Li Auto Inc. Q2 2021 Earnings Conference Call August 30, 2021 8:00 AM ET
- Janet Zhang – Director of Investor Relations
- Kevin Yanan Shen – President
- Tie Li – Chief Financial Officer
- Xiang Li – Chief Executive Officer
- Kai Wang – Chief Technology Officer
Conference Call Participants
- Fay Fang – Goldman Sachs
- Tim Hsiao – Morgan Stanley
- Ming Hsun Lee – Analyst
- Bing Wang – Credit Suisse
- Chang Liu – CICC
- Paul Gong – UBS
- Ying Bo Su – Analyst
Hello, ladies and gentlemen. Thank you for standing by for Li Auto’s Second Quarter of 2021 Earnings Conference Call. And at this time, all participants are in listen-only mode, and today’s conference call is being recorded. I will now turn the call over to your host, Janet Zhang, Director of Investor Relations of the Company. Please go ahead, Janet.
Thank you, Annie (ph). Good evening and good morning, everyone. Welcome to Li Auto’s Second Quarter 2021 Earnings Conference Call. The Company’s financial and operating results were published in the press release earlier today, and are posted on the Company’s INR website. On today’s call, we have our President, Mr. Kevin Yanan Shen, and our CFO, Mr. John Tie Li, to begin with, prepared remarks. Our founder and CEO, Mr. Xiang Li, and our CTO Mr. Kai Wang will join us for the Q&A discussion. Before we continue, please be reminded that today’s discussion will contain forward-looking statements made, ended the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve inherent risks and uncertainties. As such, the Company’s actual results may be materially different from the wills expressed today. Further information regarding risks and uncertainties is included in certain filings of the Company with the U.S. Securities and Exchange Commission, and announcements published on the website of the Hong Kong Stock Exchange and the Company. The Company does not assume any obligation to update any forward-looking statements except as required and/or applicable law.
Please also note that Li Auto’s earnings press release in this conference call includes discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial matters. Please refer to Li Auto’s press release and interim results announcement, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our President. Please go ahead, Kevin.
Kevin Yanan Shen
Thank you, Janet. Hello, everyone. And thank you for joining our call today. First of all, we are proud that our Class A ordinary shares started trading on the main board of the Hong Kong Stock exchange on August 12th, opening a new chapter for our Company. We are honored and also humbled by the support we received from all investors. With the Hong Kong due primarily listing, which significantly strengthened our [Indiscernible] base with over $1.5 billion of net proceeds rates.
This will provide strong financial support for our R&D initiatives and the direct sales and servicing network expansion, as well as enhanced protection for our shareholders. We will continue to take the responsibilities associated with being a publicly-traded Company seriously. Work to build out our long-term vision and creates value for our users, shareholders, and our employees alike. Next, moving to the key highlights of our second-quarter results. Our 2021 Li ONE has been an exceptional performer since its debut on May 25th. Our 2021 Li ONE boasts an enhanced NEDC range of 1,080 kilometers, optimize mobility comfort, and a more intelligent cockpit. It has received rave reviews and strong user endorsements for its outstanding features and performance.
Our second-quarter deliveries achieved 17,575 units, increasing 166% year-over-year. Our July deliveries reached 8,589, hitting a new record. In July, Li ONE topped sales charts in the New Energy SUV and Large SUV categories according to new car insurance registration data reported by China Automotive Technology & Research Center. It is a powerful testament to Li ONE’s highly competitive product features, making us a leading domestic?iEV? manufacturer in China. While these ratings and the Li ONE’s strong performance and popularity are exciting achievements, yesterday’s home run does not win today’s game. We will continue to be disciplined and dedicated.
We will strive to constantly surpass ourselves in products and services to earn the support, trust, and loyalty of our users. Our record-high deliveries would not have been possible without the collaboration and the assistance of our supply chain partners. They have been helping us navigate the ongoing semiconductor shortages. Turning to profitability. Our gross margin reached 18.9% this quarter, up 5.6% from year-over-year and 1.6% quarter-over-quarter. Our operating cash flow was RMB 1.4 billion or US$218 million during the second quarter, demonstrating our consistent high operating capability.
