Earnings Call Transcript - LI Q4 2023

Operator, Operator

Hello, ladies and gentlemen. Thank you for standing by for Li Auto's Fourth Quarter and Full-Year 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. Today's call is being recorded. I will now turn the call over to your host, Kobe Wang, the Head of Capital Markets of Li Auto. Please go ahead, Kobe.

Kobe Wang, Head of Capital Markets

Thank you, operator. Good evening, and good morning everyone. Welcome to Li Auto's fourth quarter and full-year 2023 earnings conference call. The company's financial and operating results were published in a 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. To begin with prepared remarks, our present, Mr. Donghui Ma; and the Senior VP, 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 U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements inform inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in certain company filings with the U.S. SEC and the Hong Kong Stock Exchange. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that Li Auto's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to Li Auto's disclosure document on our IR website, which contains a reconciliation of 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.

Xiang Li, CEO

Welcome to today's earnings conference call. 2023 was a year of accelerated growth for Li Auto. We delivered a total of 376,000 vehicles for the entire year, exceeding our target set at the beginning of 2023 and becoming the first emerging new energy automaker in China to surpass the 300,000 annual deliveries mark. Our total deliveries for the fourth quarter reached 131,805 vehicles, which is an increase of 184.6% year-over-year. In December, we achieved another significant milestone with 50,000 monthly deliveries, setting a new record for Chinese premium car brands. According to the China Automotive Technology and Research Center's insurance registration data for NEV market vehicles priced at RMB200,000 and above, Li Auto's market share rose from 10.9% in Q1 2023 to 16.0% in Q4, making us a leading Chinese automotive brand by market share; we expect this growth to continue in 2024. I would like to express our sincere gratitude to all our family users, business partners, and our team for your unwavering trust, support, and tireless efforts. Moving on to our financial performance. Our scale expansion, effective cost control, and increased operational efficiency have continuously enhanced our financial results. Q4 total revenues reached RMB41.73 billion, and annual revenues exceeded RMB100 billion, totaling RMB123.85 billion. Moreover, we achieved profitability for the first time in 2023, posting a healthy net income of RMB11.81 billion. By the end of 2023, our cash position reached RMB103.67 billion. In 2024, the virtuous cycle of our business growth will solidify our long-term profitability, cash-generating capabilities, and capital base. This trajectory will further enhance our R&D efforts across products, platforms, and systems, ensuring the consistent delivery of exceptional products and services to our users in the long run. 2024 will be a year of unprecedented new product launches for Li Auto, starting in March with the introduction of our high-tech flagship and family MPV, Li MEGA, developed on a pure BEV platform. Li MEGA incorporates the latest advancements in 5C BEV technologies, smart space, and autonomous driving. We also plan to start mass delivery of the 2024 model year Li L7, L8, and L9 models in March. I invite you all to join us for our Li Auto 2024 Spring product launch event this Friday, March 1, where we will unveil more exciting details about Li MEGA and our 2024 model year L Series. Additionally, we will introduce several new models throughout the year, including Li L6, to expand our product lineup even further. By the end of 2024, we will have eight models on the market, consisting of four EREVs and four BEVs, creating a highly competitive product matrix that meets the diverse needs of our family users. New vehicle launches are only the beginning. Since the initial delivery of our L Series, we have rolled out over 20 over-the-air updates, introducing more than 700 features. Importantly, the official release of our OTA 5.0 upgrades in December last year further boosted the competitiveness of our vehicles. In terms of autonomous driving, with the latest release of AD Max 3.0, full scenario NOA now covers all highways and city ring roads nationwide, along with urban roads across over 110 cities. We anticipate launching City NOA independently of AD Max throughout China by the end of the second quarter, with it being available to all AD Max vehicles. As of today, our users have accumulated approximately 560 million kilometers on NOA during the 10-day Chinese New Year holiday from February 8th to 17th, where over 220,000 users benefited from the convenience of NOA, covering nearly 50 million kilometers. Regarding our space, OTA 5.0 integrated Mind GPT into Lixiang Tongxue. Mind GPT is a fully multimodal large model with real-time connectivity, significantly enhancing Lixiang Tongxue's ability to understand, generate, memorize, and reason. Since its release, user engagement in giving instructions and seeking information and services through natural conversations has notably increased. During the 10-day Chinese New Year holiday, natural conversations accounted for 7.2% of all effective communications, double the level prior to OTA 5.0. In light of our impressive sales growth in 2023, we've accelerated the expansion of our direct sales network. In Q4 2023, we opened 106 new retail stores, averaging over one store per day, establishing the largest automobile direct sales network in China. As of January 31, 2024, we had 474 retail stores across 142 cities nationwide. In 2024, we aim to further grow our direct sales and service network, targeting 800 retail stores by year-end. As we expand in first and second-tier cities, we also plan to enhance our presence in third and fourth-tier cities. Now, regarding our supercharging network, we currently operate over 340 supercharging stations. Starting from the Chinese New Year holiday, we provided our family users with free access to Li Auto's supercharging services throughout the holiday. We delivered 57,000 free charging sessions to Li Auto's users and over 120,000 sessions to all EV users, totaling over 2.81 million kilowatt-hours of electricity. In response to the high demand during the holiday season, our superchargers maintained an online rate exceeding 99.3%, ensuring uninterrupted, high-quality, and efficient charging experiences for all users. In 2024, we will continue to accelerate the expansion of our supercharging network across highways and cities nationwide, aiming for 2,000 supercharging stations by year-end. On the production front, Li Auto's Beijing Green Intelligent Manufacturing base commenced production toward the end of 2023, preparing for mass production of Li MEGA and subsequent BEV models. With volume production deliveries of Li MEGA and the 2024 model year L7, L8, and L9, we expect our total vehicle deliveries for Q1 2024 to fall between 100,000 and 103,000 units, with March deliveries anticipated to exceed 50,000 units. In 2024, we will continue to learn from leading enterprises, innovate, and exceed expectations as we create mobile homes and foster happiness. With that, I will turn it over to our CFO, Johnny, for a closer look at our financial performance.

