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Li Auto Inc. (NASDAQ:LI) Q3 2022 Earnings Call Transcript

Li Auto Inc. (NASDAQ:LI) Q3 2022 Earnings Call Transcript December 9, 2022

Li Auto Inc. misses on earnings expectations. Reported EPS is $-1.68 EPS, expectations were $-1.03.

Operator: Hello, ladies and gentlemen. Thank you for standing by for Li Auto’s Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today’s conference call is being recorded. I will now turn the call over to your host, Janet Zhang, Investor Relations of Li Auto. Please go ahead, Janet.

Janet Zhang: Thank you, Matt. Good evening, and good morning, everyone. Welcome to Li Auto third quarter 2022 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 IR website. On today’s call, we have our President, Mr. Kevin Yanan Shen; and our CFO, Mr. Johnny Tie Li, to begin with prepared remarks. Our Founder and CEO, Mr. Xiang Li; together with our senior management, Mr. Donghui Ma and 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.

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Forward-looking statements involve recurrent 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 filings of the Company with the U.S. Securities and Exchange Commission 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 documents on the IR section of our website, which contain 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.

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Kevin Yanan Shen: Thank you, Janet. Hello, everyone, and thank you for joining our call today. I will review our third quarter key highlights. In the third quarter, we navigated our model succession and launch cycle as well as the challenging macro environment and supply chain constraints. Against this backdrop, we delivered 26,524 vehicles, up 5.6% year-over-year. Despite our supply chain bottleneck, we delivered over 10,000 lead airlines in September, the model’s first four months of production. This marked the first time that the Chinese branded premium model priced over RMB400,000 achieved monthly sales of more than 10,000 vehicles, demonstrating Li L9 as a topic among full-size SUVs for family users. This success was due to the exceptional strength of our team, their outstanding management of the Li L9 ramp-up process and their skillful collaboration with our supply chain partners.

As Li L9 continues to surpass user expectations with class-leading features in drivability, safety, interior space, passenger experience and smartness, demand remain robust, providing constantly strong order inflow for the model. Li L9 has been the sales champion among full-size SUVs in China since its delivery started. Benefiting from Li L9 strength, our total delivery in October reached 10,052, representing a 31.4% year-over-year increase. This followed by a record breaking 15,034 vehicle deliveries in November. As always, we would like to extend the sincere gratitude to our over 200,000 Li ONE users, we will continue to adhere to hire the industry service standards and continue to improve the performance of Li ONE through OTAs. On September 30, we launched Li L8, a six-seat premium family SUV that succeeded Li ONE.

We also unveiled Li L7, a seven-seat flagship family SUV on the same day. We commenced the deliveries of Li L8 in November. Let me provide more details of this vehicle. Li L8 employs our new generation all-wheel drive range extension system and boast over 100 features in their standard contributions. It’s available in two trims: Pro and MAX, providing users with flexible choices of smartness. The two trims are harnessed respectively, with Li AD Pro and the Li AD MAX autonomous driving systems. Pro is powered by the Horizon Robotics Journey 5 chip with 128 tops of computing power, while MAX is powered by the dual Orin-X chips with 508 TOPS of computing power. In addition, the two trims are equipped with innovative smart space system: SS Pro and SS MAX, featuring a first-roll full-screen interactive system and a five-screen three-dimensional interactive system, respectively.

These packages bring a new level of driving and entertainment experience to smart electric vehicles. We are pleased that Li L8, numerous class leading feature have delighted its first batch of users, and we believe that their satisfaction for the vehicle has broadly exceeded their expectations. We are confident that Li L8 will stand among the finance option for six seaters priced over RMB300,000. And together with Li L9, the sales campaign of full-sized SUVs in China; and the Li L7, which we believe will be a top choice among five-seats SUVs priced over RMB300,000. We expect to captivate a broader range of family users with differentiated needs and gain a larger market share in the RMB300,000 to RMB500,000 priced segment. We are encouraged by Li L9 continued strong sales performance and the solid demand for Li L8.

