Li Auto Inc.

gentlemen. Thank you for standing by for Lee Otto's first quarter 2023 earnings conference call. At this time, all participants are in the listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Janet Tsang, Investor Relations Director of Lee Otto. Please go ahead, Janet.

Thank you, operator. Good evening and good morning, everyone. Welcome to Li Auto's first quarter 2023 earnings conference call. The company's financial and operating results were published in the press release earlier today and are posted on the company's IR website. On today's call, we have our chairman and CEO, Mr. Xiang Li, and our CFO, Mr. Johnny Tia Li, to begin with prepared remarks. Our president, Mr. Donghui Ma, and other senior executive management 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 companies' filing 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 and the applicable law. Please also note that LIATO's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial matters. Please refer to Liado's disclosure documents on the IR section of our website, which contain a reconciliation of the unaudited non-GAAP matters to comparable GAAP matters. Our CEO will start with his remarks in Chinese. There will be translation after he finishes all his remarks. With that, I will now turn the call over to our CEO, Mr. Xiangli. Please go ahead.

Hello, everyone. Welcome to today's phone call meeting. In the first quarter of 2023, China's new energy car market continued to grow rapidly, but market competition increased and triggered the consumer's official sentiment. Despite this, we believe that the real strong will be born in the competition. In the first quarter, we achieved the best sales performance in the single quarter. The user's continued recognition of ideal R8 and ideal R9, as well as the strong order volume of ideal R7, and fast production capacity. Ideal Motors' single-seater delivery reached 52,584 taels, which is 65.8% of the total increase. This is the result of the top three in the Chinese market, with more than 800,000 Chinese car brands. The market share rate reached 11%, far exceeding other new market brands. This once again proves our ability to design and manufacture high-end products, as well as our supply chain, manufacturing, the advantages of sales and service networks, and system efficiency. We will do our best to quickly grow with the advantages and expand our leading position. In April, our delivery volume reached 25,681. The total delivery exceeded 335,000. Li Xiang R7, R8, and R9 have achieved a bright performance in the segment market. According to the data of the weight of the heavyweight, Li Xiang R7 opened the deal in early March, has won the Chinese market for medium-sized SUVs. It surpassed 10,000 cars in the first full delivery month in April. It became the fourth single-car delivery project. Li Xian R28 is still leading in six new markets. Li Xian R29, the first SUV market in China since the end of August last year, has become the monthly sales champion. With a strong delivery volume, is due to our continuous pursuit of outstanding efficiency. Our financial indicators have been greatly improved. The total revenue of the first quarter of the company has reached 187.9 billion RMB, which is the same as the growth of 96.5%, and it has achieved net profit and net profit. At the same time, the free cash flow has reached a new high of 67 billion RMB. The healthy profit and cash flow will provide strong support for our products, platforms, and systems, and establish a solid foundation for our long-term development. With the ideal L7R, and the ideal R8L will start delivery in April. We have further expanded the product price and the coverage of family users. It is expected that in the second quarter of this year, the market share of ideal cars with a market share of more than 200,000 new users will be further increased. The delivery amount is expected to reach 76,000 to 81,000. Product delivery is only the beginning. In order to continuously improve the user experience of family users, we continue to improve product efficiency through OTA. Since this year, has completed the upgrade of 4.3 and 4.4 OTA versions. It has updated more than 100 functions and experiences. The functions include the ability to self-define the function combination, to achieve the task master of seat, driving, navigation, application, and so on, and to achieve the function of autonomous overtaking and overtaking without the need for navigation, such as the first high-speed highway and urban expressway in China. The ideal version of OTA 3.3 will be launched at the end of this year. For family members, safety is always the first priority. Every model of ideal car has been developed with the strictest standards. After comprehensive safety testing, in April 2023, China Insurance Safety Index published the latest evaluation results. Ideal R8 achieved the highest evaluation in terms of internal member safety, outside vehicle safety, and vehicle support safety. And in terms of driving member safety, with a 2% increase in front-end value, and received a B rating. The R9 also received a 5-star rating in the latest Chinese new car rating test, with a 91.3% overall rating. In the first quarter of 2023, we will continue to strengthen our business capabilities, including upgrading and expanding our online and offline integrated direct sales and service networks to support multi-car development, providing users with more convenient and efficient services, At the same time, output our brand vision to enhance brand influence. In terms of the retail store network, with the release of the multi-car type, we continue to increase the number of new retail centers. At the same time, we will quickly carry out the upgrade work of the store, changing the store with a small area in the past into a large store that supports multi-car type. Since the release of Dream29 in June last year, we have optimized and expanded the area by exchanging paper, and we have optimized nearly 50 existing stores. At the same time, we have newly added more than 50 stores. As of April 30, 2023, Dream Cars already owns 302 retail centers nationwide, covering 123 cities, and 318 authorized retail centers and maintenance centers, covering 222 cities. As we accelerate the company's business development, we will continue to develop products and services under the company's guidance. On April 21, we published the 2022 ESG report, which detailed our continuous exploration and development in the ESG field, We have received MSCI ESG AA reviews for two consecutive years. In the future, we will continue to improve the ESG management system, promote the harmonious development of brands and environments in society, and create value for users, employees, partners, and other parties. The next stage of development, Dream Cars, will be promoted according to the dual-energy strategy issued on April 18. On the one hand, we will enter the 3.0 era of smart driving representing the city of NOA. On the other hand, we will start a new edition of high-pressure, pure power, and cheap. In terms of intelligence, so far, we have provided high-speed NMV functions for more than 280,000 families. The high-speed NMV has traveled more than 140 million kilometers. This quarter, we will extend from high-speed scenarios to urban scenarios, and send the ideal ADMAX 3.0 urban NMV function to internal users, and strive to send it to more than 100 cities nationwide by the end of 2023. Next, In the transformation of the Transformer model to smart driving, we will have the most training samples in China. Ideal cars will be the biggest beneficiaries. In the case of electric and high-pressure electric vehicles, we will stick to two lines. The first is to make the efficiency of the ride more efficient. The city uses electricity and long-distance power generation, providing a better use experience than two-wheeled vehicles. The second is to make the electric driving technology better, so that the family's travel radius is not limited to one city. Realize the energy-saving experience of electric users to look forward to. In 2025, our product base will include a super flagship model, five electric vehicles, and five pure electric vehicles, to further expand the user community and open up the mass market. This year, we will invest heavily in the construction of the super charge network. Our 4C super charge can reach 480,000 watts of peak power. With our pure electric vehicles, we can achieve a range of 400 kilometers in 10 minutes. Before the end of 2023, we plan to build Three hundred high-speed charging stations will cover the Jinjinji, Changsangjiao, Dawang District, and Chengyu four major economic areas. And by the end of 2025, the charging stations will be expanded to 3,000, covering 90% of the country's high-speed railways and the main one, two, and three-line cities. In the future, we will continue to strengthen the operational capacity of Jinjinji, build the organizational capacity of a larger scale of knowledge, maintain the healthy growth of trade, As we continue to strengthen the ability of smart driving and smart cooking, we will also carry out a double product strategy for electric and high-pressure pure electricity. I believe that ideal cars will continue to improve in the leading position in the New South Wales car market. I also believe that we will bring more and better choices for more widespread home buyers, creating a mobile home, creating a hard-working home. Next, let's welcome our CFO Li Tie to introduce our financial performance in detail.