Johnny Tie Li, CFO

Thank you, Xiang Li. Hello, everyone. I will now walk you through some of our 2023 fourth 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 fourth quarter were RMB41.73 billion or $5.88 billion, up 136.4% year-over-year and 23% quarter-over-quarter. This included RMB40.38 billion or $5.69 billion from vehicle sales, up 133.8% year-over-year and 20.1% 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 due to the different product mix between the two quarters. The quarter-over-quarter increase was mainly attributable to the increase in vehicle deliveries. Cost of sales in the fourth quarter was RMB31.95 billion or $4.5 billion, up 126.8% year-over-year and 18.2% quarter-over-quarter. Gross profit in the fourth quarter was RMB9.79 billion or $1.38 billion, up 174.4% year-over-year and 28% quarter-over-quarter. Vehicle margin in the fourth quarter was 22.7% compared with 20% in the same period last year and 21.2% in the prior quarter. Excluding the impact of inventory provision related to true-up in the fourth quarter of last year and the true-up adjustments of warranty reserves in the fourth quarter of 2023 based on updated estimates of cost of further claims. The vehicle market remained relatively stable over the fourth quarter of 2022. The increase in vehicle margin over the third quarter of 2023 was mainly due to the aforementioned true-up adjustments of warranty reserves in the fourth quarter. Gross margin in the fourth quarter was 23.5% compared with 20.2% in the same period of last year and 22% in the third quarter. Operating expenses in the fourth quarter were RMB6.75 billion or $950.8 million, up 82.4% year-over-year and 27.2% quarter-over-quarter. R&D expenses in the fourth quarter were RMB3.49 billion or $491.7 million, up 68.6% year-over-year and 23.9% quarter-over-quarter, primarily driven by increased expenses to support our expanding product portfolios and technologies, as well as increased employee compensation as a result of our growing number of staff. SG&A expenses in the fourth quarter were RMB3.27 billion or $460.5 million, up 100.6% year-over-year and 28.5% quarter-over-quarter, primarily driven by increased employee compensation as a result of our growing number of staff as well as increased rental expenses associated with the expansion of our sales and servicing network. Income from operations in the fourth quarter was RMB3.04 billion or $427.7 million compared with RMB133.6 million loss from operations in the same period last year and up 29.8% quarter-over-quarter. Operating margin in the fourth quarter was 7.3% compared with negative 0.8% in the same period last year and 6.7% in the third quarter, attributable to the increase of income from operations and the recognition of non-cash tax benefits for the release of valuation allowance on certain deferred tax assets. Net income in the fourth quarter was RMB5.75 billion or $810.2 million, representing an increase of 2,068.2% year-over-year and increasing by 104.5% quarter-over-quarter. And diluted net earnings per ADS attributable to ordinary shareholders was RMB5.32 or $0.75 in the fourth quarter compared with RMB0.25 in the same period last year and RMB2.67 in the prior quarter. Turning to our balance sheet and cash flow. Our cash position remains strong and stood at RMB103.67 billion or $14.6 billion as of December 31, 2023. Net cash provided by operating activities in the fourth quarter was RMB17.29 billion or $2.44 billion, up 251.1% year-over-year and 19.2% quarter-over-quarter. Free cash flow was RMB14.64 billion or $2.06 billion in the fourth quarter, up 349.4% year-over-year and 10.7% quarter-over-quarter. As of December 31, 2023, we had a total of 31,591 employees. For more information and details of our 2023 full-year financial results, please refer to our earnings press release. And now for our business outlook. For the first quarter of 2024, the company expects deliveries to be between 100,000 and 103,000 vehicles representing an increase of 90.2% to 95.9% from the first quarter of 2023. The company also expects first quarter total revenues to be between RMB31.25 billion and RMB32.19 billion, or $4.4 billion and $4.53 billion, representing an increase of 66.3% to 71.3% from the first quarter of last year. This business outlook reflects the company's current and preliminary view on its 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. Thank you.

