Category: Earnings Call

Li Auto aims to reach 30,000 units delivered in a single month in June, the company's management said.  |  Li Auto US | Li Auto HK

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Li Auto (NASDAQ: LI) reported first-quarter earnings that beat expectations on May 10, and held a conference call with analysts afterward.

The following is the text of the call, as compiled and translated by CnEVPost.

Management statement

The Chinese new energy vehicle (NEV) market continued to grow at a high rate in the first quarter, but increased competition triggered a wait-and-see mood among consumers.

Nevertheless, we believe the real strongest players will be born out of the competition. Li Auto achieved the best delivery result in a single quarter in the first quarter.

Continued customer acceptance of the Li L8 and Li L9, strong order intake for Li Auto, and rapid capacity climbing led to 52,584 Li Auto deliveries, up 65.8 percent year-on-year.

This achievement puts us among the top three NEV brands selling above RMB 200,000 in China, with a market share of 11 percent, far ahead of other new car-making brands.

This is another testament to our ability to design and build hot-selling models and the strength of our supply chain, manufacturing, sales and service network.

We will continue to do all we can to grow quickly and expand our leadership position with our strengths.

In April, our deliveries reached another record high of 25,681 units, and cumulative deliveries surpassed 335,000 units, with the Li L7, L8, and L9 all achieving bright performances in their segments.

According to insurance registrations, the Li L7 became the top mid to large-size SUV sales in China after deliveries began in early March.

The L7 exceeded 10,000 units in its first full month of delivery in April, becoming our fourth model to exceed 10,000 deliveries in a single month.

Li L8 maintained its sales leadership in the 6-seater segment. In the full-size SUV market in China, the Li L9 has been the monthly sales leader in every month since it was delivered at the end of August last year.

Led by strong deliveries and thanks to our continuous pursuit of efficiency excellence, financial metrics improved on all fronts.

Li Auto's total revenue for the first quarter reached RMB 18.79 billion, up 96.5 percent year-on-year, and achieved net operating profit and net income.

At the same time, our free cash flow reached another record high of RMB 6.7 billion.

Healthy profitability levels and cash flow will provide strong support for the development of our product platforms and systems, laying a solid foundation for our long-term growth.

The Li L7 and Li L8 opened for delivery in April, further expanding our product pricing and household customer reach.

In the second quarter, Li Auto's market share in the NEV market priced at RMB 200,000 and above will further increase, with deliveries expected to reach 76,000-81,000 units.

Product delivery is only the starting point, and we continue to enhance our product experience through OTA in order to continuously improve the car experience for our family customers.

So far this year, we have completed two major OTA upgrades for the L series, version 4.3 and 4.4, with over 100 updated features and experiences. Li ONE's OTA version 3.3 will also be officially pushed out in mid-2023.

For family users, safety always comes first.

Every model of Li Auto is developed with the strictest standards and undergoes comprehensive safety testing.

In April 2023, the China Insurance Auto Safety Index released its latest batch of reviews, and Li L8 received the highest scores of G for in-vehicle passenger safety, pedestrian safety and vehicle assistance safety.

We will continue to strengthen our commercial capabilities, including upgrading and expanding our integrated online and offline direct sales and service network to support the development of multiple models and provide more convenient and efficient services to our customers.

We are also exporting our brand vision and enhancing our brand influence.

In terms of our retail store network, with the launch of multiple models, we are continuing to add new retail centers and rapidly working on store upgrades, replacing stores that used to be small in size with larger stores that support multiple models.

Since the launch of Li L9 in late June last year, we have optimized a total of nearly 50 existing stores and added more than 50 new stores through location changes and space expansions.

As of April 30, 2023, Li Auto has 300 retail centers in China, covering 123 cities, and 318 after-sales repair centers and authorized sheet metal spray centers, covering 222 cities.

While accelerating our business development, we always integrate sustainable development and deepen our products and services into our corporate governance.

On April 21, we released our 2022 ESG report, which details our continued exploration and progress in the ESG space.

For the second year in a row, we have been awarded double A rating by MSCI ESG. In the future, we will continue to improve our ESE management system, promote the harmonious development of our brand with the environment and society, and create value for the benefit of our users, employees, partners and other parties.

For the next stage of development, Li Auto will advance according to the dual energy strategy released on April 18.

On the one hand, we will enter the smart driving 3.0 era represented by urban NOA. On the other hand, we will open a new chapter of parallel development of extended-range and high-voltage pure electric power.

In terms of intelligence, as of now, we have provided highway NOA function to over 280,000 households, with a cumulative mileage of over 140 million kilometers.

This quarter we will extend smart driving from highway scenarios to city scenarios, pushing the city NOA function of Li Auto AD Max 3.0 to internal test users, and aiming to push it to users in more than 100 cities by the end of 2023.

Li Auto will be the biggest beneficiary of the transformer big model for smart driving because we have the largest number of training samples in China.

In terms of extended range electric vehicle (EREV) and high voltage battery electric vehicle (BEV) models, we will stick to both routes in parallel.

We will optimize the efficiency of the range extender so that users can use electricity in the city and generate power from the range extender on long-distance trips, providing a better experience than fuel vehicles.

