Li Auto Inc. (LI) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. Thank you for standing by for Li Auto's First Quarter 2023 Earnings Conference Call. [Operator Instructions] I will now turn the call to your host, Janet Chang, Investor Relations Director of Li Auto. Please go ahead, Janet.

Thank you, operator. Good evening, and good morning, everyone. Welcome to Li Auto's first quarter 2023 earnings conference call. The company's financial and operating results were published in the press release earlier today and are posted on the company's IR website. On today's call, we 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 other senior executive management 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 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 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 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. Our CEO will start with his remarks in Chinese. There will be translation after his -- he finish all his remarks. With that, I will now turn the call over to our CEO, Mr. Xiang Li. Please go ahead.

[Interpreted] Hi, everyone, and welcome to today's earnings call. In the first quarter of 2023, China's NEV market continued to grow, but market competition intensified, triggering a wait-and-see sentiment among consumers. Nevertheless, we firmly believe that true winners will emerge from competition. In the first quarter, we achieved our best quarterly delivery results to date. With continued user recognition of the L8 and L9, we -- as well as strong order intake for L7 and its rapid production ramp-up, we delivered 52,584 vehicles this quarter, representing a year-on-year increase of 65.8%. This achievement placed us among the top 3 NEV brands priced over RMB 200,000 in China, with a market share of approximately 11%, far surpassing any other emerging automakers and once again showcasing our ability to design and build blockbuster models. It also demonstrates the strength and collaborative efficacy of our supply chain, manufacturing and sales and servicing network. We'll continue to do our best to grow rapidly and strengthen our market leadership. In April, our monthly deliveries hit a new high, reaching 25,681 units with cumulative deliveries exceeding 335,000. The Li L7, L8, and L9 all performed outstandingly in their respective market segments. According to the insurance registration data of CIRI Auto Technology Institute, L7 became the sales champion in the large SUV market in China after it started delivery in early March. In April, its first full month of delivery, L7 hit the 10,000 vehicle mark, becoming our first fourth model to reach this milestone. In the meantime, the L8 has maintained its sales leadership in the 6-seater subsegment. And in the full-size SUV market, the L9 has consistently topped the sales chart ever since its delivery started at the end of August last year. Driven by our strong deliveries and relentless pursuit of operating efficiency, our financial metrics improved across the board. In the first quarter, our total revenues reached RMB 18.79 billion, representing a year-over-year increase of 96.5%. At the same time, we delivered positive operating profit and positive net profit, and our free cash flow reached a record high of RMB 6.7 billion. A healthy profitability and cash flow will fund our R&D and products, platforms, and systems, creating a solid foundation for long-term development. With the launch of L7 and L8 air models in April, we further expanded our price range and user coverage. We expect our users -- a market share in the NEV market at over RMB 200,000 and above to expand further in the next quarter with expected deliveries to be between 76,000 and 81,000 units. Physical product delivery is just the beginning. In order to continuously improve the experience of family users, we will enhance our products through OTA. Since the beginning of this year, we have delivered 2 OTA updates for our L Series, OTA 4.3 and 4.4, updating more than 100 features in total. New features include Task Master, which allows users to create customized combinations of functions of seats, drive settings, navigation, applications and more. We also rolled out LKA Plus, the first feature of its kind in China, which can autonomously overtake on highways and urban expressways when not in navigation mode. Additionally, we will officially launch OTA 3.3 for Li ONE in the middle of this year. For family users, safety is always the top priority. Every model of Li Auto is developed to meet the most stringent safety standards and has undergone comprehensive safety tests. In