Hi, everyone, and welcome to today's earnings call. In the first quarter of 2023, China's NEV market continued to grow, but market competition intensified, triggering a wait-and-see sentiment among consumers. Nevertheless, we firmly believe that true winners will emerge from competition. In the first quarter, we achieved our best quarterly delivery results to date. With continued user recognition of the L8 and L9 as well as strong order intake for L7 and its rapid production ramp-up, we delivered 52,584 vehicles this quarter, representing a year-on-year increase of 65.8%. This achievement placed us among the top three NED brands priced over RMB 200,000 in China, with a market share of approximately 11%, far surpassing any other emerging automakers, and once again showcasing our ability to design and build blockbuster models. It also demonstrates the strength and collaborative efficacy of our supply chain, manufacturing, and sales and servicing network. We'll continue to do our best to grow rapidly and strengthen our market leadership. In April, our monthly deliveries hit a new high, reaching 25,681 units, with cumulative deliveries exceeding 335,000. Li L7, L8, and L9 all performed outstandingly in their respective market segments. According to the insurance registration data of CIRI Auto Technology Institute, L7 became the sales champion in the large SUV market in China after it started delivery in early March. In April, its first full month of delivery, L7 hit the 10,000 vehicle market. becoming our first fourth model to reach this milestone. In the meantime, the L8 has maintained its sales leadership in the six-seater subsegment. And in the full-size SUV market, the L9 has consistently topped the sales chart ever since its delivery started at the end of August last year. Driven by our strong deliveries and relentless pursuit of operating efficiency, our financial metrics improved across the board. In the first quarter, our total revenues reached RMB 18.79 billion, representing a year-to-year increase of 96.5%. At the same time, we delivered positive operating profit and positive net profit, and our free cash flow reached a record high of RMB 6.7 billion. A healthy profitability and cash flow will fund our R&D in products, platforms, and systems, creating a solid foundation for long-term development. With the launch of L7 and all eight AIR models in April, we further expanded our price range and user coverage. We expect our market share in the NDB market at over RMB 200,000 and above to expand further in the next quarter, with expected deliveries to be between 76,000 and 81,000 units. Physical product delivery is just the beginning. In order to continuously improve the experience of family users, we will enhance our products through OTAs. Since the beginning of this year, we have delivered two OTA updates for our L series, OTA 4.3 and 4.4, updating more than 100 features in total. New features include Taskmaster, which allows users to create customized combinations of functions of seats, drive settings, navigation, applications, and more. We also rolled out LKA+, the first feature of its kind in China, which can autonomously overtake on highways and urban expressways when not in navigation mode. Additionally, we will officially launch OTA 3.3 for Li-1 in the middle of this year. For family users, safety is always the top priority. Every model of Li Auto is developed to meet the most stringent safety standards and has undergone comprehensive safety tests. In April 2023, the China Insurance Automotive Safety Index SEASI, released its latest batch of evaluation results. The L8 received a GE rating, the highest rating, in occupant protection, pedestrian protection, and driver assistance systems. It also received a GE rating and a 25% offset final impact test on both the driver and passenger side. The L9 also received a five-star rating with a weighted score of 91.3% in the CM-CAP assessment test. In the first quarter of 2023, we continue to enhance our commercial capabilities by upgrading and expanding our integrated online and offline direct sales and servicing network to support the expanding product offerings and provide better services to our users while spreading our brand vision and increasing brand awareness. With respect to our retail sales network, we continue to add physical stores while accelerating the upgrade and expansion of our existing stores to support multiple vehicles. Since L9's launch in late June last year, we have relocated and expanded close to 50 existing stores and opened over 50 new stores. As of April 30, 2023, we had 302 retail stores in 103 cities, as well as 318 service centers and authorized body shops in 222 cities. As our business accelerates, sustainability has always been deeply ingrained in our products, services, and corporate governance. On April 21st, we released our 2022 ESG report detailing our continued exploration and progress in ESG. We received an MSCI ESG AA rating for two consecutive years. In the future, we will continue to improve our ESG governance, promote the harmonious development of our brand, the environment, and the society, and create value for our users, partners, employees, and other stakeholders. As we enter the next phase of the development, we will execute our autonomous driving and BEV roadmap unveiled on April 18, Shanghai Auto Show. Citi NOA will mark the beginning of autonomous driving 3.0 for our company. Meanwhile, we will also enter a new chapter in terms of powertrain platforms and products, with EREVs and HPC BEVs being developed in parallel. In terms of autonomous driving, Our highway NOA feature has served over 280,000 families, accumulating over 140 million kilometers of highway NOA mileage. In this quarter, we'll bring the NOA feature to urban driving scenarios, we'll release city NOA for beta testing on the AD AutoMax 3.0, and target to roll out the feature in 100 cities across the country by the end of 2023. Moving forward, With the application of transformer models in autonomous driving, we believe we will be the biggest beneficiary since we have the largest data set in China. With respect to EREVs and HPCBEVs, we will adhere to our parallel development strategy. For EREVs, we'll focus on enhancing the efficiency of the range extenders, allowing users to drive on battery power on urban commutes and on range extenders during long-distance travel. a much better experience than driving ICE vehicles. For HPC BEVs, we'll continue to improve our technology to offer a rapid charging experience comparable to filling up a gasoline vehicle, so that users can make intercity trips without range anxiety. By 2025, our portfolio will consist of seven models, will consist of one super model, a flagship model, five EREVs, and five HPC BEVs. BVs, 11 models in total, which will allow us to further expand our user base and expand to new markets. This year, we'll redouble our efforts in fast charging network deployments. Our 4C fast chargers can reach peak power output of 480 kilowatts, adding 400 kilometers of driving range with a 10-minute charge. We plan to build 300 charging stations in highway service areas by the end of 2023, covering four major economic zones, including the Beijing-Tianjin-Hebei region, the Yangtze River Delta region, and the Great Bay Area, and the Chengdu-Chongqing region. We expect to further expand to 3,000 charging stations by the end of 2025, covering 90% of highway mileage nationally and all major Tier 1, 2, 3 cities. In the future, we will continue to refine our operations, build organizational capabilities to support the scaling of our business, and maintain healthy sales growth. As we continue to strengthen our autonomous driving and smart cockpit capabilities and simultaneously implement our EREV and HPC BEV dual product strategy, we're confident we will also continue to strengthen our market leadership in the MEV market, creating more and better choices for family users to create mobile homes and create happiness. With that, I'll turn it over to our CFO, Johnny, for a closer look at our financial performance.

