Li Auto Inc.

Hello, ladies and gentlemen. Thank you for standing by for Lee Otto's third quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Janet Jang, Investor Relations of Lee Otto. Please go ahead, Janet.

Thank you, Matt. Good evening and good morning, everyone. Welcome to Li Auto's third quarter 2022 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, 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. 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 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 Liado's disclosure documents on the IR section of our website, which contain a recalculation 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. 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 micro environment and supply chain constraint. Against this backdrop, we delivered 26,524 vehicles, up 5.6 percent year over year. Despite a supply chain bottleneck, we delivered over 10,000 Li L9s in September, the model's first full month of production. This marked the first time that a Chinese-branded premium model priced over RMB 400,000 achieved monthly sales of more than 10,000 vehicles, demonstrating Li L9 as the top pick 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 remains 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's 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 sincere gratitude to our over 200,000 Li-1 users. We will continue to adhere to higher-than-industry service standards and continue to improve the performance of Li-1 through OTAs. On September 30, we launched Li-L8, a six-seat premium family SUV that succeeded Li-1. We also unveiled the L7, a seven-seat flagship family SUV, on the same day. We commenced the deliveries of the L8 in November. Let me provide more details of this vehicle. The L8 employs our new generation all-wheel drive range extension system and boasts over 100 features in their standard configurations. It's available in two trims. PRO and MAX, providing users with flexible choices of smartness. The two teams are harnessed respectively with the AD PRO and the 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 DUO or RingX chips with 508 tufts of computing power. In addition, the two trims are equipped with innovative smart space system, SS Pro and SS Max, featuring a first row 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 the Li L8's numerous class-leading features 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 the Li L8 will stand among the finest options for six-seaters priced over RMB $3,000 300,000 RMB, and together with Li L9, the sales champion of full-size SUVs in China, and the Li L7, which we believe will be a top choice among five-seat SUVs priced over RMB 300,000, we expect to captivate a broader range of family users with differentiated needs and gain a larger market share in the RMB 300,000 to RMB 500,000 price segment. We are encouraged by LiL9's continued strong sales performance and the solid demand for LiL8. 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 4th by the China Insurance Automotive Safety Index, or CIASI, Lee L. Nye 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, Lee L. Nye received an M rating. one of the top results received by premium vehicles tested by CIASI since 2017. In addition, it was the first domestic full-size SUV tested for 25% frontal 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 headspace for drivers and passengers to survive in case of accidents. 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 the L9, further enhancing user experience with our upgraded the AD, autonomous driving system, and smart in-car voice assistant, ,, 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 the L9 into a great sports lounge 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 growth margin and self-sustaining cash flow. which will allow us to continually invest in our due growth engine of R&D and business capabilities. Specially, our R&D efforts will be directed more comprehensively across products, platforms, and systems, with the long-term goal of growing into a world-class technology company. Our business capabilities include commercial, supply, and organization capabilities. With continued investment in R&D and business capability, supported by our healthy growth 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 Li 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 range extenders and the five-in-one electric drive units that can support our EREV delivery targets. On the BEV side, we have commenced construction of a semiconductor manufacturing base in the 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 the core component of our self-developed eight volt electric drive system. Alongside our dedicated investment in supply chain, we continue to expand our direct sales and servicing network, and increase our brand awareness with upgraded brand image to fuel our business expansion. As of November 30th, 2022, we had 276 retail stores covering 119 cities, as well as 317 servicing centers and the 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 theme parks, to diversify our locations and reach more varied target users. The retail stores we opened at Hangzhou T-Car Auto Theme Park in September is a good example. Featuring our new design language and warm 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 demands. 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 1 to 10. Therefore, we insist on full-stack self-development of core technologies such as electric drive, intelligent space, and autonomous 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 automakers 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, the AI system, powered by MimoNet, a six-zone human voice enhanced network, and MVSNet, a multi-view vision fusion network. The AI can help create accurate sound perception in a complex acoustic environment and identify complicated gestures, enabling an unparalleled in-car entertainment and entertainment interactive experience with respect to autonomous driving as of november 30th more than 170 000 family users have enjoyed our highway oa feature we have further enhanced our vehicle's ability to perceive dynamic obstacles and the 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 Li-L9 was the first to realize highway NOA based on an NVIDIA O-ring 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, LiMOS, 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 aspire 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 5th, 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 endeavors in our next ESG report, which we expect in the first half of next year. In addition, we are pleased to be included as a constituent stock in the Hengsheng China Enterprise Index. effective December 5th. 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 1st, 2023, I will no longer serve as the company's president. I will spend more time to support the company's new round of 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 closed-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, John, for a closer look of our financial performance. Please go ahead.

