Li Auto Inc. Q1 FY2025 Earnings Call

Hello, ladies and gentlemen. Thank you for standing by for Li Auto's First Quarter 2025 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, Kelly. Good evening, and good morning, everyone. Welcome to Li Auto's first quarter 2025 earnings conference call. The company's financial and operating results were published in a press release earlier today and are 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, to begin with prepared remarks. Our President, Mr. Donghui Ma; and our Senior Vice President, Mr. James Liangjun Zou; and our CTO, Mr. Yan Xie, 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 US Private Securities Litigation Reform Act of 1995. Forward-looking statements may 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's 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 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 with the content of 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 all his remarks. With that, I will now turn the call over to our CEO, Mr. Xiang Li. Please go ahead.

Hi, everyone. This is Li Xiang, and thank you for joining today's conference call. In the first quarter of 2025, we delivered more than 92,000 vehicles, which is a 15.5% increase year-over-year, resulting in total revenues of RMB25.9 billion. We showed strong performance in the RMB200,000 and above NEV market in China, growing at twice the market rate according to insurance registration data from the China Automotive Technology and Research Center. As of April 2025, we have been the sales leader in this segment among Chinese auto brands for 14 consecutive months. Notably, we attained a 14.1% market share in April, further solidifying our leadership position. By the end of April, we have delivered over 1.26 million vehicles. As a leader in EREV, the Li L Series continues to provide user value through innovation and product updates, maintaining a competitive advantage despite competition. Recently, we introduced the new Li MEGA and updated the Li L Series. The refreshed Li AD Max models now feature NVIDIA's latest Thor-U chip, while Li AD Pro models have upgraded from Horizon Robotics Journey 5 to Journey 6M chips and include ATL LiDAR sensors co-developed with our partner. In addition to assisted driving upgrades, we've improved chassis control, exterior and interior design, and smart cockpit features across the new Li L Series. On April 23, we launched Li MEGA Home at the Shanghai Auto Show 2025, showcasing our understanding of multigenerational families’ mobility needs. With exceptional configurations for our flagship model, Li MEGA Home aligns with our mission to create a mobile home that brings happiness. Since the launch, Li MEGA Home has made up over 90% of Li MEGA orders, highlighting its strong value and appeal among users. Li MEGA currently has a solid order backlog with ongoing inflow. To accommodate increasing demand, we are boosting our production capacity to achieve 2,500 to 3,000 monthly deliveries by July. With the introduction of Li MEGA Home, the new Li MEGA Ultra, and the new Li L Series in May, we anticipate second-quarter deliveries to reach between 123,000 and 128,000 units. The success of Li MEGA Home enhances our confidence in becoming a strong contender in the premium BEV market, supported by a robust BEV pipeline. Preparations for our upcoming launches are proceeding well, with Li i8 and Li i6 scheduled for release in July and September, respectively. Test vehicles for Li i8 are undergoing road tests nationwide and have already covered over 9.5 million kilometers in preparation for mass production. An efficient and streamlined charging network is essential for the electric vehicle user experience. To support our BEV launch, we have established the largest urban highway supercharging network among all automakers in China, covering over 50,000 kilometers of highways as of the end of the first quarter. We currently operate 2,350 supercharging stations with over 12,800 charging stalls. Additionally, we have completed deploying a supercharging network along 20 long-distance tourist routes, including the G318 Sichuan-Tibet Highway. We will continue to accelerate the deployment of the supercharging network, aiming to install over 2,500 stations in June and reach 4,000 stations by year-end. We will strengthen our competitive edge over other automakers in the charging network, ensuring a seamless charging experience for our users. We continue to swiftly advance our ADAS technology. Our proprietary VLA Driver model, as our next-generation ADAS architecture, integrates spatial, language, and behavioral intelligence into a unified model, allowing ADAS to perceive, reason, and adapt dynamically to the environment. VLA Driver will redefine user experience and introduce innovative product formats, transforming vehicles into smart agents that can communicate with users, understand their intentions, and act as dedicated drivers. Our unique cloud-based world model creates realistic simulation environments that will facilitate the closed-loop reinforcement learning of VLA Driver at scale, driving ongoing improvements in efficiency and quality. We plan to roll out VLA Driver with Li i8 and subsequently to all Li AD Max equipped vehicles through OTA updates. We are confident that VLA Driver will bridge the physical and digital realms. Moving forward, we will explore opportunities to seamlessly integrate multimodal interaction, providing a more natural co-driving experience between humans and vehicles. Lixiang Tongxue continues to evolve as well. The latest OTA update at the end of May introduced memory capabilities to recognize each family member and agent functions that assist with daily tasks like placing orders, making reservations, and tracking deliveries via voice commands. Our goal is to create a progressively personalized smart space that allows human-vehicle interaction to feel as intuitive as interacting with a family member. In April, we shared the Li Halo OS technical architecture and white paper and released initial code to the open-source community. As the first automaker globally to open-source this proprietary smart vehicle operating system, we aim to empower industry partners and promote industry-wide advancement through Li Halo OS. Regarding our sales and service network, we are preparing for the anticipated growth in sales and new vehicle releases this year. We will continue to expand our network in major auto parts and shopping malls while reaching into lower-tier cities through the Star Plan to enhance overall coverage and efficiency. As of April 30, 2025, we had 500 retail stores in 151 cities and 500 servicing centers and Li Auto authorized body and paint shops operating in 223 cities. Looking ahead, we remain dedicated to our user-centric approach fueled by innovation and will strive to enhance our industry-leading product capabilities to bring greater happiness to more families. I will now turn the call over to our CFO, Johnny, to discuss our financial performance.

