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

Hello, ladies and gentlemen. Thank you for standing by for Li Auto's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded. I will now turn the call over to your host, Ms. 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 Second Quarter 2016 Earnings Conference Call. The company's financial and operating results were published in the press release earlier today annual posted on the company's IR website. On to this 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 CTO, Mr. Yan Xie will join for the Q&A discussion. Before we continue, please be reminded that today's discussion will contain forward-looking statements made under 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 views expressed today. Further information regarding risks and uncertainties is included in certain company filings with the SEC and the Hock 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 Liatos 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 disclosure documents in the IR section of our website, which contains 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 his remarks. With that, I will now turn the call over to our CEO, Mr. Xiang Li. Please go ahead.

[Interpreted] Hi, everyone. This is Li Xiang and thank you for joining our earnings conference call today. In the first half of this year, in the midst of intense market competition and a complete product refresh Li Auto has remained the top-selling Chinese automotive brand and the RMB 200,000 and above NAV market. The continued rollout of our dual energy strategy has resulted in a healthy product mix with eREV and BEV each accounting for 50% of total sales. Since Q2, we have updated entire L series showcasing our latest technologies. Key updates include our in-house MAC 100 and 100 chip running MOBA model, 800-volt active suspension and drive by wire shafting and our third generation range extender with supercharging battery. The hardware and software upgrades set new standards for the technology and user experience once again. Turning over to our fab lineup. The IV has been 1 of our top top-3 selling model priced over RMB 200,000 for 6 consecutive months. MI6 and and the 6 are the top sellers in their respective segments, further solidifying our leadership in the RMB 200,000 to 300,000 SUV market. Upgrades to our BEV lineup is also underway. In late July, we launched the rail wheel at long-range version of Li I8 based on user feedback. -- we added features such as Power Funk and 0 gravity driver and passenger seats. These updates bolstered our product competitiveness and translated to a notable sales uplift. The new generation lead mega is scheduled for launch on September 2. We further polished its pioneering design and completely revamped the interior, the cabin experience, intelligent platform and with quality. Additionally, the all-new flagship fab SUV Li i9 will also be launched in mid-September, further enriching the Li auto's BEV product lineup, we anticipate that model to account for an even larger share of total sales over time. With new models launching and ramping up in the second half of this year, we're confident in maintaining a top 3 position among all brands in China's passenger vehicle market priced above RMB 200,000. By developing core technologies in-house, we're continuously deepening our competitive moat, steadily translating these technological advancements into tangible user value and commercial efficiency. Supercharging has become a prerequisite in user purchase decisions and the proprietary supercharging network fans as one of our key competitive advantages. On batteries, we're able to develop sell BMS and pack fully in-house, completing the final piece of the electric powertrain pub following electric motors and control units. Federal integrated design with the overall vehicle system, combined with the technology and experience we have accumulated in 5C supercharging, we're confident that the Li Auto in-house battery will deliver industry-leading performance in....

The conference will recommence shortly. The conference is reconnected. Please go ahead.

Apologies for that breakup to continue with the CEO's remarks. Through integrated design with the overall vehicle system, combined with the technology and experience we have accumulated 5 supercharging, we're confident that Li Auto's in-house battery will deliver industry-leading performance in quality, safety and service line. Our in-house batteries are already deployed on our all new , the new Li L6 and Li i8, within the next few months, all of our models will be equipped with our proprietary batteries. We firmly believe that batteries and chips are going to be the most critical technological barriers in the embodied AI industry. In May, we started shipping our full SAC ADAS solution based on the MC100 chips. To date, shipments of the MCM100 chips have exceeded 50,000 units, maintaining excellent quality track record. Beyond chips, we're also making R&D breakthroughs across models, controllers and software. These achievements have steadily translated into product experience. In late July with OTA 9.1, overall MAC VLA performance improved by 20% and user mileage penetration nearly doubled compared to the previous generation food platform. In September, we will also roll out MAC VLA to cars with NVIDIA for and [ ORex ] chips. Building on the data we have accumulated, we'll accelerate model training and iterations to fully leverage the compute advantage on our chips. The July OTA 9.1 update allows BLA mag and surpass human drivers in reaction stage. The October OTA 9.2 update will enable BLA to fully adopt 3D vision transformers, providing long range and better precision. And the year-end OTA9.3 update will see VLA model parameters scale exponentially, significantly enhancing test comprehension and reasoning capabilities in complex scenarios. Faster reactions, sharper vision and stronger reasoning are the 3 most crucial upgrades for the MCM100 and CVA this year. Going forward, building and body AI vehicles will remain at the core of our strategy. Through full stack in-house development across hardware and software with continuous iteration -- our vision is that vehicles will become true intelligent agents that can not only look after human beings, but also complete task independently, more efficiently than human beings. With that, I'll turn the call over to our CFO, Johnny, to walk you through our financial performance.

