Li Auto Inc.

Ladies and gentlemen, thank you for standing by for Lee Otto's second quarter 2023 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 Zhang, Investor Relations Director of Lee Otto. Please go ahead, Janet.

Thank you, Sarah. Good evening and good morning, everyone. Welcome to Lee Otto's second quarter 2023 earnings conference call. The company's financial and operating results were published in a 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, begin with prepared remarks. Our president, Mr. Donghui Ma, and other senior 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 certain filings 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 matters. Please refer to Li Auto's disclosure documents on the IR section of our website. which contain a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. Our CEO will start his remarks in Chinese. There will be English translation after he finished all his remarks. With that, I will now turn the call over to our CEO, Mr. Xiangli. Please go ahead.

Hello, everyone. I'm Li Xiang. Welcome to today's conference. Regarding the current situation of the government, In the second quarter of 2023, the ideal car achieved more than 30,000 units of monthly delivery. In the second quarter, it delivered more than 86,000 units, which is three times the same as last year. The amount of delivery this year is also more than the total in 2022. In the beginning of this year, we delivered the 400,000th ideal car. Since the official delivery in December 2019, it has become the fastest in China to deliver 400,000 units in 24 months. It took less than four months to deliver 300,000 to 400,000 units. Our delivery volume in July is also at a new high of more than 34,000 units. The total delivery broke through 430,000 units. Thanks to our strong product power and the comprehensive improvement of organizational processes and management capabilities, the three models of the ideal L series have kept the sales lead in each air market. Since its release in June of last year, the total delivery has exceeded 200,000 units. According to the mid-term data, in the second quarter, Li Xian 27 is still the top seller of more than 300,000 large SUVs. Li Xian 28 is still the top seller of more than 300,000 SUVs. Li Xian 29 continues to be the top seller of all SUVs. Li Xian is becoming the top seller of Chinese luxury brands in the Chinese market. In China, we have more than 200,000 new car brands. The market share has increased from 11% in the first quarter to 14%. Our financial performance has continued to improve with the increase in delivery and better operation capabilities. In the second quarter, the company's income, net profit, and free cash flow, and other financial data have set a historical record. The total income reached 286.5 billion yuan, which increased by 228.1%, and the net profit reached 23.1 billion yuan. The free cash flow has reached 9296.2 billion yuan. I believe that the ideal car's outstanding self-sufficiency and abundant cash can firmly support us to invest in R&D, recruit talent, accelerate business expansion, and establish long-term competitiveness. In the third quarter of this year, the delivery volume of the ideal car can exceed 100,000 taels. This year, we are confident that we will exceed 10% to 20% of the year-end internal set goals and break through the annual revenue of 100 billion RMB. At the end of this year, we will hit 40,000 monthly payments. In order to achieve the goals of payment support, we will continue to increase the ability to coordinate production and sales, and continue to increase the ability to raise prices. By optimizing supply chain management strategies and upgrading management processes, we will increase supply capabilities. In terms of intelligent value, we have made rapid progress this year. In June 2023, we opened China's first city-wide and commuter OAs that are not dependent on high-altitude maps in the most complicated roadblocks in Beijing. We have also promoted the city-wide OAs to Beijing and Shanghai early bird users. In terms of perception, we use the new NPN characteristics and TNN network to strengthen the BV model. Real-time perception of complex road structures, understanding traffic rules, to identify various obstacles through dedicated networks. At the same time, in terms of regulation and control algorithm, we use imitation learning to make human-like driving decisions. The driving safety, driving efficiency, and input performance of real-time users and media show the ideal of ADMAX. In the second half of the year, we will open up city NOA and traffic NOA to more early-stage users, and make city smart driving available to more families. At the same time, Users are also becoming accustomed to the ease and convenience of the journey brought by high-speed NOA. So far, we have provided high-speed NOA functions for more than 380,000 household users. The high-speed NOA journey has exceeded 230 million kilometers. In terms of the type of car, we introduced the 800-hp high-pressure fast charge solution in June 2023. to optimize the battery and the battery heat management system of the high-pressure pure electric vehicles. The 5C charging ratio of the battery can be used more efficiently to achieve a charging power of more than 500 kilowatts. Charging for 12 minutes can carry 500 kilometers. With the 5C supercharged charging network designed by ideal cars, the energy-saving experience of ideal cars and pure electric vehicles is also very close to two-wheeled vehicles. Our first 5C pure electric supercharged flagship vehicle, the ideal mega, will be released at the end of this year. We are confident that the ideal mega will become the number one new product with a sales of more than 500,000. At the same time, we are also actively setting up a 5C supercharging network. So far, the ideal car has built 37 ideal 5C supercharging stations nationwide. We will accelerate the construction of the basic network. The goal is to build more than 300 at the end of this year. At the end of the second half of the year, more than 3,000 ideal 5C supercharging stations will be built. We will provide a fast and reliable charging experience for ideal cars and electric cars. We believe that the core technology of large-capacity and high-efficiency refueling is the best solution for large-capacity and high-efficiency refueling, as well as the high-pressure pure electricity technology that really solves the charging speed and the length of the charging port. The two routes are the best solution for large-scale replacement of two cars. In terms of sales and service, to support the rapid increase in sales, we accelerate the expansion of the online and offline integrated direct sales and service network. At the same time as the shopping center opened the mall, we increased the center of the car sales area and satisfied the shopping habits and needs of different users. We will further increase the flow of customers and order conversion rate. In the second quarter, we added 32 new retail centers and upgraded 18 existing stores by changing paper or expanding the area. As of July 31, 2022-23, Liqiang Car has already had 337 retail centers nationwide, covering 128 cities. We will continue to use continuous growth as the core power, continue to learn, continue to train, polish our two most important products, serve the automatic electric vehicles of family users and serve the process organizations of internal employees, and better support the development of ideal cars from 1 to 10.