Thank you, Cam. 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 price release, which is posted online for additional details. Total revenues in the third quarter of 2022 were RMB 9.34 billion or 1.31 billion U.S. dollars, representing an increase of 20.2%. from RMB $7.78 billion in the third quarter of 2021. This included RMB $9.05 billion, or $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 the I09 starting in late August, which raised our average selling price in the third quarter of 2022. Revenues from other sales and services were RMB 296.4 million, or $41.7 million. In the third quarter of 2022, representing a decrease of 23.9% from the same period last year and the 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 RMB $8.16 billion, or $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-ionide starting in late August and the provision related to Li-1s as we lower its order forecast considering the stronger-than-expected market demands for the IL-9 and our accelerated launch of the IL-8. The provision in the amount of RMB $802.8 million or US dollar $112.9 million was made based on our updated order forecast. for Li-1 after the launch of Li-L9 and Li-L8. Gross profit in the third quarter of 2022 was RMB 1.18 billion, or $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 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-1 I just mentioned. Excluding this impact, the vehicle margin was 28%. 0.8% in the third quarter of 2022. Going forward with our production ramp-up and responsible cost management, we expect to realize greater economics of scale and drive costs 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% in the third quarter of last year and 21.5% in the second quarter of this year. Operating expenses in the third quarter of 2022 were RMB 3.31 billion or $465.6 million U.S. dollars. increasing 73.4% year-over-year, and 15.9% quarter-over-quarter. R&D expenses in the third quarter of 2022 were RMB 1.8 billion, or $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. This quarter-over-quarter increase was primarily driven by increased expenses associated with future models. Signing general and administrative expenses in the third quarter of 2022 were RMB 1.51 billion, or $211.9 million, 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 the growth in our staff HICOM, as well as increased rental expenses associated with the expansion of the company's sales network. This cultural-work-culture increase was primarily driven by increased marketing and promotion activities and increased employee compensation as a result of the growth in our staff HICOM. Loss from operations in the third quarter of 2022 was RMB 2.13 billion or 299.4 million U.S. dollars compared a loss of RMB 97.8 million in the same period last year and a loss of RMB 976 .5 million in the second quarter of this year. Net loss was RMB 1.65 billion or $231.3 million in the third quarter of 2022. Compared with RMB 21.5 million in the third quarter of last year and RMB 641 meeting 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 RMB 55.83 billion. or 7.85 billion U.S. dollars as of September 30, 2022. Net cash used in operating activities in the third quarter of 2022 was RMB 508.3 million, or 71.5 million U.S. dollars. 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. Pre-cash flow was negative RMB 1.96 billion, or negative 275.9%. $3 million in the third quarter of 2022. And now for our business outlook. For the fourth quarter of 2022, the company expects the 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 RMB 16.51 billion and RMB 17.61 billion, or US dollar 2.32 billion and the US dollar 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 the market condition, which is subject to change. Going forward, we believe our naval 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 to start the Q&A session. Thank you.

Thank you. If you wish to ask a question via the phones, you will need to press the star key followed by the number one on your telephone keypad. 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. Please ask your question in Chinese first, then follow with the English translation. And our first question will come from Tim Hassow with Morgan Stanley. Please go ahead.

Hello, Manager Chen. Thank you very much for answering my question. Congratulations on the continued sales of the new L9 and L8 models. I have two questions. The first question is about the stable sales of our new models. How should we predict the stable sales of the L8, L9 and L7 models next year? Is it still the same as before for some of Zeng Chen's car type expectations, such as monthly delivery total of 25,000 to 30,000? In addition, considering the past two months, the epidemic seems to have a greater impact on the overall new orders, as Mr. Ya Nan mentioned just now. In addition, we are now accelerating the delivery at the end of the year. Is it enough to support some of the orders that Gui Si is ordering now? So my first question is about vehicle sales. So how should we think about the stable monthly run rate of the sales of L7, 8, 9 in aggregates next year? Could the sales of the whole L family models say that around like 25 to 30,000 level on a monthly basis as previously expected. And in the meantime, considering the declining store traffic in October and November due to the COVID, does Leo's older backlog so far remain strong and adequate enough to bolster the delivery momentum into first quarter 2023? So it just would be willing to.

Yeah. Tim, you want me to answer your first question first, right? Okay. About the outlook of L9, L8, and L7. So we can only make judgment based on the competitiveness of this product and also outlook based on the market size of each of these products' segments. So our outlook is that for L9, the stabilized monthly sales should be around 8,000 to 11,000. That's our estimation. And for L8, will be 10,000 to 15,000, yeah, 14,000. And L7, now it's quite early to do estimation, yeah. So basically, For the Q1 outlook, we believe the beginning of the Q1, our backlog will continue to drive strong delivery performance. And of course, after Chinese New Year, we need to bring more order in. We have strong confidence that in Q1, we'll continue to beat the overall PV market performance. But Tim, as you mentioned, there are some factors that are beyond our control, like COVID. But we believe it will beat the overall PV market performance.

Thank you. Thank you, Mr. Yang. My second question is about the battery-powered vehicles. Can you please update the development and listing progress of the battery-powered vehicles next year? Is the ideal vehicle still in place? Our original plan was to list two battery-powered vehicles in 2023. So my second question is about the battery EV, the pure EV. What's the current update on Lioto's BEV pipeline? Will the company follow its original plan to launch two BEV models next year within 2023? Thank you.

Next year, we will release our first pure electric vehicle. This is a certainty. So for us, the most important thing next year is the official delivery of L7, and the release and delivery of the first pure electric vehicle.

So we're pretty certain that next year we'll be releasing our first electric vehicle.

And so the two big events for next year, one is the release of the first electric vehicle and the other one is the delivery of L7. Thank you very much for the update.

Our next question will come from Olivia Zhu with Goldman Sachs. Please go ahead.

Hello, Mr. Guai. First of all, I would like to congratulate the company for its good delivery and positive leadership in November. I have two main questions. The first one is that the competition for the price of new cars is still quite intense, especially since Tesla has been challenging it many times. I would like to ask how Li Xiang's price response strategy is. Now let me translate my two questions. The first question is about the pricing and competition. Recently, Tesla has announced a meaningful pricing cut in Chinese market. What is the auto's response to that? And how should we examine such pricing competition next year? Is it expected to be more severe? The second question is on the supply chain management. As Kevin mentioned in the briefing, there exists supply chain uncertainties. Could you please clarify what's the key bottleneck for now? And as the COVID-related policies change a lot recently, what is the expected impact on the auto production in the next several months? Thank you.

Thank you, Olivia. Let me take your question. Your first question about the price cut from Tesla side. Actually, we see little impact on our auto flow. Our product right now, L9 and the L8, the price segment is higher than Tesla's main selling model. We would expect the same kind of situation in next year. We still have a strong confidence that in this industry, turmoil will continue to lead. For your second question about the supply chain, yeah, of course, we are glad to see the new COVID policy that ultimately with the pandemic will resolve. Actually, the supply chain will back to normal. But as we should all know that for the next two, three months, Based on the trend we see in other foreign countries, once the policy change, we may see here and there the manpower shortages. Right now we already see some of these kind of manpower shortages impact our production, especially in our suppliers side. So we are working closely with our supply chain partners, try to mitigate all these risks. And we even start to prepare some of the workforce by ourselves. Whenever there is a shortage, we'll send the workforce to help our supply partners.