Operator, Operator

Thank you. Your first question comes from Bin Wang with Deutsche Bank. Please go ahead.

Unidentified Analyst, Analyst

Congratulations on the great results. I have two questions. First, you mentioned aiming to deliver 100,000 units by September this year, and individual products can exceed 30,000 units. Given the pricing competition, do you plan to revise your guidance considering the current monthly figures, and can you break down the 103,000 units by model? My second question is regarding your previous guidance about being a leader in self-driving technology in China. Can you explain the differences or gaps between the leading players like Huawei, and when you anticipate being able to catch up and surpass them? Thank you.

James Liangjun Zou, SVP of Sales and Service

Okay. I will take the first question. This is James Zou Liangjun from Li Auto, SVP of Sales and Service. So a very good question, Mr. Wang Bin. Our guidance remains unchanged. So we are still talking about selling over 100,000 models by end of this year. Starting from March 2024, we will commence delivering the Li MEGA and also 2024 model year L9, L8, and L7 models, marking our entrance into a brand-new product cycle with the launch and delivery of more competitive new products. We anticipate our monthly deliveries to exceed 50,000 vehicles in March, which is next month and 70,000 in June. So, for the first half of the year, when we hit the 70,000 monthly delivery milestone in June, the market will have a better understanding of all of our company's assumptions and dedication. We encourage you to watch our performance in the coming months. So I will hand over to Mr. Ma to answer your second question.

Donghui Ma, President

We released our OTA 5.0 around the end of 2023, and the full scenario NOA is now available in over 110 cities across China. According to our statistics, two months after the release, daily active usage for NOA has increased by 50% compared to before the OTA, and we have accumulated over 100 million kilometers on NOA since its launch. NOA has assisted our users with over 3 million parking maneuvers, and AD has helped avoid over 30,000 accidents. This data, along with the positive feedback from users and media, showcases our product's competitiveness. In the second quarter of 2024, our AD Max models will provide napless capability for City NOA in all cities in China without limitation on the number of cities, and it will be available for all cars equipped with AD Max through OTA. For cars equipped with AD Pro, we will also be deploying large BEV models to enhance highway NOA features, improving ramp and lane change experiences. We are very confident that in 2024, with our products and R&D capabilities, we will be among the top in China.

Unidentified Analyst, Analyst

Thank you.

Operator, Operator

Your next question comes from Tim Hsiao with Morgan Stanley. Please go ahead.

Tim Hsiao, Analyst

My first question is about the production and potential bottleneck, as Li Auto's volume guidance for the first quarter of 100,000 to 103,000 units suggests a significant increase in March to 50,000 units or more. With several new models, including MEGA and L6, launching around the same time, do you foresee any risk of supply bottlenecks in March and April? What measures has the company undertaken to ensure a smooth ramp in production and delivery? That's my first question.

Donghui Ma, President

First of all, we have extensive experience in launching new products and quickly ramping up production afterward. In the first month after launching the L7 and L9 models, we successfully produced and delivered over 10,000 units of each. We have compiled best practices and lessons learned into our system, allowing new factories or employees to easily replicate past successes. Regarding new models, all vehicle lines in development are on schedule. We have also completed factory construction ahead of time and recruited and trained the necessary blue-collar workers. On the supply side, we have established our supply capabilities and finished a risk analysis, creating plans and strategies accordingly. With our new integrated planning system, we have aligned supply and demand and confirmed all requirements. We expect 2024 to be a significant year for new product launches, and we are confident in our ability to ensure consistent and timely supply.

Tim Hsiao, Analyst

The second question is about product planning. After the launch of the L6 in April, our model portfolio will comprehensively cover segments priced around RMB250,000 or about $35,000. Are we considering entering the market for vehicles priced under $35,000, which could represent a larger market for NEV conversion? Additionally, are there any technological constraints or disadvantages that might prevent Li Auto from developing a compact or low-cost SUV to compete with local competitors? That's my second question.