In the second quarter of 2023, we reached multiple milestones and deliveries. We delivered over 30,000 vehicles in June, taking our second quarter deliveries to 86,533 vehicles, tripling the volume from the same period last year. We delivered more vehicles in the first half of this year than all of 2022. Furthermore, in early July, we delivered our 400,000 Li Auto vehicle, taking just 42 months to reach this important milestone since we commenced deliveries in December 2019, setting a record for Chinese emerging NEV OEMs. Going from 300,000 cumulative deliveries to 400,000 took less than four months. Finally, our July deliveries hit a new high of 34,134 units. bringing our total cumulative vehicle deliveries over 430,000. With our strong product lineup and comprehensive improvements in organizational processes and operating capabilities, our three models continue to lead in their respective market segments, with cumulative deliveries exceeding 200,000 units since their successive launches starting in June last year. According to the insurance registration data of China Automotive Technology and Research Center, In this past quarter, Li L7 consistently topped China's large SUV monthly sales chart. The L8 also remained customers' favorite six-seater SUV priced over RMB 300,000. The L9 continued to dominate the full-size SUV sales chart in China. Li Auto has the highest sales among domestic premium automotive brands in China and remained one of the top three SUV brands priced over RMB 200,000 in China. with market share increasing from approximately 11% in the first quarter to about 14% in the second quarter. Driven by our delivery growth and stronger operational capabilities, our financial performance continued to improve. In the second quarter, the company achieved record-breaking results across revenue, net income, and free cash flow. During the quarter, our revenue reached RMB $28.65 billion, up 228.1% year-over-year, while net income and free cash flow increased from RMB 2.31 billion and RMB 9.62 billion, respectively. We're confident that our outstanding cash generation capability and ample cash reserve will support our unwavering commitment to invest in R&D, business expansion, and building long-term competitive barriers. We expect our third quarter deliveries to be between 100,000 to 103,000 units. For the full year 2023, we're confident to beat the internal delivery target we set at the beginning of this year by 10% to 20%, but annual revenue exceeding RMB 100 billion. We aim to hit the 40,000 monthly delivery milestone by the end of this year. To achieve our delivery target, we will continue to foster coordination across production, supply chain, and sales. while continuing to expand production capacity, enhance supply chain management processes and capabilities. We made rapid progress in autonomous driving this year. In June 2023, we started test drives for China's first NOA and commute NOA, which do not rely on high-definition maps in Longjing, known as one of the most complicated traffic zones in Beijing. We also rolled out our city NOA to early bird users in Beijing and Shanghai. On the perception front, we use VEV models enhanced by innovative NPN features and TIN network to perceive complex road structures in real time and comprehend traffic rules. While utilizing occupancy network to identify common obstacles, we also utilize imitation learning and control algorithms to make judgments more akin to human drivers. Test drivers and media have spoken highly of driving safety efficiency, and comfort demonstrated by Lee Auto 80 Max. In the second half of 2023, we will continue to release City NLA and Commute NLA to more early bird users, bringing city-level autonomous driving to more families. Meanwhile, users are increasingly accustomed to the convenience and ease of Highway NLA during their journey. As of today, we have provided highway NOA to over 380,000 families covering more than 230 million kilometers. With respect to BEV models, we introduced our 800-volt high-power charging solution at our first-ever Family Tech Day in June 2023. With optimized battery and thermal management systems, our BEVs can fully leverage the battery's 5C charging rate with peak charging power of over 500 kilowatts and 500 kilometers of driving range from a 12-minute charge. In conjunction with our own 5C charging network, our BEV can offer a very comparable energy replenishment experience to ICE vehicles. We will unveil our super flagship 5C BEV, Lean Mega, by the end of this year, and we're confident that it will emerge as the new top seller among all vehicles priced over RMB $500,000. Meanwhile, we're actively deploying our 5C supercharging network. As of now, we have built and commenced operation of 37 LiAuto 5C supercharging stations. Going forward, we'll accelerate the rollout, aiming to establish over 300 5C supercharging stations by the end of this year and over 3,000 by the end of 2025 to offer our BEV users a fast and reliable charging experience. We firmly believe our dual energy strategy is the best solution to replacing ICE vehicles at scale. The dual energy strategy composes of EREV technologies that center on high capacity batteries and highly efficient range extenders, as well as a high voltage BEV technology that can truly address pain points in charging speed and charging on long trips. To support the rapid sales growth, we accelerated the expansion and upgrade of our integrated online and offline direct sales and servicing network. While we continue to open retail stores in shopping malls, we have increased the proportion of our retail stores located in automotive retail parts to cater to different users' purchasing habits and needs, further improving user acquisition and sales conversion. In the second quarter, we opened 32 new retail stores and upgraded 18 existing stores through relocation and expansion. As of July 31, 2023, we operated 337 retail stores in 128 cities, as well as 323 service centers and Lee Auto authorized body and paint shops operating in 222 cities. Looking ahead, driven by our pursuit of continuous growth, we will relentlessly explore, train, and learn to refine our two most critical products, namely our smart electric vehicles for family users and organizational processes to serve our internal talent and teams, better supporting our journey from one to ten. With that, I will turn it over to our CFO, Johnny, for a closer look at our financial performance.