Got it. That's very clear. Thank you.

Thank you.

Our next question will come from Ming Hassan Lee with Bank of America. Please go ahead.

Thank you, Director. I'm Ming. My first question is related to the announcement that we will build the ability of the carbon fiber. I would like to know, because some of our colleagues choose to build electronic products, and some of them choose to build their own chip or design ICs. Because I saw that the announcement mentioned that the future is still for the 800V super fast charge. So we are going to do this. But I want to know more about Guan Mingcheng's final decision. The most important reason for this component is that he thinks that the future supply and demand will be very unbalanced. Or is it that his product has a higher ratio? Then we are confident that we can make a more high-quality carbon carbon carbon plate and then import it into our full-size car. Then we can charge it better. This is my first question. My first question is regarding your decision to make the system common by yourself. And compared to your peers, some choose to build internal capacity for factory, some decide to design chips by themselves. What is the decision? Why is the decision made for these capacity builds? Thank you.

Thank you, Ming. This is Kevin. Let me take this question. Actually, just to clarify, we are not in Suzhou not manufacturing the silicon cut-by-chipset. Actually, we're making the power drive module with the chipset. So why we choose to design our own power module is because the power module is closely integrated into our five-in-one electric motors. and our three-in-one electric motors. So therefore, the thermal solution and the size of this module are very important for our competitiveness and energy efficiency.

That's why we choose to build this module by our design and build these modules by ourselves. Yeah, just to clarify.

Thank you, Kevin. My second question, the new energy vehicle will change in Shanghai in 2023. So could you remind us what is the current contribution from Shanghai area and how do you see the impact after the policy change? Besides that, will you speed up your battery EV launch? in order to make the potential after the policy change. 互動一下我的提問就是 關於上海立牌政策的明後改變 想了解一下現在的話 上海大概佔我們的訂單大概多少 我們預計這個 policy change 對我們的訂單會有怎樣的影響 Thank you. So Shanghai comes for 6% to 5% of our sales volume. So of course, the policy change, of course, will have some impact on our

our sales in Shanghai. But actually, as we should all know, most of the auto customer are not buying a new car. They are kind of upgrading their car. So in theory, they already have the car plate. So therefore, we are actively working with our Shanghai team to build a new sales strategy for next year to mitigate the impact of this policy change. But again, overall Shanghai is only like 6% of our sales total volume. And about the BEV, actually just now Li Xiang already disclosed that next year we're going to have a launch of our first BEV car, yeah.

As a reminder, please first ask your question in Chinese and then translate into English. Our next question will come from Zhu Yingbo with CITCS. Please go ahead.

感谢管理层。 我有两个问题。 第一个是关于理想ONE的波倍减持对于成本端的大概接近半个月的影响。 想问一下这部分具体是基于一个什么样的原则? 对一个多大规模的ONE进行的具体, 后续生产出来的ONE还有没有潜在的成本? 那第二个问题呢, My first question is about has cost about $800 million cost. So what is the principle for this cost? And how can we expect for the future potential cost of produced one? And my second question is about metric organization. Could you please talk more about that? Thank you.

I will take your provision question. This is Johnny. And for this provision, it's already said to the raw materials, which means the parts. Already in our inventory, all the purchase commitment we made to our suppliers. For those inventory and parts commitment, we don't plan to make it into vehicles in the future. So the provision was based on the lower of cost and the not realizable value based on our estimate and negotiation with the vendors. So it's an estimate. So when I finally realized in the next two quarters, there will be some minor adjustment to the final amount. Comparing with quarterly gross margin, it's not very significant. Second question, I think Li Xiang will take it.

Let me answer the second question. Yes. I think our ideal car, from the beginning, we believe that our dream is to become a company with a scale of 10 billion revenue. Actually, next year, we will enter such a threshold with a scale of 10 billion revenue. From my personal and management point of view, and they have never found a company with a billion-euro scale. Although many of these companies have joined from other billion-euro-scale companies, including colleagues and executives, most of the companies are either owned by foreign headquarters, or a group of people built these billion-euro-scale systems and organizational capabilities many years ago. This is a big challenge for us. Either we haven't seen it, or we've used it, but we haven't seen it ourselves. We've known this situation for a long time. So, since 2019, we've spent a lot of time and investment to study it seriously. Then, the top companies in the world, which are similar to us, and which combine this software, and achieve the management of RMB and 100 billion-level income companies, as well as the specific choices, methods and experiences of these companies that have been made under different stages and different scales. We found that similar companies will generally upgrade to the management method of a giant organization when the entire revenue scale reaches one billion. The key feature of an ideal car from 0 to 1 is the speed efficiency, which is a necessary condition from 0 to 1. We think that for such a long chain, highly complex enterprise, when the scale expands, it will be our stage from 1 to 10, and then quality is the efficiency. Internal management is the recognition of high quality, high quality planning, high quality execution, high quality recovery. For consumers, there should be high quality research, high quality manufacturing, high quality products, and high quality services. I think this is what we really know. The biggest feature of the geostationary organization is to ensure the management quality of the whole process, and then the horizontal team to design the road, repair the road, and operation the road, and the vertical team to build the car, drive the car, and operate the car. Therefore, it is a high-quality road with a high-level team, so that the value we have created will continue to be delivered to consumers, and the success of the business will generate a positive cycle. So, actually, through a smaller way, in the past two years, through IPD, we have been verifying the management of the data center. In fact, the products of R9, R8, and R7 that you see today have been successfully developed and delivered. The main reason is that in the past two years, from a small trial point, through IPD, the management of the data center, we have been managing the results. Actually, since we founded the auto, we've always dreamed of becoming a trillion dollar or trillion RMB company.

