Li Auto Inc.

Hello, gentlemen. Thank you for standing by for Lee Otto's Third Quarter 2021 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, the Relations Director of Lee Otto. Please go ahead, Janet.

Thank you, Rachel. Good evening and good morning, everyone. Welcome to Lee Otto's Third Quarter 2021 Earnings Conference Call. The company's financial and operating results were published in the press release earlier today and were posted on the company's IR website and the Hong Kong Stocks Exchange. On today's call, we have our president, Mr. Kevin Yanan Shen, our CFO, Mr. Johnny Tia Li, to begin with prepared remarks. Our founder and CEO, Mr. Xiang Li, and our CTO, Mr. Kai Wang, will join for the Q&A discussion. Before I continue, please be reminded that today's discussion will contain forelooking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forelooking 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 filings of the company with the U.S. Securities and Exchange Commission and announcements published on the websites 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 under applicable law. Please also note that Lee 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 Lee Auto's press release and interim announcements which contain a reconciliation of unaudited non-GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our president. Please go ahead, Kevin.

Thank you, Jenny. Hello, everyone, and thank you for joining our call today. We are excited to be part of this once-in-a-century transformation from ICE vehicle to smart electric vehicles. We are also pleased to see user acceptance of NEVs reaching an inflection point. As reported by the China Passenger Car Association, the penetration rate of NEVs in retail sales rose significantly to 18.5% in October from 5.8% in 2020. Looking out to 2022, we believe the extended range system with a large battery capacity will usher in a year of explosive EREV sales. Against this backdrop and on the heels of the successful 2021 Liwan launch in May, we delivered strong results in the third quarter, achieving revenue growth of 209.7% year-over-year, underpinned by record-breaking quarterly delivery of 25,116 units and increase of 190% year-over-year. This growth, once again, highlights the underlying strength of our 2021 Liwan and its compelling appeal to family users. Thanks to the dedicated efforts of our team and supply chain partners, as well as continuous support from Liwan users, our October delivery was 7,649 units, increasing 107.2% year over year. Our order intake remains robust, hitting a new monthly record of over 14,500 units in October. The rapid development of the smart EV industry has magnified the effects of the industry-wide chip shortage, challenging each OEM's production and delivery schedule. While we are enjoying the strong user endorsement of our product, our delivery growth lacked our order growth due to the chip supply shortage, which has constrained our production. Despite the lingering impact of COVID-19 and extreme weather conditions in certain regions, we have resolved some of the chip supply problems by working diligently with our supply partners and also internal teams. We delivered the 100,000 Li-1 to our family users in this month and expect our deliveries in November to exceed 10,000 vehicles. In light of the ongoing industry-wide semiconductor shortage, we expect the total delivery in the fourth quarter of 2021 to be between 30,000 to 32,000 vehicles. As the development of the smart electric vehicle industry accelerate, we think the challenge to the overall EV supply chain facing the industry will persist into the future. Going forward, We will continue to take actions and find multiple measures together with our supply chain partners to mitigate the risk. Turning to the profitability, our gross margin stood at 23.3% in the third quarter, up 3.5% year-over-year, and 4.4% quarter-over-quarter. Our operating cash flow was RMB 2.3%. $17 billion or US$336.7 million during the third quarter, reflecting our consistent and relentless focus on execution and cost management. During the third quarter, we made notable progress in the expansion of our direct sales and service network, which not only serves as our user touchpoint for efficient sales and marketing, but also an integral component of our closed-loop integrated online and offline platform that helps us manage user feedback to continuously enhance our products and services. As of October 31, 2021, we had 162 retail stores covering 86 cities and 223 servicing centers and the auto authorized body and paint shops operating in 165 cities. We will continue to expand our coverage of lower tier cities while deepening our penetration in first and second tier cities to reach our target of 200 retail stores by year end, covering more than 100 cities in China. This will increase our brand awareness and prepare us for surging user demand as we launch new models. In terms of product optimization, we upgraded the in-car invoice assistant, Li Xiang Tong Xue, and launched a new application store via an OTA update in early September. The new Li Xiang Tong Xue is smarter and able to carry out smoother and more natural conversations. Li Xiang Tongxue can also take separate commands from four different rooms in the car, providing full coverage in-car voice control and creating a more fun and entertaining experience for families. The new application store offers a streamlined interactive design supporting an application ecosystem similar to that on smartphones. allowing user to upgrade their in-car application without the need of an OTA update. With these upgrades, our Li1 continues to evolve and grow. Meanwhile, we plan to release our NOA upgrade to 2021 Li1 users in December. We are confident that 2021 Li1 with NOA functions will provide family users with safe, enhanced, convenient, and effective ADAS functions. Following the NOA upgrade through OTA, all 2021 Li1 will be equipped with this feature. We are prepared to provide NOA to over 60,000 family users by year end, gaining a dominant leadership in this regard in China. In terms of HPC BEV, we are making good progress developing our technologies to support high-power charging. We have completed the 4C battery pack test on vehicles and demonstrated that it can support a driving range of more than 400 kilometers with only 10 minutes charging. With the proceeds raised through our dual primary listing, we will build upon our recent success and deploy R&D capital to drive parallel development in EREVs and BEVs and advancement in smart cockpit and ADAS technologies. Aiming to introduce more product catering to family users' needs and competing with both ICE vehicles and the electric vehicles, we also made headway in expanding our production capacity In October, we officially commenced the construction of our manufacturing base in Beijing. The manufacturing base is scheduled to be operational in 2023 and will serve as an important production base for our premium BEVs. Now, I will turn this call over to our CFO, Mr. Pei Li, to review our financial performance in the third quarter.