Thank you, Li Xiang. Hello, everyone. I will now walk you through some of our 2023 second quarter financials. Due to time constraints, I will address financial highlights here and encourage you to refer to our earnings price release for further details. Total revenues in the second quarter of 2023 were RMB 28.65 billion or 3.95 billion U.S. dollars. increasing 228.1% year-over-year and 52.5% quarter-over-quarter. This included RMB $27.97 billion or $3.86 billion from vehicle sales, which was up 229.7% year-over-year. and 22.6% quarter-over-quarter. The year-over-year increase was mainly due to the increased vehicle deliveries. The quarter-over-quarter increase was mainly due to the increase in vehicle deliveries partially offset by the lower average selling price as a result of different product mix between the two quarters. Revenues from other sales and services were RMB $688.8 million or $93.9 million in the second quarter of 2023, growing 173.4% year-over-year and 48.1% quarter-over-quarter. The increase was mainly due to the increase of sales of accessories and provision of services in line with higher accumulated vehicle sales, as well as increased sales of charging stores in line with higher vehicle deliveries. Cost of sales in the second quarter of this year was RMB 22.42 billion, or 3.09 billion US dollars, up 227.1% year-over-year, and 49.9% quarter-over-quarter. Gross profit in the second quarter of this year was RMB 6.24 billion, or $859.9 million, growing 232%, and 62.8% compared with the second quarter, of 2022 and the first quarter of this year. Vehicle margin in the second quarter of 2023 was 21%, compared with 21.2% in the second quarter of last year, and 19.8% in the first quarter of 2023. Excluding the impact of Li-1, the vehicle margin of the Li series, Li-L series, remain stable over the first quarter of 2023. Gross margin in the second quarter of 2023 was 21.8% compared with 21.5% in the second quarter of 2022 and 20.4% in the first quarter of 2023. Operating expenses in the second quarter of 2023 were RMB 4.61 billion or $635.7 million, growing 61.4% year-over-year and 34.6% quarter-over-quarter. Research and development expenses in the second quarter of 2023 RMB 2.43 billion, or $334.5 million, up 58.4% year-over-year and 31% quarter-over-quarter. The increase was primarily driven by increased employee compensation as a result of our growing number of staff, as well as increased expenses to support our product portfolio expansion and technology advancements. Citing general and administrative expenses, in the second quarter of 2023, RMB 2.31 billion, or US$318.5 million, are 74.3 year-over-year and 40.2 4% quarter over quarter. The increase was mainly driven by increased employee compensation as a result of our growing number of staff, as well as increased rental expenses associated with our sales and service network expansion. Income from operations in the second quarter of 2023 was RMB $1.63 billion, of 224.2 million U.S. dollars, compared with RMB 978.5 million loss from operations in the second quarter of last year, and growing 301.3 percent from RMB 405.2 million income from operations in the first quarter of this year. Net income in the second quarter of 2023 was RMB 2.31 billion, or $318.6 billion, compared with 641 million net loss in the second quarter of last year, and more than doubled the RMB 933 billion. 0.8 million net income in the first quarter of 2023. Turning to our balance sheet and cash flow, our balance of cash and cash equivalents, restricted cash, time deposits, and short-term investments totaled RMB 73.77 billion, or 10.17 billion US dollars as of June 30th. 2023. Net cash provided by operating activities in the second quarter of 2023 was RMB 11.11 billion or 1.53 billion US dollars. Free cash flow was RMB 9.62 billion or 1.33 billion US dollars in the second quarter of And now for our business outlook. For the third quarter of 2023, the company expects the deliveries to be between 100,000 and 103,000 vehicles, representing an increase of 277% to 288.3%. from the third quarter of 2022. The company also expects the third quarter total revenues to be between RMB 32.33 billion and RMB 33.3 billion of 4.46 billion U.S. dollars and 4.59 billion U.S. dollars, representing an increase of 46% to 256.4% from the third quarter of last year. This business outlook reflects the company's current and preliminary view on its business situation and market condition, which is subject to change. That concludes our prepared remarks. I will now turn the call over to the operator to start our Q&A session. Thank you.

Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you are on a speakerphone, please pick up your handset to ask your question. For the benefit of our participants on today's call, please limit yourself to two questions, and if you have additional questions, you can re-enter the queue. If you are a Mandarin speaker, please ask your question in Chinese first, then follow with English translation. Our first question comes from Tim with Morgan Stanley. Please go ahead.

Because as I mentioned earlier, the third quarter may be the first quarter of the delivery volume. Such a guidance actually indicates that the production bottleneck, as shared by President Li Xiang, is basically short-term and may be unsolvable. Can we understand the main reason for the production bottleneck? Is it the whole production, or is it a special reason? As we mentioned earlier, we have some expectations for the fourth quarter. If the production bottleneck of the fourth quarter or the average delivery volume rises to 40,000, So my first question is about vehicle delivery, because the auto's third quarter volume guidance of around 100,000 implies the vehicle supply constraints will persist throughout the whole quarter. So could you please elaborate a bit more about the key bottleneck to your production? Is that due to supply constraint of any specific component or anything else? And how confident are you in the company's ability to remove the bottleneck and to deliver like around 40,000 units per month in fourth quarter? And in the meantime, should we be concerned about a similar challenge might relapse when launching the BEV models on the new platform and at the new plant? That's my first question. Thank you.

Thank you, Tim. My name is Ma Tonghui. I will answer the question about the production capacity. We have two production lines in Changzhou. We use L7 and L8 and L9 for production. In terms of the production capacity of the entire vehicle, If it is a double shift, we can reach five shifts per month. At present, the main bottleneck is the supply of Linfujian. On the other hand, because the sales of the company is relatively good this year, the demand for the year-end production target is still increasing. Although we have developed a strategy and plan for improvement in Q2, it will take some time. At present, Linfujian's production line and construction are still in adjustment and verification. First, I'll take the question on production capacity. We currently operate two production lines in Changzhou for L8, L9, and L7.

The total capacity, if we run it in two shifts, is around 50,000 units per month. The current bottleneck is still with component supply, mostly because of a very strong demand for this year, which led us to increase our target compared to what we set at the beginning of the year. To cope with the additional demand, we actually have a production expansion plan made in Q2, but it's taking some time for us to test the production lines, and verify those. So the new capacity will be released in due time. We are still confident that on an annual basis we will be able to reach our delivery targets. In addition, to prepare for our growth in 24 and 25, we have started early to make production and capacity plans to satisfy the needs for those two years.

I see. My second question is about the change in the organization. In the past 12 months, we have seen many new employees withdraw from the industry and carry out organizational adjustments. During this time, there have been a lot of changes in the number of employees. In our impression, at the end of last year, we also proposed a change in the organizational structure of the company. Can you share with the management team the latest progress in the organization's change? So my second question is about organization restructure, because we noticed that over the past 12 months, Quite a lot of EV industry peers have gone through organization restructure or had management reshuffle. We recall that Li Auto also announced organization upgrade last December to prepare for its future growth. So could you share with us the latest progress of the restructuring efforts and should we expect any changes to the management team in the next six to 12 months amidst such upgrade? In the meantime, any operational or financial metrics create monitor more closely to quantify the improvement, for example, the lower cost, higher margin, for a faster model upgrade in upcoming quarters. So that's my second question. Thank you.

Okay. I'm Li Jiang. I'll answer this question. For the upgrade of the governance organization, we invested a lot of resources and manpower this year. The business team set a target of 360,000 deals for this year. But at the beginning of the year, We consider the economic situation and the economic situation after the epidemic. On the other hand, we also consider that the successful enterprises that we referred to before will bring two to three years of stagnant growth when the organization is blocked. So we lowered the target to 300,000 taels. But in the first half of the year, the actual result was that the organization was upgraded. It did not bring the organization, nor did it bring a decrease in efficiency, but a significant improvement in efficiency. Every month, the goal is exceeded. The overall coordination efficiency has become very high. The benefits of organizing upgrades have exceeded the company's initial expectations. Organizing upgrades allow us to really have the ability to fight a real battle in the smart electric car industry with long-term strong chains and then the group army. The market share we get will not retreat again, and we will win step by step. Therefore, you can see that we have a very stable growth curve this year and the whole year. This is the benefit of organizing upgrades. Let's talk about the three benefits of our giant organization. First, from the beginning of entrepreneurship, the oil rig management method has been upgraded to the standard. Therefore, the company first built a high-speed highway for core business, so that the value transportation efficiency of each person in the team becomes higher. Although there are more rules for high-speed highways, the efficiency of high-speed highways is the highest, and the rate of accident is also the lowest. Second, the process upgrade brings a very good training system. The whole work principle is very similar to artificial intelligence. From the input of insight perception to the goal-setting planning plan, to coordination and execution, and finally to review, and then grow into one's own ability, grow into the ability of the process. Even if it is a graduate student joining the company, he does not need to be a traditional assistant, but can train the real combat ability. Third, it brings the contract system of the household. Compared with the original OKR we used, the process of organizing the organization has changed from the original OKR to the household, to the contract between the team and the team. When you set a goal, you can challenge each other. When you work together, you can fight together. The goal becomes a kind of contract from the original way of matching. The goal is becoming more and more challenging. But the success rate is getting higher and higher. We think that the most important thing for this organization to upgrade is to have a good culture. For example, we put the value of consumers in the first place. Doing the right thing is not easy. Then in a cooperative way, then there is no fundamental culture. To translate the answer to the previous question,