Donghui Ma, President

If we look five years into the future, we have no intention of releasing any vehicles priced below RMB200,000. Focusing on the long-term vision through 2030, even if we only concentrate on the family market above RMB200,000, capturing one-third of that segment in China would result in total sales exceeding RMB1 trillion. When considering international markets by 2030, this sector could generate revenue comparable to all iPhones sold globally, indicating a significant opportunity that we believe we have only begun to explore. Therefore, there is no need for us to divert our attention at this moment; instead, we aim to concentrate solely on the family market above RMB200,000 worldwide. Our strategy is to delve deeper into this market, develop our brand, and increase our market share.

Tim Hsiao, Analyst

Thanks for sharing all the great insights. And congratulations on the great result again. Thank you.

Operator, Operator

Your next question comes from Yingbo Xu with CITIC Securities. Please go ahead.

Yingbo Xu, Analyst

I have two questions. The first is about how we balance pricing and volume, and how we can increase profitability and volume by adjusting our pricing in different periods. My second question is regarding the upcoming EV models. What are our plans after the MEGA model? Could you provide more details? Thank you.

Johnny Tie Li, CFO

This is Johnny. Yingbo, regarding your first question, when we established the full-year sales target, we took into account the competitive landscape and the pace of our product launches. Given that, we want to emphasize that we will consistently maintain a healthy gross profit margin of over 20%. Depending on market competition, the gross margin may fluctuate between 20% and 25% in various quarters. In the last quarter, there were concerns about competition in the fourth quarter, leading to some promotions. However, for each quarter, we also face various factors from the supply side and material prices. Overall, despite the fourth-quarter promotions, we had positive developments, and our gross margin improved compared to the third quarter.

Xiang Li, CEO

For the first half of the year, we will release our March 1st spring event, Li MEGA, along with the 2024 model year Li L7, L8, and L9, and the L6. In the second half of the year, as previously mentioned, we will introduce three additional pure electric SUV models, all equipped with standard 5C charging and all-wheel drive. I want to highlight that these vehicles are highly competitive and will likely become the preferred choice for families within their price segments. The year 2024 will be a groundbreaking product year for Li Auto. By the end of the year, we will have four range-extended models and four highly competitive electric BEV models. All products are very competitive and will collectively meet the needs of our family users.

Operator, Operator

Your next question comes from Tina Hou with Goldman Sachs.

Tina Hou, Analyst

Thank you to the management for answering my questions and congratulations on the strong results. I have two questions. First, regarding the three BEV models launching in the latter half of the year, considering factors like battery prices, 5C charging capabilities, and the initially lower volume compared to your EREV models, what margin difference should we anticipate for the BEV models? Secondly, what is the management's current perspective on the overseas sales volume target for the next three to five years?

Johnny Tie Li, CFO

Tina, this is Johnny. For the gross margin, as we mentioned in previous calls, both for the BEV and the EREV series, the overall blended gross margin will be 25% for both series. So when we start from MEGA, and then the nine series, the gross margin will start from higher to lower, and we still want to emphasize that the product gross margin is established when you define your product. Our products are designed to ensure a healthy gross margin and also to balance the customers' demand for the car. Also, from the material side like the battery material, I think it's – since the second half of last year, I think it's – for us, it's a good timing for us to launch our BEV models starting from this year. Thank you.

James Liangjun Zou, SVP of Sales and Service

Okay, Tina, it’s James. I will address your second question. First of all, the overseas market is very important to Li Auto, and we are aiming to start exploring this market more aggressively. We remain committed to our direct sales model in international markets, focusing on establishing a strong sales network and comprehensive after-sales services. With Li Auto's increasing global appeal, we are intensifying the development of our sales service network and spare parts supply chains to ensure a great service experience for our international customers. We have successfully set up operations in the Middle East and begun recruiting local sales and service teams in Dubai. In the first half of this year, we plan to establish a dedicated after-sales service network in Central Asia and the Middle East. By the first quarter of this year, we will begin overseas deliveries starting with the introduction of the L9 and L7 models in local regions, which have also been customized for the local environment and regulations. Thank you.

Operator, Operator

Your next question comes from Ming Hsun Lee with Bank of America. Please go ahead.

Ming Hsun Lee, Analyst

My first question is related to gross margin trends in the first and second quarters. In the first quarter, since you are selling the 2023 versions of the L7, L8, and L9, your gross margin is slightly lower than in the fourth quarter. However, in the second quarter, with a full-quarter contribution from MEGA, do you expect the gross margin to recover? Additionally, how does the L6 affect the overall margin?

