Earnings Call Transcript - LI Q2 2025

Operator, Operator

Hello, ladies and gentlemen. Thank you for standing by for Li Auto's Second Quarter 2025 Earnings Conference Call. 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.

Janet Chang, Investor Relations Director

Thank you, Darcy. Good evening, and good morning, everyone. Welcome to Li Auto's Second Quarter 2025 Earnings Conference Call. The company's financial and operating results were published in our 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 CTO, Mr. Yan Xie, will join for the Q&A discussion. Before we continue, please be reminded that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in certain company filings with the U.S. 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, which contain a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. Our CFO 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

Hello, everyone. This is Li Xiang and thank you for joining today's earnings conference call. In the second quarter of 2025, we delivered over 110,000 vehicles, bringing total revenues to RMB 30.2 billion. According to insurance registration data from the China Automotive Technology and Research Center, we captured a 13.4% market share in the RMB 200,000 and above NEV market in China, making it another quarter where we have top segment sales among Chinese auto brands. As of the end of July, our cumulative deliveries exceeded 1.36 million vehicles. I would like to extend my sincere gratitude to those 1.36 million families who have placed their faith in us as well as our partners, shareholders, and employees for being part of this journey. We launched Li MEGA Home in April this year. The sales results far exceeded our expectations, with approximately 3,000 units sold monthly. Fourteen months post-launch in March last year, Li MEGA has become the best-selling MPV priced above RMB 500,000 since May 2025 and the top seller among all BEVs in the same price range since June 2025. These achievements demonstrate our ability to quickly identify issues and grow while also validating our product value over time. The refreshed Li L series that we launched in the first half of this year saw sales fluctuations since June due to sales and service system adjustments and other market factors. Despite these challenges in June and July, we maintained our top 3 position in the RMB 200,000 and above NEV market. We will harness Li Auto's capability to thrive under challenging conditions and swiftly complete the restructuring of our sales and service systems. This includes enhancing sales and delivery capabilities, building an end-to-end marketing system, and boosting sales team morale. Meanwhile, we will focus on creating value for our users to respond more effectively to market dynamics. We officially launched Li i8 on July 29 with delivery starting on August 20. Li i8 showcases our latest innovation and redefines BEV SUVs by combining the versatility of off-roaders, the handling of luxury sedans, and the comfort of MPVs. Its pioneering design is a key reason why users choose Li i8, supporting our product philosophy. Since its launch, we have focused on gathering positive user feedback for this innovative product, and we are pleased to see a test drive satisfaction rate of over 97%. As customers experience the product firsthand, Li i8 continues to gain momentum. Since deliveries began on August 20, we have received positive reviews from the initial batch of customers. We expect cumulative deliveries of Li i8 to surpass 8,000 units by the end of September. We are confident that over time, like Li MEGA, Li i8 will set the standard in its price range. Furthermore, preparation for our 5-seat BEV, Li i6 is progressing well. We plan to launch Li i6 and start deliveries at the end of September, broadening our product lineup to cater to a wider audience. To support our BEV launch, we offer the largest charging network among automakers in China. As the automaker with the fastest-growing charging network in recent years, Li Auto strives to ensure a hassle-free experience for BEV users. Currently, we have over 3,100 charging stations equipped with more than 17,000 charging stalls. Among these, over 1,000 supercharging stations on highways cover China's busiest 9 East-West and 9 South-North routes, with an average interval of 150 kilometers. Additionally, there are more than 2,100 urban supercharging stations across over 266 cities, with an average coverage radius of 3.5 kilometers in first and second-tier cities. We are confident that we will achieve our goal of 4,000 stations by the end of this year. Our charging network also leads the industry in charging rates. Currently, all of our charging stalls support rates of 250 kilowatts or higher, with over 61% being 4C and 5C chargers. All upcoming charging stations will use 4C and 5C charging stalls, further enhancing our energy replenishment network's ultra-fast