On the matrix organization upgrade, it's something we have invested a significant amount of resources and manpower. Our business team at the beginning of the year had set an annual delivery target of 360,000 units. But considering two factors, we had in fact earlier this year downgraded the target to 300,000 units. One is the overall economic environment and the other is considering many of the enterprises while they are carrying out organization upgrades, their growth, in fact, has stagnated for two to three years. However, in hindsight, the actual results from the first half of this year, our operating efficiency has not only not declined, but we actually saw a very significant increase. We have beaten our target every single month, and the overall coordination and cooperation efficiency is very high. The benefits from a organizational upgrade have significantly exceeded our expectations. The organizational upgrade has really allowed us to fight trench wars as a Army group in the smart electric vehicle industry, which is known for having very long product cycles and long value chains. Once we have achieved certain milestones in terms of market share, we are able to defend it very steadily and continue to build on top of it. So we can see, as a result, we have displayed a very steady growth curve over this first half, but also the second half of this year. And that is the real benefit of our organizational upgrade. In terms of the matrix organization, there are really three types of specific benefits. First of all, from our... describe ourselves as a guerrilla in our early days to being a actual formal armed forces, the company is really building highways for its core businesses so that every person on the value chain can run very efficiently. Even though there are more traffic rules on highways, overall the efficiency of highways is much higher and there are much fewer accidents. And secondly, the organizational upgrade has allowed us to build a very robust training structure for our employees and business practices. The working mechanism is very similar to artificial intelligence, from perception and observations to setting goals and planning its activities, and finally to execution and collaboration. and after-action reviews to really build it in as the company's capability. So even for a fresh graduate, he or she doesn't need to start as a business assistant, but rather can really get into real battles and grow quickly. And thirdly is what we call interlocking, and it's really a contractual relationship between our different teams and talents. Compared to the OKR mechanism, our matrix organization could change what we used to call alignment to interlocking, which is essentially a contract between teams and our different individuals. So when people set their goals, they can challenge each other, and when they execute, they can work very closely and collaborate to deliver the best results. And so by going from alignment to interlocking, We're really setting a contract between the different teams, and the targets become more and more challenging, but we're able to achieve these targets with higher and higher competence. So overall, we believe that the most critical ingredient to a successful organizational upgrade is great culture, which includes putting customers' values first, taking the right path but not the easy path, and building everything on collaboration which is our core value. The organization and process is really the best product that we can build for our employees. It's simple yet sophisticated and it brings the best practices from each business area and build them into products so that the organization can grow along the way. So without great culture, the business processes are going to be rigid and complicated. So this is the biggest learnings from upgrading our matrix organization and processes. So basically, product upgrades bring more margins or value to the company, and organizational upgrades bring more efficiency for the company.

Thank you, Mr. Xiang and Mr. Dong. Thank you.

Our next question comes from Ben Yang with Critics, Please. Please go ahead.

Thank you, everyone. I have two questions. The first is about the interest rate. Let's say that in the second half of the year, there is no ideal rate. Then when we think about it on a larger scale, we see what kind of trend the three-degree and four-degree interest rates will have. Because the company mentioned that the ideal rate will be reduced to two points. Can we assume that the three-degree and four-degree interest rate will exceed 23? Because you have two points of rise. This is the first question. The second question is about this kind of driving. I would like to ask when will the company be able to reach a plan so that this kind of driving can be realized by every consumer when they buy a car, and the specific time should be in 2024. Can you remember if you can see our plan in detail? Let me translate it in English. I got two questions. Number one is about the margin. What's your outlook in the third quarter and the fourth quarter of this year? Because previously you've got about 2% gross margin. Now you have a better volume in the second half of this year. Can you assume the second half margin will be above 23% increased by 2%? That's the number one question about the margin. And second thing about the self-driving technology. Right now you're doing the early bird program for some customers. Can I know when the self-driving can go out to every single car buyer when they purchase the car they're enjoying? So do you have a timetable to share for 2024? Thank you.

Hi, this is Johnny from the company. Our second quarter gross margin has reflected our sales and marketing team's effort so you can see the improved SG&A percentage as the total revenue. And also some positive improvement on the bond side from our supply chain team. And we will continue to improve on that but for the whole year because we still got six months, five months to the end. So we still want to keep the whole year's cross-marketing guidance at about 20%. Thank you.