And as you can see, next year we're expecting to become a hundred billion RMB company already. So personally, I have never built a company from zero to one, a $100 billion company from scratch. And most of my colleagues have not had that experience either. Most of my colleagues, either they come from companies that are smaller than that, or they come from companies that became that large years ago, or they work off of a remote office that's not headquartered in China. So we have seen this issue a long time ago. So since 2019, we've been starting, to study software and hardware companies that have reached the size of 1 trillion RMB very, very deeply to see how they manage their business at different stages and what we can learn from them. And one thing in common that we've seen is that they've all transformed to a matrix organization when they reach the level of about 10 billion RMB. And so for Lee Auto, when we started from zero to one, speed was efficiency. Speed meant everything. But as time went on, we saw that in a very long value chain where quality and efficiency is very important. In our 1 to 10 stage, quality is efficiency. So a successful enterprise will need to be able to, for their internal purposes, we need to have a very robust planning, perception, execution process. And for their customers, they need very strong R&D, strong products, sales, and services. So the matrix organization was the only way to manage this entire process end-to-end. To make an analogy, the horizontal teams make sure that they built the roads, they maintain the roads, and the roads are good to run for vehicles. And the vertical teams are the ones that build cars, maintain the fleet, and make sure the cars run smoothly on the roads. And these cars on the well-built and maintained roads are responsible for delivering good services and products to our consumers. which forms a very healthy cycle. So we first started piloting this thought in what we call IPD integrated product development. And the process has actually been validated by the success of L9, L8, and L7, where you might have seen the success of V1, which in certain view could be a coincidence, But through the application of IPD, we've made that a certainty so that we can replicate the success with our current and ongoing future product development. So we are now in the process of applying our pilot process on a much larger scale to make sure that our company can continue to turn out successful products and services to our customers.

And our last question will come from Jing Chang with CICC. Please go ahead.

Okay. So my first question is about the extent of R&D that in the first quarter our R&D and selling stats increased to 1.8, 1.5 billion. So can you give us more guidance on next year's expense ratio? And considering that next year we will have a brand new BEV platform model on the market and a more complicated and a more channeled network layout. So in addition, in terms of which parts will we do? mainly to our in-house research.

Hello, Changjin. This is Johnny. I will take your first question about R&D expenses. This year's R&D expenses will, just as we guided, will be around $1 billion US dollar, which is $7 billion RMB for the whole year. As expected. And for next year, currently we see over 10 billion to 12 billion RMB depending on our final decision on summer investment will start next year or in 2024. So it will be 10 to 12 billion RMB for next year.

Let me answer the second question. From 2020, our entire research and development can be divided into three parts. One part is product research, which is the same as in all car manufacturers. The second part is the research and development of technical platforms. Our new electric power station, our high-pressure pure electricity platform, our smart cockpit platform, and our smart driving platform. So the advantage of it is that all of our models can use exactly the same platform. So the entire development efficiency, cost, and the user experience at the back can maintain very good consistency. The third part is the development of our underlying system, including the operating system, including the AI computing platform, including our cloud services, including our IT system, including including the support of all our internal computing platforms. This is a longer-term investment for us. Ma Donghui is responsible for product and platform development. BiTeng is responsible for system development. Xie Yan is responsible for it. In terms of investment, our biggest investment is in platform development. If we look back to 2020 until now, R&D spending mostly fall into three areas. The first area is product development, which you see similar

in traditional car OEMs. The second one is technological platforms, including our REV platform, our high-voltage BEV platform, our smart space platform, Atom's driving platform. These are shared platforms that all of our vehicles use. The platformization allow us to maximize cost efficiency, R&D efficiency, and user experience and make sure that they're consistent across all products of our companies. The third one is new and fast-growing is our system development, which includes supercomputing, supercomputing platform, cloud computing platform, and our IT infrastructure. These are very long-term but crucial investments for our company. And in terms of organization, product and technological platforms are run by Mr. Ma Donghui, and system development is run by our CTO, Xie Yan. And in terms of spending level, We spend the most today in technical platforms, followed by product, and then thirdly, system and infrastructure. And going forward, we expect to see more spending in system and infrastructure, which might eventually overtake technological infrastructure, because we think in the longest term, the most crucial investment or competitive advantage lies in our system and infrastructure capabilities.

My second question is about product design and planning. Aiming at the family car market segment, how can we achieve greater product appreciation in addition to different models such as SUV or MPV and also different number of seats? What can we be looking forward to to get a greater differentiation?

We still maintain the original point of view, that is, the price. We maintain the original point of view, that is, the distinction between the price and the seat is the best way to distinguish the user group. In terms of actual practice, R8 and R9 have already started to deliver, and R7 has started to receive small orders. There is a significant difference between the three user groups. The R9 user group is basically a luxury brand of the same price range, as well as a more expensive luxury brand to buy R9 products. The R8 user group is relatively good and has completed the replacement of the ideal version. It is basically a completely identical user group. The R7 user group has a large number of 25- to 35-year-old young family users. We actually implemented it. Due to the different prices and different seats, the three products were very effective in following our plan and covering different people. They even brought us some surprises on the age of the users. We didn't expect that some users would be added to younger users and then added to our user group.

Our philosophy is the same as before. We still believe that price and seat configuration is the best way to segment the market, and this has been partly tested by the success of L9 and 7, which is soon to start delivery, in that these three cars actually have attracted three very different user groups. If you look at L9, it's pretty much attracted premium car buyers at the same price point or even higher. than the current price level of L9. And L8 pretty perfectly replaced V1 and has shares of a very similar customer base as V1. And L7 has been attracting a lot of young family users aged between 25 and 35. So as you can see, pricing and seat arrangements have allowed us to very efficiently cover the market in different user groups. And there have even been some surprises in the case of L7 where we've been able to tap into new age groups that we weren't expecting before.