charging capability. Additionally, we continue to explore and develop a new ecosystem for automotive charging services. In June, we introduced China's first pass-through supercharging station in Changzhou, enabling users to remain in their cars while multiple vehicles supercharge simultaneously, thus making the process more efficient and convenient. We are also testing autonomous charging robots, aiming to redefine smart charging in the future. We remain committed to continuous investment in research and development to further solidify Li Auto's leading position in intelligence. We believe that as intelligence becomes an increasingly crucial aspect of user purchasing decisions, it will reshape the automotive industry. We anticipate our AI investments this year will exceed RMB 6 billion, directed towards infrastructure, product, and technology development. On August 20, we officially launched our proprietary VLA large model driver and Li Xiang Tong Xue Agent alongside the delivery of Li i8. As the industry's first VLA architecture available in production vehicles, the VLA Driver large model is expected to be deployed across all AD Max models by OTA updates by mid-September. The VLA Driver large model combines spatial and linguistic intelligence with behavioral strategy, featuring enhanced capabilities in spatial perception, reasoning, decision-making, natural language interaction akin to human drivers, and optimal route generation. With a technical architecture that closely mimics human intelligence, the VLA Driver greatly enhances user experience in areas such as defensive driving, smoothness during 3-point turns, continuous task execution, and underground garage navigation. Furthermore, through ongoing and reinforcement learning, it can improve its understanding of user preferences. Meanwhile, our foundation model, MindGPT-powered Li Xiang Tong Xue, has transitioned from a voice assistant to an intelligent agent, with capabilities that greatly expand the in-car service ecosystem. For example, it can connect with food delivery apps to pick up orders or activate the vehicle's external cameras and facilitate payments at parking lots. Its memory capability enhances the diversity of tools and increases the emotional resonance and personalization of Li Xiang Tong Xue. Moving forward, we will continue to expand our AI capabilities and leverage our R&D successes to advance product evolution. By using the vehicle as a platform, we aim to integrate the physical and digital worlds, extending AI benefits to every user. In addition to AI, our R&D focuses on electric drive technology and 5C supercharging. For instance, our proprietary drive motors, including key components like silicon carbide power chips, have greatly improved vehicle energy efficiency and range. Another key area of R&D is 5C batteries, which we have developed along with a thermal management system to support ultrafast charging and long driving range. The 5C battery can maintain over 300 kilowatts of charging power while charging from 0% to 80%, and it boasts an exceptional lifespan; even after 1,500 full charge-discharge cycles in supercharging mode, battery health remains above 80%, an industry first. We will continue to utilize our in-house R&D advantages to enhance product competitiveness and optimize production costs through in-house technology development and manufacturing via joint ventures. Regarding our sales and service network, a recent organizational restructuring will enable us to strengthen our store-centric user operation capability, which we believe will enhance sales conversion and improve our brand and product communication. We will continue to refine our network structure by expanding and upgrading our presence in major auto parts and shopping malls while gradually increasing the number of stores in lower-tier cities to reach more user groups. To better support our BEV launches, our store expansion plan has been strategically prioritized this year. Currently, we operate over 550 retail stores across more than 150 cities nationwide, with net additions of around 50 stores and 700 display spots since the end of last year. Throughout our journey, we have held firm to our principles, believing in what is right, even when faced with challenges. From EREVs, Li ONR, and Li L series to BEVs like Li MEGA and Li i8, our dedication to advanced technology and superior products remains strong, regardless of the circumstances. This year, we've demonstrated progress in BEV innovation with initiatives like Li MEGA Home and Li i8. Looking ahead, we will continue to focus on creating exceptional EREVs and BEVs while reinforcing our brand. We will leverage technological advancements to drive industry transformation, aiming to provide our users with cutting-edge technology, outstanding services, and meaningful interactions. I will now hand the call over to our CFO, Johnny, to review our financial performance.

