Li Auto Inc.

Hello, ladies and gentlemen. Thank you for standing by for Lee Otto's fourth quarter and full year 2021 earnings conference call. At this time, all participants are in a listen-only mode. Today's conference call is being recorded. I'll now turn the call over to your host, Janet Zhang, Investor Relations Director of Lee Otto. Please go ahead, Janet.

Thank you, Amber. Good evening and good morning, everyone. Welcome to Li Auto's fourth quarter and full year 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. On today's call, we have our president, Mr. Kevin Yanan Shen, and our CFO, Mr. Johnny Tia Li, to begin with prepared remarks. Our founder and CEO, Mr. Xiang Li, will join for the Q&A discussion. Before I 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 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 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 interim results announcement and the fourth quarter and full year 2021 results announcement, 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.

Thank you, Janet. Hello, everyone, and thank you for joining our call today. 2021 was a pivotal year for new energy vehicle sales in China. During this year, China's auto industry witnessed a notable substitution of EVs for ICE, internal combustion engine vehicles. evidenced by NEV's rapid growth in contrast to the sluggish sales trend of ICE vehicles. This led to growing penetration of NEVs in overall passenger vehicle sales. According to China Passenger Car Association, in 2021, the retail sales of new energy passenger vehicles increased by 169 percent year-over-year to nearly 3 million while ICE vehicle retail sales decreased by 5.6 percent. The penetration rate for retail sales of new energy passenger vehicles rose substantially to 20.8 percent in the fourth quarter of 2021 versus 12.6 percent and 5.8 percent for the first nine months of 2021 and the full year of 2020. With mobility transformation trend pointing to increase the smart electric vehicle use, we are proud to forge ahead as a pioneer. As an industry leader, we are ready to serve more families with continuing product and technological innovations. We achieved deliveries of 35,221 units in the fourth quarter of 2021. up 143.5% year-over-year, driving total revenue to RMB $10.6 billion, or $1.7 billion, growing 156.1% year-over-year. The robust fourth quarter performance took our full-year deliveries to 90,491, up 177.4% year-over-year, and the total revenues to RMB 27 billion, or 4.1 billion U.S. dollar, up 185.6% year-over-year. Liwan was the first domestic-branded premium model priced above RMB 300,000 in China to achieve the 10,000 monthly deliveries. In January 2022, we have delivered over 10,000 Liwans Third consecutive month, achieving a new record. We believe this is another milestone for D1 to qualify as a blockbuster model and will be a benchmark for all our future models. We are excited to see D1 awaken the premium passenger vehicle market in China, targeting family users, and emerge as one of the best choices. We attribute our vehicle's success to our outstanding product definition capabilities. The extended-range six-seater SUV has gone from being questioned to mainstream, while our full-screen, full-vehicle interactive voice system has set a new industry benchmark. This further proves our users' recognition of V1's pioneering energy replenishment solution of adopting battery power for urban commuting and the reach heart with range extender during long distance traveling, and highlights our users' endorsement of the brand new in-vehicle driving and riding experience V1 offers in this autonomous era. Our product definition capability are built on the shared vision in our organization and foundation of comprehensive capability including technological strengths, profound consumer insights, and systematic execution. And we are confident we can apply this to our future models and continue to provide our users with solutions beyond what they have demanded. We aim to grow our model lineup significantly in the coming years while advancing our R&D efforts as product provides the competitiveness mode for business and the technology for the mode for product. While production and delivery improved, as most of our chip supply chain partners resume normal operations, challenges to the overall NED supply chain will likely become long-lasting, affecting chips, batteries, and potential other auto parts given the accelerating development of the smart electric vehicle industry. Going forward, together with our supply chain partners, we will continue to work on multiple measures such as advanced planning and diversify the supply chain to mitigate supply chain risk. In light of the ongoing industry-wide semiconductor shortage, we expect the total deliveries in the first quarter of 2022 to be between 30,000 to 32,000 vehicles. Turning to the financial side, we maintained strong performance with a robust and steady gross margin of 22.4% in the fourth quarter, growing 4.9% year-over-year. This was driven by our strong vehicle sales performance and consistently effective cost management measurements. Even as we accelerated the pace of R&D spending to 11.6% of revenue and grew our sales network by adding 53 retail stores in the first quarter, we achieved the profitability as well as a record-breaking RMB 3.8 billion operating cash flow, which is a significant reflection of our operating excellence. In 2021, we significantly expanded our direct sales and servicing network, almost quadrupling our number of retail stores to 206 in 102 cities, from 52 in 41 cities as of the end of 2020. By the end of January, we had 220 retail stores in 