April 2023, the China Insurance Automotive Safety Index, CIASI, released its latest batch of evaluation results. The L8 received a G rating, the highest rating in occupant protection, pedestrian protection, and driver assistance systems. It also received a G rating and the 25% offset frontal impact test on both the driver and passenger side. The L9 also received a 5-star rating with a weighted score of 91.3% in the C-NCAP assessment test. In the first quarter of 2023, we continue to enhance our commercial capabilities by upgrading and expanding our integrated online and offline direct sales and servicing network to support the expanding product offerings and provide better services to our users, while spreading our brand vision and increasing brand awareness. With respect to our retail sales network, we continue to add physical stores, while accelerating the upgrade and expansion of our existing stores to support multiple vehicles. Since L9's launch in late June last year, we have relocated and expanded close to 50 existing stores and opened over 50 new stores. As of April 30, 2023, we have 302 retail stores in 103 cities, as well as 318 service centers and authorized body shops in 222 cities. As our business accelerates, sustainability has always been deeply ingrained in our products, services, and corporate governance. On April 21, we released our 2022 ESG report detailing our continued exploration and progress in ESG. We received an MSCI ESG AA rating for 2 consecutive years. In the future, we will continue to improve our ESG governance, promote the harmonious development of our brand, the environment, and the society, and create value for our users, partners, employees, and other stakeholders. As we enter the next phase of the development, we will execute our autonomous driving and BEV Roadmap unveiled on April 18 Shanghai Auto Show. City NOA will mark the beginning of autonomous driving 3.0 for our company. Meanwhile, we will also enter a new chapter in terms of powertrain platforms and products, with EREVs and HPC BEVs being developed in parallel. In terms of autonomous driving, our highway NOA feature has served over 280,000 families, accumulating over 140 million kilometers of highway NOA mileage. In this quarter, we'll bring the NOA feature to urban driving scenarios. We'll expand -- we'll release city NOA for beta testing on Li AD [ Auto ] Max 3.0, and target to roll out the feature in 100 cities across the country by the end of 2023. Moving forward, with the application of transformer models in autonomous driving, we believe we will be the biggest beneficiary since we have the largest data set in China. With respect to EREVs and HPC BEVs, we will adhere to our parallel development strategy. For EREVs, we'll focus on enhancing the efficiency of the range extenders, allowing users to drive on battery power on urban commute and on range extender during long distance travel, a much better experience than driving our BEVs. For HPC BEVs, we'll continue to improve our technology to offer a rapid charging experience comparable to fill up a gasoline vehicle so that users can make intercity trips without range anxiety. By 2025, our portfolio will consist of several models with what consists of 1 super model, a flagship model, 5 EREVs, and 5 HPC BEVs, 11 models in total, which will allow us to further expand our user base and expand to new markets. This year, we'll redouble our efforts in fast charging network deployment. Our 4C fast chargers can reach peak power output of 480 kilowatts, adding 400 kilometers of driving range within a 10-minute charge. We plan to build 300 charging stations in highway service areas by the end of 2023, covering 4 major economic zones, including the Beijing-Tianjin-Hebei region, the Yangtze River Delta region, and the Great Bay Area, and the Chengdu-Chongqing region. We expect to further expand to 3,000 charging stations by the end of 2025, covering 90% of highway mileage nationally and all major Tier 1, 2, 3 cities. In the future, we will continue to refine our operations, build organizational capabilities to support the scaling of our business, and maintain healthy sales growth. As we continue to strengthen our autonomous driving and smart cockpit capabilities and simultaneously implement our EREV and HPC BEV dual product strategy, we're confident we will also continue to strengthen our market leadership in the NEV market, creating more and better choices for family users to create mobile homes and create happiness. With that, I'll turn it over to our CFO, Johnny, for a closer look at our financial performance.

