Li Auto Inc.

Hello, ladies and gentlemen. Thank you for standing by for Lee Otto's second quarter 2024 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, Ms. Janet Zhang, Investor Relations Director of Lee Otto. Please go ahead, Janet.

Thank you, Kaylee. Good evening and good morning, everyone. Welcome to Lee Otto's second quarter 2024 earnings conference call. The company's financial and operating results were published in a press release earlier today and were posted on the company's IR website. On today's call, we will 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 Senior Vice President, Mr. Liang Junzhou, will join for the Q&A discussion. Before I continue, please be reminded that today's discussion will contain forward-looking made under the safe harbor provisions of the U.S. Private Securities Detegation 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 company filings with the U.S. Securities and Exchange Commission. Commission and the Stock Exchange of Hong Kong Limited. 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 price release and discomfort call include discussions of unaudited U.S. 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 contains a reconciliation of the unauthorized non-GAAP measures to comparable U.S. GAAP measures. Our CEO will start his remarks in Chinese. There will be English translation after he finishes all his remarks. With that, I will now turn the call over to our CEO, Mr. Xianglin. Please go ahead.

Hello, everyone. I'm Li Xiang. Welcome to today's conference. In July this year, the penetration rate of New South Wales cars in China has reached nearly 50%. Everyone's recognition of smart electric vehicles has gradually exceeded that of combustion cars. Consumers are more inclined to buy top-notch brands with high sales and maintenance technology. The brand concentration of the New South Wales car market will become more and more obvious. Second, although the market environment is complex and diverse, we focus on the value and efficiency of users. Sales performance is still strong. The total delivery of new cars is more than 1.8 million. The same growth is 25.5%. Ideal cars are more than 200,000 yuan. The market value of new and old cars has increased from 13.6% in the first quarter to 14.4% in the second quarter. It is one of the best-selling domestic car brands. Since June, more than 200,000 yuan, including the entire SUV market including new energy and diesel cars, and achieved the best performance of more than 200,000 brands. In terms of models, the ideal all-seater models are in the top position in the market. In the second quarter, the ideal R7 and the ideal R8 are the top two in the medium to large SUV sales of more than 300,000 yuan respectively. The ideal R9 is still one of the top SUV users. In addition, In April of this year, the ideal R6 was released. Production and delivery are on the rise. With excellent product power and accurate positioning for user needs, since June, the delivery volume has continued to exceed 20,000. At more than 200,000 yuan, it is ranked second in the entire car market, including new energy and diesel cars. It is only second in the Tesla Model Y. In recent years, we have achieved many delivery milestone cups. On June 21, the ideal car accumulated delivery broke through 800,000 units and became the first new Chinese brand to reach this milestone. In July, our delivery amount reached 51,000 units, creating a new record of monthly delivery. On August 21, the ideal car accumulated delivery further broke through 900,000 units and created a new history of Chinese luxury car and car brand. Here, I would like to express my special gratitude for the hard work of Ideal Motors and all its members, as well as the recognition and support of a large number of users. In the second quarter of 2024, our total revenue reached RMB317 billion, with a 10.6% growth ratio, and the net profit remained at 19.5% of the health level. As the capacity of Ideal26 reaches a stable state, with the implementation of all of our cost reduction and efficiency measures, We are confident that the