Li Auto Inc. Q2 FY2024 Earnings Call

Hello, ladies and gentlemen. Thank you for standing by for Li Auto's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. 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, Kerry. Good evening and good morning, everyone. Welcome to Li Auto's second quarter 2024 earnings conference call. The company's financial and operating results were published in our press release earlier today and were posted on the company's IR website. On today's call, we will have our Chairman and CEO, Mr. Xiang Li; and our CFO, Mr. Johnny Tie Li, begin with prepared remarks. Our President, Mr. Donghui Ma; and Senior Vice President, Mr. James Liangjun Zou, 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 provisions of the US 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 US Securities and Exchange Commission and the Stock 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 Li Auto's earnings press release and this conference call include discussions of unaudited US 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 US GAAP measures. Our CEO will start his remarks in Chinese. There will be English translation after he finishes all his remarks. With that, I will now turn the call over to our CEO, Mr. Xiang Li. Please go ahead.

The NEV penetration rate in China in July was approaching 50%, indicating a higher adoption of smart electric vehicles compared to ICE vehicles. As consumers increasingly prefer leading brands with strong sales and substantial user bases, we anticipate the NEV market will continue to concentrate around top brands. In a complex and rapidly changing environment, we achieved strong sales performance in the second quarter by focusing on user value and operational efficiency. We delivered over 108,000 vehicles in the second quarter, a 25.5% increase year-over-year. In the NEV market priced at RMB200,000 and above, our market share rose from 13.6% in Q1 to 14.4% in Q2, leading among domestic auto brands. Since June, we have been the top-selling brand in the RMB200,000 and higher SUV market in China across both NEV and ICE vehicles. Performance by model shows that all Li Auto models lead their respective market segments. In Q2, Li L7 and Li L8 secured the top two positions in sales in the RMB300,000 and over large SUV NEV market, while Li L9 remained the top-selling full-size SUV. Additionally, Li L6's production and delivery have ramped up since its launch in April, with monthly sales consistently exceeding 20,000 units since June. Li L6 ranked second in sales in the RMB200,000 and higher passenger vehicle market, just behind the Tesla Model Y. Recently, we achieved several delivery milestones. On June 21st, our cumulative deliveries surpassed 800,000 vehicles, making us the first emerging new energy auto brand in China to reach this milestone. In July, we set a new monthly delivery record of 51,000 units. By August 21st, our cumulative deliveries exceeded 900,000 units, a significant achievement for Chinese premium auto brands. I want to thank every member of Li Auto for their hard work and express my gratitude to all our users for their recognition and support. In Q2 2024, our total revenues were RMB31.7 billion, marking a 10.6% year-over-year growth, while we maintained a healthy gross margin of 19.5%. We are confident that our operational performance will improve in the second half of this year as Li L6 completes its production ramp-up and our cost-reduction and efficiency improvement efforts take effect. Vehicle delivery is just the start of a typical user journey. Through regular OTAs, we continuously add features and enhance user experience, allowing Li Auto vehicles to evolve alongside our users. In July, we released OTA 6.0 and 6.1 to all MEGA and L series users, implementing significant upgrades across autonomous driving, smart space, and smart electric drive features. I want to emphasize the substantial progress we've made in autonomous driving. In July, we introduced our HD mapless NOA to over 240,000 Li AD Max users. This version operates without prior information, enabling it to function on almost all roads in China. The reception of our HD mapless NOA has been excellent, reflected in our growing order intake. Since its introduction to beta users in May, the proportion of NOA test drives has nearly doubled. Following the launch of OTA 6.0, the daily user engagement rate of city NOA has grown almost eight-fold, and the average NOA mileage per user has tripled. Currently, over 99% of users regularly utilize our autonomous driving features, with cumulative NOA mileage exceeding 1.11 billion kilometers. Additionally, user satisfaction and the AD Max take rate are steadily increasing. Our autonomous driving system is continuously evolving. During our summer launch event on July 5, we revealed the industry's first dual-system autonomous driving solution, integrating an end-to-end model with a vision language model. By the end of July, we had rolled out this new solution to about 1,000 data users. The E2E and VLM models enhanced the complex resolution and reasoning abilities of our autonomous driving system. The ONE model strategy allows for rapid iterations, with our early beta version being updated three to four times weekly and achieving a daily user engagement rate exceeding 70%. Moreover, we've developed in-house reconstructed and generative world models for training and validation, leading to more efficient inference, quicker model iterations, human-like route planning, and an improved overall user experience. To accommodate our expanding product lineup and increased vehicle ownership, we are enhancing and expanding our sales and service network. In Q2, we upgraded existing mall stores and replaced some underperforming locations with new sales centers in major auto parks. The share of sales centers has reached 31%, with the total number of showroom display spots up over 13% compared to last quarter. As of July 31, 2024, we operated 487 retail stores across 146 cities and 411 service centers, including Li-authorized body and paint shops in 220 cities in China. Concerning our charging network, as of August 27, we had 733 supercharging stations with 3,428 charging stalls. In addition to the ongoing expansion of our supercharging stations, we partnered with several premium entities to launch our first group of LI SELECTION supercharging stations in July. We will keep expanding the coverage and density of our charging network to improve the charging experience for our users, enabling more families to consider Li Auto products. Looking ahead to Q3 2024, we anticipate vehicle deliveries to range from 145,000 to 155,000 units. As a growth-oriented company, we are committed to delivering products and services that exceed our users' expectations while enhancing our brand in the new energy and premium vehicle market. In the first half of 2025, we expect to introduce our battery-electric SUVs to cater to a wider range of family users. Now, I will hand it over to our CFO, Johnny, to discuss our financial performance.