As we're 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 once again for joining us today. If you have further questions, please feel free to contact Liotto's Investor Relations Team. Then that's all for today. Thank you and have a good weekend.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you. Thank you. Hello, ladies and gentlemen. Thank you for standing by for Lee Otto's third quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Janet Jang, Investor Relations of Lee Otto. Please go ahead, Janet.

Thank you, Matt. Good evening and good morning, everyone. Welcome to Li Auto's third quarter 2022 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, 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. 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 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 Liado's disclosure documents on the IR section of our website, which contain a recalculation 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. 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 microenvironment and supply chain constraint. Against this backdrop, we delivered 26,524 vehicles, up 5.6 percent year over year. Despite a supply chain bottleneck, we delivered over 10,000 Li L9s in September, the model's first full month of production. This marked the first time that a Chinese-branded premium model priced over RMB 400,000 achieved monthly sales of more than 10,000 vehicles, demonstrating Li L9 as the top pick 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 remains 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's 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 sincere gratitude to our over 200,000 Li-1 users. We will continue to adhere to higher-than-industry service standards and continue to improve the performance of Li-1 through OTAs. On September 30, we launched Li-L8, a six-seat premium family SUV that succeeded Li-1. We also unveiled the L7, a seven-seat flagship family SUV, on the same day. We commenced the deliveries of the L8 in November. Let me provide more details of this vehicle. The L8 employs our new generation all-wheel drive range extension system and boasts over 100 features in their standard configurations. It's available in two trims. Pro and Max, providing users with flexible choices of smartness. The two teams are harnessed respectively with the AD Pro and the 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 Duo or Ring X chips with 508 tops of computing power. In addition, the two teams are equipped with innovative smart space systems, SSPro and SSMax, featuring a first-row 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 the Li L8's numerous class-leading features 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 the Li L8 will stand among the finest options for six-seaters priced over RMB $3,000 300,000 RMB, and together with Li L9, the sales champion of full-size SUVs in China, and the Li L7, which we believe will be a top choice among five-seat SUVs priced over RMB 300,000. We expect to captivate a broader range of family users with differentiated needs and gain a larger market share. in the RMB 300,000 to RMB 500,000 price segment. We are encouraged by the L9 continued strong sales performance and the solid demand for the 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 4th by the China Insurance Automotive Safety Index, or CIASI, Lee L. Nye 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 crash worthiness and repair economy, Lee L. Nye received an M rating. one of the top results received by premium vehicles tested by CIASI since 2017. In addition, it was the first domestic full-size SUV tested for 25% frontal 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 headspace for drivers and passengers to survive in case of accidents. 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 the L9, further enhancing user experience with our upgraded the AD, autonomous driving system, and smart in-car voice assistant, ,, 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 the L9 into a great sports lounge 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 growth margin and self-sustaining cash flow. which will allow us to continually invest in our due growth engine of R&D and business capabilities. Specially, our R&D efforts will be directed more comprehensively across products, platforms, and systems, with the long-term goal of growing into a world-class technology company. Our business capabilities include commercial, supply, and organization capabilities. With continued investment in R&D and business capability, supported by our healthy growth 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 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 range extenders and the five-in-one electric drive units that can support our EREV delivery targets. On the BEV side, we have commenced construction of a semiconductor manufacturing base in the 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 eight volt electric drive system. Alongside our dedicated investment in supply chain, we continue to expand our direct sales and servicing 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 the Z-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 theme parks, to diversify our locations and reach more varied target users. The retail stores we opened at Hangzhou Tea Car Auto theme park in September is a good example. Featuring our new design language and warm 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 1 to 10. Therefore, we insist on full-stack self-development of core technologies such as electric drive, intelligent space, and autonomous 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 automakers 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 MimoNet, a six-zone human voice enhanced network, and MVSNet, a MockView vision fusion The 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 30th, more than 170,000 family users have enjoyed our highway experience. an OA feature. We have further enhanced our vehicle's ability to perceive dynamic obstacles and the 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 Li-L9 was the first to realize highway NOA based on an NVIDIA O-ring 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, LiMOS, 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 aspire 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 5th, 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 endeavors in our next ESG report, which we expect in the first half of next year. In addition, we are pleased to be included as a constituent stock in the Hengsheng China Enterprise Index, effective December 5th. This is a strong recognition of our underlying strength 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 round of 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 closed-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, John, for a closer look of our financial performance. Please go ahead.