Thank you, Xiang. Hello, everyone. I will now walk you through some of our 2025 first quarter financials. Due to time constraints, I will highlight key financial points and encourage you to refer to our earnings press release for more details. Total revenues in the first quarter were RMB25.9 billion or $3.6 billion, which is an increase of 1.1% year-over-year but a decrease of 41.4% quarter-over-quarter. This included RMB24.7 billion or $3.4 billion from vehicle sales, up 1.8% year-over-year and down 22.1% quarter-over-quarter. The increase from the previous year was mainly due to a rise in vehicle deliveries, though this was partially offset by a lower average selling price caused by a different product mix. The sequential decrease was primarily due to a drop in vehicle deliveries, influenced by seasonal factors associated with the Chinese New Year holiday. The cost of sales for the first quarter was RMB20.6 billion or $2.8 billion, reflecting a 1.3% year-over-year increase and a 41.6% decrease quarter-over-quarter. Gross profit was RMB5.3 billion or $732.9 million, an increase of 0.6% year-over-year but down 40.7% quarter-over-quarter. The vehicle margin for the first quarter was 19.8%, compared to 19.3% in the same quarter last year and 19.7% in the prior quarter. The year-over-year increase was driven by cost reductions and changes in pricing strategy in early 2024, somewhat offset by the product mix. The vehicle margin remained fairly stable compared to the previous quarter. Gross margin for the fourth quarter was 20.5%, slightly down from 20.6% year-over-year and up from 20.3% in the prior quarter. Operating expenses for the first quarter were RMB5 billion or $695.5 million, down 14% year-over-year and 4.2% quarter-over-quarter. Research and development expenses were RMB2.5 billion or $346.4 million, down 17.5% year-over-year but up 4.4% quarter-over-quarter. The yearly decrease was mainly due to lower employee compensation and the pace of new vehicle program implementations. R&D expenses remained relatively stable compared to the last quarter. Selling, general and administrative expenses were also RMB2.5 billion or $348.8 million, down 15% year-over-year and down 17.7% quarter-over-quarter. This decrease was driven by reduced employee compensation, improved operational efficiency, and a cut in marketing and promotional activities. Income from operations for the first quarter was RMB271.7 million or $37.4 million, compared to a loss from operations of RMB584.9 million in the same period last year and income of RMB3.7 billion in the prior quarter. The operating margin for the first quarter was 1.0%, versus negative 2.3% last year and positive 8.4% in the prior quarter. The net income for the first quarter was RMB646.6 million or $89.1 million, up 9.4% year-over-year but down 81.7% quarter-over-quarter. Diluted net earnings per ADS for ordinary shareholders were RMB0.62 or $0.08 in the first quarter, compared to RMB0.56 in the same period last year and RMB3.31 in the previous first quarter. Turning to our balance sheet and cash flow, our cash position remained strong at RMB110.7 billion or $15.3 billion as of March 1, 2025. Net cash used in operating activities during the first quarter was RMB1.7 billion or $234.4 million, compared to RMB3.3 billion in the same period last year and net cash provided by operating activities of RMB8.7 billion in the prior quarter. Free cash flow was negative RMB2.5 billion or negative $348.7 million for the first quarter, compared to negative RMB5.1 billion in the same period last year and positive RMB6.1 billion in the previous quarter. Now, regarding our business outlook for the second quarter of 2025, the company expects deliveries to be between 121,000 and 128,000 vehicles, indicating a year-over-year increase of 13.3% to 17.9%. The company also anticipates total revenue for the second quarter to be between RMB32.5 billion and RMB33.8 billion or $4.5 billion to $4.7 billion, representing a year-over-year increase of 2.5% to 6.7%. This outlook reflects the company's current preliminary view on its business situation and market conditions, which may change. That concludes our prepared remarks. I will now turn the call over to the operator to begin our Q&A session.