Thank you, Li Xiang. Hello, everyone. I will now walk you through some of our 2024 second quarter financials. Due to time constraints, I will address financial highlights here and encourage you to refer to our earnings press release for further details. Total revenues in the second quarter were RMB31.7 billion or $4.4 billion, up 10.6% year-over-year and 23.6% quarter-over-quarter. This included RMB30.3 billion or $4.2 billion from vehicle sales, up 8.4% year-over-year and 25% quarter-over-quarter. The year-over-year increase was mainly attributable to the increase in vehicle deliveries, partially offset by the lower average selling price, mainly due to different product mix and pricing strategy changes. The sequential increase was mainly due to the increase in vehicle delivery, partially offset by the lower average selling price as a result of different product mix. Cost of sales in the second quarter was RMB25.5 billion or $3.5 billion, up 13.8% year-over-year and 25.3% quarter-over-quarter. Gross profit in the second quarter was RMB6.2 billion or $850 million, down 0.9% year-over-year and up 16.9% quarter-over-quarter. Vehicle margin in the second quarter was 18.7% versus 21% in the same period last year and 19.3% in the prior quarter. The year-over-year decrease was mainly due to different product mix and pricing strategy changes, partially offset by cost reduction. The sequential decrease was mainly due to different product mix. Gross margin in the second quarter was 19.5% versus 21.8% in the same period last year and 20.6% in the prior quarter. Operating expenses in the second quarter were RMB5.7 billion or $785.6 million, up 23.9% year-over-year and down 2.7% quarter-over-quarter. R&D expenses in the second quarter were RMB3 billion or $416.6 million, up 24.8% year-over-year and down 0.7% quarter-over-quarter. The year-over-year increase was primarily due to increased expenses to support the expanding product portfolios and technologies as well as increased employee compensation as a result of the growth in the number of staff on a year-over-year basis. The sequential decrease was primarily due to decreased employee compensation, offset by increased expenses to support expanding product portfolios and technologies. SG&A expenses in the second quarter were RMB2.8 billion or $387.4 million, up 21.9% year-over-year and down 5.5% quarter-over-quarter. The year-over-year increase was primarily due to increased employee compensation as a result of the growth in the number of staff as well as increased rental and other expenses associated with the expansion of our sales and servicing network. The sequential decrease was mainly due to decreased marketing and promotion activities and employee compensation on a quarter-over-quarter basis. Income from operations in the second quarter was RMB468 million or $64.4 million versus income from operations of RMB1.6 billion in the same period last year, a loss from operations of RMB584.9 million in the prior quarter. Operating margin in the second quarter was 1.5% versus 5.7% in the same period last year, and negative 2.3% in the prior quarter. Net income in the second quarter was RMB1.1 billion or $151.5 million, down 52.3% year-over-year and up 86.2% quarter-over-quarter. Diluted net earnings per share per ADS attributable to ordinary shareholders was RMB1.05 or $0.14 in the second quarter versus RMB2.18 in the same period last year and RMB0.56 in the prior quarter. And turning to our balance sheet and cash flow. Our cash position remained strong and stood at RMB80 – RMB97.3 billion or $13.4 billion as of June 30, 2024. Net cash used in operating activities in the second quarter was RMB429.4 million or $59.1 million versus net cash provided by operating activities of RMB11.1 billion in the same period last year and net cash used in operating activities of RMB3.3 billion in the prior quarter. Free cash flow was negative RMB1.9 billion or negative $254.9 million in the second quarter versus positive RMB9.6 billion in the same period last year and negative RMB5.1 billion in the prior quarter. And now for our business outlook, for the third quarter of 2024, the company expects the deliveries to be between 145,000 and 155,000 vehicles, representing a year-over-year increase of 38% to 47.5%. The company also expects third-quarter total revenues to be between RMB39.4 billion and RMB42.2 billion or $5.4 billion and $5.8 billion, representing a year-over-year increase of 13.7 billion to 21.6%. This business outlook reflects the company's current and preliminary view on its business situation and market conditions, 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. Thank you.