Thank you, Li. Hello, everyone. Given time, my remarks today will be limited to our second quarter financial highlights. All figures will be quoted in RMB, unless otherwise stated. For further details including the corresponding U.S. dollar amount, we encourage you to refer to our earnings press release. Total revenues in the second quarter were RMB 25.7 billion, down 15.1% year-over-year and up 11.7% quarter-over-quarter. This included RMB 24.1 billion from vehicle sales down 15.7% year-over-year and up 11.8% quarter-over-quarter. The year-over-year decrease was mainly driven by reduced vehicle delivery and a lower average selling price due to different product mix. The sequential increase was mainly attributable to a higher average selling price due to different product mix and increased vehicle delivery. Cost of sales in the second quarter was RMB 22.8 billion, down 5.6%. And year-over-year and up 7.8% quarter-over-quarter. Gross profit in the second quarter was RMB 2.8 billion, from 53.3% year-over-year and up 56.9% quarter-on-quarter. Vehicle margin in the second quarter was 9.4%, versus 19.4% in the same period last year and 6.1% in the prior quarter. The year-over-year and sequential changes were mainly due to different product mix. Gross margin in the second quarter was 11% versus 20.1% in the same period last year and 7.9% in the prior quarter. Operating expenses in the second quarter was RMB 5.1 billion, down 2% year-over-year and up 6.9% quarter-over-quarter. R&D expenses in the second quarter were RMB 2.8 billion, down 1.2% year-on-year and up 2% quarter-over-quarter. As G&A expenses in the second quarter were RMB 2.3 billion, down 16.2% year-over-year, mainly on lower on volume compensation and up 11.2% quarter-over-quarter, mainly on higher marketing and promotion spending. Loss from operations in the second quarter was RMB 2.3 billion versus RMB 827 million income from operations in the same period last year and $3 billion loss from operations in the prior quarter. Operating margin in the second quarter was negative 9% versus 2.7% in the same period last year, a negative 13% in the prior quarter. Net loss in the second quarter was RMB 1.7 billion versus RMB 1.1 billion net income in the same period last year and RMB 2.3 billion net loss in the prior quarter. Diluted net loss per ADS attributable to ordinary shareholders was RMB 1.69 in the second quarter, vs diluted net earnings of $1.03 in the same period last year and diluted net loss of $2.26 in the prior quarter. Now turning to our cash flow and balance sheet. Net cash provided by operating activities in the second quarter was RMB 15 million versus $3 billion used in the same period last year. and $6.1 billion in the prior quarter. Free cash flow was negative RMB 1.3 billion in the second quarter versus negative RMB 3.8 billion in the same period last year and negative RMB 7.4 billion in the prior quarter. Our quarter end cash position remained robust at RMB 87.5 billion, this solid cash position give us the flexibility to invest in product and technology innovation while also returning value to our shareholders through share repurchase. To date, we have repurchased a total of 91.7 million Class A ordinary shares, including 23.7 million ADS for a total consideration of about USD 631.5 million. Now for our business outlook. For the third quarter of 2026, the company expects to deliver it to be between 95,000 and 100,000 vehicles. and quarterly total revenue between RMB 26.6 billion in 2018. This business outlook reflects the company's current and preliminary view on business situation and market condition, 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.