105 cities. as well as 276 servicing centers, and we auto-authorize the body and paint shops operating in 204 cities. We aim to provide our users with more convenient, efficient, and pleasant purchasing and user experience by strengthening our online operations, as well as continually adding physical touch points close to our users. We plan to further enlarge our footprint and target reaching 400 retail stores by the end of this year to meet the growing market demand for NEV nationwide, supported by consumers' rising NEV adoption and our upcoming new model launches in 2022 and onward. Moving to our product optimization and R&D efforts, in December, 2021, we released the OTA 3.0 update to all our Li1 users, further enhancing the in-car experience for both drivers and passengers. This upgrade includes the navigation on ADAS and the automatic emergency braking, AEB, features, making us the third automotive OEM globally to develop its own full-stack As of January 31st, 2021, we have provided NOA to more than 70,000 family users. And during the Spring Festival holiday, we accumulated over 2 million kilometers of NOA mileage with an ADAS-equipped user base at the leading scale in China. We will continue to increase the R&D of ADAS-related technology and we believe we are well-positioned to push the boundaries of assisted driving technologies. The upgraded AEB with vision perception algorithm enables Liwan to identify roadworks and highway traffic accident sites and prompt users in advance to avoid major accidents. Liwan was awarded 2021 Car of the Year by DCAR, Zhongche Di, a renowned auto information platform in China due to its outstanding AEB performance exhibited in the DCAR AEB test, known as the most strict vehicle test in China by automotive professionals. During the test, Li-1 was the only assessed model in the final round capable of accurately identifying crossing vehicles and two-wheelers. This further reflects our full-stack self-development capabilities. The OTA 3.0 update also includes an upgraded version of the V1's smart in-car voice assistant, ,, which now recognizes and executes more voice instructions for in-car entertainment, navigation, and the vehicle setting. We will continue to conduct R&D to develop safer car with smarter product features that can be helpful for all members of the family, young and old, as we remain steadfast in our commitment to creating homes on the move that bring happiness to the entire family. We are also happy to share that we have been added to the Hang Seng Tech Index under the index newly added category of autonomous technology. The inclusion will take effect on March 7th this year. We have also been included in the Hansen Composite Large Cap Index since August 2021. As a technology leader in smart mobility, our addition to the Hansen Tech Index endorses the strength of our full-stack self-developed ADAS and smart cabin technologies, as well as recognizes our capability to create value for our investors. We look forward to bringing more families our V1 premium experience that offers safer, simpler driving with all the amenities and technology people want in a premium vehicle. In the second quarter of 2022, we will unveil our next mass-produced vehicle model, a full-size premium extended range electric SUVs. Deliveries of this model will start in the third quarter of this year. In 2023, we plan to launch two BEV models that support ultra-fast charging. By then, our ultra-high voltage charging solution will be readily available to our users, effectively shortening the charging time and addressing mileage anxiety. As we remain committed to developing new models autonomous driving, smart cockpit, and others. Our R&D extends for 2021, tripled year-over-year, to R&D 3.3 billion, or $515.7 million, accounting for 12.2% of the revenue. We will continue to expedite our R&D progress with the support of our extending R&D team which is comprised of more than 3,400 personnel as of the end of 2021, representing 139.8% year-over-year growth. We target to maintain our R&D investment at the level of 10% of revenue and above going forward. Turning to our production capacity, we are expanding our capacity at the Changzhou factory and constructing our Beijing manufacturing base. Once the expansion and construction are completed, the design production capacity at these two manufacturing sites will reach 500,000 units annually in 2023, and around 750,000 with double shifts. Meanwhile, we are excited to share that in December, In 2021, we entered into a strategic cooperation framework with the Chongqing municipal government for establishing our new manufacturing base. We will make relevant disclosure of the Chongqing manufacturing base when appropriate. They enhance the production capacity together with our enriched product line-up. will position us well to capture an increasing share of the booming EV market, laying a solid foundation for our strong growth in the years to come. With the launch of our second major vehicle just around the corner and continuous strength in order for our L1, we expect 2022 will be another pivotal year of growth for the auto. Our pioneering spirit tells us to keep pushing the boundary of what is possible, and that's what we are doing. The market is ripe for advancement, and we are in the right place at the right time with the right strategy, the right skill set, the right business model, and the right vehicle to drive us to the next destination. In 2022, we expect the NEV market to see its greatest number of drivers yet, and we are all ready for it. I will turn this call over to our CFO, Mr. Pei Li, to review our financial performance in the fourth quarter.