business performance of ideal cars will be further improved in the second half of the year. Product delivery is just the beginning. Continuous upgrade through OTA, we continue to replace new functions and improve new experiences, so that users can grow together. In July this year, we released the OTA 6.0 and 6.1 updates of the ideal MEGA and ideal L series. to realize the comprehensive evolution of smart driving, smart space, and smart electric vehicles. The most worth mentioning is our long-term progress in smart driving. In July, we sent more than 240,000 ABMAX users unlimited city and unlimited roads of WUTU NOA. It can rely on fresh information and can be used all over the country. Our WUTU NOA has received a wide range of reviews from users and has led to an increase in orders. Since the start of the U2O in May, the NVA price has increased by 3 times. After OTA 6.0 was launched, the daily life of city NVA has doubled nearly 8 times, and the city NVA journey has doubled nearly 3 times. So far, the user penetration rate of ideal car intelligent driving has exceeded 99%. The total journey of the entire scene NVA has exceeded 1.1 billion kilometers. The satisfaction of smart drivers and the ADMAX orders are also continuously improving. The smart driving of ideal cars will continue to upgrade and quickly stack up. At the summer release of smart driving on July 5, we released the first dual-system smart driving program based on the E2E end-to-end and VRM visual language model, and at the end of July, we promoted it to thousands of special users. E2E's end-to-end and VRM's The visual language model also shows the speed of one model in addition to the ability to play and think logically with the intelligent driving system. At present, the bird test is being relayed at a speed of three to four versions per week. The average daily life of the user is more than 70%. In addition, we independently developed the reconstruction and generation-style visual model for the training and verification of intelligent driving. Based on this new dual-system architecture, the pricing plan can make the information transmission and reasoning calculation efficiency higher, the model generation speed is faster, the planning ability is more attractive, and the user experience is also more optimized. With the abundant growth of the product array, we continue to upgrade and expand the sales and service network of ideal cars. In the second quarter, we will convert the shopping mall at the back into the center shop, which is the 4S shop. As well as the way of upgrading the existing shopping malls, the ratio of our central stores has been increased to 31%, and the number of stores in the store has been increased by more than 13%. As of July 31, 2024, Dream Cars has operated 487 retail centers in 146 cities across the country, and has operated 411 post-sales centers and retail centers in 220 cities. In terms of charging network construction, the ideal car has already operated 733 ideal supercharging stations on August 27, with 3428 supercharging stations. At the same time as the national highway and urban continuous layout supercharging station, we work closely with many high-quality cooperation partners to integrate industry resources. In July, the first selection of supercharging stations was also put forward. Through funding, We will continue to expand the coverage of the super network and increase the density of the network to improve the user experience, so that more families can freely choose the products of ideal cars. In the third quarter, we expect the delivery of ideal cars to reach 14.5 million to 15.5 million. As a growth-driven company, ideal cars will continue to create products and services that exceed the needs of users. At the same time, strengthen the influence of ideal brands in the new energy and luxury car market. We will stick to the value of users and carefully polish products. It is expected that in the first half of 2025, a new pure SUV will be released to serve more family users. Next, let's welcome our CFO Li Tie to introduce our financial performance in detail.

