restricted short-term deposits and short-term investments. This includes a USD 10 million strategic investment made by the Qingdao West Coast New Area in Q1, which provides additional liquidity support to bolster our operations and growth. That concludes our prepared remarks. Let's now open the call for questions. Operator, please go ahead.

[Operator Instructions] We will now take our first question. Please standby. This is from the line of [ Farina Jang ] from Goldman Sachs.

2 questions from me. First is about the TC progress. We have completed over 90% of the progress. So wondering if there is any timeline for the rest of 10%? And are there any hurdles going forward? My second question is about the following quarter outlook. So we delivered a strong sales volume and also the revenues in first quarter. So just wondering if we see the strong momentum to continue in the following quarters.