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

[Interpreted]. I have 2 questions. The first question is Power Series. How is the model year update for the Li-L Series now completed? Could the management provide an update on its market performance so far since launch? That's my first question.

[Interpreted]. This year, we have completed the full refresh of the L Series from L9, L8, L6 have all transitioned to the latest platform. which includes the MCM100 chip, 5s range extension and other core technologies. And on latest models, we also carry our latest fully drive by wire chassis -- with these, we have completed coverage of the RMB 20,000 to RMB 500,000 range extended SUV market. Since we started delivery, we have seen a few trends. First of all, our high-end models have exceeded users and our expectations. Since launch the L9 limit account -- delivered version of the online account for over 85% of all sales. Many users willing to pay for this fully drive by wire chassis as well as high-end ADAS systems as well as other core technologies. This also solidified our leadership in the RMB 400,000, 500,000 home family SUV market. And since launch of L8, Ultra version has been a key sales driver and the conversion ratios in our store fronts have been performing very well. Secondly, the new generation L6 has successfully retained the user base from the previous generation with the previous generation laying a very good foundation by delivering almost 400,000 units. And the new generation have addressed key user feedback such as EV range, charging speed at intelligent platforms and also completed the offering with 20 ground-based set in the front row and the 29-inch panoramic screen, which also enhanced user experience. So since launch, we have seen very good reception on L6, and we're hopeful that there will be a 10,000 unit per month demand level steadily going forward. So this is a core pillar for our sales of the 200,000 to 300,000 market. In the meantime, we have honestly seen some temporary disruptions caused by the model refresh cycle, including clear old inventory ramping up new models and sales policy transition to have all created short-term operational headwinds. We're currently working very hard to optimize our processes and address these challenges. Going forward, we will focus on 2 facts. The first is to further enhance product value through OTAs. The all new L Series have a very robust and industry-leading hardware as the basis. So moving forward, we'll continue to unlock these hardware capabilities and AI features through OTA updates. Secondly, we will continue to build out our 5C supercharging network, increasing both density and coverage. As of the end of July, we have already 4,141 charging stations in operations and over 22,800 charging stores. We have now a 9x9 grid covering 18 national level highways and covering more than 300 cities. So -- our in-house charging network as well as 5 C charging capability have become a prerecorded for many of our users in their car purchase decisions. So with the L Series refresh complete, it is now -- will now complement our I-Series, staff to jointly drive overall business growth. Currently, a each account for half of our total sales, and we expect that share to rise further as we launch more of that models later this year. Thank you.

[Interpreted] My second question is Bamega. Following today's release of the preview video for the new Le mega, -- could you share the key highlights of this refresh and your sales expectations?

[Interpreted] As many of you have noted, we have today officially released the first batch of teaser information on our new generation mega -- this new generation is really based on user feedback, real user feedback from the previous generation mega and to address the important feedback and product shortcomings of the previous generation. And they mainly fall into 3 categories. The first is improvements in chassis and handle experience. Many view NPVs at very large cumbersome in cities. So the new generation mega will have -- will be equipped with rail wheel steering drive by wire system as well as active anti-roll bars, which will greatly reduce the turning radius and reduce reduced body roll in cornering and also make the car more flexible and agile at cities. And second is upgrade to the intelligent platform. We improved the entire as driving system with our in-house mark and 100 chips. We've also completed the lateral and rare sensors to improve city and OA and handling complex intersections and auto parking. On the cabin side but also be upgrading to the latest Qualcomm chips to bring better interactive and entertainment experience. And thirdly, it's improvements in the cabin and details to further drive the positioning as a family on TV. We've made significant upgrades. But second, that's third row, including the interior atmosphere interactions to better serve the needs of large families. Mega Bertearly positioned as the flagship SUV over RMB 500,000. So this new generation has really addressed user feedback and have completely revamped the product and improve the product. Of the sales performance will depend on many things, including sales conversion, including product ramp-up as well as changes in the market, but we will make sure to make sure to deliver -- to focus on delivery, store experience as well as use our operations, and we'll keep updating everyone on the sales performance as we launch the product.