Thank you, Li Xiang. Hello, everyone. I will now review some of our 2023 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 detail. Total revenue in the first quarter of 2023 were RMB 18.79 billion, or USD 2.74 billion, increasing 96.5% year-over-year and 6.4% quarter-over-quarter. This included RMB 18.33 billion, or USD 2.67 billion from vehicle sales, which was up 96.9% year-over-year and 6.1% quarter-over-quarter. The year-over-year increase was mainly due to the increase of vehicle delivery and the higher average selling price contributed by the Li L Series. The quarter-over-quarter increase was mainly due to the increase in vehicle delivery, partially offset by the lower average selling price due to different product mix between the 2 quarters. Revenues from other sales and services were RMB 459.7 million, or USD 66.9 million in the first quarter of 2023, growing 81.4% year-over-year and 20.5% quarter-over-quarter. The increase was mainly attributable to increased sales of accessories and services in line with higher accumulated vehicle sales. Cost of sales in the first quarter was RMB 14.96 billion, or USD 2.18 billion, representing an increase of 102.2% year-over-year and the increase of 6.2% quarter-over-quarter. Gross profit in the first quarter of 2023 was RMB 3.83 billion, or USD 557.7 million, growing 77% compared with the first quarter of last year and 7.4% versus the fourth quarter of 2022. Vehicle margin in the first quarter of this year was 19.8%, compared with 22.4% in the first quarter of 2022, and 20% in the fourth quarter of 2022. The year-over-year decrease was mainly due to the different product mix between 2 quarters. Gross margin in the first quarter of 2023 was 20.4%, compared with 22.6% in the first quarter of last year and 20.2% in the fourth quarter of last year. Operating expenses in the first quarter of 2023 were RMB 3.42 billion, or USD 498.7 million, increasing 32.9% year-over-year and decreasing 7.4% quarter-over-quarter. Research and development expenses in the first quarter of 2023 were RMB 1.85 billion, or USD 269.7 million, up 34.8% year-over-year, and down 10.5% quarter-over-quarter. Year-over-year increase was primarily driven by increased expenses to support our expanding product portfolios, as well as increased employee compensation as a result of our growing number of staff. The quarter-over-quarter decrease was mainly in line with timing and progress of new vehicle programs. Selling, general and administrative expenses in the first quarter of 2023 were RMB 1.65 billion, or USD 239.6 million, representing an increase of 36.8% year-over-year, and the increase of 0.9% quarter-over-quarter. The year-over-year increase was primarily driven by increased employee compensation as a result of our growing number of staffs, as well as increased rental expenses associated with the expansion of our sales and servicing network. Income from operations in the first quarter was RMB 405.2 million or USD 59.0 million, compared with RMB 413.1 million loss from operations in the first quarter of 2022 and RMB 133.6 million loss from operations in the first quarter of 2022. Net income in the first quarter of 2023 was RMB 933.8 million or USD 136 million compared with RMB 10.9 million net loss in the first quarter of 2022 and more than tripled the RMB 265.3 million net income in the first quarter of 2022. Turning to our balance sheet and cash flow. Our balance of cash and cash equivalents with restricted cash, time deposits, and the short-term investment was RMB 65 billion or USD 9.46 billion as of March 31, 2023. Net cash provided by operating activities in the first quarter of 2023 was RMB 7.78 billion or USD 1.13 billion. Free cash flow was RMB 6.7 billion or USD 975.9 million in the first quarter of 2023. And now for our business outlook, for the second quarter of 2023 the company expects the delivery to be between 76,000 and 81,000 vehicles, representing an increase of 164.9% to 182.4% from the second quarter of 2022. The company also expects the second quarter total revenue to be between RMB 24.22 billion and RMB 25.86 billion, or USD 3.53 billion and USD 3.77 billion, representing increase of 177.4% to 196.1% from the second quarter of last year. This business outlook assumes supportive macroeconomic conditions, no significant disruption in the supply chain, and reflects the company's current and preliminary view on its business situation and market condition, which is subject to change. I will now turn the call over to the operator to start our Q&A session.