We will make pure electric technology better, so that the travel radius of families is not only limited to the city, to achieve a battery travel replenishment experience comparable to refueling.

By 2025, our product matrix will include one super flagship model, five EREVs and five BEVs, further broadening our user base and developing incremental markets.

This year we will invest heavily in the construction of our supercharger network, with our 4C supercharger piles capable of 480 kW peak power, enabling our pure electric models to get 400 km range in 10 minutes.

We plan to build 300 charging stations along highways by the end of 2023, covering the four economic zones of Beijing-Tianjin-Hebei, Yangtze River Delta, Guangdong-Hong Kong-Macao Greater Bay Area and Chengdu-Chongqing.

By the end of 2025, we will increase the number of charging stations to 3,000, covering 90 percent of the country's highway mileage and major Tier 1, Tier 2 and Tier 3 cities.

In the future, we will continue to strengthen our refined operational capabilities, build organizational capacity to support larger scale, and maintain healthy sales growth.

As we continue to strengthen our smart driving and smart cockpit capabilities and execute our dual product strategy of EREVs and BEVs, we believe Li Auto's leadership position in the NEV market will continue to grow and we believe we will bring more and better choices to a wider range of customers.

Analyst Q&A

Q1: What do you think the gross margin trend of Li Auto in the next few quarters?

Li Auto's volume size increased in the second quarter, with lower parts and battery costs, but at the same time, the cheaper Li L7 and Air versions continue to contribute to sales. What is the combined impact of this?

Do you expect gross margins to rebound to 20 percent or more in the next few quarters?

A: We are confident that gross margins will improve.

In the first quarter, Li One contributed 1.6 percent to gross profit, and in the first half of the year, Li One will be fully sold out.

With the new Li L7 model and the growth in deliveries of the Air version models, we still have room for gross margin growth and maintain our full-year gross margin guidance at 20 percent.

Q2: Li Auto plans to open up the city navigation assisted driving feature during the year, especially for early bird users for internal testing. Could you please share the initial size of the test users and the exact timeline for pushing it out to all car owners.

Based on your analysis of users, how will Li Auto's target household users' habits for city assisted driving differ from those of the average car owner? How much of an impact will this have on consumer purchase decisions, as well as the home user experience?

A: The city NOA testing is progressing well, both system level testing and road testing.

We will start testing for early bird users in June, and the rules are currently being developed. We will first select users based on how often they use the highway NOA function and their driving habits in the early days.

At the same time, we also hope that these users will be willing to use the smart driving function and that early bird users will have a higher tolerance and understanding of this set of functions and system.

According to the set target, we will push the city NOA function in 100 cities in China by the end of this year, and the pushing order and logic are related to the local vehicle ownership.

Since the whole technical architecture does not rely on high-precision maps, theoretically, the city NOA assisted driving function can be used anywhere there is a navigation map.

If a city has high ownership of the Li L9 and Max versions and more vehicle miles driven, it may get the function earlier.

Coverage of complex intersections is also very important in the evaluation process. We will gradually advance the opening of the feature in 100 cities based on the training of complex intersections.

Li Auto targets home users, who require more safety for smart driving, want a driving experience more like a human driver, and need more comfort.

During the testing process, we will do more like shadow testing, real car testing, and testing for extreme working conditions, so that users can use the city NOA function with confidence under safe and reliable conditions.

Q3: When do you expect monthly sales to reach 30,000 units? Will the release of the pure electric flagship model, which was planned for this year, be delayed until next year?

A: Our deliveries are expected to grow gradually in the second quarter, and we aim to reach our goal of 30,000 units delivered in a single month in June.

Our BEV flagship will be launched in the fourth quarter of this year, and show cars and test drives will be available soon after the launch, similar to the pace of the Li L9, Li L8 and Li L7.

Q4: Li Auto's R&D expenses in the first quarter were lower than last year's fourth quarter, and sales and administration expenses did not increase compared to last year's fourth quarter.

In the next few quarters, will you maintain the same R&D budget or tend to be more frugal?

Can you update your guidance on sales and administration expenses?

A: Our full-year R&D expense guidance is maintained at RMB 10-12 billion, and SG&A expense ratio will continue to be optimized.

Q5: During the Shanghai auto show, we saw another car company from northern China launch a model about the same size as the Li L8, but priced lower than the Li L8.

How do you see more car companies launching similar models and how will this affect Li Auto's existing models?

A: In terms of our actual orders, the Li L8 orders are continuing to grow.

And more and more brands are competing, which can bring a lot of benefits for relatively leading products like ours.

Many users are looking at the various marketing, which in turn has increased the number of orders for the Li L8, which is actually very beneficial for us.

In terms of the specific model, the one you mentioned is not in the top 20 in terms of competitor sales, and the Li L8's biggest competitor is still the Tesla Model Y.

Q6: Based on Li Auto's current size and market share, are you currently looking more at profitability and cash flow, or more at market share and sales?

In this competitive environment, is there a chance for the entire NEV industry to see improvement this year?