Thank you, Liqiang. Hello, everyone. I will now review some of our 2023 first quarter financials. Due to time constraints, I will address financial highlights here and encourage you to refer to our earnings press release for further details. Total revenues in the first quarter of 2023 were RMB 18.79 billion or 2.74 billion U.S. dollars, increasing 96.5% year-over-year and 6.4% quarter-over-quarter. This included RMB 18.33 billion or 2.67 billion U.S. dollars from vehicle sales, which was up 0.9% year-over-year and 6.1% quarter-over-quarter. The year-over-year increase was mainly due to the increase of vehicle deliveries and the higher average selling price contributed by the L-series. The quarter-over-quarter increase was mainly due to the increase in vehicle deliveries, partially offset by the lower average selling price due to different product mix between the two quarters. Revenues from other sales and services were RMB $459.7 million or $66.9 million in the first quarter of 2023, growing 81.4% year-over-year and 20.5% quarter-over-quarter. The increase was mainly attributable to increase the sales of accessories and services in line with higher accumulated vehicle sales. Cost of sales in the first quarter was RMB 14.96 billion, or 2.18 billion U.S. dollars. representing an increase of 102.2% year-over-year and an increase of 6.2% quarter-over-quarter. Gross profit in the first quarter of 2023 was RMB 3.83 billion, or $557.7 million, growing 77% compared with the first quarter of last year and 7.4 percent versus the fourth quarter of 2022. Vehicle margin in the first quarter of this year was 19.8 percent compared with 22.4 percent in the first quarter of 2022 and 20 percent in the fourth quarter of in the fourth quarter of 2022. The year-over-year decrease was mainly due to the different product mix between two quarters. Growth margin in the first quarter of 2023 was 20.4 percent compared with 22.6 in the first quarter of last year and 20.2 percent in the fourth quarter of last year. Operating expenses in the first quarter of 2023 were RMB 3.42 billion, or $498.7 million, increasing 32.9% year-over-year and decreasing 7.4% quarter-over-quarter. Research and development expenses in the first quarter of 2023 were RMB 1.85 billion, or $269.7 million, up 34.8% year-over-year, and down 10.5% quarter-over-quarter. The year-over-year increase was primarily driven by increased expenses to support our expanding product portfolios, as well as increased employee compensation as a result of our growing number of staff. The quarter-over-quarter decrease was mainly in line with the timing and progress of new vehicle programs. Signing general and administrative expenses in the first quarter of 2023 were RMB 1.65 billion, or $239.6 million, representing an increase of 36.8% year-over-year and an increase of 0.9% quarter-over-quarter. The year-over-year increase was primarily driven by increased employee compensation as a result of our growing number of staff, as well as increased rental expenses associated with the expansion of our sales and servicing network. Income from operations in the first quarter was RMB 405.2 or 59.0 million U.S. dollars. compared with RMB $413.1 million loss from operations in the first quarter of 2022 and RMB $133.6 million loss from operations in the first quarter of 2022. That income in the first quarter of 2023 was RMB $933.2 million. 8 million or 136 million U.S. dollars compared with RMB 10.9 million net loss in the first quarter of 2022 and more than tripled the RMB 265.3 million net income in the fourth quarter of 2022. Turning to our balance sheet, and cash flow. Our balance of cash and cash equivalents with restricted cash, time deposits, and short-term investments was RMB $65 billion, or $9.46 billion as of March 31, 2023. Net cash provided by operating activities in the first quarter of 2023 was RMB 7.78 billion or 1.13 billion U.S. dollars. Free cash flow was RMB 6.7 billion or 975.9 million U.S. dollars in the first quarter of 2023. And now for our business outlook. For the second quarter of 2023, the company expects the delivery to be between 76,000 and 81,000 vehicles, representing an increase of 164.9% to 182.4% from the second quarter of 2022. The company also expects the second quarter total revenue to be between RMB 24.22 billion and RMB 25.86 billion, or U.S. dollar 3.53 billion and U.S. dollar 3.77 billion, representing an increase and 77.4% to 196.1% from the second quarter of last year. This business outlook assumes supportive macroeconomic conditions, no significant disruptions in the supply chain, and reflects the company's current and preliminary view on its business situation and market conditions, which is subject to change. turn the call over to the operator to start our Q&A session.

Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you are using a speakerphone, please pick up the handset to ask your question. For the benefit of all participants on today's call, please limit yourself to two questions. And if you have additional questions, you can reenter the queue. If you are a Mandarin speaker, please ask your questions in Chinese first, then followed by the English translation. The first question comes from Tim Xiao from Morgan Stanley. Please go ahead.

Hello, Manager Chen. Thank you for accepting my question. I also congratulate the bright performance of Grace E-Systems and the performance of two consecutive quarter profits. I have two questions here. The first question is about the net profit. As we can see, the net profit of E-Systems seems to be affected by the combination of products and the impact of the net profit. The ratio is falling. How should we judge the trend in the next few quarters? In the second quarter, we see that the scale will rise, and then the cost-effectiveness of non-existent cost-effectiveness batteries will drop. But at the same time, the L7 and ARID versions of relatively low horsepower will also continue to rise. So how do we consider this comprehensive impact? In the next few quarters, will we have a chance to see the horsepower rate bounce back to a previous pre-high, maybe more than 22 points? So my first question is about the gross profit margin. So first quarter gross profit margin was adversely affected by the inferior product mix and the lower utilization rate. So how should we think about the margin trajectory in the following quarters, given the interplay of multiple factors? So on the bright side, the scale will rise in component costs, including the battery prices would fall. And on the flip side, we expect the rising mix of L7 and the error models might cause greater margin dilution. So any chance in the following quarter we could see the gross profit margin bounce back to like a previous peak level, more than 22%? So that's my first question.