Tie Li, CFO

Thank you, Xiang. Hello, everyone. I will now walk you through our second quarter financial performance. Given time constraints, my remarks today will be limited to some key financial results. All figures will be quoted in RMB unless otherwise stated. For further details, including the corresponding U.S. dollar amount, we encourage you to refer to our earnings press release. Total revenue in the second quarter was RMB 30.2 billion, down 4.5% year-over-year and up 16.7% quarter-over-quarter. This included RMB 28.9 billion from vehicle sales, down 4.7% year-over-year and up 17% quarter-over-quarter. The year-over-year decrease was mainly due to lower average selling price caused by product mix changes, customer interest subsidies and higher sales incentives, partially offset by increased vehicle deliveries. The sequential increase was mainly due to the increase in vehicle deliveries. Cost of sales in the second quarter was RMB 24.2 billion, down 5.2% year-over-year and 17.3% quarter-over-quarter. Gross profit in the second quarter was RMB 6.1 billion, down 1.8% year-over-year and up 14.1% quarter-over-quarter. Vehicle margin in the second quarter was 19.4% versus 18.7% in the same period last year and 19.8% in the prior quarter. The year-over-year increase was attributable to lower average cost of sales mainly due to cost reduction, partially offset by lower average selling price caused by product mix changes, customer interest subsidies and higher sales incentives. Vehicle margin remained relatively stable over the prior quarter. Gross margin in the second quarter was 20.1%, versus 19.5% in the same period last year and 20.5% in the prior quarter. Operating expenses in the second quarter was RMB 5.2 billion, down 8.2% year-over-year and up 3.8% quarter-over-quarter. R&D expenses in the second quarter were RMB 2.8 billion, down 7.2% year-over-year and up 11.8% quarter-over-quarter. The year-over-year decrease was primarily due to decreased employee compensation. The sequential increase was mainly impacted by the pace of new vehicle programs and higher expenses to support our product portfolio expansion and technology advancement. Our SG&A expenses in the second quarter were RMB 2.7 billion, down 3.5% year-over-year and up 7.4% quarter-over-quarter. The year-over-year decrease was primarily due to decreased employee compensation, partially offset by increased marketing and promotion activities. The sequential increase was mainly due to increased marketing and promotion activities. Income from operations in the second quarter was RMB 827 million, up 76.7% year-over-year and 204.4% quarter-over-quarter. Operating margin in the second quarter was 2.7% versus 1.5% in the same period last year and 1% in the prior quarter. Net income in the second quarter was RMB 1.1 billion, down 0.4% year-over-year and up 69.6% quarter-over-quarter. Diluted net earnings per ADS attributable to ordinary shareholders were RMB 1.03 in the second quarter, versus RMB 1.05 in the same period last year and RMB 0.62 in the prior quarter. And now turning to our balance sheet and cash flow. We maintained a robust cash position of RMB 106.9 billion as of June 30, 2025. Cash used in operating activity in the second quarter was RMB 3 billion versus RMB 429.4 million in the same period last year and RMB 1.7 billion in the prior quarter. Free cash flow was negative RMB 3.8 billion in the second quarter versus negative RMB 1.9 billion in the same period last year, and negative RMB 2.5 billion in the prior quarter. And now for our business outlook for the third quarter of 2025. The company expects the delivery to be between 90,000 and 95,000 vehicles and quarterly total revenues to be between RMB 24.8 billion and RMB 26.2 billion. This business outlook reflects the company's current and preliminary view on its business situation and market conditions, which is starting 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

Your first question comes from Tina Hou from Goldman Sachs.

Tina Hou, Analyst

I have two questions. First, I'd like to discuss our sales volume. This year, we've noticed a decline in sales for the L series. What strategies does management have in place for product marketing and channel strategies to meet our full-year target? Secondly, could management provide us with an update on our self-developed chips?