Let me answer the question about self-driving. I'm Ma Donghui. In terms of the city and transportation of ideal cars, we will still follow the previous planned plan to open them in batches. The logic and order of opening is largely determined by the amount of local ideal cars. If the amount is more, then the number of test drives will be more, and the number of testing data related to autonomous driving will be more. Then this city may be opened earlier. In addition, it will depend on the completion of the NPN specialization of complex ports in this city. We have now opened some new users. As these new users join, Then the cities we open will gradually increase. At present, overall, the development and testing progress is relatively smooth. In June, in Beijing, Wangjing opened the first non-dependent high-precision map city in China. Then, we also largely expanded the media market. In July, just past July, we also opened long-term users in two cities in Beijing and Shanghai. Then users for our entire The comfort and safety of this smart driving is still given a very high feedback ah That based on the words of this big model ah comprehensive words land smart driving Well, we are confident that next year we will be able to open the city and the high speed of the words of this whole thing and then fully open it Well, at the moment, the research and testing is still in the process

On city NOA and commute NOA, we will continue our original plan to roll them out in batches in different cities. And the rollout plan is going to be largely based on the number of vehicles or owners in the specific cities. The more owners, the more mileage is accumulated, the more test data, the more likely the cities will get city NOA and commute NOA early. In addition to that, we're also taking into consideration the NTN features of complex intersections in those cities and the amount of data coverage that we have. So as more and more early bird users join into our pilot program, we'll be opening up our NOA features in more cities. Overall, the development and testing for NOA features are going on track, and in June 2023, we've offered test drives of our city NOA in Mengjing, which is known as one of the most complicated traffic zones in Beijing using China's first city NOA solution that doesn't rely on high-definition maps. And media gave very nice reviews about the features. In July, in Beijing and Shanghai, we've opened up city NOA to early bird users, and users feel very highly of the comfort and safety of our solution. And this year, we will be releasing our city NOA and community NOA for large-scale testing, and the plan to release it in 100 cities remains unchanged. Internally, we're continuing to accelerate the R&D and testing of our city solutions.

Thank you. Thank you so much.

Our next question comes from Yingbo Zhu with... Nick, please go ahead.

and the progress of the monthly sales will reach a level of 40,000 at the beginning or the end of the fourth quarter. This is the first question about sales prospects. The second question is that when we launched the MindGPT project in the Family Technology Day, the market was also very concerned. I would like to ask about the current progress of MindGPT and when consumers may have the opportunity to experience such an application of MindGPT. I have two questions. The first one is about the third quarter's sales. How do we see the sales elasticity for the third quarter expectation? My second question is about MindGPT. Could you give us more color about how MindGPT is going? Thank you.

I'll start. I'll start. First of all, on guidance, the guidance we've given earlier today

is really built around our production capacity, the maximum of our production boundaries for Q3. For Q4, with increased production capacity, we'll be able to reach or surpass the $40,000 per month mark. And another important point to note is we're very confident that we will be able to challenge the leadership position of Mercedes, BMW, and Audi in China, meaning that we'll exceed their sales in China and become the top-selling luxury brand in China?

My name is Ma Donghui. Let me answer the question about Manned DTP. On the 6th of June, we released the self-developed cognitive model, Manned DTP. From the development point of view, we have the full potential of self-development. From the development point of view, it is divided into four parts. Data, and the model training algorithm, assessment and safety, and application delivery. In terms of the model training algorithm, it is consistent with the mainstream of the industry, including machine learning and model training. In the press conference, we also mentioned that we used 1.3 trillion tokens to carry out machine learning and model training. Based on this, in order to ensure the accuracy and individualization of the knowledge of MATGTP, we also added the self-referencing ability of search and recommendation. Currently, we have used 161 parameters in the first version. Based on the self-made model, it can better match our users and enhance the effect of the ideal class dialogue. In the end, a series of products will be formed. It can make the ideal class a member of the family. It can also become a car expert or a teacher who is talented in teaching. As for the current progress, in September, we will share a more detailed progress of the entire MyGPT intelligence space. Currently, a test has been launched within the company. After the test is passed, it will be released to a small number of users through OT.

Second question on MyGPT. In terms of technology, we released our internal big model, MyGPT. And we have built, since built a full stack in-house development capability of large length models. And the R&D really falls into four areas. First is data. And second is big model training algorithms. And third is assessment and security. And lastly, application deliveries. On the training algorithm front, we've stayed in line with mainstream algorithms in the industry. including the foundational model training, which utilizes 1.3 billion tokens, and to command fine tuning and reinforce learning. And in order to make sure that the MyGPT model can have accurate knowledge and be able to personalize based on the users, we've also introduced search and recommendation algorithms, which are also built in-house. MyGPT is now in version 1, which uses 16 billion parameters. And based on the foundation model, we can better suit the user scenarios of our users and to make Li Xiang Tongxue more interactive with our users. On the product front, the big model-based MyGPT is really going to power our first-generation multimodal of human-machine interface operating system. And it can allow every single person of our user family to use AI with ease and make Li Xiangtongxue a new member of the family and can be an expert on the car and can be a teacher and can be a tour guide and can be everything. In terms of progress, we'll be sharing more details about the progress of R&D. And so far, we have already opened up MyGPT for internal dog fooding. And after these tests, we will be releasing the models to a small number of early bird users through OTAs.

Okay, thank you very much.

Our next question comes from Paul Zong with UPS. Please go ahead.