Thank you, Kevin. Hello, everyone. I will now walk you through some of our financial results for the third quarter of 2021. Due to time constraints, I will address the financial highlights here and encourage you to refer to our earnings price release for further details. Total revenue in the third quarter of 2021 were RMB 7.78 billion, or 1.21 billion U.S. dollars, representing an increase of 209.7% from RMB 2.51 billion in the third quarter of 2020, and an increase of 54.3% from RMB 5.04 billion in the second quarter of this year. This included RMB $7.39 billion or $1.15 billion from vehicle sales, which increased 199.7% year-over-year and 50.6% quarter-over-quarter. The increase in revenue from vehicle sales from the third quarter of 2020 and the second quarter of 2021 was mainly attributable to the increase of vehicle delivery in the third quarter of 2021. Revenues from other sales and services were RMB $389.4 million or $60.4 million in the third quarter, representing an increase of 745.1% year-over-year and an increase of $150 87% quarter-over-quarter. The increase in revenue from other sales and services over the third quarter of 2020 and the second quarter of 2021 was mainly attributable to the sales of regulatory credits as well as increased sales of charging stores, accessories, and services in line with the higher accumulated vehicle sales. Cost of sales in the third quarter of 2021 was RMB 5.96 billion, or $925.5 million, representing an increase of 196.1% year-over-year and an increase of 45.9% quarter-over-quarter. Cross-profit in the third quarter of 2021 was RMB 1.81 billion or 281.2 million US dollars, growing 264.8% comparing with the third quarter of 2020 and 90.2% compared with the second quarter of this year. Vehicle margin in the third quarter was 21.1% compared with 19.8% in third quarter of 2020 and 18.7% in the second quarter of 2021. The increase in vehicle margin was primarily driven by higher average selling price attributable to increasing deliveries of 2021 Li-1s in the third quarter of 2021. Gross margin in the third quarter was 23.3% compared with 19.8% in the third quarter of 2020. and 18.9% in the second quarter of this year, mainly driven by the increase in vehicle margin. Operating expenses in the third quarter were RMB 1.91 billion, or $296.4 million, representing an increase of 182.2% year-over-year and an increase of 28.3% quarter-over-quarter. R&D expenses in the third quarter of 2021 were RMB $888.5 million, or $137.9 million, representing an increase of 165.6% year-over-year and an increase of 36%. quarter over quarter. The increase in R&D expenses over the third quarter of 2020 and the second quarter of this year was primarily attributable to increased employee compensation as a result of growing research and development staff as well as increased cost associated with new product developments. SG&A expenses in the third quarter were RMB $1.02 billion, or $158.5 million, representing an increase of 198.5 year-over-year and an increase of 22.3% quarter-over-quarter. The increase in SG&A expenses over the third quarter of 2020 was primarily driven by increased marketing and promotion activities, as well as increased employee compensation and rental expenses associated with the expansion of the company's distribution network. The increase in SG&E expenses over the second quarter of this year was primarily driven by the increased employee compensation and rental expenses, associated with the expansion of the company's distribution network. Loss from operations in the third quarter of 2021 was RMB $97.8 million, or $15.2 million, representing a decrease of 45.7% year-over-year, and a decrease of 81.8% quarter-over-quarter. Net loss in the third quarter of 2021 was RMB 21.5 million, or 3.3 million U.S. dollars, representing a decrease of 79.9% year-over-year, and a decrease of 90%. 0.9% quarter over quarter. And turning to our balance sheet and the cash flow, our cash and the cash equivalents, restricted cash, time deposit, and short-term investment, total RMB 48.83 billion, or 7.58 billion US dollars as of September 30th. Operating cash flow in the third quarter of 2021 was RMB 2.17 billion, or $336.7 million. Free cash flow was RMB 1.16 billion, or $180.8 million in the third quarter. For our business outlook, for the fourth quarter of 2021, the company expects the deliveries to be between 30,000 and 32,000 vehicles, representing an increase of 107.4% to 121.2% from the fourth quarter of 2020. The company also expects fourth quarter total revenues to be between RMB 8.82 billion and RMB 7.41 billion, or US dollar 1.37 billion and US dollar 1.46 billion, representing an increase of 112.7%. to 126.9% from the fourth quarter of 2020. This business outlook reflects the company's current and the preliminary view on its business situation and the market condition. In particular, the ongoing industry-wide semiconductor shortage, which are all subject to change. I will now turn the call over to the operator to start our Q&A session. Thank you.

Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. For the benefit of all participants on today's call, please limit yourself to two questions. And if you have additional questions, you can re-enter the queue. If you are going to ask the question in Chinese, Please follow with English translation. Once again, ask a question. It's star and the number one on your telephone keypad. Your first question comes from the line of Fei Feng of Goldman Sachs. Please ask your question.

Great. Thanks for the opportunity. Very impressive quarter. My first question is on your HPC BEV pipeline. Other than the 4C battery pack test that Shenzhou have shared on the call, which is obviously very impressive, what else have you thought about in terms of the key features that differentiate your upcoming product from this competitive market? And also, can you refresh us the timeline for your next product launch? And the second question is about production hurdles. Now, management mentioned that, if I heard you correctly, in October there was 14,500 units of intake in terms of the backlog expansion. So if you look at next year, when do you think the monthly production can ramp up towards that level? Thank you.

Hi, Fangfei. Can you also repeat your question in Chinese, please?

Yes, of course. 感谢管理层这个机会,非常非常亮丽的这个业绩。 两个问题,第一个问题是这个BEV, HPC BEV这个产品的这个推出的计划, 那管理层谈到了这个4C的这个电池现在的一个进展, 那除了这个功能之外,其他的点, 管理层能不能分享一下最新的一些思考, 比如说哪些功能,比如说在时间上怎么样去安排。 Thank you, Fangfei. This is Kevin. To your first question, for HPC, besides the 4C battery, we made good progress. On the other hand, we also made a lot of progress on our

high voltage air conditioning system. Also the progress made on the high power charging infrastructure. So in terms of timing, we still plan to, we still on track to launch our first HPC BEV product in the second half of 2023. And in terms of production, Production plan, actually, right now, our factory already ramp up, can support roughly 14,000 per month. Right now, our production is gated by the cheap shortage. So basically, next year, we expect our production will ramp up to more than 1,000. 15,000 right after the Chinese New Year, assuming the chip shortage will be, to a certain extent, will be resolved. Yeah.