In the second quarter, we aimed to further broaden and deepen city coverage to address increasing demand from prospective users across China and prepare ourselves for our new model launches in 2022 and beyond. Thus, we accelerated the expansion of our direct sales and servicing network. As of July 31st, 2021, we had 109 retail stores covering 67 cities and 176 servicing centers and Li Auto authorized body and paint shops are operating in 134 cities. We are on track to reach our year-end target of 200 retail stores. We have extended our footprint to lower-tier cities in China.
In August, we opened a retail store in Lhasa, Tibet. This has taken us direct sales and servicing network, geography co-coverage of provinces, autonomous regions, and the centrally administered [Inaudible] police in Mainland, China to 100%. The industry-wide semiconductor shortage has affected our monthly deliveries in recent months, resulting in an undelivered backlog. As our new order exceeded 10,000 in June, we tried our best to utilize alternative solutions to enhance our flexibility and acquire industry sources.
Going forward, we’ll continue to collaborate closely with our supply chain partners to mitigate the semiconductor shortage and minimize the impact on our production. Given the proven success of our Li ONE catering to the needs of families, we are working to diversify our product portfolio to appeal to an even broader family-user base. We have 3 platforms under development; the X platform for our next-generation EREV, with the first model to be released in 2022; and the Whale and the Shark platform for our BEV models to be launched in 2023.
The development of these new platforms is progressing smoothly and we are confident to launch new vehicle models sometime. In July, we also signed an MOU with a local Company for collaboration in the reconstruction and expansion project of an automobile manufacturing plant in Beijing. This will further expand our production capacity and support increasing vehicle sales volume with future models.
On August the 27th, 2021, we also signed an investment agreement with a wholly-owned subsidy — subsidiary of Xingchen China Power Holdings Limited to form a new Company in [Indiscernible] Sichuan Province, China, to develop and manufacture our next-generation [Indiscernible] extension system. Do we firmly believe that smart EREVs will be a superior replacement?ICE? costs and the increase the overall AEV penetration rate in the medium to long term.
We continue to view it as one of our core strategic development directions. The comp ratio. will leverage the R&D and the production capabilities of both companies to provide high-quality products and further expand the market share of smart EREVs in the domestic market. With respect to international markets, we will keep our strategy to always make plans before taking action.
As we want to be a winner, not just a mere participant in the global market, doing many shares overseas, our car Company has to develop the right product to attract customers with tastes and the requirements that are different from domestic customers. We have set up a team dedicated to the overseas market, and we are meticulously working on the plans to find a winning formula. As corporate citizens, we are proud to have passionately engaged in social relief activities to help people in need.
In July, in response to the [Indiscernible] province, we organized the emergency relief with donations to support effective people, including our users. We also mobilized all three trailers, we have excess in the adjacent provinces to join the rescue efforts. In addition, we provide our users with services such as warranty extension for replacement parts, free replacement of flood-damaged charging posts, and free vehicle inspections for all disaster-stricken vehicles.
We made our efforts to reassure them and help in any way possible for a smooth transition back to normalcy. Lastly, we achieved a AA MSCI ESG rating in April, making us the leader in ESG among 40 rated automotive companies. Going forward, we will continue to undertake social responsibilities, and view this as an integral part of our region to build smart electric vehicles that make families happier. Now, I will turn this call over to our CFO, Mr. Tie Li to review our financial performance in the second quarter.
Thank you, Kevin. Hello, everyone. I will now walk you through some of our financial results for the second quarter of 2021. Due to the time constraints, I will address our financial highlights here and encourage you to refer to our earnings press release for further details. Our total revenues in the second quarter of 2021 were RMB 5.04 billion or $788.4 million, representing an increase of 40.7% from RMB 3.58 billion in the first quarter of 2021. These included RMB 4.9 billion or $759.4 million from vehicle sales, which increased 41.6% quarter-over-quarter.