The NUV penetration rate in China in July was approaching 50%, indicating higher adoption of smart electric vehicles versus ICE vehicles. As consumers increasingly favor leading brands with strong sales and substantial user bases, we expect the NUV market to further concentrate around top brands. In a complex and rapidly changing environment, in the second quarter, we achieved strong sales performance by focusing on user value and operating efficiency. we delivered more than 108,000 vehicles in the second quarter, representing an increase of 25.5% year-over-year. In the RMB 200,000 and higher NEV market, our market share grew from 13.6% in Q1 to 14.4% in Q2, ranking first among domestic auto brands. Since June, we have remained the top-selling brand in the RMB 200,000 and higher SUV market in China across and ICE vehicles. In terms of performance by model, all Li Auto models remained leaders in their respective market segments. In Q2, Li L7 and Li L8 claimed the top two spots in sales in the RMB 300,000 and over large SUV and EV market, while Li L9 continued to be a top sales full-size SUV among users. Additionally, production and delivery for LEAL 6 continue to ramp up since its launch in April. Driven by its compelling product features and precise market positioning, LEAL 6 monthly sales deliveries, monthly deliveries have consistently exceeded 20,000 units since June. LEAL 6 ranks second in sales in the RMB 200,000 and higher passenger vehicle market, including both NEVs and ICE vehicles, only short of Tesla Model Y. Recently, we reached multiple delivery milestones. On June 21st, our cumulative deliveries exceeded 800,000 vehicles, making us the first emerging new energy auto brand in China to reach this milestone ever. In July, we set a new monthly delivery record of 51,000 units per month. On August 21st, our cumulative deliveries surpassed 900,000 units, an unprecedented achievement for Chinese premium auto brands. I would like to take this opportunity to express my gratefulness to each member of Lee Auto and for their hard work, and also my gratefulness to all of our users for their recognition and support. In the second quarter of 2024, we recorded total revenues of RMB 31.7 billion, up 10.6% year over year, while maintaining a healthy growth margin of 19.5%. We're confident that our operating performance will improve further in the second half of this year as VL6 completes its production ramp-up and cost reduction and efficiency improvement efforts come to fruition. Vehicle delivery is only the beginning of a typical user journey. Through frequent OTAs, we continually add new features and optimize our user experience, allowing the auto vehicles to grow with our users. In July, we released OTA 6.0 and OTA 6.1 to all Mega and L-series users, introducing major improvements across autonomous driving, smart space, and smart electric drive features. I would like to highlight the substantial progress we made in autonomous driving. In July, we rolled out our HD mapless NOA to over 240,000 ADMAX users. This version is no longer dependent on prior information and therefore can operate on almost all roads across all cities in China. Our HDMAP list NOA is very well received, which is also reflected in our accelerating order intake. Since this feature was introduced to beta users in May, the proportion of NOA test drives has nearly doubled. Following the rollout of OTA 6.0, the daily user engagement rate of Citi NOA has increased nearly eightfold, and the average NOA mileage per user has almost tripled. As of now, over 99% of users use our autonomous driving features regularly, with cumulative NOA mileage surpassing 1.11 billion kilometers. Additionally, user satisfaction and 80 max take rate are both increasing steadily. Our autonomous driving system continued to iterate quickly. On our autonomous driving summer launch event on July 5th, we introduced the industry's first dual-system autonomous driving solution, integrating an end-to-end model for e2e with a vision language model, or VLM. We rolled out the new solution to approximately 1,000 Theta users by the end of July. the E2E and DLM models brought much stronger conflict resolution and reasoning capabilities to our autonomous driving system. The one model approach also facilitates rapid iteration. Our early bird beta testing version iterates three to four times weekly with an average daily user engagement rate of over 70%. Additionally, we developed in-house reconstructed and generated world models for training and validation purposes. This new dual system architecture has many benefits, including more efficient inference, faster model iterations, and more human-like route planning and better overall user experience. To cope with our growing product portfolio and greater number of vehicles owned, we continue to upgrade and expand our sales and servicing network. In Q2, we upgraded existing shopping mall stores and replaced some lower-performing ones with new sales centers located in major auto parts. The proportion of sales centers has increased to 31%, with the total number of showroom display spots increasing by over 13% over the last quarter. As of July 31, 2024, we had 487 retail stores located across 146 cities, as well as 411 service centers and lead authorized body and paint shops operating in 220 cities in China. Looking at our charging networks, as of August 27th, we had 733 supercharging stations in operation with 3,428 charging stalls. Alongside the ongoing build-out of our own supercharging stations, we collaborated with a number of premium partners to launch the first batch of what we call lease selection supercharging stations in July. We will continue to expand the coverage and increase the density of our supercharging network. This improves the charging experience for our users, allowing more families to choose Lee Auto's products with no concerns. Looking ahead to the third quarter of 2024, we expect vehicle deliveries to be between 145,000 to 155,000 units. As a growth-driven company, We're committed to creating products and services that exceed our users' expectations while strengthening our brand and the new energy of premium car market. In the first half of 2025, we expect to launch our battery electric SUVs to serve a broader range of family users. With that, I will now turn it over to our CFO, Johnny, to walk you through our financial performance.