Thank you, Tim. This is Johnny. Basically, we are confident of improving performance The cross-marketing, starting from Q1, first, in the first quarter, the LIWAS sales impact 1.6% on the cross-marketing negative if we excluding that. So we will close out all the LIWAS in the first quarter, in the first half. And yeah, there will be some room on this only was a negative impact. And with the ramp-up of our L7 series and also the AR series, there will be some room on that. But we still see there will be some other bombs caused stress, so we still keep our 20% of full-year guidance. Thank you.

Got it. Thank you very much, Johnny. My second question is related to AD functions. Because we know that the ideal vehicle plan is to open city and navigation assistance drivers within the year, especially those early users' internal tests. Could you please share with us the initial test user scale and the time limit for sending to all drivers? My second question is about the CTNOA. Li Auto plans to push through the CTNOA. to a small group of users for early testing. So what's the size of the user group at the initial stage, and when are you going to activate the function to all ADMAX users? Separately, when the company thinks about the Liotos, the targeted customers, i.e. the family users, what's the value proposition of CT-108, or a high-level time-thriving function? What does that mean to them, and how important Is it when the family users make the decision to buy the cars and to enhance their user experience? So that's my second question. Thank you.

Hello, Tim. I'm Ma Duhui. Currently, we are doing relatively well in terms of testing. Whether it's system-based testing or road-based testing. According to the time we set before, we will send the early bird test in June. Currently, the rules of the user group are being set for early test. First, we will use the frequency used by our high-speed NLA in the early stage, including driving habits. We will choose these users first. At the same time, we also hope that these users are willing to use the smart driving function, and the frequency used will also be relatively high. Moreover, because we are in the test, we also hope that the early bird users will be able to There is a higher level of tolerance and understanding. According to our previous goals, we will send 100 cities across the country by the end of this year. However, the order and logic of the delivery is related to the number of cars in the local area. The main thing is that the entire technical structure does not rely on high-definition maps. Therefore, from the theoretical aspect of the structure, we can use our NVA to support driving in places with navigation maps. If the city has higher L9, L7, and L4 security, the more data we have, the more we may have the opportunity to release such a function earlier. Of course, in the evaluation process, a coverage rate is also very important for complex entrances. We will gradually advance the development of 100 cities based on the training of complex entrances. In addition, ideal car users are all positioned in family users. Family users have higher requirements for the safety of their own car, and they also hope that the overall driving experience will be more humanized and comfortable. In the process of testing, we will conduct similar shadow testing and test testing, as well as testing the extreme conditions of our R&D section, so that users can be at ease and use the features of our city NVA under safe conditions.

Overall, we're making good progress in terms of city NOAs, both on a system testing level as well as real-world testing. Our plan is still to release early bird testing in June. And the policy, specific policy as to who do we release it to is still being created. But generally, our rule of thumb is we will try to cover more frequent users of highway NOAs, which are users who have more willingness and ability to use NOAs. They also have higher tolerance and level of understanding of the NOA feature. By year end, we still plan to launch city NOA in 100 cities. And as to which specific cities we will cover first is mostly dependent on the number of our existing vehicles in those cities because, as you know, our city NOA solution doesn't rely on high-definition maps. which means as long as we have navigation data for the city, as long as there's enough drivers driving our max models, we will be able to accumulate enough data to allow users to use city in a way. Especially when it comes to complex intersections, as long as we achieve good coverage on those scenarios, we will be able to accumulate more data and open up those cities and locations for our users. Speaking of family users, as we've always believed, they care a lot about safety and also comfort, especially when it comes to mimicking human drivers to be able to drive smoothly and give the entire family a good experience. So to make that happen, we're running shadow testing in our existing vehicles already to try to improve the behavior of our NOA features so that when they are launched, they can provide the best experience for our family users.

Thank you for your answer. Thank you very much for your detailed sharing. Thank you.

Thank you. The next question comes from Bin Wang with Credit Suisse. Please go ahead.

Hello, everyone. Congratulations on your great performance. I have two questions. They are related to Xiong. First of all, I would like to ask a few questions about the second wave. During the last phone call, we said that there will be 30,000 units in a month. I would like to ask if this prediction is true. When do you expect we will have 30,000 units this year? This is the first question. The second question, I remember the media reported that we said that this year's stock movement may be postponed until next year. Is this the case? If so, what is the reason? Thank you. Let me translate it. I actually got two questions all about the volume. If you see in last conference call, you mentioned you actually maybe try to do monthly 30,000 units a month. What's your expectation? Which months will it deliver? Still in second quarter or in the future? The second thing about the POEV, in your media interview, it seems that you had to say that the EV has been postponed to next year. Can you confirm that? If yes, what's the reason behind the postponement to next year? Thank you.

Hello, I'm Li Xiang. Let me answer these two questions. First, I think in the second quarter, we will gradually climb up. We will try to achieve this goal in June, which is to deliver 30,000 units in three months. This is the first question. The second question is that our pure electric mechanical vehicles will be released in the fourth quarter of this year. After the release, So first question, in Q2, we will gradually ramp up our delivery numbers, and our current goal is to reach the $330,000 monthly mark by June of this quarter. And talking about the BEV flagship,

Our plan is still to release it in Q4 and after which we will be delivering the vehicle to retail stores for static viewing and test drives, which will follow a similar pace as you observed with L9 and L8.