Donghui Ma, President

I'm translating for Mr. Ma here. There has been a significant focus on sales recently. Since our product lineup includes BEVs and EREVs, I will address these questions from two angles. Firstly, regarding EREVs, we will strengthen our market position through technology. As a leader in range-extended technology, we are improving product competitiveness with major upgrades in assisted driving. Starting in September, all AD Max models in our EREV lineup will be equipped with the VLA assisted driving system. We have delivered a preview version of VLA to users alongside the full delivery. The performance enhancements brought by VLA can be compared to the upgrade from ChatGPT 3.5 to 4.0. The VLA Driver large model has 4 billion parameters, which is over ten times higher than our previous end-to-end model, similar to an increase in brain capacity. This improvement has greatly enhanced experiences in two key areas. In daily driving, it provides significantly better smoothness and comfort, with many users reporting that it’s now hard to differentiate between whether the car or a human is driving. In terms of parking, users have praised our new VLA summon function and parking features, as they directly address pain points and enhance user experience. From an industry perspective, we believe the VLA architecture will strongly align with the evolution of human intelligence. More participants in the industry are recognizing and joining the VLA initiative. We anticipate that future competition in assisted driving will depend on the speed of iterations, with reinforcement learning being crucial. The simulation environment necessary for reinforcement learning has been established and is currently operational. The core technology behind it is the world model, which is used to recreate and generate scenarios and data essential for reinforcement learning. Moving forward, we will utilize this system to rapidly iterate the VLA model, maintaining its leading position in the industry. Regarding BEVs this year, we will gradually release our BEV lineup through two major models, creating new growth opportunities. Li MEGA has consistently achieved monthly sales exceeding 3,000 units, securing a stable foundation for our BEV sales. Since its launch, our Li i8 has received very positive feedback from test drives. We are currently increasing production capacity and aim to deliver between 8,000 to 10,000 units cumulatively by the end of September. In September, we will launch Li i6, which boasts a very appealing design, excellent driving capabilities, a good balance between comfort and sportiness, and spacious interiors. It meets the needs of younger consumers and has the potential to become a strong sales driver in the BEV segment. On the marketing side, we will implement tailored strategies for various markets. Our sales service system is structured around a single headquarters and 23 provincial regions, focusing on localization with strategies suited to local markets. For instance, in the northern region, we will emphasize promoting EREV models due to their advantages in range and performance during winter. In southern regions, we will concentrate on BEV models, highlighting aspects like energy efficiency, spacious interiors, and smart features to align with local consumer preferences. We will increase our marketing investments and move away from the belief that great products will sell themselves. We will fully embrace digital operations, developing a sophisticated digital marketing platform to track and optimize the entire consumer journey from audience targeting and lead generation to opportunity conversion. This will allow for precise decision-making on online marketing investments and significantly improve campaign effectiveness. Concerning our distribution channels, in Tier 1, Tier 2, and Tier 3 cities, we are optimizing our store portfolio to enhance consumer acquisition and conversion, with a primary focus on improving existing resources. We will optimize store locations and proactively relocate stores from lower traffic areas to those with higher consumer engagement and operational efficiency. We are also balancing our store mix, refining the ratio between mall-based and central auto parts stores, leveraging mall stores’ strengths in high-traffic areas while utilizing central stores’ capabilities for high conversion rates, creating a seamless acquisition to conversion loop and enhancing overall offline operational efficiency. To expand our coverage in lower-tier cities, we are implementing a lightweight model called Star Plan to open stores and explore new growth potential. These Star Plan stores require lower investments and have a shorter setup cycle compared to traditional stores, allowing for rapid development in key locations within Tier 4 and Tier 5 cities. By increasing store density, we aim to enhance brand visibility and fully capitalize on the potential of lower-tier markets, injecting fresh momentum into our overall sales growth.

Yan Xie, CTO

This is Yan. Let me share some information about our in-house design chip. The chip successfully tapered out and returned at the beginning of this year. It is currently undergoing vehicle testing and everything is in good shape. We expect to deploy it on our flagship models and deliver it to users next year. It takes about 3 years from setting up the project to its shipment. As far as I know, it is the fastest among similar efforts. The performance is quite satisfactory. Compared to the most powerful chips on the market, it could provide 2x performance when running GPT-like large language models and 3x when running vision models like CNN. We designed a novel data flow architecture in which model computation is mostly driven by data, not instructions like other architectures. In this way, the chip could achieve higher parallelism at runtime, and we believe it is more suitable for large neural networks. The data-driven logic is orchestrated by our in-house design compiler, allowing the hardware to be more efficient and run at a higher frequency than most comparables in the market. Quite different from other AI chips on the market, we adopted a truly hardware-software co-design approach where the chip, compiler, runtime system and operating system are designed together from the beginning. So we can vertically integrate the hardware and software modules into a more powerful AI inference system and it could keep on scaling in the future. With the landing of VLA models in vehicles, we observed that computing power increases could translate to ADAS performance improvement. This means higher computing power yields better performance, and it's more predictable. We have very strong confidence that our innovative architecture and full stack development capability could become our continuous differentiated strengths and grow even stronger in the future.