This increase in vehicle sales was mainly driven by the increase in delivery of the 2021 Li ONE since its release on May 25th, 2021. Revenues from other sales and services were RMB135.7 million or $21 million in the second quarter of 2021, representing an increase of 21.7% quarter-over-quarter. The increase in revenue from other sales and services over the first quarter was mainly due to the increased sales of charging stores, accessories, and services in line with our higher accumulated vehicle sales.
The cost of sales in the second quarter was RMB4.09 billion or US$632.9 million, representing an increase of 38.2% quarter-over-quarter. Gross profit in the second quarter of 2021 was RMB 952.8 million or US$147.6 million, or growing 54.5% compared with the first quarter of 2021. Vehicle margin in the second quarter was 18.7% compared with 16.9% in the first quarter of 2021. The increase in vehicle margin from the first quarter was primarily driven by a higher average deciding price in the second quarter of 2021 due to our launch of 2021 Li ONE in late May.
Our gross margin in the second quarter of 2021 was 18.9% compared to 17.3% in the first quarter of 2021, which was mainly attributable to the increase in vehicle margins. Operating expenses in the second quarter of our 2021 were R&D 1.49 billion $230.6 million representing an increase of 44 –45.3% quarter-over-quarter. Research and Development expenses in the second quarter of 2021 were RMB 653.4 million or $101.2 million, representing an increase of 70, 27% cost or will cover excluding share-based compensation expenses, non-GAAP, research and development expenses were RMB 543.7 million or 84.2 million U.S. dollars, increasing 36.6% quarter-over-quarter.
The increase in research and development expenses over the first quarter of 2021 was primarily attributable to the increasingly high cost and the increased research and development activities for the Company’s future vehicle models. [Indiscernible] expense in the second quarter of 2021 were RMB of 835.3 million or 129.4 million U.S. dollars representing an increase of 63.8% quarter-over-quarter, excluding share-based compensation expenses non-GAAP selling, general and administrative expenses were RMB 788.9 million or US$129.9 million, increasing 73.6% quarter-over-quarter.
The increase over the first quarter of our 2021 was primarily driven by increased marketing and promotion activities, as well as increased headcount and rental expenses with the expansion of the Company’s distribution network. Loss from operations in the second quarter of 2021 was RMB 535.9 million or $83 million U.S. representing an increase of 31.4% compared with the first quarter, Excluding share-based compensation expenses, the non-GAAP loss from operations was RMB 365.5 million or $56.6 million, representing an increase of 62.6% quarter-over-quarter.
Net loss was RMB 235.5 million. or $36.5 million in the second quarter of 2021, compared with an RMB 360 million net loss in the first quarter of 2021. Non-GAAP net loss was RMB 65.1 million or $10.1 million in the second quarter of 2021, compared with an RMB 177 million net loss in the first quarter of 2021. Now, turning to our balance sheet and cash flow; our cash and cash equivalents, restricted cash, time deposits, and short-term investments, total RMB 36.53 billion or $5.66 billion as of June 30th, 2021. Operating cash flow in the second quarter of 2021 was RMB 1.41 billion, or $218 million. Free cash flow was RMB 982.1 million or $152.1 million in the second quarter.
And now for our business outlook. For the third quarter of 2021, the Company expects deliveries to be between 25,000 and 26,000 vehicles, representing an increase of approximately 188.7 to 200.2% from the third quarter of 2022. The Company also expects the third-quarter total revenue to be between RMB 6.98 billion and RMB 7.25 billion or $1.08, and $1.12 billion, representing an increase of 177.8% to 188.9% from the third quarter of 2022. This business outlook reflects the Company’s current and preliminary view of the business situation and market conditions. In particular, the ongoing industry-wide semiconductor shortage, due to the global COVID-19 pandemic, which is all subject to change. I will now turn the call to the operator to facilitate our Q&A session. Thank you.