Yeah, that's a very helpful color. Thank you.

Thank you.

Your next question comes from the line of Tim Shao from Morgan Stanley. Please ask your question.

Hi, mentioned team. Congratulations on the great results, and thanks for taking my questions. I've got two questions. The first one about the margin, because the gross margin extension certainly tracks much ahead of a previous target of high teams. So given the favorable volume scale in the upcoming quarter, should we expect the upward trajectory of gross margin to persist into fourth quarter or early next year? In the meanwhile, will LIOTO consider leveraging more aggressive promotion to further boost the scale on the back of a better growth margin? I think the current gross margin is as we guided before.

It was mainly due to the higher average selling price of the new 2021 Liwan and also the cost control effort of our internal supply chain team despite the semiconductor shortage. On this year's cross-margin, we still want to keep our previous guidance. For the promotion, currently the customer has about six to eight weeks waiting time. So no need to do more promotion to let the customer wait too long. So currently at least in the next two to three months we won't do that.

Got it. So my, my second question, uh, basically want to follow up on the wait time, because, um, as you mentioned, the wait times were newly one, um, are as long as like six to eight weeks. Um, so if the company fails to deliver the vehicle before Chinese new year, uh, should we worry or concerned about the rising order cancellation rate, uh, early next year, or the new order in tech would fall substantially towards the end of this year. and any precaution the company can or will take to avoid such an order volatility. Tim, this is Kevin.

First of all, we don't expect that we'll see any other cancellation due to the prolonged delivery lead time because before we take the order from our customer, normally we will reach agreement with them in terms of roughly when they can expect the delivery. So basically, when they give us order, they already have the expectation set for the delivery.

Great. Thank you very much.

Thank you, Tim.

Your next question comes from the line of Ben Wang of Credit Suisse. Please ask your question.

Thank you. I've got two questions. Number one is about the 2022 guidance, volume guidance. And second question is about the battery cost for next year because the battery cost may be increased. Let me translate. There are two questions. The first question is how many batteries will be used in 2022? I would take the first question. I think due to the current supply chain shortage, I think it's not the right time to give guidance for next year.

But you should believe within the company we have a very, yeah, robust plan for the next year. Yeah. Maybe, Kevin, the second question.

Yeah. Of course, we all know that right now we all see a big jump in terms of raw material cost for the batteries. But so far, within this year, we have no plan to increase the price with this ATL.

Yeah. And also, I think we are less impact as we do, yeah, EREV. Yeah. We have a less battery pack.

Thank you. Great. Thank you.

Your next question comes from the line of Mingxuan Li of Bofa Securities. Please ask your question.

Thank you, Mingxuan. I have two questions. The first question is regarding the new functions of the NOA to be upgraded in December. Could you elaborate more functions of this new service? And secondly, Also, could you elaborate more on credit sales in the third quarter and the potential contribution in the fourth quarter as well as 2022? Thank you. 管理層,您好,我這邊有兩個問題。 第一個問題就是我們12月要OTA的NOA可不可以請管理層? Thank you, Director.

Okay, I will take the second question first. This is Johnny. I think we have already sold off all the AEV credits begin from last year's sales. So basically it's around 200 million RMB with all the AEV credits over 70 scores last year. they won't have more revenue for the first quarter. But for the first question, I will pass to Kai.

This is Kai speaking. So regarding your first question, so our NOA feature will be released in December. And so far, we have lots of testing over a million kilometers. So since our 2021 Li-1 model has NOA feature by default, which makes our December OTA update the biggest NOA release in scale in China. So I think this is probably the biggest difference compared with our peers. Thank you.