Your first question comes from Tim Hsiao with Morgan Stanley.

My first question is about the volume growth because Li Auto's new L Series has received great market feedback. However, we've also noticed that competitors are working hard to benchmark the L Series with more aggressive pricing and specifications. How will Li Auto continue to grow vehicle sales at twice the rate of the overall high-end market for the rest of the year and gain market share at the expense of peers in China? That's my first question. Thank you.

After we launched the new Li L Series, sales performance met our expectations and has shown healthy growth. Our weekly sales are now over 10,000 units and month-to-date, our market share in the RMB200,000 and above NEV market has reached 14.7%. We're very confident the monthly deliveries of our new L Series will return to the 50,000 per month level pretty soon.

My second question is about the products. Aside from the current SUV lineup, when would Li Auto consider selling sedans? Will the company also adopt dual powertrain strategies to include both EREV and BEV for a sedan product line to cater to or grow their consumer base? That's my second question. Thank you.

In our view, the Li MEGA and the extended Li range SUV series lead the market as the best SUV series in full sales production. We anticipate reaching up to RMB300 billion in revenue. Once we achieve that revenue level, we will evaluate user demand and market conditions to determine the timing for launching sedan and MPV models at more affordable price points. These products will be available not only in China but also in other Asian and European markets. Thank you.

Thank you. Thanks a lot for sharing all the information. Thank you.

Your next question comes from Yingbo Xu with CITIC Securities.

I have two questions. The first one is about Li Halo OS. Could you provide more details about the intelligence level, cost-cutting measures, and the difference between AUTOSAR and Halo OS? The second question is regarding the L6 and L8 products; what is the real difference between their users? Additionally, what are the prospects for the i8 and i6? How can they attract consumers in the BEV market? Thank you.

Hi, Yingbo, this is Yan. I will answer your first question. Right now, we are seeing strong interest in our Halo OS from three main types of companies, automakers, chip manufacturers, and other ecosystem suppliers. In fact, some of these suppliers have already started contributing code to the open-source community. For us, the stronger the overall industry ecosystem becomes, the faster we can iterate on our own product and technologies. As our partners grow in capability and collaborate with us more closely, we also see meaningful cost efficiencies. And as the open-source community matures, our investments in certain areas can be reduced, allowing us to focus more resources on what truly sets us apart, our core strength. At the same time, our operating system gives us a unique opportunity to vertically integrate hardware, software, and algorithm capabilities. Over time, we are confident this will allow us to continuously enhance the AI user experience on Halo OS. So how does Halo OS compare to AUTOSAR? First of all, Halo OS can fully replace the core functionalities of the standard AUTOSAR operating system. On top of that baseline, Halo OS brings significant advantages in areas where traditional AUTOSAR OS doesn't do very well, such as more efficient resource usage and true end-to-end time determinism. What is more, by redefining the system architecture, we are able to address some of the limitations of the relatively heavyweight AUTOSAR framework, especially when it comes to enabling faster, more agile innovation. Thank you.