Johnny Tie Li, CFO

Hi, this is Johnny. I think all the factors you mentioned are clear. The company will also maintain a healthy gross margin of about 20% for the first quarter. As we mentioned earlier, the company will also maintain a healthy gross margin throughout the full year, which means almost about 20% for all quarters. The MEGA and the 2024 model of the L series will positively impact the gross margin starting in March. And the L6 will be negative if we want to say to be for the over 20% gross margin. With our volume group, it will also positively impact the gross margin. Yes, for every quarter, there are some positive and negative, so I hope this is helpful for you.

Ming Hsun Lee, Analyst

Li Auto plans to expand the charging station to 2,000 by the end of this year. How do we expect the total CapEx? Previously, the Chairman mentioned the charging stations could be a profitable investment project. So when do you expect your charging station to reach breakeven or cash flow breakeven? Thank you.

James Liangjun Zou, SVP of Sales and Service

Okay, I will take this question, James. By the end of 2024, the company plans to build a total of 2,000 charging stations as you just mentioned. By the end of this year, we will have built more than 700 highway supercharging stations covering 70% of the highways in China as well as 90% of the highways in the four major economic zones. With the successive launches of BEV models this year, we have also begun to accelerate the expansion of charging stations in cities. We anticipate that by the end of this year, the number of charging stations in cities will exceed 1,300, so totally 2,000. The company's cash reserves are ample, and we have allocated sufficient capital for the construction of charging stations. The company has detailed operating models for the evaluation of each charging station. By the way, personally, I'm looking after each and every charging station investment, and each station has its own profitability and ROI target. From a long-term perspective, we are very confident in our charging stations' profitability prospects. Thank you.

Operator, Operator

Your next question comes from Yuqian Ding with HSBC.

Yuqian Ding, Analyst

Two questions. First, we observed that the industry is undergoing a challenging consolidation period. While Li Auto has achieved record high earnings, many others are facing difficulties. How do you perceive the turning point in the industry's consolidation amidst weak car demand and ongoing pricing challenges, including those faced by Li Auto? What are Li Auto's strategic priorities for this year? Secondly, management has mentioned over-the-air updates, local operations, and expanding into more cities and scenarios. From management's perspective, when do you anticipate the IPO moment for autonomous driving development? Additionally, how should we interpret the current state of the autonomous driving market, which seems to be homogeneous and lacking a revenue model in the short term, despite advancements in technology?

Xiang Li, CEO

As we have stated previously, we are confident in the smart EV industry and anticipate a significant Matthew effect in the near future. I expect that by the fourth quarter of this year, in the market segment priced at RMB200,000 and above, the top three brands will account for nearly 70% of the market share. We will evaluate this prediction by the end of the year. To succeed in this competitive landscape, we will remain dedicated to creating user value, which will become our competitive edge. Regarding our products, we will focus on perfecting every detail to ensure a comprehensive experience for our users. In terms of research and development, we will invest in our autonomous driving technology, smart space, and high-voltage and range-extended EV platforms, with the aim of translating these investments into enhanced user value. Our target remains to sell 800,000 units in 2024 and to establish ourselves as the leading premium brand in China. The team is fully prepared to achieve this goal this year.

Donghui Ma, President

Personally, I believe the significant breakthrough for autonomous driving will occur in two to three years. The iPhone 4 transformed people's views on smartphones. Although the iPhone 4 itself may not be flawless, it addressed all the crucial elements for success, including design, user experience, hardware, software, and business model. In relation to autonomous driving, with levels 2 and 3 gaining traction and being widely adopted, data continues to grow along with the deployment of advanced AI models. I think autonomous driving will reach a pivotal moment, akin to the iPhone 4’s impact. Suddenly, cars equipped with the necessary hardware—potentially hundreds of thousands or even over a million—could achieve autonomous capabilities. For Li Auto, we are committed to setting autonomous driving hardware standards across all our vehicles. We currently have no plans for subscription fees or additional charges. By making autonomous driving standard, we aim to attract as many users as possible, gather extensive data, enhance our algorithms, and improve the user experience, creating a favorable cycle.

Operator, Operator

As we are reaching the end of our conference call now, I'd like to turn the call back over to Kobe Wang for any additional or closing comments.

Kobe Wang, Head of Capital Markets

Thank you once again for joining us today. If you have any more questions, please feel free to contact Li Auto's IR team. That concludes this conference call. You may now disconnect your lines. Thank you. Bye.