Operator instructions]. [ Operator instructions]. And please standby while we compile the Q&A roster. And for the benefit of all participants on today’s call, please limit yourself to 2 questions. And if you have additional questions, you can re-enter the queue. If you’re going to ask a question in Chinese, please follow with English translation. [ Operator instructions]. Our first question is from the line of Fay Sang of Goldman Sachs. Your line is open. Please go ahead.
Great. Thanks for the opportunity. Congratulations on the results. Can management talk a little bit about competition and regulation? So on competition, some of your incumbent peers have really speed up launching new products; Great Wall, Geely, BYD, for instance. The frequency of their launches has increased, and the hit rate sales also increased. So just wondering if — if you have refreshed thoughts on their progress and also the potential for them to enter into the premium segment. That’s the first question. The second is about regulation. What are your thoughts on regulatory risks around autonomous driving and assisted driving development? Do you think if there is any regulatory intention to slow down things a bit in order to perfect the safety and customer experience? [Indiscernible] [Indiscernible]
Kevin Yanan Shen
Fang, Fei, this is Kevin. Thank you for the question. Yeah. I think for the product development cycle, we have our own strategy and schedule to launch new products. So basically, we are accelerating our development, our next generation of the IED platform, and also the HPC BEV platform. As we shared before, we’ll roll out our brand new models based on our next-generation EREV platform next year. And 2023 will be a big year for us. We will have 2 new models on the X platform and another to HPC BEV model launch. Yeah.
And for the regulation impact, we have been closely communicating and engaging with the authorities. I think the intention of the MRIT is to standardize the overall smart electrical vehicle industry, and there is a technology requirement for the ADAS solution. I think overall, this is a good thing. This will ensure the healthy development of this industry. And I think as the impact to us is basically in the future, we need to be more cautious when we launch the product with ADAS solution.
I think it will take us more effort to fully develop a function before the launch into the market, but that’s was our original plan, so there is no change in our strategy. But overall I think — our focus on ADAS will not change. Yeah.
That’s a very helpful color. Thank you, Kevin.
Kevin Yanan Shen
Thank you. Thank you. Our next question is from the line of Tim Hsiao of Morgan Stanley. The line is open, please go ahead.
Thanks for taking my question, and congratulations on the solid results. I have 2 questions. The first question is could the management team shed some light on what components or types of changes are currently in short supply for Li Auto? Because if we look at the numbers, I think Li Auto’s production since more resilient than its peers. So how can we manage their supply disruption that triggers and however peers? Are there any alternative sources Li Auto could secure the component and the support likely more than 12,000 multi-gram grades into the fourth quarter? So this is the first question about the supply.
And my second question, I think Johnny touched briefly on, during the presentation. What’s the progress in our new plans for capacity expansion in Beijing? What the? nameplate? capacity and [Indiscernible] the contribution from the new capacity started kicking in. [Indiscernible] [Indiscernible]
Kevin Yanan Shen
Thank you, Tim. This is Kevin. I will answer the first question about the shortage. Right now, the single-biggest shortage we are facing is an industry-common shortage due to the COVID-19 situation in Malaysia, especially from?ST.? This is an industry common shortage. And in the past several months, we have been fighting every day for the supply. I don’t think we — our situation is better than the other competitors. The outlook for the next quarter, if the COVID-19 situation we are getting better. We believe overall the industry supply will become more balanced. But the COVID-19 situations. And it’s not that predictable. So it’s still a risk for us. Yeah. John, do you want to comment on this?
Yeah. For the Beijing fights, I think we will release more details in the future. One thing we’ve made sure is on track to get ready for the BEV launch in 2023. Yeah. Thank you.
Great. Thanks for sharing.
Thank you. Our next question is from the line of Ming Hsun Lee of [Inaudible] Securities. Please go ahead, your line is open.
Ming Hsun Lee
Thank you. [Foreign language] [Indiscernible]
My first question is regarding the gross margin improvement chain, especially in the second quarter. Your S&P is increasing, but also you’re close to, of course, sell the car is also decreasing, so could you elaborate more and also comment on the third quarter and quarter trends. This is my first question. My second question, could you give us more details regarding your collaboration with [Indiscernible] Power on the collaboration of EREV? Thank you.