Thank you. Thank you. The next question comes from Paul Gong. with UBS. Please go ahead. 谢谢管理层,我也两个问题,第一个问题来说是关于费用的,应该说看到这个季度的这个费用的控制还是相当的不错的,就研发的费用不仅比上一个季度还低一点,而且跟我们全年的一个计划相比是要低一些,然后那个

In terms of sales management fees, although our electricity has increased, compared to the previous quarter, this fee has not increased. Then we look at the next few quarters, do we still maintain the original development budget? Or is it that if we can't spend so much money, we will try to save as much as possible? Then the next one is the cost of sales management fees. Can the cost of sales management fees be updated? So my first question is regarding the expense. It seems that both R&D and SG&A seems to be having either flattish quarter over quarter or even slightly decline and below our budget. Especially in terms of SG&A, even with the expanded network, it still seems to be well within control. So can you please give an update of the full year R&D spending guidance as well as SG&A expense ratio? Thank you.

Hi, Paul, and this is Johnny. I will take over. For the R&D, we will still keep our full year guidance, which is over from 10 to 12 billion RMB for the full year. And for the SG&A, as a percentage of our revenue, we will continue They will improve starting from the first quarter of last year's ratio. This is our plan. Thank you. Thank you.

So my second question is regarding the competition. I think some other car makers have launched similar size of the vehicle with also plug-in hybrid system and with even lower price than the L8. Have we observed any impact in terms of new order intake? And how shall we think about the rising competition in the same segment? Thank you.

From our actual order, R8's order is still growing. And I think more and more brands are participating in this kind of market competition. And then for us, such a relatively market-leading product can bring a lot of benefits. A lot of users are also because they have seen all kinds of publicity and then increased the number of orders of R8. This is very beneficial for us. On the other hand, from the perspective of the specific type of vehicle, from our actual battle, and then the new car that has recently been promoted has not ranked in the top 20.

Looking at our actual order intake, the orders for L8 is actually increasing very steadily. In fact, we believe as more players enter the market, it's actually good for our L8, which is market leader, because many users read about these competitors and they start looking into this market segment, and eventually they come over to L8 and order. our products. So we generally don't think this to be a big threat. And even when we look at the defeat data for our L8 orders, this product you're talking about, this specific product, isn't even among the top competitors. Our top competitor is still the Tesla Model Y. Thank you so much.

Thank you. The next question comes from Ming Sun Li from Bank of America. Please go ahead.

OK, thank you. Hello, everyone. I also have two questions. The first question is related to the recent competition situation. I would like to ask Mr. Li, based on the current scale of our company and the current market, do you think profit and cash are more important at this time? Or the market share, which is the sales. Because this seems to be a knock-off version. Because the cars in the first season of Ideal are all new cars. In fact, there is no discount. In fact, I think the image of this brand is maintained very well. Do you think there is a chance to see the entire industry improve in this competitive environment this year? Or maybe as the battery price goes down, my first question is regarding your business priority at the current moment is profitability and free cash flow more important for you or market share is more important for you And also, how do you see the price competition in the second half this year, given the battery price already declined a lot? So, will you consider to slightly give a little bit of discount in order to maintain an even higher market share? Thank you.

I think the first and most important thing for us is the market share. So our core goal in the second quarter is to increase the market share rate by 11% to 13% in the first quarter of 2021. Secondly, we have not considered the price drop yet. Because when we make detailed long-term planning and pricing for the car, we have already set the level and size of each model and the corresponding price limit at the most competitive price range. There will be problems up and down. First of all, our top priority is going to be market share.

In Q2, our goal is to increase our market share in the MEV market above RMB 200,000 in MSRP from 11% to 13%. And we don't have any plans to offer discounts because as we made our long-term sales and product plans, we have already considered the price of our product as the most competitive considering the size, the segment, and the price segment. So this is all taken into consideration, and we have confidence not to offer discounts.

Thank you, Mr. Li. My second question is about the electric car. Because when CSM mentioned the electric car solution, So my second question is regarding your battery EV plan. In April, you already disclosed your long-term goal. By 2025, you will have five BEV models and also five EREV models and one flagship model. How do you think about the long-term gross margin of your battery EV? And also, what is your capex related to the BEV business?

I will take that question. This is Johnny. And for this year's capex, And in the last three years, our capex is about 10 billion RMB. And rolling three years, starting from this year, based on our current estimate, including the HPC capex, it's about 18 billion RMB. But it may expand if our early test on the HPC was sustained, we will may adjust our expansion plan on this.

Thank you. Thank you. Thank you. The next question comes from Yukian Ding with HSBC. Please go ahead.