Your first question comes from Tim Hsiao with Morgan Stanley.

My first question is about autonomous driving. I understand that Li Auto is making significant investments in NTM autonomous technology and is expanding the team quickly. How does Li Auto assess the return and efficiency of this ambitious investment? What metrics should investors focus on to evaluate the results and progress in the commercialization of NTM autonomous driving technology? That's my first question. Thank you.

Since the beginning, our investment yield on autonomous driving has been quite high. We would like to focus on two key results regarding operating metrics. One is whether users are willing to use the technology, and the other is whether they are willing to pay for it. Metrics on the user front include the percentage of time and mileage used. Since we launched HD mapless NOA in July, user engagement has been steadily increasing, as shown by significant growth in both the daily active rate and mileage driven. On the market side, improvements in NOA have positively influenced the adoption rate. For potential users who visit our stores, the percentage of users taking NOA on test drives has more than doubled. Additionally, the take rate for NOA AD Max across all models is also on the rise, particularly for vehicles priced above RMB300,000, where the take rate has approached 70%. We believe that the VLM and E2E models signify the start of creating entry barriers in R&D for autonomous driving, as we consider this generation to be truly AI-powered. AI relies heavily on vast amounts of data and computational power, so only companies capable of investing in this data and training, along with a sufficiently large user or vehicle base, can scale effectively in autonomous driving. This advancement in autonomous driving will contribute to increased overall sales and a higher number of AD Max equipped vehicles, which in turn will allow us to invest even more in autonomous driving. This creates a very positive snowball effect.

My second question is about the competition. Could the management comment on the ongoing competition between Li Auto and Huawei? How do we expect the competitive landscape to evolve into the second half as both brands, Li Auto and AITO, strive for the top spot in the family SUV market with advanced smart driving features? That's my second question. Thank you.

Firstly, HIMA is our largest competitor in the market, and we believe that we will continue to coexist with HIMA in a very healthy manner over the long term. Our approach has always been to continually learn from Huawei, particularly regarding its R&D system and management methodologies. For us as a startup, having a model like that to learn from is extremely important.

Your next question comes from Ben Wang with Deutsche Bank.

I have two questions. First, can you confirm if you are maintaining the full-year gross margin guidance of 20%? In particular, you mentioned that the AD Max version proportion has increased to over 70% for the third quarter. Will this enhance the product mix and bring the vehicle gross margin back up to 20%? My second question pertains to your pure EV products, which have been delayed by almost six months. Have there been any changes made to the design, particularly the exterior? Some style features appear unchanged, while many customers seem to prefer modifications to distinguish their vehicles from the MEGA design. Could you provide some insights on this? Thank you.

Hello, Ben, this is Johnny. I will take the first question. I think last quarter we guided vehicle margin of around 18%. Actually, we delivered 18.7%, which reflects the efforts of the company as well as the product mix and final delivery. For the third quarter, we believe our vehicle margin will be a bit better, exceeding 19%, and our total gross margin will be above 20% for that quarter. Thank you.