Thank you, Kim. 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 price release, which is posted online for additional details. Total revenues. Revenues in the third quarter of 2022 were RMB 9.34 billion, or 1.31 billion U.S. dollars, representing an increase of 20.2% from RMB 7.78 billion in the third quarter of 2021. This included RMB 9.05 billion, or 1.25 to $7 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 the L9 starting in late August, which raised our average selling price in the third quarter of 2022. Revenues from other sales and services were RMB 296.4 million, or $41.7 million. In the third quarter of 2022, representing a decrease of 23.9% from the same period last year, and the 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 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 RMB $8.16 billion, or $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 LII starting in late August and the provision related to LII as we lower its order forecast considering the stronger than expected market demands for LII and our accelerated launch of LII. The provision in the amount of RMB $802.8 million, or $112.9 million, was made based on our updated order forecast for Li-1 after the launch of Li-L9 and Li-L8. Gross profit in the third quarter of 2022 was RMB 1.8. $18 billion, or $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 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-1 I just mentioned. Excluding this impact, the vehicle margin was 20.8% in the third quarter of 2022. Going forward with our production ramp-up, and responsible cost management, we expect to realize greater economics of scale and drive costs 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% in the third quarter of last year. and 21.5 percent in the second quarter of this year. Operating expenses in the third quarter of 2022 were RMB 3.31 billion, or $465.6 million, increasing 73.4 percent year-over-year and 15.9 percent quarter-over-quarter. R&D expenses in the third quarter of 2022 were RMB 1.8 billion, or $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. This quarter-over-quarter increase was primarily driven by increased expenses associated with future models. Signing general and administrative expenses in the third quarter of 2022 were RMB 1.5 $1,211.9 million, 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 the growth in our staff high count, as well as increased rental expenses. associated with the expansion of the company's sales network. Its quarter-to-quarter increase was primarily driven by increased marketing and promotion activities and increased employee compensation as a result of the growth in our staff HICOM. Loss from operations in the third quarter of 2022 was RMB 2.13%. or 299.4 million U.S. dollars compared a loss of RMB 97.8 million in the same period last year and a loss of RMB 976.5 million in the second quarter of this year. Net loss was RMB 1.65 billion or 299.4 31.3 million US dollars in the third quarter of 2022. Compared with RMB 21.5 million in the third quarter of last year and RMB 641 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 RMB $55.83 billion or $7.85 billion as of September 30, 2022. Net cash used in operating activities in the third quarter of 2022 was RMB $508.3 million, or $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. Pre-cash flow was negative RMB 1.96 billion or negative 275.3 million US dollars in the third quarter of 2022. And now for our business outlook. For the fourth quarter of 2022, the company expects the 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 RMB $16.51 billion and RMB 17.61 billion, or US dollar 2.32 billion, and the US dollar 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 a preliminary view on the business situation and the market condition, which is subject to change. Going forward, we believe our naval 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.

Thank you. If you wish to ask a question via the phones, you will need to press the star key followed by the number one on your telephone keypad. 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. Please ask your question in Chinese first, then follow with the English translation. And our first question will come from Tim Hissow with Morgan Stanley. Please go ahead.

Hello, Mr. Manager. Thank you very much for your question. Congratulations to Gui Si on the new L968 sales innovation call. I have two questions. The first question is about the stable sales of our new model. How do we predict the future of the new model? How do we predict the future of the new model? How do we predict the future of the new model? How do we predict the future of the new model? How do we predict the future of the new model? So my first question is about vehicle sales. So how should we think about the stable monthly run rate of the sales of L7, 8, 9 in aggregates next year? Could the sales of the whole L family models stay at around like 25,000 to 30,000 level on a monthly basis as previously expected? And in the meantime, considering the declining store traffic in October and November due to the COVID, The three OTOs, the older backlog so far remains strong and adequate enough to bolster the delivery momentum into first quarter 2023. So it's just with the O&T. Yeah.

Tim, you want me to answer your first question first, right? Okay. About the outlook of L9, L8, and L7. So we can only make a judgment based on the competitiveness of this product and also outlook based on the market size of each of these products' segments. So our outlook is that for L9, the stabilized monthly sales should be around 8,000 to 11,000. That's our estimation. And for L8, will be 10,000 to 15,000, 14,000. And L7, now it's quite early to do estimation. So basically, for the Q1 outlook, we believe the beginning of the Q1, our backlog will continue to drive strong delivery performance. And of course, after Chinese New Year, we need to bring more order in. We have strong confidence that in Q1, we'll continue to beat the overall PV market performance. But Tim, as you mentioned, there are some factors that are beyond our control, like COVID. But we believe we'll beat the overall PV market performance.

Thank you. Thank you, Mr. Yang. The second question is about the pure electric vehicles. So my second question is about the battery EV, the pure EV. What's the current update on Li Auto's BEV pipeline? Will the company follow its original plan to launch two BEV models next year in 2023? Thank you.

So we're pretty certain that next year we'll be releasing our first electric vehicle. And so the two big events for next year, one is the release of the first electric vehicle, and the other one is the delivery

Commence delivery of L7.

Thank you very much for the update.

Our next question will come from Olivia Zhu with Goldman Sachs. Please go ahead.

Hello, Mr. Guai. First of all, congratulations. The company has had a very good 10-month transition and growth. Then I have two main questions here. The first one is that the competition for the price of new year's car is still quite intense, especially Tesla has been bargaining many times recently. I would like to ask how the price response strategy of Li Xiang is, and whether the company will expect the entire market to have a more intense price war next year. The second question is about supply chain stability. Just now, President Yanan also mentioned the uncertainty of the supply chain. I would like to ask which part of the supply chain is the main bottleneck now? Now, let me translate my two questions. The first question is about the pricing and competition. Recently, Tesla has announced a meaningful pricing cut in Chinese market. What is the other's response to that? And how should we examine such pricing competition next year? Is it expected to be more severe? The second question is on the supply chain management. As Catherine mentioned in the briefing, there exists supply chain uncertainties. Could you please clarify what's the key bottleneck for now? And as the COVID-related policies change a lot recently, what is the expected impact on the auto production in the next several months? Thank you.

Thank you, Olivia. Yeah, let me take your question. Your first question about the price cut, from Tesla side, actually we see a little impact on our other flow. Because our product right now, L9 and the L8 is the price segment is higher than Tesla's main selling model, yeah. And we would expect the same kind of situation in next year. So, yeah, we still have a strong confidence In this industry turmoil turmoil will continue to be For your second question about the supply chain. Yeah, of course We we we we are glad to see the the the new COVID policy that ultimately the the with the with the pandemic will will resolve actually the supply chain will back to normal and But as we should all know that for the next two, three months, based on the trend we see in other foreign countries, once the policy change, we may see here and there the manpower shortages. Right now, we already see some of these kind of manpower shortages impact our production, especially in our suppliers' side. So we are working closely with our supply chain partners, try to mitigate all these risks. And we even start to prepare some of the workforce by ourselves. Whenever there is a shortage, we'll send the workforce to help our supply partners.

Got it. That's very clear. Thank you.