Thank you, Lisa. Hello, everyone. I will now walk you through some of our 2024 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 will arm be $31.7 billion or $4.4 billion U.S. dollars. up 10.6% year-over-year and 23.6% quarter-over-quarter. This included RMB $30.3 billion or $4.2 billion from vehicle sales, up 8.4% year-over-year and 25% quarter-over-quarter. The year-over-year increase was mainly attributable to the increase in vehicle delivery, partially offset by the lower average selling price, mainly due to different product mix and pricing strategy changes. The sequential increase was mainly due to the increase in vehicle delivery, partially offset by the lower average selling price as a result of different product mix. Cost of sales in the second quarter was RMB 25.5 billion or 3.5 billion U.S. dollars. Up 13.8% year-over-year and 25.3% cultural quarter. Gross profit in the second quarter was RMB 6.2 billion or 850 million U.S. dollars. Down 0.9% year-over-year and up 16.9 percent quarter-over-quarter. Vehicle marketing in the second quarter was 18.7 percent versus 21 percent in the same period last year, and 19.3 percent in the prior quarter. The year-over-year decrease was mainly due to different product mix and pricing strategy changes, partially offset by cost reduction. The sequential decrease was mainly due to different product mix. Gross margin in the second quarter was 19.5% versus 21.8% in the same period last year, and 20.6% in the prior quarter. Operating expenses in the second quarter were RMB 5.7 billion, 785.6 million U.S. dollars, up 23.9 percent year-over-year, and down 2.7 percent quarter-over-quarter. RMB expenses in the second quarter were RMB 3 billion, or 416.6 million U.S. dollars, up 24.8 percent year-over-year, and down 0.7 percent quarter-over-quarter. The year-over-year increase was primarily due to increased expenses to support the expanding product portfolios and technologies, as well as increased employee compensation as a result of the growth in the number of staff on a year-over-year basis. The sequential decrease was primarily due to decreased employee compensation offset by increased expenses to support expanding product portfolios and technologies. FC&A expenses in the second quarter were RMB 2.8 billion, or $387.4 million, up 21.9% year-over-year, and down 5.5% quarter-over-quarter. The year-over-year increase was primarily due to increased employee compensation as a result of the growth in the number of staff as well as increased rental and other expenses associated with the expansion of sales and servicing network. The sequential decrease was mainly due to decreased marketing and promotion activities and employee compensation on a quarter-over-quarter basis. And income from operations in the second quarter was RMB 468 million, or 64.4 million U.S. dollars, versus income from operations of RMB 1.6 billion in the same period last year, a loss from operations of RMB 584.9 million in the prior quarter. Our facing margin in the second quarter was 1.5% versus 5.7% in the same period last year and negative 2.3% in the prior quarter. Next income in the second quarter was RMB 1.1 billion of $151.5 million, down 52.3% year-over-year. and up 86.2% quarter-to-quarter. Diluted net earnings per share for ADS attributable to ordinary shareholders was RMB 1.05 or 0.14 US dollars in the second quarter, versus RMB 2.18 in the same period last last year and RMB 0.56 in the prior quarter. And turning to our balance sheet and cash flow, our cash position remains strong and stood at RMB 97.3 billion or 13.4 billion U.S. dollars as of June 30, 2024. Net cash used in operating activities in the second quarter was RMB 429.4 million, or 59.1 million US dollars, versus net cash provided by operating activities of RMB 11.1 billion in the same period last year, and net cash used in operating activities of RMB $3.3 billion in the prior quarter. Free cash flow was negative $1.9 billion or negative $254.9 million in the second quarter, versus positive RMB 9.6 billion in the same period last year and negative RMB 5.1 billion in the prior quarter. And now for our business outlook for the third quarter of 2024. The company expects the deliveries to be between 145,000 and 155,000 vehicles, representing an year-over-year increase of 38% to 47.5%. The company also expects third quarter total revenues to be between RMB 39.4 billion and RMB 42.2 billion, or 5.4 billion US dollars and 5.8 billion US dollars, representing a year-over-year increase of 13.7 to 21.6 percent. This business outlook reflects the company's current and the preliminary view on its business situation and market conditions, which is subject to change. That concludes our prepared remarks. I will now send 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 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're on 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 re-enter the queue. If you are a Mandarin speaker, please ask your questions in Chinese first, then follow with English translation. Your first question comes from Tim Sao with Morgan Stanley.