Li MEGA has validated our capabilities in the 800 volt high-voltage drivetrain and our research and development efforts in this area, including drivetrain efficiency and the overall charging experience. We have also established ourselves as a Tier 1 player in autonomous driving as we enhance our autonomous features. Additionally, we have a strong historical competitiveness in smart cockpit technology. For our premier SUVs, we need to address two key issues: the overall design of the product and ensuring we have more than 200,000 charging stations available by the time we begin product deliveries. Overall, we are confident in the competitiveness of our top electric SUVs, and our objective is to become a Tier 1 player in the premium battery electric vehicle market within the next two years.

The second question is about your pure electric vehicle products for next year. Given the adjustment in the launch schedule, will you be implementing newer technologies, and what preparations have you made for the supply chain in terms of capacity?

Hi, Tina. This is James. I will take your first question. New models are only one of the reasons contributing to sales growth. And from my point of view, efficient sales operations is another way to promote sales, and that's what we are doing now. And looking forward, we will continue to optimize the deployment of our stores while strengthening our capability to gain online needs. This will open the door to higher possibilities of sales growth while enhancing the efficiency of sales operations. In addition, our recently increased publicity of autonomous driving also facilitated sales growth, in particular, the sales of AD Max models. As the results show, our market share in the RMB200,000 and higher NEV market increased to 14.4% in the second quarter of 2024 from 13.6% in the first quarter. We aim to grow our market share in this segment further to 16% in the last quarter this year.

I believe what James just mentioned about achieving a 16% market share in the NEV market above RMB200,000 is significant. Assuming a strong passenger vehicle market in the second half of the year, we are confident that our total deliveries will exceed 0.5 million vehicles for the full year. Regarding our capital expenditure, we have adjusted our pace and initially estimated it to be around $2 billion at the beginning of this year. Currently, we expect the CapEx to be between $1.1 billion and $1.2 billion. For free cash flow, both June and July showed positive results. With the optimization of our CapEx investments and improvements in operational efficiency, we are optimistic that our free cash flow will return to positive in the third quarter.

Your next question comes from Xu Yingbo with CITIC Securities.

I have two questions. The first is regarding our future plans for end-to-end autonomous driving. The second question is about the trend of robotaxis. Thank you.

First of all, regarding the end-to-end VLM model, the iteration rate and performance have surpassed our expectations. Since we initiated our 1,000 early bird testing program in July, the model has completed nine iterations in less than a month, averaging a new iteration every 34 days. The training data has increased from 1 million clips at the beginning to 2.3 million clips now, and the model's capabilities have also improved over time. Many of our early bird testing users have shared videos of their end-to-end driving on social media, demonstrating impressive performance on city roads. The rapid iteration of the model is made possible by our efficient and automated testing capabilities, which rely on world models to create a simulation testing system. This system, leveraging user feedback and real-world scenario reconstruction along with generative technologies, has established a library of mistakes and testing scenarios for our models to ensure thorough testing and training. This program evaluates the models based on safety, comfort, and various other factors. We believe there has been a significant shift in autonomous driving R&D from focusing on feature iteration to model capability iteration. The speed of iteration is heavily influenced by the availability of high-quality, large datasets and computing power, as well as our automated simulation testing program. For our end-to-end VLM system, we plan to launch a larger scale testing program with approximately 10,000 users starting in September. Regarding robotaxi, we believe that as we achieve Level 4 autonomous driving, the demand for ride-hailing and taxi services will actually decrease. However, it will take more time to monitor the market and understand how it evolves in the future.

Your next question comes from Paul Gong with UBS.

We have observed weak consumer sentiment in China recently, but auto sales continue to increase in terms of volume. Given the government stimulus and certain price increases by high-end German brands, have you noticed any improvements in the competitive landscape in the luxury market?