Thank you.

Our next question will come from Ming Hassan Lee with Bank of America. Please go ahead.

Thank you, Director. I am Ming. My first question is regarding the announcement that we will build the ability of the carbon fiber circuit. I would like to know, because some of our colleagues choose to build electronic products, and some of them choose to make their own chips or design ICs. Because I saw in the announcement that the future is still for the 800V super fast charge. So we want to do this. But I want to know about this management city. The most important reason for deciding this component is that I think that the future supply and demand will be very unbalanced. Or is it that its output ratio is relatively high? Then we are confident and confident that we can make a higher-quality lithium carbon carbonate and then import it into our full-time car and then charge it better. This is my first question. My first question is regarding your decision to make the system carbon by yourself. And compared to your peers, some choose to build internal capacity for battery. Some decide to design chips by themselves. What is the decision? Why is the decision made for these capacity builds? Thank you.

Thank you, Ming. This is Kevin. Let me take this question. Actually, just to clarify, we are not in Suzhou not manufacturing the silicon carbide chipset. Actually, we're making the power drive module with the chipset. So, why we choose to design our own power module is because the power module is closely integrated into our five-in-one electric motors. and our three-in-one electric motors. So therefore, the thermal solution and the size of this module are very important for our competitiveness and energy efficiency.

That's why we choose to build this module by our design and build these modules by ourselves, yeah, just to clarify.

Thank you, Kevin. My second question, the new energy vehicle will change in Shanghai in 2023. So could you remind us what is the current contribution from Shanghai area and how do you see the impact after the policy change? Besides that, will you speed up your battery EV launch? in order to make the potential return after the policy change. I would like to ask you a question about the change in the policy of Shanghai. I would like to know how much is the order in Shanghai? What is the impact of the policy change on the order? Thank you. So Shanghai comes for 6% to 5% of our sales volume. So of course, the policy change, of course, will have some impact on our

our sales in Shanghai. But actually, as we should all know, most of the auto customer are not buying a new car. They are kind of upgrading their car. So in theory, they already have the car plate. So therefore, we are actively working with our Shanghai team to build a new sales strategy for next year to mitigate the impact of this policy change. But again, overall Shanghai is only like 6% of our sales total volume. And about the BEV, actually just now Li Xiang already disclosed that next year we're going to have a launch of our first BEV car, yeah.

As a reminder, please first ask your question in Chinese and then translate into English. Our next question will come from Zhu Yingbo with CITCS. Please go ahead.

感谢管理层。 我有两个问题。 第一个是关于理想ONE的波倍减持对于成本端的大概接近半个月的影响。 想问一下这部分计题是基于一个什么样的原则? 对一个多大规模的ONE进行的计题, 后续生产出来的ONE还有没有潜在的成本? 那第二个问题呢, 我一定提問就是我們最近看到理想提到的關於矩陣型的組織很有前瞻性,能不能講更多? My first question is about Li-1 has cost about $800 million cost for it. So what is the principle for this cost? And how can we expect for the future potential cost of produced one? And my second question is about metric organization. Could you please talk more about that? Thank you.

I will take your provision question. This is Johnny. And for this provision, it's already said to the raw materials, which means the parts. Already in our inventory, all the purchase commitment we made to our suppliers. For those inventory and parts commitment, we don't plan to make it into vehicles in the future. So the provision was based on the lower of cost and the not realizable value based on our estimate and negotiation with the vendors. So it's an estimate. So when I finally realized in the next two quarters, there will be some minor adjustment to the final amount. Comparing with quarterly gross margin, it's not very significant. Second question, I think Li Xiang will take it.

Let me answer the second question. Yes. I think we, Li Xiang Motors, believe that one of our dreams is to become a company with a scale of 10 billion revenue. In fact, next year, we will enter such a threshold with a scale of 10 billion revenue. In fact, from my personal and management team's point of view, and they have never found a company with a billion-euro scale. Although many of these companies have worked with other billion-euro-scale companies, but most of the companies are either owned by foreign headquarters, or a group of people built these billion-euro-scale systems and organizational capabilities many years ago. Yes, so this is actually a very big challenge for us. Either we have not seen it, or we have used it, but we have not seen it ourselves. So we have long known such a situation. So since 2019, we have spent a lot of time and investment to study seriously. And then the top of the world, like us, and then this kind of software combination, and then reach RMB, and then 10,000 billion-level income companies, their management method. as well as the specific choices, methods and experiences of these companies that have been made under different stages and different scales. We found that similar companies will generally upgrade to the management of large organizations when the entire revenue scale reaches one billion. One of the key characteristics of ideal cars from 0 to 1 is the speed efficiency, which is a necessary condition from 0 to 1. We think that for such a long chain, highly complex enterprise, when the scale expands, it will be our stage from 1 to 10, and then quality is the efficiency. Internal management is the recognition of high quality, high quality planning, high quality execution, high quality recovery. For consumers, there should be high quality research, high quality manufacturing, high quality products, and high quality services. I think this is what we really understand. The biggest feature of G-Centurion is to ensure the quality of management throughout the process, and to create roads, repair roads and operation roads by horizontal teams, and to build cars, drive cars and operate cars by vertical teams. Therefore, it is a high-quality road with a high-level team, so that the value we have created continues to be delivered to consumers, and to achieve commercial success and create a positive cycle. So, actually, through a smaller method, in the past two years, through IPD, we have been able to verify the way of management of data. In fact, the products of R9, R8, and R7 that you see today, the success of the development and delivery, is largely due to the fact that in the past two years, from a small trial point, through IPD, the way of management of data, we have been able to manage the results. Actually, since we founded the auto, we've always dreamed of becoming a trillion dollar or trillion RMB company.