But considering the ongoing supply chain uncertainty, we expected fourth quarter deliveries to be in the range of 45,000 to 48,000 vehicles. We will continue to collaborate closely with our supply chain partners to react quickly to changes and to mitigate potential risks. During the third quarter, we continued to demonstrate our strong commitment to vehicle safety. According to the vehicle safety evaluation results released on November 4 by the China Insurance Automotive Safety Index, or C-IASI, Li L9 obtained the G rating, the highest safety rating in three out of four evaluation categories: occupant safety, pedestrian safety and assistance safety. In the category of crashworthiness and repair economy, Li L9 received an M rating, one of the top results received by premium vehicles tested by C-IASI since 2017.

In addition, it was the first domestic full-size SUV tested for 25% front offset impact on both the driver and passenger sides and achieved the G rating for both tests. Thanks to its ultra-high-strength body structure, Li L9 also demonstrated class-leading performance with the ability to withstand a peak force of 116,475 newtons in the roof strength test. Its roof can withstand a weight of 11.8 ton on the side effectively preventing cabin deformation and the safeguard, a relatively large head space for drivers and passengers to survive in case of accidents. We continue to — we continually improved our vehicle’s performance and features through OTA after their delivery. In early November, we released our OTA 4.1 upgrade for Li L9, further enhancing user experience with our upgraded Li AD autonomous driving system and smart in-car voice assistant, Li Xiang, Tongxue, as well as improved smart space interactions and entertainment experiences.

In particular, the vehicle’s three 15.7-inch 3K automotive-grade OLED screens can now project the same events and all game from the three different camera angles, transforming Li L9 into a great sports launch for families and friends to watch games such as the ongoing FIFA World Cup. To create successful products, we have two core goals. Firstly, for consumers, we choose to exceed their needs rather than merely meeting them. Secondly, as a company, we aim to achieve healthy gross margin and self-sustaining cash flow, which will allow us to continually invest in our dual growth engine of R&D and business capabilities. Especially, our R&D efforts will be directed more comprehensively across products, platforms and systems with a long-term goal of growing into a world-class technology company.

Our business capability includes commercial supply and organization capabilities. With continued investment in R&D and business capability, supported by our healthy gross margin, we will continue to pursue product and commercial success and foster a healthy long-term development model. This flywheel has been the strategic focus since our founding, and we believe will remain our strategy going forward. By understanding this business model, you will understand the auto more. Our supply chain remains one of the most significant variables with respect to our deliveries. We are accelerating supply chain deployment and optimization to build our resilience for fluctuations and support our rapid growth sales. Importantly, we are committed to extending our in-house development and the manufacturing capability vertically along our supply chain.

Through our forthcoming self-owned manufacturing base and the majority owned JVs, we expect to be able to self-produce both ranging tenders and the five-in-one electric drive units that can support our EREV delivery target. On the BEV side, we have commenced the construction of a semiconductor manufacturing base in high-tech zone of Suzhou, Jiangsu province in the third quarter. It will focus on R&D and production of automotive-grade power module based on the third-generation semiconductor material silicon carbide. The power module is a core component of our self-developed electric drive system. Alongside our dedicated investment in supply chain, we continue to expand our direct sales and service network and increase our brand awareness with upgraded brand image to fuel our business expansion.

As of November 30, 2022, we had 276 retail stores, covering 119 cities as well as 317 servicing centers and Li Auto authorized body and paint shops operating in 226 cities. During the third quarter, we also started to open retail stores in places other than shopping malls, such as automotive parts to diversify our locations and reach more varied target users. The retail stores we opened at Hangzhou auto theme park in September is a good example featuring our new design language and one colors, it creates a welcoming interactive space for visitors. It also enjoys strong food traffic due to its excellent location and word-of-mouth publicity. In addition, this store also offers customers a comprehensive and convenient experience with combined showroom and delivery center functions.

The expansion and upgrade of our direct sales and servicing network have boosted both our brand recognition and our ability to fulfill user demand for our compelling products, which we are confident, will drive meaningful sales growth going forward. We will continue to innovate new retail formats, finding new ways to attract more users while providing them with better services and experiences. Moving to R&D. We believe R&D capability lies at the core of product competitiveness as we scale our company from one to 10. Therefore, we insist on full stack self-development of core technologies such as electric drive, intelligence space and the automotive driving system. We have spared no effort in solidifying our leadership in the EREV space with continued investment in our new generation range extension system.