Okay, thank you for accepting my question. My first question is, what is our current production and sales expectation for Mega? So far, the stock MPV on the market is Geek 009, which is about 2,000 units a month. We think this is a sale reference for us. And then after Mega, what is our latest plan for a stock product? So my first question is regarding the MEGA, regarding its capacity preparation as well as sales expectation. Does ZECA-009, the only pure electric MPV currently in the market, provide a benchmark? And after MEGA, what is our latest thought on the product pipeline for the BEV?

First on MEGA sales target, we're confident that MEGA will become the top seller

in the market about 500,000 R&B across all different energy forms and body types. Just like we've seen from L7 and L8, which are respected market leaders in their segments, they've also won over market share from sedans and other segments.

Can you answer that part of the storage after MEGA?

Next year, we're planning to release four vehicles, one range extender vehicle and three pure electric vehicles, not including Mega, which we just talked about. For specific product details, we'll be sharing on our

product release next year when the time is appropriate.

So the second question is regarding the parallel exports. We realize that there are some informal trading of the autos or products into other countries. How big is this in terms of scale and do you have any plan to formalize it from guerrilla into formal army and expand our sales volume as well as our global influence of the branding?

I think we want to, yeah. to state again, we won't do any globalization after we become dominant in China, because China is a very big market, as we just mentioned. So, yeah, the answer is no. We won't do, and also our product was designed and was available for sale only for China and mainland. So, let's Yeah, basically. Thank you.

Okay, thank you very much. Thank you. Our next question comes from Jing Ching with CITC. Please go ahead.

Okay, thank you. This is my question. I have two questions. The first one is about the interest rate. In the whole year, we still maintain a net profit of 20%. We will see what the potential negative effects will be. In the next 24 years, our entire pure electric vehicle and all new factories may start to invest. Considering that the margin of pure electric vehicles is relatively low at present, can we expect that the pure electric vehicles will get a higher net profit at the beginning of the market? Is there any better way to achieve this? This is the first question. The second question is... Let me ask the first question first. A follow-up question about gross margin. As Mr. Michie just mentioned, some positive factors on our gross profit margin in the second half of this year. We still maintain a guidance of 20% for the whole year guidance. So is there any potential negative impact we can see, and what might that be? Looking into 2024, our BEV model and the new factory will start to put into operation. So because we can see the current BEV models, they have a very low gross profit margin. So how can we achieve our BEV model to drive a higher gross profit margin compared to the industry?

Take this question, please, Johnny. And as I just mentioned in the earlier question, the current gross margin has to reflect the effort from our supply chain team. And we keep improving on the BOM side and to help us to improve our gross margin to the 25% designed gross margin. continuously. And for the BEV, I think every time we launch a new product, we will welcome some questions about the marketing. And because there are some product offering in the market, but we still want to reinforce our statement that the product Cross-margin was from the first day you define your customer and you define your product. So what we want to say is that overall, we want to keep 35% for the whole company with different product offerings. Thank you. Okay.

My second question is about this question. Then can you introduce us a little bit more about our pricing aspect? My second question is about autonomous driving. So we plan to release City AOT, NOA Plus, NOA function to 100 cities by the end of this year, which is a very aggressive target. Is there any great challenge as you can see at present? So can you share more about our outstanding capabilities in different aspects of our autonomous driving to support us in achieving such a challenging target? I am Ma Dongfei.

I will answer this question. First of all, we will still split up to carry out the opening. We will not carry out the opening at the end of this year. But our goal has not changed. We still need to do it In comparison, the competitors, we think we have an advantage in terms of perception, including the rules and algorithms. On the one hand, we are through the innovative NPN, including TNN network, we can actually perceive the complex road structure, and then through the Occupancy network, identify the common barriers. As we mentioned earlier, we're still planning to release city NOA and commute NOA in batches.

as opposed to releasing all the cities in one go. And we're on track to delivering city NOA to 100 cities by the end of this year. In terms of technical capabilities, we think we have advantages in both perception and planning. On the perception side, we have this innovative newer prior network and also traffic end-to-end network to predict traffic light intentions using this end-to-end model. All of this is going to enhance our BEV model, which can perceive or sense the complex road structure information in real time and understand traffic rules. And also using occupancy network, we're able to recognize general obstacles on the driver's route. On the planning side, we're utilizing imitation learning algorithms, which learns from a lot of human driver behavior and decisions to make sure our city of NOA can stay safe on track and also follow traffic rules and at the same time drive very similar to human behavior. We have the biggest autopilot or NOA testing fleet in China and also have the most training mileage as well as a significant reserve of cloud-side computing power, which we believe will be our absolute competitive advantage.

Okay, okay. Thank you. No other questions. Thank you very much.

Our next question comes from Ming Finley with Bank of America. Please go ahead.