Thank you, Guan Yicheng. I have two questions. First, I would like to ask about the product strategy and profit margin of the power generation series. Will the MPVs of the power generation series do the design of the improved version? Because we see that the MPVs of the large-scale MPVs are currently at the 9th place, which is the best, but 70% comes from the plug-in. The second question is that we want to ask about the product strategy and time table between 200,000 and 300,000, and compete in a more intense but larger market. Two questions on the product map. First, on the pure battery electric vehicle product strategy and profit outlook. As BEV might have a quite different bond structure versus range extender. For the coming EV models, big size MPV, will there be range extender version versus pure battery electric version? So far, we noticed that during the competition, BYD's D9 has been selling well, but 70% is PHEV. And second, on the RMB 200K to 300K pricing range, larger time but more competition, how would Lyoto differentiate itself in winning midsize and compact size segment, which already have crowded model supply? Thank you.

I will answer this question from two points of view. First, in order to make high-pressure pure metal vehicles, we have already invested a lot of money in the development and the quality of the supply chain. Our core goal is to sell high-pressure pure metal vehicles at a price that is close to the price of Zengcheng. And we can still get a similar profit margin. This is a reflection of our business health. Yes, so this is based on our research, and we have already started to build on the industrial chain and the autonomous chain. I think on the other hand, without talking about the specific type of car, I think the ideal car, whether it is our increased power generation or the high-pressure pure electricity we do, actually only has one core goal, which is to be able to carry a large-scale diesel car. So our high-pressure pure electricity is the same. There are two most important things in it. One is that the user can use this car and be able to create five groups. That's why we built a large-scale supercharger on the highway, so that users can truly experience the safety and convenience of the two-wheeled car. On the other hand, as I just mentioned, we cannot transfer such costs to consumers, so we will use effective research and supply chain layout to make it cheaper and more suitable for users to buy the most competitive products in the same class.

So I'll answer this question from two angles. First of all, even though we haven't launched our HPC BEV products, in fact, we have invested in R&D and supply chain, especially developing in-house parts, very early on to prepare so that we can offer that product at a price point very close to our REV product and deliver very similar gross margin as well. All this is relying on our R&D efforts, as well as in-house parts, which is deployment in our supply chain. Without talking about specific models, whether it's BEVs or RUVs, our goal has always been to massively replace ICE vehicles. And in order to do that, the top priority is to tackle range anxiety so that our users can drive freely between cities and away from their homes. So our strategy for that product is to deploy charging stations which can charge very rapidly in service areas and highways so that it can provide a very similar experience, even comparable to cars that are powered by traditional chemical fuels. So at the same time, as I mentioned earlier, with our strategy in R&D and in-house development, we're able to offer all of this without incurring additional costs for the users so that they can buy these products at prices very similar to REVs.

Thank you. The next question comes from Yingbo Zhu with CITIC Securities. Please go ahead.

My question is how we plan our sales and service network in next two or three years to prepare for the large sales volume in future. Thank you.

I think there are three levels of warning. The first level is due to the multi-car type, we will be able to effectively upgrade the front of the car that can only be put in one or two cars in the past. This is the first level. The second level is that we will start to open a lot of integrated power in some cities where we have a very good market share. Because of the integrated power, the entire conversion rate and the user's experience in the market will be better. And then, The third one is that we will cover almost all four cities in the future. At the same time, the four-way city is an effective way for us to build a comprehensive chain in a large-scale car city. So the overall strategy and the way of covering will be similar to the whole coverage scale and coverage method of Benz, BMW, and Audi. Because these mature brands have been verified.

I'll answer this on three levels. First of all, as we build multiple vehicles in our product portfolio, we'll be upgrading stores which only have one or two cars today so that they can have a bigger part of our product offering. And secondly, we will change the format in the cities where we have a very high market share. We'll change the format of some of our stores to be a sales complex which will offer better test driving experience as well as drive higher conversion rates. And thirdly, in Tier 4 cities, we plan to pretty much cover all of the Tier 4 cities, and the format will be very similar to what you see in auto complexes offering a comprehensive store offering services as well as sales in the same complex. So overall, as you look at our sales network, it will look very similar to what you see with Mercedes, BMW, and Audi, both in terms of scale and format.

Thank you. The next question comes from Jing Chang with CICC. Please go ahead.

Okay, thank you for your sharing. I'm Chang Jing from Zhongjing Motor Company. I have two questions for you. The first one is about the delivery of our second quarter. It means that before the second quarter, we may not be able to hit the 30 million. I would like to ask if the trend of new orders, especially since May 1, has seen a significant improvement to support the continuous improvement of the delivery volume in May and June. In addition, I would like to ask about the current stock price of the AER version and the future expectations. Uh, uh, We can see that our average second quarter viewable guidance is around 78,000 units, which means that by the end of the second quarter, the monthly sales volume will hit 30,000 units. And therefore, I want to ask whether the trend of new orders since May 1st we have already seen a significant improvement and the continuous improvement of delivery volume in May and June. In addition, I want to ask whether the current proportion of error version and also the proportion of sales volume in lower tier cities have already made a greater incremental contribution than before, and what do you think for the further space of our three existing models after their quarterly sales volume has already reached 30,000 units, especially in the third and fourth quarter this year. Can you expect a higher level? Thank you.