Operator, Operator

Your next question comes from Tim Hsiao from Morgan Stanley.

Tim Hsiao, Analyst

My first question is about the adjustments to the sales system. What is the current status of the changes to the auto sales system? Can you explain the reasoning behind these adjustments and the results you hope to achieve? Additionally, could these changes negatively impact short-term sales performances and the rollout of new models? That's my first question.

Donghui Ma, President

Translating for Mr. Ma here. In August, we underwent a significant reorganization of our sales team. The headquarters now directly manages 23 regions, and we have created new departments for sales, service operations, and marketing. We've restructured the store site collection team, enhanced our training academy, and improved our vehicle delivery teams. The new organizational structure is fully operational and running smoothly. In leading the sales system transformation, we implemented a 4-step internal approach, identifying frontline experts as key stakeholders. We focused on three main needs of these experts while aligning with the company's objective of providing the best direct sales store experience. First, we aim to ensure that frontline experts receive a competitive income, which depends on order volume and sales. We established a dedicated marketing department to increase online demand and restructured the site selection team to drive more foot traffic to stores. We now empower teams to develop sales strategies during non-peak times. Additionally, we have strengthened our training academy, providing experts with high-quality product messaging and tools to improve order conversion rates. Second, we will offer growth opportunities through a dual-track career advancement system for frontline staff, with both specialist and managerial paths. We initiated targeted training programs for store managers to define long-term career pathways, enhancing team stability and frontline execution capabilities. Lastly, we aim to enhance efficiency by reducing reporting layers and creating a flatter decision-making structure. We established dedicated feedback channels and quality operations teams to ensure frontline concerns are acknowledged and addressed promptly. This takes advantage of our direct sales model to quickly solve on-the-ground challenges. The sales system transformation is a proactive strategic move to better meet frontline needs and strengthen our direct sales advantage. While short-term adjustments may happen, this will improve user experience and team effectiveness in the long term. Concerning new vehicle launches, our timeline remains unchanged, and support has strengthened. Li Auto's new model rollout is progressing according to our roadmap. The Li i8 was successfully launched at the end of July, with deliveries starting on August 20. Our production facilities are at full capacity, and by the end of September, we expect to have delivered over 8,000 units of the Li i8, aiming to reach the 10,000-unit milestone. Looking ahead, the Li i6 will launch as scheduled in September. The sales system transformation is designed to provide robust support for these new launches, optimizing sales and service processes, enhancing the consumer purchase experience, and ensuring seamless new model launches to drive rapid sales growth. Thank you.

Operator, Operator

Your next question comes from Yingbo Xu from Citic.

Yingbo Xu, Analyst

So I have two questions. The first is that i8 has adjusted some of the configurations. What is our future strategy for the product and SKU for upcoming models? My second question is how we anticipate the gross margin level will be affected by the consumption of the third quarter sales and revenue guidance.

Xiang Li, CEO

We will be reducing the number of SKUs back to the time of Li ONE and the Li L9. Our focus will be on a single SKU to ensure it is competitive, maximized, and offers the best value for customers. We will also accelerate our technological platform and product iterations. Currently, the challenge is that while we are making one move, our competitors are making two. The speed of our iterations allows our peers to see our developments while we are still playing catch-up. Therefore, we need to enhance our pace of both product and technology iterations to stay ahead. We are confident that by 2026, we will have a stronger lead in vehicle products and AI compared to the L9's position in 2022.

Tie Li, CFO

This is Johnny. For the third quarter gross margin. I think with the current sales volume and revenue guidance, we expect to maintain our gross margin at about 19%. Yes, just as the second quarter and first quarter. Thank you.

Operator, Operator

Your next question comes from Paul Gong from UBS.

Paul Gong, Analyst

I have two questions. The first is about i6. Can you provide more details on the product positioning, launch timeline, and marketing strategy? My second question concerns your overseas strategy. I would appreciate any updates or insights you can share on this.