In addition, we are actively self-developing the key building blocks of our 8-volt HPC BEV platform, including the power chip, power module, electronic control unit, electric motor and transmission system, aiming to be one of the first automaker to roll out HPC BEV vehicles. We are also proud to lead the industry in Smart Space R&D. For example, we self-developed our Smart Space Li AI system powered by MIMO-Net, a fixed-zoom human voice-enhance network; and the MVF-Net, a multi-view fusion network. Li AI can help create accurate sound perception in a complex acoustic environment and identify complicated gestures, enabling an unparalleled in-car entertainment and interactive experience. With respect to autonomous driving as of November 30, more than and 170,000 family users have enjoyed our highway NOA feature.

We have further enhanced our vehicle’s ability to perceive dynamic obstacles and static road structures in a complex environment as well as their ability to forecast traffic participants’ action. We were the first in the industry to extend the concept of 3D hypothesis 2D verification to multi-mode sensor. And the Li L9 was the first to realize highway NOA based on an NVIDIA Orin SoC chipset. Meanwhile, we have partnered with Tsinghua University and MIT to complete the world’s first public project to construct high precision maps in real-time. Intelligent manufacturing is another core competence for any successful automaker and another area in which we excel. First, we have industry-leading manufacturing equipment. Our fully self-developed manufacturing management software, Li MOS can greatly improve production efficiency and quality with precision control during the entire automotive manufacturing process.

This system will be implemented in all our future factories, shortening new factories deployment cycle by more than three months. Our R&D efforts are not limited to building a grid car, but also how to make it. We use vision sensors and algorithms to precisely control the workflow of hardware equipment in order to realize flexible production and intelligent inspection. As we strive to enhance our R&D and manufacturing capabilities, we also aspired to make a positive environmental and social impact through our sound government structure and the dedication to sustainable development. In September 2022, we received an MSCI ESG rating of AA for the second year in a row, maintaining our leadership position in the automotive industry in terms of ESG performance.

Moreover, following the earthquake in Luding County, Sichuan province on September 5, we made a donation to help the affected people and to support disaster relief efforts. We hope to play our part as a corporate citizen and a member of the community by helping people in need. We look forward to sharing more of our ESG handovers in our next ESG report, which we expect in the first half of next year. In addition, we have — we are pleased to be included as a constituent stock in the Hang Seng China Enterprise Index, effective December 5. This is a strong recognition of our underlying strengths and investment value. Lastly, as you may have seen from today’s press release from January 1, 2023, I will no longer serve as the Company’s President.

I will spend more time to support the Company’s new roundup organizational upgrades to prepare for its future. In the future, our CEO, Li Xiang, will take over the responsibility of sales and services. Our newly appointed President, Mr. Ma Donghui will be responsible for the overall close to loop management from product R&D to procurement and supply, production and manufacturing and quality. Xie Yan, our new CTO will lead the Company’s R&D team to explore the most advanced underlying technologies in the smart electric vehicle industry. I would like to thank our investors for the support and trust they have placed in Li Auto and myself. I firmly believe that Li Auto will continue to achieve great results under the leadership of the new management team and continue to lead the smart new energy vehicle industry in China.

With that, I will turn the call over to our CFO, Johnny, for a closer look of our financial performance. Please go ahead.

Johnny Tie Li: Thank you, Kevin. Hello, everyone. I will now go over some of our financial results for the third quarter of 2022. To be mindful of the length of this call, I will address financial highlights here and encourage you to refer to our earnings press release, which is posted online for additional details. Total revenues in the third quarter of 2022 were RMB9.34 billion or US$1.31 billion, representing an increase of 20.2% from RMB7.78 billion in the third quarter of 2021. This included RMB9.05 billion or US$1.27 billion of vehicle sales in the third quarter of 2022, up 22.5% year-over-year and 6.6% quarter-over-quarter. This increase was mainly due to our delivery of Li L9, starting in late August, which raised our average selling price in the third quarter of 2022.

Revenues from other sales and services were RMB296.4 million or US$41.7 million in the third quarter of 2022, representing a decrease of 23.9% from the same period last year, an increase of 19% from the second quarter of this year. The year-over-year decrease was attributable to the sales of automotive regulatory credits in the third quarter of 2021, which didn’t recur in the third quarter of 2022. The quarter-over-quarter increase in revenue from other sales and services was mainly due to the increased sales of accessories and services in line with higher accumulated vehicle sales. Cost of sales in the third quarter of 2022 was RMB8.16 billion or US$1.15 billion, representing an increase of 36.8% year-over-year and an increase of 19.1% quarter-over-quarter.