This question is based on Shunjie's answer. I think the first one is that in May, the sales volume was the same as before. But from the previous ten days, no matter the order volume or delivery volume, we were significantly better than in April. This is the second one, and then actually, then the second model, and then as the electric market began, there was a significant increase in the whole thing. At present, L7 and L8, through the second model, have brought us about 20% of the increase. This is the second part. The third part, then our program, according to the one-line program, the new one-line and the two-line program, and then draw the increase. At present, in fact, the increase rate is the best. In fact, the new one-line program is also because of the more than 300,000 SUVs. Answering these questions in order, first of all, may have typically been a low season in terms of vehicle sales. But for us, we have seen a strong

growth compared to April, both in terms of delivery numbers and order numbers. And as the air models hit our stores and we begin to offer test drives, we've also seen a greater share of air models in both L8 and L7. To gather L8 and L7 air contribute about 20% of incremental sales. And secondly, we divide the city by what we call new tier 1s and tier 2s. and we see the best performance in these so-called new Tier 1 cities because these are strong drivers in terms of buying SUVs that are priced over 300,000 RMBs, and they will continue to be strong drivers. In our next steps, we will expand into Tier 3 and Tier 4 cities, and we believe they will be a growth engine for our next stage of development.

Thank you. Please go ahead.

My second question is we can see a number of our stores has expanded a lot and most stores will open in the lower tier cities. And this is one of the major driving for our further self-volume growth. And we also can see that we are constantly adjusting our distribution channels and organization methods. So can you share some detailed cases, especially for what difficulties do we see in the larger cities and how we adjust to make the improvement?

There's no way to explain it in detail, but in the first quarter of this year, we launched an upgrade of the entire organizational process of the business system. A more significant change will be from the management of the past big districts to the management of the provinces. Then the provinces will directly manage the stores. Then, whether it is the allocation of goods and resources or the transfer of resources, it will be processed from the previous general company. and then hand it over to each province, each store, and then be able to do such a process of independent management. The advantage that we brought to the table is that, in fact, compared to the fourth quarter, our number of stores has not increased too much. However, the output of our three stores, as well as the output of each product expert, each person, has increased significantly. At the same time, from the order to the delivery, from the clues to the order conversion rate, we also got a very significant improvement. As for how to fight more 3- and 4-line cities, and how to effectively go down, I think we will still, in the new process management, and after this upgrade, we will believe more in the judgment and ability from the first line. Then they will decide for themselves, different cities, different types of areas,

I can't disclose too many details, but what I can share is that this quarter we have started a comprehensive organizational upgrade on the commercial side. We have changed from a regional organization structure to a province-based organizational structure. So in terms of both customer acquisition and conversion resources, we've changed from a centrally allocated model to a more regional, more frontline-directed allocation model so that the resources can be allocated more efficiently. Compared to Q4 last year, actually our number of stores hasn't changed much, but the sales per store and sales per person have both increased very dramatically. Also, the conversion rate from leads to order has also increased. As to our strategy in Tier 3 and 4 cities, What I can't share right now is that we will trust this new process and organizational structure and give the power to the frontline workers so that they can use their judgment and experience to decide what is the best strategy that best suits their city and region to achieve the best results.

Thank you. The next question comes from Jiong Xiao with Barclays. Please go ahead.

Thank you. Hello, I am Ma Donghui. Let me answer some questions about production capacity. Currently, we have two production lines in Changshu Factory.

One is to produce i9 and i8. If we look at it in terms of double shifts, we can produce 20,000 to 25,000 units per month. The other production line can produce L7 and L8. L8 can be balanced on two production lines. Currently, the second production line is single shift production. It can produce 10,000 to 12,000 units per month. According to the demand of the delivery, we can improve the production capacity. At present, First of all, in the Chengzhou factory, we currently operate two production lines. The first line produces manufacturers L8 and L9.

And we currently operate two shifts, which gives us a capacity of about 20 to 25,000 per month. The second line can make L7 and L8 and currently operates on one shift delivering 10 to 12,000 per month. And L8 is actually used to balance the load of the two lines so that they can operate at optimal efficiency. And going forward, based on demand, we can easily improve our production output with the current factory in Changzhou. So this year, This factory should be enough to support our sales targets. The phaging factory is dedicated to our best product line and it's designed to initially offer 100,000 units production capacity annually. And as we deliver more vehicles in the future, we will strategically increase the output of these production capacities to meet our demand.

Thank you. As we are reaching the end of our conference now, I'd like to turn the call back over to the company for closing remarks. Ms. Janet Tsang, please go ahead.

Thank you all once again for joining us today. If you have any further questions, please feel free to contact Seattle's investor relations team. Then that's all for today. Thank you and have a good day.