Kevin Yanan Shen
Lee, thank you. This is Kevin. Very quickly, your first question, besides the sales price, the increase of the [Indiscernible] one, from the cost perspective, primarily we have the — partially due to the bond costs of reduction from some of our suppliers. And also because of the sales volume increase, therefore the amortization will reduce. So that’s result in the gross margin increase. I think for the third quarter and the fourth quarter will continue to see the gross margin will gradually improve also.
We still see that overall for this year, the blended gross margin will be somewhere between 19 to 20%. The second — your second question is about our joint venture with Xinchen [Indiscernible] . Actually, Xinchen [Indiscernible] is a leading engineering Company in China, especially they have been a long-term partner with BMW. We have this joint venture to jointly develop and manufacture our next-generation EREV engine with Xinchen. And for this joint venture, we have 51% of the share. Thank you, Lee.
Ming Hsun Lee
Thank you. Our next question is from the line of Bing Wang of Credit Suisse, line is open, please go ahead.
Thank you. I’ve got 2 questions. Number 1, about long-term borrowing. So we found out in the second quarter our long-term borrowing actually got to 5.6 billion. Given you have so much cash on hand. Can you explain why the tapped have a big jump at the end of June? That’s the number 1 question. Number 2, is [Indiscernible] volume guidance. You actually, you could be on September number can go to 10-K, but on third-quarter guidance, it seems much if we maintain the 10-K guidance for September ended August are very low [Indiscernible] So how should we think about the sort of quarter guidance? And yours actually at 1.6 million units by 2025. In price and maybe next year, profit about 150,000 units. What we’re doing the next year 2022, the volumes should be 150,000 units. Thank you. [Indiscernible]. [Indiscernible]
First of all, a lot of them [Indiscernible] because of the long-term [Indiscernible] in April. So yeah. It’s the [Indiscernible] .
Kevin Yanan Shen
Yeah. This is Kevin. Thank you Wang Bing for the question. I think when we give out the guidance for the third quarter, we have already taken to consideration of the potential risk of the impact of the COVID-19 militia. Yes. So, therefore, we don’t want to be too aggressive. So I think today is already the 30s. So in the next 2 days, you will see our August number. Yeah. And for the next year, I think your estimation is within the range of our plan, yeah. Of course, we want to further increase the monthly delivery of Li ONE.
Thank you. Our next question is from the line of Chang Liu of CICC. Please go ahead. The line is open.
[Indiscernible] I will translate my question. My first question is about our financial expenses. Could you give us some details on the acceleration of SG and an in second quarter, and then the guidance on the full year on the January expenses? And my second question is down our pure and extra models to be launching 2023. Could you give us — some updates on — its development, especially some key miles high-pressure charging system. Thank you.
Yeah. So for the SG&A, this is Tony (ph). And for the SG &A, as I just mentioned, is so more adhere to the network expansion and also the marketing and promotion activities are in the Second Quarter. and also the increased high car and the rental expenses. And in the second half of this year, we will continue to expand our retail stores towards our target of 200. And for R&D, we still want to keep our — the whole year of guidance, which is around 3 billion RMB. Well, second question. [Indiscernible] .
Kevin Yanan Shen
Yeah. This is Kevin. For the HPC BEV models, we are on track in terms of the R&D process. To share some of the milestones, for example, we already have we foresee new battery, heath sample ready. That’s a big milestone. And also for our HPC, super-fast charging port design. We have already finished the concept design and we plan to have our first pilot charging station within this year. Yeah.
Thank you. Our next question is from the line of [Indiscernible] Fang of UBS. The line is open. Please go ahead.
Hi. I’m not sure if this is my line, this is Paul Gong of UBS. I have two questions. The first one is regarding your split of the BEV versus the [Indiscernible] — versus the EREV in terms of positioning. Starting from 2023, you have both. How do you position the different segments and the size of each segment? And how should we think — is this going to be the EREV is more focused on the larger recall, our SUV NPV, etc, and the PUV more focused on the smaller vehicle, next to Sedan, etc.