The Li Auto brand is positioned as a premium brand, which means that additional purchases and upgrades are significant for our customers. Our range-extended models are specifically designed for customers who currently own internal combustion engine models, serving as an upgrade, while battery electric vehicles are intended for those who already own new energy vehicles. The i8 and i6 are aimed at current owners of new energy vehicles. This year, we expect the overall new energy vehicle market, priced over RMB 200,000, to reach approximately 3.8 million units, including about 1.69 million plug-in hybrid electric vehicles and 2.13 million battery electric vehicles. By introducing new battery electric vehicle models, we will expand our reach into a larger market. Thank you.

Your next question comes from Tina Hou with Goldman Sachs.

Hi, management, thanks for taking my questions. So I have two questions. The first one is regarding our balance sheet. So just wondering what is our target leverage ratio and also sort of what is our payable cycle, including some of the bank bills, bills payable to the supply chain? And then the second question is regarding our upcoming i8, the BEV model. So could management share with us what do you think is the biggest selling point and advantage versus other BEV models in the same segment?

Okay. Tina, this is Johnny. I'll take the first question. We are very committed to maintaining good relationships with supplier partners. We strive to maintain the payable days at a reasonable and healthy level, basically renewing from total format. So if you see our payable days at the year end, it's because there are some reconciliations that need to be spent after we book the balance, and we will finally reconcile the balance with our suppliers. At the end of Q1, the payable balance didn't change much compared with the end of last year. So, the quarter-over-quarter increase in the payable base was mainly due to the calculation adjustments due to the lower cost of sales in the first quarter. Thank you.

So, a brief overview of the key selling points for the i8. In addition to the VLA Driver model that I mentioned earlier, the i8 features innovative styling for both the exterior and interior. The exterior design focuses on smart packaging to maximize space inside while achieving a low drag coefficient. Additionally, the i8 provides excellent handling and ride comfort. It also supports charging up to 500 kilometers in just 10 minutes using advanced high-voltage charging technology. By the time we launch the i8, we will have established 2,500 supercharging stations strategically located along the travel routes of our potential customers. We believe the Li i8 will be a top choice for current owners of NEV cars looking to upgrade or replace their existing models.

Your next question comes from Jing Chang with CICC.

This is my first question. Regarding our sales target and trends outlook, will we establish a clear sales target this year? Will we be flexible in adjusting our volume and pricing strategy based on market changes? Additionally, considering the market size calculations we had before, have there been any adjustments due to changes over the last two years? Specifically, for mid- to high-end SUVs and family cars, what is our midterm sales target in the domestic market?

As we've communicated before, we expect our growth in 2025 to be double that of the overall RMB200,000 above NEV market. As we launch our BEV models, we will enter a larger total addressable market. This year, the market of NEV over RMB200,000 is expected to be 3.8 billion, with 2.1 million being BEV. Our new BEV model launches will allow us to tap into this larger market. We see significant potential in market demand, particularly in Tier 4 and Tier 5 cities. Recently, we announced the Star Program to enhance our presence in these regions. We conducted pilot programs last year in Tier 4 and Tier 5 cities like Sichuan Dazhou and Ziguang. Since opening our stores in September, we've achieved over 28% market share in the passenger vehicle segment over RMB200,000, irrespective of energy type. In Shaanxi, Yan'an, our market share for vehicles over RMB200,000 stands at 25%. As the overall penetration rate of NEV surpasses 50%, an increasing number of users are opting for new energy vehicles. With the launch of models like L6, we are identifying greater opportunities in Tier 4 and Tier 5 cities. This year, we plan to continue expanding our Star Program, aiming to enter 100 cities within these tiers and achieve 100,000 additional sales by 2026.

So my second question is regarding AD. Mr. Li Xiang elaborated in detail how we do AI in the previous talk. Talking about our driver model, several progresses include the pre-training, the foundation model, and the different types of reinforcement learning. What difficulties do you think are there and how do we differentiate ourselves from peer companies?