Xiang Li, CEO

For the Li i6, I am very confident that it will be the most competitive product in the large 5-seater SUV market due to its distinctive exterior design, spaciousness, comfort, extensive range, and excellent real-world performance. It will feature our industry-leading VLA Driver large model and will provide the best handling of any Li Auto product to date. Our marketing approach for the Li i6 will focus on being more user-centric, emphasizing product value and experience in a way that is easily understood by users. The training for our sales, deliveries, and services teams will also be more effective. Additionally, we will take public relations seriously, ensuring that any issues are addressed promptly before they escalate.

Donghui Ma, President

Translating for Mr. Ma here. With our first program, Li ONE, we started delivering in volume at the beginning of 2020. We view the period from 2020 to 2024 as the initial stage of development for Li Auto, focusing on the domestic market and EREV products. The second phase will span from 2025 to 2027, during which we will formally expand into both global and domestic markets, and our product line will include electric vehicles. The third phase will begin after 2027, concentrating on full autonomous driving and new AI technologies. 2025 marks the start of our global strategy. In terms of research and development, we have established development centers in Germany and the U.S. Regarding sales channels, we are beginning to develop an overseas after-sales organization and building an international team alongside a variety of IT systems. For products launching in 2026, we will consider global regulatory standards. Our product roadmap and go-to-market strategy have solidified with a focus on the Middle East, Central Asia, and Europe. While the overseas market presents both opportunities and challenges, such as Li Auto being a relatively unknown brand abroad, we understand that expanding into these markets will require time and effort. We are committed to this long-term strategy of overseas market expansion. Thank you.

Operator, Operator

Your next question comes from Jing Chang from CICC.

Jing Chang, Analyst

I have two questions. First, we noticed that our operating cash flow or net cash outflow increased in the second quarter. Could you explain the main reason behind this and how we should anticipate future cash flow? Second, regarding autonomous driving, we observe some changes in our autonomous sector along with regulatory tightening. Will this impact our future development and the iteration and deployment of our new VLA factors?

Tie Li, CFO

This is Johnny. I will take the first question. I think in the second quarter, as our payment term at the end of last year was 3 months to 4 months. Basically, we are paying off most of the payables of last December, November, and January, February. So this is why in the second quarter, we had some negative operating cash flow. As you may know, we have already adjusted suppliers' payment terms to 60 days to respond to regulatory requirements and the industry trend. So basically, in the third quarter, the negative operating cash flow used can be expected to improve in the fourth quarter if we can have a better sales volume guidance in the fourth quarter. Thank you.

Donghui Ma, President

Translating for Mr. Ma here. To directly answer the question, yes, our assisted driving team has experienced a few departures recently. Some level of talent movement is not uncommon in this growing industry. The percentage of people involved is actually very small. We sincerely thank those who have left for their contributions at Li Auto. Together, we have delivered many great products and experiences for our users. Our current assisted driving team operates within a well-defined organizational structure, a robust talent pipeline, and a strong strategic resource pool. In light of recent changes, we have appointed new leaders who bring valuable energy to their roles. They possess extensive experience from previous work and offer an international technical perspective. We have the innovative thinking necessary to propel the team forward. Additionally, Li Auto's strong brand appeal and promising prospects continue to attract exceptional talent from across the industry, infusing fresh energy into our team. We are making steady progress with our VLA product delivery. The VLA preview version we have delivered includes VLA driving, VLA parking, and VLA summon capabilities. We anticipate rolling out a complete version with VLA command functions to provide more convenient and intelligent assisted driving experiences. We also have another major update planned for October to create additional user value. The heightened regulatory focus on assisted driving signifies an important factor for the healthy and orderly growth of the industry. From our viewpoint, a stricter regulatory environment allows truly capable companies with real technical expertise to stand out. Li Auto's safety and compliance have always been our top priorities in developing new technologies. As we adjust to these evolving standards, we have been enhancing our testing protocols and quality control systems. This not only improves VLA's technological maturity but also reduces potential risks, helping us deliver a safer and more reliable assisted driving experience for our users. Throughout VLA's development, we've maintained a focus on user values and compliance boundaries, continually balancing safety validation with experience innovation. We are confident and fully capable of maintaining consistent progress in VLA's development and ensuring a timely rollout. Thank you.

Operator, Operator

Your next question comes from Ming-Hsun Lee from Bank of America.