How do you see your pricing as battery prices drop? Will you consider offering discounts in exchange for greater market share?

A: For us, market share is the most important thing right now, so our core goal in Q2 is to increase our share of the market priced above RMB 200,000 from 11 percent in Q1 to 13 percent.

We are not considering price reductions at this time because we have set each of our models at the most competitive price point in their class, size and price range when we do detailed long term planning and pricing.

Q7: When Li Auto announced its dual energy strategy in April, it mentioned that the goal is to have a product matrix consisting of one super flagship model, five EREVs and five BEVs by 2025.

Will your future capital expenditure related to BEVs be mainly on charging stations: what will be the approximate capital expenditure in the next few years?

A: Our capital expenditure in the past 3 years is at RMB 10 billion, and in the 3 years after starting from this year, including the construction of charging stations, it is expected to be at RMB 18 billion.

Q8: Will Li Auto's pure electric MPV be offered in a version with extended-range technology? At present, among large MPVs, BYD Denza D9 has the best sales, of which 70 percent of sales are for D9 PHEV.

What is your product strategy in the RMB 200,000 - 30,000 range? Is there a timeline for product launches?

How does Li Auto plan to differentiate and challenge the mid-size or compact models in the more intense but roomier market?

A: In order to create a high-voltage pure electric model, Li Auto has been working on research and development for a long time, and has done a lot of advance preparation in terms of supply chain qualification.

Li Auto's core objective is to make the high-voltage EVs priced close to the EREVs and to get similar gross margins.

Whether Li Auto's EREVs or BEVs, we have one core goal, which is to be able to replace traditional fuel vehicles on a large scale.

One of the two most important things involved here is the ability for users to use the vehicle without obstruction. That's why Li Auto is building supercharging piles along the highway on a large scale, so that the real user experience and safety and convenience can be comparable to driving a fuel car.

On the other hand, we can't pass on the cost to the consumers. Li Auto is trying to reduce the cost through effective R&D and supply chain layout, so that users can buy the most competitive products in the same class at a more suitable price.

Q9: Li Auto will launch more models. So, what are your plans for the sales and service network in the next 2 to 3 years, especially in the third and fourth tier cities?

A: Due to the increase of our models, we will upgrade our past stores that can only show 1-2 models.

In cities where we have a good market share, we will open a large number of open integrated stores, because the conversion rate and user test drive experience will be better in such stores.

We will cover almost all the fourth-tier cities in the future, and in those cities, the effective way is to open integrated stores in large-scale auto cities.

So our overall strategy and coverage will be similar to that of Mercedes-Benz, BMW and Audi, as these established brands have proven that such an approach works.

Q10: What is the trend of new orders for Li Auto since the Labor Day holiday, and how are sales of the Air version models going? What are your expectations for this version?

How are Li Auto's sales in cities outside of Tier 1 and Tier 2 cities? Are these smaller cities contributing more sales than before?

After reaching 30,000 deliveries in a single month, is there any room for the three models of Li Auto to further increase sales in the third and fourth quarters? Will higher deliveries be expected?

A: In the past, May was usually a slow month for car sales.

However, in May this year, both the number of orders and deliveries for Li Auto were significantly better than the performance in April.

With the availability of the Air version test cars, there was a significant increase in orders. The Air versions of the Li L7 and L8 are currently bringing in roughly 20 percent of incremental orders.

The current Li Auto sales growth is best in the new Tier 1 cities, which are the real main consumers of SUVs priced above RMB 300,000.

The overall distribution of Li Auto users is still relatively healthy.

In the long run, Tier 3 and Tier 4 cities are the core areas where Li Auto will focus on expanding to gain more market share in the future.

Q11: What are the main difficulties Li Auto will face when expanding to lower tier cities? How do you plan to deal with them?

A: Li Auto initiated an organizational process upgrade in the first quarter. The significant change is that we are now managing by province instead of by region.

In the fourth quarter of last year, the number of Li Auto stores did not increase much, but the output of single store, as well as the output of single person per product specialist, has increased significantly, and the conversion rate of leads and orders has also gained a very significant improvement.

As for how to expand in third and fourth tier cities, Li Auto will trust more in the judgment and ability from store personnel after the new process management upgrade, and they will manage according to what they think is the most effective way.

Q12: Does Li Auto have any plans for capacity expansion this year and next year? You faced some parts shortages last year, are there any bottlenecks in this area this year?

A: At present, Li Auto has two production lines in Changzhou, Jiangsu province, one of which is used to produce the Li L9 and Li L8, with a capacity of 20,000 to 25,000 cars per month in double shifts.

The other production line, which produces Li L7 and Li L8, is currently operating on a single-shift basis and has a capacity of 10,000 to 12,000 vehicles per month. The production capacity can be further increased later depending on the demand for deliveries.

The production of L8 can be balanced on these two lines.

As of now, these two production lines in Changzhou can meet the delivery demand this year.

The Beijing plant is designed to produce pure electric models, with an annual capacity of 100,000 units. In the future, we will optimize the production lines and production work based on the release of more models and demand.

Li Auto sees Q1 revenue beat expectations, net income up 252% from Q4

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