Thank you.

As a reminder, if you wish to ask a question, you will need to press star 1 on your telephone and speak closer to the mouthpiece or speakerphone. Thank you. Your next question comes from the line of Paul Gong of UBS. Please ask your question.

Yes, thanks for taking my questions. Basically two questions. The first one is regarding your product pipeline. We have observed that in this rising competition environment, some peers have already accelerated their new product launch or adding new models or more models into the pipeline. How does the auto consider and your action on this? 第一个问题是关于后续的产品线的一个投放计划的问题。 Because the competition in the market is increasing, and some competitors are also accelerating the speed of the product or increasing the number of products in the product line. We now have a relatively sufficient amount of funds in our hands. Paul, this is Kevin. So in terms of our future product, actually we will unveil X01 to the market in the second quarter next year and start to deliver in the third quarter.

So more details of X01 will be introduced at the launch event. So although we see a lot of new products launching to the market, but we want to still keep to our own schedule. So right now, for example, when our E1 delivered volume reached the level of Highlanders, its residential value is also getting close to the Highlander level. This is the benefit of reaching scale by a single model. We would choose to sell a big volume with one model rather than very quickly launch a lot of models but only sell a small volume. Our philosophy is slightly different than our peers.

My second question is regarding the ADAS going forward. It seems that now the different ADAS systems by different car makers are getting a little bit similar to each other. Everyone would adopt LiDAR. Everyone would use NVIDIA chips with high calculation power. So what is the key differentiation in this competition, the ADAS function going forward for a relatively longer time? My second question is about the development of autonomous driving. Now, it seems that the next generation of autonomous driving solutions proposed by different car companies are all missing a symbol. Everyone wants to use the laser radar, and everyone wants to use the high-sensitivity Invida chip. I want to ask, from the management's point of view, what will be the difference in competition in the future of autonomous driving?

This is Kai speaking. Regarding this ADAS-related topic, we believe ADAS technology eventually, I think, user experience is the most important thing. But order, let's say, to achieve automated, let's say, user experience, as in the previous quarter we already explained. So you need massive data. to train your algorithm to make it more intelligent. And as you know, Lee Auto, we have the biggest basically customer base with NOA feature by default because we believe safety is very important to every single of our customer. And therefore, so by using the complete, let's say, fleet, we can speed up our progress of development to make the user experience reach much, let's say, faster speed than our competitors. Thank you.

Okay, thank you very much.

Once again, if you wish to ask a question, please press star and the number one on your telephone keypad. Your next question comes from the line of Chang Lu of CICC. Please ask your question.

Thank you for taking my question, and congrats on the great results. And my first question is regarding our cost, because we see that the cost per vehicle rise to 232,000 RMB in the third quarter, which is 5,000 more Then second quarter and also it's the highest quarter since 2020. Could you share the reason with us? Maybe how much is caused by the rising cost of 2021 model and how much is caused by the rising price of material? 我第一个问题是关于这个单车成本,我们算下来三季度单车成本可能是在23万2,比二季度要多5000元。

I think generally we still target to achieve our design cross-margin of E1. As we mentioned before, it will be finally to achieve 25% as we design the product. Currently, we are under pressure of the supply chain cause pressure, and it's slower than we expected last year. And so it's a mix of our supply chain effort and also those measure from the semiconductor parts. And also, with the volume increase, we have some benefit from the manufacturing side. So it's a net-net impact for each quarter.

I would like to add one more thing. I think we will continue to have a relatively healthy interest rate for the long term. Because compared to the previous generation of Chinese engineering companies, we can see a big difference today. And then the profit margin is very important for a company to be able to continue to invest a lot into technical research. And then if a company has a profit margin of various numbers, in fact, its entire investment can only be made in product-level research, and it cannot invest more research costs in a deeper technical level. Yes, then I think we keep a very healthy, and then the profit margin is not too high, and then it is not very low, and then it can ensure that we continue to invest more than 10 points in the long term. Yes, and then use it in addition to the product, which is more important than the product, and then the investment in technical development. Yes, I think this is a very important mission and responsibility of our generation of technology and operating enterprises. So this is our own, from a big business perspective, we are seriously controlling the core reason of the interest rate. Because only a very good healthy interest rate can have long-term healthy and stable technical investment.