Ming-Hsun Lee, Analyst

Currently, Li Auto has established a significant number of 5C supercharging stations. In the future, will you allow other brands to use your charging stations? How will you manage these stations? If you permit other brands access, will that affect the user experience for your own brand's car owners? Additionally, I have a question about your autonomous driving technology. You have developed impressive VLA technology, but what do you foresee as the future direction for autonomous driving and the evolution of this technology?

Donghui Ma, President

Translating for Mr. Ma here. For Li Auto vehicle owners, I can assure you that their experience with our charging stations will always be the best. I can summarize the experience with four words: coverage, speed, experience, and value for money. First of all, coverage. We are absolutely number one among all automakers in terms of the number of supercharging stations. We have about 1.5 times the number of charging stations compared to Tesla. Wherever our users go, they can easily find our charging stations. We completed the coverage along the G318 Sichuan-Tibet best highway route and core sections of the 9x9 highway network in China. We now operate the largest urban and highway supercharger network of any automaker in China. Second, speed. Our charging network supports 500 kilometers of driving range with only 10 minutes of charging, just the time it takes to buy a cup of coffee—it's really, really fast. And experience, our charging network provides our users with a very integrated experience between the vehicle and the charging stall, supported by intelligent charging planning, charging reservation, and plug-in charge functionalities. Combining that with a lightweight charging pole designed to be easily handled with one hand, it is especially user-friendly for female users. In terms of value for money, compared to the owners of other EV brands, Li Auto vehicle owners enjoy a dedicated preferential electricity charging rate, saving on every charge. In addition to that, our owners can use their loyalty points to offset our charging costs. These aren't just numbers on paper; they translate into real everyday charging experiences that our users can share positive feedback on every day. Our 2C and 4C charging stalls have been open to vehicle owners of other brands, but those owners won't be able to have the same level of experience as our vehicle users because the best experience requires seamless integration of the vehicle as well as the charging stations. Thank you.

Xiang Li, CEO

In the beginning of 2025, the assisted driving sector has faced significant challenges, with technological advancements and user experiences slowing down alongside increasing regulatory pressures. However, I view this as a turning point. The VLA offers a clear pathway to L3, L4, and even L5 autonomous driving. It operates similarly to human drivers, suggesting it could perform 10 to 100 times better than human drivers in the future. The VLA is a pivotal player in the third stage of AI, and we are developing these capabilities in two main ways. First, it leverages human experience by learning from human data and foundational models through extensive operation of supervised fine-tuning and reinforcement learning from human feedback to reach human-driver performance levels. This is akin to an apprentice learning from a master. More crucially, it undergoes reinforcement training within environments created by a world model using reinforcement learning with AI feedback to train agents. For instance, we observe L4 vehicles navigating construction zone tracks. Such data is rare in the real world and isn't suitable for training. However, through the world model, we can produce countless variations of scenarios that vehicles might encounter, allowing agents to learn quickly and manage these challenges through repeated practice. The world model supplies more complex, comprehensive, and higher-quality data compared to real-world data. This method effectively tackles critical problems in real data, including underrepresentation, imbalanced distribution, and the effects of unavoidable data quality issues on the agent. We believe that with continuous iterative training and development, the VLA will achieve a driving safety level at least 10 times greater than a human driver in the next two years. The difficulty lies in developing an agent with both a more powerful brain and a stronger heart. The brain refers to model scale; our end-to-end model has 0.3 billion parameters, while the VLA model has 4 billion, which is still far less than human capacity. Expanding this scale will significantly improve generalization abilities. Scaling the model will also demand much more computing power on the device side, which provides the necessary resources for the larger models. Additionally, in terms of world models and reinforcement learning with AI feedback, we will likely need at least ten times more computing power for reasoning than previously to create the necessary environments and data for training. We expect that with advancements in reinforcement training, increased scale, and computing power, our progress will surpass anything experienced with earlier approaches. In the next 3 to 5 years, I believe the greatest application of agents in the digital domain will be in programming and coding, while in the physical realm, it will focus on autonomous driving. I am confident that Level 4 autonomous driving will be achieved by 2027.

Operator, Operator

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.

Janet Chang, Investor Relations Director

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 lines. Thank you.