How should we think about the different positioning of the BEV versus a year-over-year? My second question is regarding your R&D spending split going forward, for the second half of this year, for next year, and going forward. How much portion is going to be spent on the BEV — how much on the EREV and how much on the autonomous driving. And let me translate my questions quickly. [Indiscernible]
Kevin Yanan Shen
Paul, yeah. Let me take the first question. This is Kevin. So in the future, when we have a BEV and the EREV at the same time, actually we do not differentiate these 2 based on size or car form factor. So basically, the all these 2 driving power trains, we will, based on these developer cars to cover the price band from 200 to 500 RMB.
And each will have a different size of cars designed for family users. I think the key difference between these 2 is based on customer preference. If they are more concerned about the BEV’s range and anxiety and they don’t have access to good charging infrastructure. They will choose — we believe they will choose [Indiscernible] Yeah. If they have a good charging infrastructure, they will choose BEV. So that’s our viewpoint. Yeah.
Yeah. Are the expenses we still want to keep our original guidance from now to 2023 to $1 billion U.S. dollars. And yeah, that will cover the vehicle at the coming models, and also the autonomous driving and also some area we want In the next week or three and also some investments on the RD5 for the future [Indiscernible] side. Thank you, Paul.
Thank you. [Operator instructions]. Next — our next question is from the line of Ying Bo Su of [Indiscernible] . Please go ahead, your line is open.
Ying Bo Su
My first question is, how — what’s our pricing strategy? Are trying to maintain our high margin or maybe we have more flexibility, in the pricing power of items. And the second question is that considering a lot of newcomers in this sector, maybe 2023. is a period that a lot of newcomers join in, and they launch new models. And by the year 2025, maybe the market share is going to be concentrated again. So how do we expect the next 3 or 5 years of computation like technical products. [Indiscernible] So could you give us some colors? Thank you.
Kevin Yanan Shen
Thank you, Ying Bo. This is Kevin. First of all, about the pricing. From our point of view, for each of the products, we designed, based on a price point. And unless we see the competitiveness issue, Otherwise, we will not alter the price point of these products. I think to answer your question in another way to gain more volume definitely, well, we’ll launch [Indiscernible] cover wider price band. Yeah. So as we mentioned that in the future, our product will cover between 200 K RMB to 500 K RMB.
That’s not to say, we are going to reduce the price of some of our products. We’re going to design different products to cover different price points. That’s our philosophy. And also, by the way, they — the market size of between 200K to 500K is increasing. That’s probably the only increasing segment. Segment — the volume is increasing, yeah. And about the future competition starting from 2023, I think we will stick to our 3 key choices. Yeah. So the first one is that we’re competing in the overall PV market. Yeah. That’s why we designed — that’s why we believe that we have to solve the anxiety issue. That’s one of the core values we want to deliver to our customers.
That’s why you see we already have an EREV solution and we’re going to have our next-generation EREV solution to completely solve the range anxiety issue for our customer, and this is our midterm-long-term strategy. We’ll continue to launch EREV products. On the other hand, we also see the opportunity to solve the range anxiety issue with high-power charging solutions. That’s why we have this new whale and shark platform. This is the first choice. The second choice is our target customer choice. We want to focus only on the family users. We see this is our growing demand segment.
And when we design our car, we want to design the car catering to the needs of all the family members. The third thing is that we will continue to focus on the autonomous driving solution development and also the smart cabin solutions development. So these three things are the fundamental building block of our product competitiveness. We don’t think we’ll — we believe we’ll stick to these 3 key things. Yeah.
Ying Bo Su
Thanks, Kevin. That’s very helpful. Thank you.
Thank you. And as we are reaching the end of our conference call, I’d like to turn the call back over to the Company for closing remarks. Ms. Janet Zhang, please go ahead.
Thank you [Indiscernible] Thank you once again for joining us today. If you have any further questions, please feel free to contact Li Auto’s in-retro relations team. Then that’s all for today. Thank you, and have a good one.
Source: Li Auto