And as you can see, next year we're expecting to become a hundred billion RMB company already. So personally, I have never built a company from zero to one, a hundred billion dollar company from scratch. And most of my colleagues have not had that experience either. Most of my colleagues, either they come from companies that are smaller than that, or they come from companies that became that large years ago, or they work off of a remote office that's not headquartered in China. So we have seen this issue a long time ago. So since 2019, we've been starting to study software and hardware companies that have reached the size of 1 trillion RMB very, very deeply to see how they manage their business at different stages and what we can learn from them. And one thing in common that we've seen is that they've all transformed to a matrix organization when they reach the level of about 10 billion RMB. And so for Lee Auto, when we started from zero to one, speed was efficiency. Speed meant everything. But as time went on, we saw that in a very long value chain where quality and efficiency is very important. In our 1 to 10 stage, quality is efficiency. So a successful enterprise will need to be able to, for their internal purposes, we need to have a very robust planning, perception, execution process. And for their customers, they need very strong R&Ds from products, sales, and services. So the matrix organization was the only way to manage this entire process end-to-end. To make an analogy, the horizontal teams make sure that they built the roads, they maintain the roads, and the roads are good to run for vehicles. And the vertical teams are the ones that build cars, maintain the fleet, and make sure the cars run smoothly on the roads. And these cars on the well-built and maintained roads are responsible for delivering good services and products to our consumers. which forms a very healthy cycle. So we first started piloting this thought in what we call IPD integrated product development, and the process has actually been validated by the success of L9, L8, and L7, where you might have seen the success of V1, which in certain view could be a coincidence, But through the application of IPD, we've made that a certainty so that we can replicate the success with our current and ongoing future product development. So we are now in the process of applying our pilot process on a much larger scale to make sure that our company can continue to turn out successful products and services to our customers.

And our last question will come from Jing Chang with CICC. Please go ahead.

Okay. So my first question is about the effect of our R&D and selling stats increased to 1.8 to 1.5 billion. a historical height. So can you give us more guidance on next year's expense ratio? And considering that next year we will have a brand new BEV platform model on the market and a more complicated and a more channeled network layout. So in addition, in terms of which parts will we do mainly to our in-house research.

Hello, Changjin. This is Johnny. I will take your first question about R&D expenses. This year's R&D expenses will, just as we guided, will be around $1 billion US dollar, which is $7 billion RMB for the whole year. As expected. And for next year, currently we see over 10 billion to 12 billion RMB depending on our final decision on some investment will start next year or in 2024. So it will be 10 to 12 billion RMB for next year.

Let me answer the second question. From 2020, our overall development can be divided into three parts. The first part is product development, which is the same as that of all car manufacturers. The second part is the development of technical platforms. Our new generation of electric power generation platform, our high-pressure power supply platform, our smart warehouse platform, and our smart driving platform. So the advantage of it is that all of our models can use the same platform. So the whole development efficiency, cost, and the user experience at the back can maintain very good consistency. The third part is the development of our underlying system, including the operating system, including the AI computing platform, including our cloud service, including our IT system, including It also includes the support of all our internal computing platforms. This is a longer-term investment for us. Ma Donghui is responsible for product and platform research. BiTeng is responsible for system research. Xie Yan is responsible for it. In terms of investment, our maximum investment is in platform research. If we look back to 2020 until now, R&D spending mostly fall into three areas. The first area is product development, which you see similar

exercises in traditional car OEMs. The second one is technological platforms, including our REV platform, our high-voltage BEV platform, our smart space platform, autonomous driving platform. These are shared platforms that all of our vehicles use. The platformization allow us to maximize cost efficiency, R&D efficiency, and user experience, and make sure that they're consistent across all products of our companies. The third one is new and fast-growing is our system development, which includes supercomputing, supercomputing platform, cloud computing platform, and our IT infrastructure. These are very long-term but crucial investments for our company. And in terms of organization, the product and technological platforms are run by Mr. Ma Donghui, and system development is run by our CTO, Xie Yan. And in terms of spending level, We spend the most today in technical platforms, followed by product, and then thirdly, system and infrastructure. And going forward, we expect to see more spending in system and infrastructure, which might eventually overtake technological infrastructure, because we think in the longest term, the most crucial investment or competitive advantage lies in our system and infrastructure capabilities.

Thank you. My second question is about product design and planning. Aiming at the family car market, how can we achieve greater product appreciation? In addition, different models such as SUV or MPV and also different number of seats. What can we be looking forward to to get a greater differentiation?

We still maintain the original point of view, that is, the price. We maintain the original point of view, that is, the distinction between the price and the seat is the best way to distinguish the user group. From the actual practice point of view, R8 and R9 have already started to pay, R7 has started to receive a discount, There is a significant difference between the three user groups. The R9 user group is basically a luxury brand of the same price and a more expensive luxury brand to buy R9 products. The R8 user group is better and has completed the replacement of the most ideal version. It is basically a completely identical user group. The R7 user group has a large number of 25- to 35-year-old young family users. Because of the different price, different seats, and different seats layout, the three products are very effective in following our plan and covering different people. They even bring us some surprises on the age of the users. We didn't expect that some users will be added to younger users and then added to our user group.

Our philosophy is the same as before. We still believe that price and seat configuration is the best way to segment the market. And this has been partly tested by the success of L9 and 7, which is soon to start delivery, in that these three cars actually have attracted three very different user groups. If you look at L9, it's pretty much attracted premium car buyers at the same price point or even higher. than the current price level of L9. And L8 pretty perfectly replaced V1 and has shares of a very similar customer base as V1. And L7 has been attracting a lot of young family users aged between 25 and 35. So as you can see, pricing and seat arrangements have allowed us to very efficiently cover the market in different user groups. And there have even been some surprises in the case of L7 where we've been able to tap into new age groups that we weren't expecting before.

As we're 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 once again for joining us today. If you have further questions, please feel free to contact Liotto's investor relations team. Then that's all for today. Thank you and have a good weekend.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.