Yes, this is Kevin. I will translate. Mr. Li Xiang just made some comments on the gross margin. Yes. Our philosophy is healthy growth margin is very important for us, especially considering we are a technology company. If we look at some of the previous generation technology companies, they have a very thin growth margin. Therefore, they cannot invest enough money on the R&D. Most of their R&D money is spent on the product development. not enough in the technology development. So our thinking is that we want to keep a very healthy gross margin so that not only we can invest in the product development, but also we'll invest more and more on the technology development. 10% of the technology R&D. Yeah, thank you.

And my second question is regarding the expansion of sales network. As we see, we already have over 150 stores by the end of third quarter, which is close to our target, which is 200 stores by the end of this year. So could you please update our plan of our sales network expansion for this year and also next year? This is Kevin. Right now we are on track to achieve 200 retail stores by the year end to cover around 100 cities within China.

And next year, our initial plan is to at least double the number of retail stocks.

Yeah, thank you.

Your next question comes from the line of Jeff Chung of Citi. Please ask your question.

Hi, everyone. I'm Jeff. Congratulations on your great performance. I have two small questions. The first one is that we saw that the new orders in September were sold twice as much, 100%. And then in October, if the sales were more than 10,000 units in November, then the orders would be more than 20,000 units. This is the first question. The second question is, do you think the chip supply of this month, because we see that the editor has improved, at the end of the year, So my first question is with regard to the November or the backlog, would that be 100% higher than the actual potential November shipments similar to the momentum in October? And secondly, it's about the monthly production runway. Can the cheap supply support around 14,000 to 15,000 units per month in the first quarter next year? Thank you.

Thank you, Jeff. This is Kevin. First question. October delivery was impacted by both the Bosch ESP supply and also the millimeter radar supply. That's why you see that our order intake is around double the number of the final delivery. And this month, actually, the millimeter radar supply shortage has been solved The only constraint we have is from Bosch. So, therefore, the order intake will not be 200% of the delivery. The second question, actually, right now the headline we have is in the first quarter of next year, we will still continue to be constrained by this Bosch ESP component. Right now, we are working with Bosch to try to solve as much as possible.

Thank you.

Thank you, Jeff.

As a reminder, for those participants who wish to ask a question, please ask your question clearly and come closer to your speakerphone if you're on a speakerphone. Your next question comes from the line of of BOCI Research. Please ask your question.

Hello, Management. This is from BOCI Research. I have two questions. One is about SG&A ratio. Actually, we have seen that this year SG&A ratio increased compared with last year. So just now management mentioned that the target for R&D ratio is 10%. So I want to know that what about SG&A ratio standard level. My second question is about the capacity. We know that we are building the new plant in Beijing. So I want to know what are our detailed capacity levels in 2023. And we know that we have the Changzhou plant for ER1B. So any expansion plan for Changzhou plant. The second question is about Thank you, Lu Jia. This is Kevin. First of all, for the SG&A, the highlight I can give to you is that for the...

Immediately the next step, our plan is to control SG&A to a 10% level. And for the longer term, we plan to, especially with the volume growth, we plan to further decrease this percentage. So this year you see a slightly increase on the SG&A is because on one hand of the promotion, and also especially the aggressive sales network expansion increased our SG&A In terms of capacity, by the end of 2023, our plan is to reach standard capacity of annual capacity half million. And with the double shift, actually, we can do the total capacity near 700,000 units. That's our plan for 2023.

Thank you.

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.

Okay. Thank you, everyone. That's all for today's call. Hope you have a good one.

This concludes today's conference call. Thank you for participating. You may now