Our training process for replicating an experienced driver is divided into four steps. The first step is the training of what we refer to as a VL foundational model, which involves pretraining. The second step is post-training into a VLA model. This is followed by reinforced learning with human feedback, and lastly, reinforced learning. This methodology is how we train an experienced driver using AI. The most challenging part of this process is the pretraining phase, which includes the VL foundational model, as well as the final step, the reinforced learning step. This is an issue that many companies are tackling. In the VL foundational model training process, we incorporate specific video data to enable the foundational model to comprehend three-dimensional space, unlike other models that only grasp 2D space. This is a significant differentiator for our foundational model. Reinforced learning involves training the model in real-world simulated environments to enhance the VLA's model and improve its proficiency. By using reconstruction and generative processes, along with these two methods, we can create world models that accurately adhere to the physical laws of reality and replicate traffic participants and other elements. With precise simulation capabilities, the VLA driver model can train at a very low cost while effectively addressing real-world issues in a simulated setting, which notably shortens the iteration period. Thank you.

Your next question comes from Bin Wang with Deutsche Bank.

I have two questions. First, regarding your gross margin, you've experienced margin expansion in the first quarter due to a pricing strategy change. Can you elaborate on this strategy? Also, what is your outlook for the second quarter? We believe that when you introduce a new system, your margin should increase in the second quarter. Secondly, concerning exports, you previously mentioned that you would be a starting point for exports. When do you expect to reach a minimum volume where you can state that monthly export volume will exceed 1,000 units? Thank you.

Hi, this is Johnny. First, we expect the vehicle margin to still remain around 19% for the second quarter. As you know, the second quarter is when we have April and May without the MEGA. As of today, we have a lot of new MEGA Home orders that will start in Q1 and deliver starting from this week. Now it's a switch from the old 2024 version of L Series to the 2025, so it's a combination. So we still achieved the vehicle margin in the second quarter. Thank you.

We have three key prerequisites for entering a new or overseas market: offering quality hardware, providing after-sales support, and delivering smart software services. We will only pursue new markets once these conditions are met, as we view ourselves as selling AI near terminals rather than merely physical products. In the coming years, our focus will be on the Asian and European markets, and we will recruit established distributors in these regions. Additionally, we are enhancing our efforts to identify and assign top internal talent to our overseas team, while also actively seeking professionals with international experience. The international market is a crucial aspect of our long-term strategy, and we are dedicated to achieving the goal of having 30% of our overall sales come from overseas.

Our next question comes from Paul Gong with UBS.

My first question is about the timing for the VLA's availability to consumers, especially considering the recent tightening of regulations on driving assistance by the government. Do we need more time to verify it, or are we still confident it will be available for consumers in July? The second question concerns the implications of MEGA Home. There has definitely been some improvement compared to previous MEGA sales. What lessons have been learned, and what should we carry forward for the upcoming i8 and i6 launches?

We're still on track to release our VLA Driver model in July alongside our BEV electric SUV, i8, and we will roll out VLA Driver to all our users in August. Customers can also experience VLA Driver during test drives at our stores. We believe that regulations on safety in assisted driving are essential. In fact, we think that stringent regulations are more advantageous for companies with strong technical capabilities. For Li Auto, our super alignment technology will tackle many safety concerns and help us prioritize safety in all stages of development. Enhanced regulatory requirements will not impede our R&D efforts.

In fact, our previous rate of MEGA deliveries was approximately 1,000 per month. We expected it to increase by 50% with the launch of the new model. However, it ultimately increased by over 150%, exceeding our expectations significantly. We aim to boost production capacity to maintain a consistent delivery rate of 2,500 to 3,000. Reflecting on this, it's crucial not to concentrate on internal desires or competition but to focus on users, understanding their actual needs and how we can exceed their expectations. One opportunity we identify is in the mobile space experience; there are many innovations we can pursue in this arena because we believe that the car experience should not only focus on hardware but also on an integrated AI experience supported by both hardware and software. We aspire for Li Auto to be recognized for the mobile space experience, similar to how people associate Apple with user machine interactions. Thank you.

Thank you so much. 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. This concludes today's conference call. You may now disconnect your lines. Thank you.