Your next question comes from Paul Gong with UBS..

[Interpreted]. So my first question is regarding the impact of commodity cost inflation. How much can you quantify in terms of the impact in Q2 and moving towards Q3? And what would be your strategy to counter for such cost inflation challenge and the margin pressure.

[Interpreted]. This year, we've seen cyclical fluctuations in upstream raw materials and core components, which has created temporary cost pressures for both the industry and our company, which has been further impacted our gross margin. To look at this in more detail on the AI side, because of the development in the AI sector, has business driven demand for chips and PCBs pushing prices up. On the memory side, membership prices have also risen, but with our early volume commitments and long-term procurement agreements, the price impact on us is less than the industry average. And on the battery front, lithium carbonate prices also experienced cyclical fluctuations this year. And to navigate the cyclical cost fluctuations, we're taking a two-pronged approach. On the one hand, we're continuously driving cost reductions through more efficient operations. And on the other hand, we're leveraging our full stack in-house technology and proprietary supply chain to build the long-term structural cost advantages. So specifically, first, on the on the electric drive train front, we will continue to be committed to owning and driving the R&D and supply chain of the 3 key electric systems to solidify our dual mode in technology and cost. On the electric drive side, we have achieved inhale development and manufacturing of motors, controllers and silicon carbide chip modules, which ensures our control over the critical components. By leveraging our integrated architecture, we're continuously optimizing energy consumption and iterating on our technological solutions which has steadily amortized the hardware cost per vehicle. And in terms of battery system, we developed in tandem and deeply ingrate our battery packs with the overall vehicle architecture, which allows us to achieve the best possible balance between energy consumption, thermal management, safety and packaging efficiency, which further develops -- delivers an exceptional user experience while maintaining strict cost dental. We have established the in-house R&D capabilities in core areas, which includes cell pack, thermal management and BMS algorithms. We're accelerating the deployment of our proprietary battery systems across a broader range of models, establishing a strong competitive action, quality, performance and cost. And secondly, is in-house developed chips. We're building a strong competitive advantage across technology and cost again. The proprietary MCM100 chip is built on an innovative data flow structure, which would integrate hardware and software customization and delivers a structural advantage in compute performance and also cost. So overall, in the short term, we're trying to smooth out the temporary cost fluctuations and the pressures on our business through volume commitments and refined operations. And in the medium to long term, we're relying on scale deployment of our in-house technologies to stabilize the gross margin and support the company's high-quality sustainable growth.

[Interpreted] So if we're considering the raw material costs as well as the commoditized competition, what would be our latest gross margin target?

[Interpreted]. As we can observe this year, we have seen a very big increase in the cost of batteries and memberships, which is a common challenge for everyone in the industry. And because Liatos products are more intelligent, which makes them consume more memory and semiconductor, so we are more impacted. And apart from the impact on Bob, we are also experiencing amortization and depreciation on our tooling and production equipment. We were following more strict rules as well as the treatment to enter production items. As we launch new products this year and all the time, we already are seeing improvement in gross margin. But we must also face the increase in chip and PCB as well as other semiconductor, the cost increase. We must face this as well. We have made a decision not to pass these price increase over to our customers. But instead, we will -- we'll continue to leverage our integrated design and supply chain such as deepening our in-house R&D and deployment of our batteries to make our system more self-sufficient. And secondly, we will build a better cost control, cost management capabilities. And thirdly, on the sales front, we have through our sales partner program, we have benefited from lower sales costs, better operational mindset and an increase in efficiency. So all of these lower prices at low cost will be transformed to actual benefit that our users can receive. In the long term, my view is that the company a healthy margin for the company will be somewhere between 15% to 20% gross margin with the main driver here being the raw material cost.