Hello, I'm Guan Yicheng. I'm the CEO of Meiyun. I have two questions for you. The first question is about our electricity. As of July, we now have more than 330 stores and more than 120 cities. I noticed that in terms of sales, the sales of the same store has not been improving. I would like to know, Mr. Li, if we compare with other brands, where do you think the operating efficiency of our store is better? Of course, from the IPO, it is very good, but it has already opened more than 300 stores, and the efficiency is still very good. I would like to know. What do you think? If we do it in 2024 or 2025, how many stores do we want to have? How many cities can we cover? If our brand is more advanced, So my first question is regarding your sales channel. So right now you have more than 330 retail stores that cover more than 120 cities. So in terms of your long-term goal, how many stores and how many cities do you want to cover? Besides that, could you also share what is the successful part of your sales channel management and also in what area do you want to improve, if there is any?

Let me answer. I think the first one, I think good products and good sales channels That's right. In the future, in 2.4 and 2.5 years, the most important thing for us is that there will be multiple models going to the market. So, based on this, we will still open more stores. In fact, the current way of opening stores, the logic, and the user group are not particularly secretive. Because flower brands like Benz, Barma, and Audi have already verified how many stores should be opened in what level of cities. On stores, we have a firm belief that good products and good channels work in tandem. We can't live without either of them. A metric we use internally is for a venture store which has been operating for six months,

We think getting over 100 orders per month is a pretty healthy level of operating efficiency. But with that said, we'll still focus on not only short-term sales per store, but also long-term. We'll be looking into investing in more stores and expanding our sales network. By 2025, we'll by then have many models and much greater sales than today. So we are still committed to opening more stores and covering more cities covering more users. And we really think there's not much secret sauce in terms of where to open stores and how the stores should look like because Mercedes-Benz and Audi have, all of them have verified a very successful model in terms of user coverage and city coverage. So we don't really need to reinvent the wheels here. Our plan is really in the next few years to continue to expand to lower tier cities and cover more users just following their footsteps. so that we can support our sales healthily by 2025. Thank you, Mr. Lee.

My second question is about the rechargeable energy. I just want to know, because you just mentioned that we now have more than 30 5C charging stations. Is there a goal at the end of 2024 or 2025? In addition, how much is the relevant capital spending? We are currently using the third party So my second question is regarding your charging network. So do you have any plans regarding your expansion target? What's your potential CapEx? Will you build the charging station by yourself, or you mainly let the third party to build and operate? Will all of those charging stations be 5C grade, or some will be lower grade?

Thank you. I'm Li Xiang. In 2023, we will complete more than 300 charging stations. and the construction of a high-speed supercharger station. It mainly covers the four major economic areas of Changsha Triangle, Dawan District, Jinjinji, and Chengyu. In 2025, our supercharger station will have more than 3,000 stations and 3,000 seats, covering more than 90% of the highway and the main city. I think we will complete the charging station's layout with the effort of maintaining healthy operation and free cash flow. This is very important We're still on track to rolling out 300 supercharging stations by the end of this year. And in 2023, our charging stations by the end of this year will cover

mainly the four economic zones, which includes the Tianning, Beijing, Hebei area, the Yangtze River Delta area, and the Guangdong Bay area, as well as the Chengdu, Chongqing area. And by 2025, we will have built 3,000 HPC charging stations, which will cover over 90% of all of the highway mileage, as well as the major cities in China. We will make sure to finish, achieve that goal, of course, with operating efficiency as well as healthy free cash flow in mind. And so far, we believe the financial burden is totally manageable. All of our highway HBC stations will be built and operated in-house, and all the city stations will be working with a franchise model to accelerate the expansion of our tragic stations.

Thank you, Mr. Lee.

Our next question will come from Yu Kanding with HSDC. Please go ahead. 我们可以结构性的调低研发费用指引吗?

Or do we need to invest more money in the next half of the year to expand Baicheng? And the second question is about going out of the comfort zone. We are currently in the range of more than 300,000 people in this large family. That's quite ahead of us. So if we put this product in the range of 200,000 to 300,000 people next year, it looks like this competition is very intense. There are also a lot of current models. So how do we differentiate and keep us as much as we are now? I've got two questions. The first is on the OPEC management. The company's OPEC management has been quite good, especially in the first half, the R&D round rate is roughly 30%, 40% of the full year guidance. So can we structurally revise down the guidance on R&D and SG&A, or that suggests in the second half when we roll out an OA in 100 cities, that would require more intensity in terms of R&D and SG&A? And the second question is about breaking out into our current dominating zone. We're currently quite dominant in the big size, the family utility SUV at the pricing category above $300K. But in the future, we'll probably have model launch in a pricing category between $200K to $300K. Currently, we're seeing a very intense competition and many new models supply over there. So how do we potentially differentiate over there? and maximize the volume impact that we currently see in our dominating zone.

I will take the R&D question first. We will continue to invest in R&D either for autonomous driving or other areas that we believe are necessary. We still want to keep our full-year R&D expenses above We're very confident on the overall product leadership of BL6.

We believe that L6 will become the best-selling product across the L lineup. We will continue to invest in its competitiveness, and we believe it will be the product of choice in its price range for family users.

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

Thank you once again for joining us today. If you have any further questions, please feel free to contact Rialto's Investor Relations team. You may disconnect your line. Thank you.