The increase in cost of sales was mainly driven by higher average cost of sales due to our delivery of Li L9 starting in late August and a provision related to Li ONE as we lower its order forecast considering the stronger-than-expected market demand for Li L9 and our accelerated launch of Li L8. A provision in the amount of RMB802.8 million or US$112.9 million was made based on our updated order forecast for Li ONE after the launch of Li L9 and Li L8. Gross profit in the third quarter of 2022 was RMB1.18 billion or US$166.2 million, decreasing 34.8% year-over-year and 37.1% quarter-over-quarter. Vehicle margin in the third quarter of 2022 was 12% compared with a 21.1% in the third quarter of 2021 and 21.2% in the second quarter of this year, mostly due to the provision related to Li ONE as mentioned.

Excluding this impact, the vehicle margin was 20.8% in the third quarter of 2022. Going forward with our production ramp-up and the responsible cost management, we expect to realize greater economies of scale and drive cost down further, putting us back on track to hit our profitability inflection point. Gross margin in the third quarter of 2022 was 12.7% compared to 23.3% third quarter of last year and 21.5% in the second quarter of this year. Operating expenses in the third quarter of 2022 were RMB3.31 billion or US$465.6 million, increasing 73.4% year-over-year and 15.9% quarter-over-quarter. R&D expenses in the third quarter of 2022 were RMB1.8 billion or US$253.6 million, up 103.1% year-over-year, and 17.8% quarter-over-quarter. The year-over-year increase was primarily driven by increased expenses associated with future models as well as increased employee compensation as a result of our growing number of R&D staff.

As quarter-over-quarter increase was primarily driven by increased expenses associated with the future models. Selling, general and administrative expenses in the third quarter of 2022 were RMB1.51 billion or US$211.9 million, up 47.6% year-over-year and 13.8% quarter-over-quarter. The year-over-year increase was primarily driven by increased employee compensation as a result of growth — of the growth in our staff headcount as well as increased rental expenses associated with the expansion of the Company’s sales network. This quarter-over-quarter increase was primarily driven by increased marketing and promotion activities and the increased employee compensation as a result of the growth in our staff headcount. Loss from operations in the third quarter of 2022 was RMB2.13 billion or US$299.4 million compared a loss of RMB97.8 million in the same period last year and a loss of RMB976.5 million in the second quarter of this year.

Net loss was RMB1.65 billion or US$231.3 million in the third quarter of 2022 compared with RMB21.5 million in the third quarter of last year and RMB641 million in the second quarter of 2022. And now turning to our balance sheet and the cash flow. Our cash and cash equivalents, restricted cash, time deposits short-term investments, long-term time deposits and long-term financial instruments that were included in long-term investments totaled RMB55.83 billion or US$7.85 billion as of September 30, 2022. Net cash used in operating activities in the third quarter of 2022 was RMB508.3 million or US$71.5 million. The change in net cash used in operating activities over both the third quarter of last year and the second quarter of this year was mainly due to the increase in payment related to inventory purchase, partially offset by the increase in cash received from the customer.

Free cash flow was negative RMB1.96 billion or negative US$275.3 million in the third quarter of 2022. And now for our business outlook, for the fourth quarter of 2022, the Company expects deliveries to be between 45,000 and 48,000 vehicles, representing an increase of 27.8% to 36.3% from the fourth quarter of last year. The Company also expects fourth quarter total revenues to be between RMB16.51 billion and RMB17.61 billion or US$2.32 billion and US$2.47 billion, representing an increase of 55.4% to 65.6% from the fourth quarter of last year. This business outlook reflects the Company’s current and preliminary view on the business situation and market condition, which is subject to change. Going forward, we believe our navel and collaborative corporate culture, execution discipline and strong balance sheet will allow us to face challenging markets head on and continue to deploy capital and resources efficiently to focus on our products and innovation initiatives and drive our long-term growth.

I will now turn the call over to the operator and to start the Q&A session. Thank you.

To continue reading the Q&A session, please click here.

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