[Operator Instructions] The first question comes from Tim Hsiao from Morgan Stanley.

[Foreign Language] So my first question is about the gross profit margin. So first quarter gross profit margin was adversely affected by the inferior product mix and the lower utilization rate. So how should we think about the margin trajectory in the following quarters, given the interplay of multiple factors? So on the bright side, the scale will rise in component costs, including the battery prices would fall. And on the flip side we expect the rising mix of L7 and the air models might cause greater margin dilution. So any chance in the following quarter, we could see the gross profit margin bounce back to like a previous peak level more than 22%. So that's my first question.

Basically, we are confident of improving the gross margin starting from Q1. First -- in the first quarter, the Li ONE sales impact 1.6% on the gross margin negative, if we're excluding that. So we will sold out all the Li ONEs in the first quarter -- in the first half, and yes, there will be some room on this Li ONE negative impact. And with the ramp up of our L7 series and also the air Series, there will be some room on that, yes. We still see there will be some other form cost up of [ stress ]. So we still keep our 20% full year guidance.

[Foreign Language] So my second question is about city NOA. So Li Auto's plans to push through the city NOA to the small group of users for early testing. So what's the size of the user group at the initial stage? And when are you going to activate the function to all AD Max users? Separately, when the company thinks about the Li Auto's the targeted customers, i.e. the family users, what's the value proposition of city NOA or a high-level autonomous driving function? What does that mean to them? And how important is it when the family users make the decision to buy the cars and to enhance their user experience? So that's my second question.

[Foreign Language] Overall, we are making good progress in terms of city NOA, both on a system testing level as well as real road testing. Our plan is still to release early bird testing in June, and the policy -- specific policy as to who do we release it to is still being created. But generally our rule of thumb is we will try to cover more frequent users of highway NOA, which are users who have more willingness and ability to use NOA and they also have higher tolerance and level of understanding of the NOA feature. By year end, we still plan to launch city NOA in the 100 cities. And as to which specific cities we will cover first is mostly dependent on the number of our existing vehicles in those cities, because as you know, our city NOA solution doesn't rely on high definition map, which means as long as we have navigation data for the city, as long as there's enough drivers driving our Max models, we will be able to accumulate enough data to allow users to use city NOA. Especially when it comes to complex intersections, as long as we achieve good coverage on those scenarios, we will be able to accumulate more data and open up those cities and locations for our users. Speaking of family users, as we've always believed, that they care a lot about safety and also comfort, especially when it comes to mimicking human drivers to be able to drive smoothly and give the entire family a good experience. So to make that happen, we're running shadow testing in our existing vehicles already to try to improve the behavior of our NOA features so that when they're launched, they can provide the best experience for our family users.

The next question comes from Bin Wang with Credit Suisse.

[Foreign Language] Actually got 2 questions, all about the volume. If you see in last conference call, you mentioned you actually maybe try to do monthly -- 30,000 units a month. What's your expectation? Which month will deliver still in second quarter or in the future? The second thing about the pure EV. In your media interview, it seems that you have said that the EV has been postponed to next year. Can you confirm that? If yes, what's the reason behind the postpone to next year?

[Foreign Language] So first question, in Q2, we will gradually ramp up our delivery numbers, and our current goal is to reach the 30,000 monthly mark by June of this quarter. And talking about the BEV flagship, our plan is still to release it in Q4 and after which we will be delivering the vehicle to retail stores for static viewing and test drives, which will follow a similar pace as you've observed with L8 -- L9 and L8.

The next question comes from Paul Gong with UBS.

[Foreign Language] So my first question is regarding the expense. It seems that both R&D and SG&A seems to be having either flattish quarter-over-quarter, or even a slightly decline and below our budget. Especially in terms of SG&A, even with the expanded network, it still seems to be well within control. So can you please give an update of the full year R&D spending guidance as well as SG&A expense ratio?

I will take over. For the R&D, we will still keep our full year guidance, which is over from RMB 10 billion to RMB 12 billion for the full year. And for the SG&A, as a percentage of revenue, we will improve starting from the first quarter of last year's ratio. This is our plan, yes.

[Foreign Language] So my second question is regarding the competition. I think some other car makers has launched similar size of the vehicle with also plugging hybrids system and with even lower price than the L8. Have we observed any impact in terms of the order intake and how shall we think about the rising competition in the same segment?

[Foreign Language] Looking at our actual order intake, the orders for L8 is actually increasing very steadily. In fact, as -- we believe, as more players enter the market, is actually good for our L8, which is the market leader, because many users read about these competitors and they start looking into this market segment, and eventually they come over to L8 and order our products. So, we don't -- generally don't think this to be a big threat. And even when we look at the data for our L8 orders, this product you're talking about, this specific product isn't even among the top competitors. Our top competitor is still the Tesla Model Y.

The next question comes from Ming-Hsun Lee from Bank of America.

[Foreign Language] So my first question is regarding your business priority. At the current moment, is profitability and free cash flow more important for you or market share is more important for you? So -- and also how do you see the price competition in the second half this year given the battery price already declined a lot? So will you consider to slightly give a little bit discount in order to maintain even higher market share?