Okay, Paul, this is James. I will take your question. And I believe our recent robust sales performance has been largely attributable to our Li series competitive advantage from its product strength. And our adaptability and ability to make swift adjustments in responding to the market. Apart from the traditional sales channels in the second quarter, we ramped up our investment in online marketing resources such as Douyin and other online platforms, achieving significant results as it brought our process substantial increases in sales leads. Additionally, we are revolutionizing our sales system by giving more empowerment to the regional level. This system allows each region to adopt a regional sales strategy in a flexible approach on the condition of accomplishing profit targets given by the company. This approach significantly enhances the sales potential to reach to each regional. Last but not least, since June 2024, the NEV penetration rate in the RMB200,000 and higher market has reached over 50%, which is a significant milestone. After this, I think the premium NEV industry will continue to consolidate, and I believe the auto will be one of the main beneficiaries during this process. Thank you.

My second question is about the preparation work for the BEV models next year. Given the adjustment in the launch timeline, will you be incorporating more advanced technologies, and how well prepared is the supply chain in terms of capacity?

Our plan is still to launch multiple 800-volt high voltage pure electric vehicles next year, 2025. In terms of R&D, everything is on track. So far, we have completed multiple rounds of low-volume trial production of prototype vehicles. According to our testing, including high-temperature and high-humidity durability testing, everything is progressing as planned. Regarding supply-chain readiness, everything is also on track. The planned production capacity is sufficient to meet sales targets. The factories for manufacturing these vehicles have completed production, and the four major lines of stamping, welding, painting, and assembly are currently being tested and installed. We are planning to develop key components in-house for our BEV electric vehicles, and these have undergone performance testing. External suppliers and our partners have also been developing and building out their production capacity as scheduled. Overall, we are very confident in delivering our BEV models next year as planned.

Your next question comes from Yuqian Ding with HSBC.

I have two questions. First, last season management talked about reallocating the model display in the channel to maximize the product mix and increase exposure to the high-end model like L8. How has that progressed compared to expectations? The second question is regarding the significant restructuring and adjustments in the first half. Could you update us on the full year R&D expense guidance and highlight any changes? Thank you.

Okay, Yuqian. This is James. I will take your first question. As we open more stores in auto parks, the number of display spots for L8 has gradually recovered. We also developed new online sales channels including Douyin to ensure sufficient sales leads for L8. So now L8 sales have been steadily improving since April. Currently, its monthly deliveries have recovered to the range of 6,000 to 7,000 units.

Hi, this is Johnny. For R&D, we expect the full year GAAP R&D to be below RMB12 billion. Thank you.

Your next question comes from Jin Zhong with CICC.

My first question is about the distribution network. After reviewing the first half of 2024, we have made significant improvements. As Mr. Li Xiang mentioned, we have increased the proportion of central stores. Can you provide more details on the reasoning behind these changes regarding the extension of the distribution network and our entry into lower-tier cities? Additionally, what further preparations should we undertake for the launch of EV models next year?

Okay, Jin Zhong, this is James. I will take your question. So first of all, we are speaking to our direct sales model, and we are aiming to display all models in our showrooms. And that's what we are doing now. And our retail stores in all auto parks have larger floor spaces and have the capacity to display 9 to 11 vehicles. And we will display all of our models in these stores. Since the start of this year, we have been making many adjustments towards our sales channels. We are gradually replacing low-performing stores in the shopping malls with retail stores in leading auto parks. We will continue to focus on the best auto parks in the top 150 cities and open large high-quality stores there. In terms of our achievements so far, the proportion of our stores in auto parks has increased from 24% last year to 31% at the end of June 2024. We plan to further increase this proportion to close to 50% by the end of this year. And regarding your question for next year on the BEV, when we launch our BEV models, we will continue to increase the proportion of the car park stores next year, so to facilitate our display spots. The showroom capacity per store also improved, alongside the increased proportion of stores in auto parks, the number of showroom vehicles per store has increased from 4.6 units at the end of last year to 5.1 units at the end of June 2024. Our total number of showroom display ports has increased from 2,642 at the end of last year to 2,919 at the end of June 2024. We plan to further increase this number to over 3,600 by the end of this year. Thank you.

As we are reaching the end of our conference call now, I'd like to turn the call back over to the company for closing remarks. Ms. Janet Chang, please go ahead.

Thank you once again for joining us today. If you have further questions, please feel free to contact Li Auto's Investor Relations team through the contact information provided on our IR website. This concludes this conference call. You may now disconnect your line. Thank you.