Hello, Mr. Guan. Thank you for accepting my question. I have two questions. The first one is about the price. Because we noticed that ideal cars this year is a calculation and mass production development team. I would like to ask the management team how to evaluate the efficiency of ideal cars' investment and production in this price. Then the investors should focus on the sales of the new car and the sales ratio of the price version. There are other more important indicators. We will measure the commercialization process of ideal car price technology. So my first question is about the atomic driving. Because the lead author is diving into the end-to-end atomic driving technology and expanding the team aggressively. How would the author evaluate the return and efficiency of such an ambitious investment? What could be the more relevant metrics for investors to assess the results and the commercialization progress of LiAuto's anti-anatomic tri-zine technology? That's my first question. Thank you.

Let me answer this question.

In terms of the investment and output of ideal vehicles in the manufacturing industry, the efficiency has always been relatively high. Then, regarding the Douhua measurement index, we think it is the direction of the result. It should be viewed from two aspects. The first one is whether our users are willing to use it. For example, the use time of the frame and the ratio of the journey. The second point is whether the user is willing to spend money on a group of versions. From the user's point of view, since the launch of Dream Car's unpublished NVA in July, our users' acceptance of frame is increasing. The daily life and journey of the city NVA has obviously increased, even doubled. Then from the market point of view, the market price has also had a very good promotion effect for our sales. The potential users come to our store to test the ratio of NOA has also achieved a three-fold increase, and the admax order ratio of all models is improving, especially in models over 300,000. The admax order ratio is close to 70%. At the same time, we think that the end-to-end plus VOM From now on, we have already started to build the threshold for the development of the frame. Because from this generation, it is the real way to use artificial intelligence to make frames. And artificial intelligence needs a lot of data and computing power. It will make companies with high-end frame vehicle maintenance and sufficient research and development investment have greater and greater advantages in the field of automatic driving. And it will gradually promote a sales improvement.

Since the beginning, our investment yield on autonomous driving has always been pretty high. And in terms of operating metrics, we'd like to focus on two key results. One is whether our users are willing to use it, and second is whether users are willing to pay for it. So on the user front, metrics include the percentage time used or percentage mileage used. And since we launched HDMAPLIS in July, users' usage rate has been increasing steadily, as shown by both the daily active rate and the mileage driven have both increased manifold. On the market front, the improvement in NOA has positive effects on adoption rate, since potential users who come to our stores, the percentage of users who take NOA on test drives has increased more than twice. And the percentage of NOA 80 max take rate on every model has also been increasing, especially cars priced above 300,000 RMB. The percentage of 80 max take rate has already approached 70%. And we believe that VLM and ETE model marks the beginning of establishing entry barriers in terms of R&D for autonomous driving because we believe that this generation is real AI-powered autonomous driving. And AI further relies on large amounts of data and computing power, so only companies with the ability to invest in this data and training capability and also have a large enough user or vehicle base are able to become bigger and bigger in autonomous driving. And this improvement in autonomous driving will then further increase sales overall and also the number of AD MAX equipped vehicles. And this further in return allows us to invest even more in autonomous driving. So this is a very positive snowball effect.

Thank you. My second question is about the competition. Could management comment on the ongoing competition between Liado and Huawei? How do we expect the competitive landscape to evolve into second half as both brands, like Liado and Eidos, keep striving for the top spot in the family SUV market with advanced smart driving features? That's my second question. Thank you.

I'm Li Jiang. I think Hongmeng Zhiting is our strongest competitor in the market. So first of all, Hema is our biggest competitor in the market.

And our view is that we will continue to coexist with HEMA in the long term in a very healthy fashion. And our attitude has always been to continually learn from Huawei, especially its R&D system and methodologies in operations and management. As for us as a startup company, to have such a model to learn from is very critical.

Your next question comes from Din Wang with Deutsche Bank.

Thank you for giving me this opportunity. I have two questions. The first one is about the net profit. I want to know if the company has maintained the net profit of 20 cars last year. So, especially in the third quarter, how does the net profit increase? Because the company just mentioned that the ratio of ADMAX is 70%. Can this help us improve the combination of products and return to the 20 car net profit? This is the first question. The second question is about the electric car next year. So I want to ask, after the past six months, what changes do we have? Because we see some decals, it feels like there is no big change in appearance. But consumers especially expect our company to have a big difference in ICV and Mega. There is a big improvement. I want to ask, Mr. Guan, do you think there will be any changes in the appearance of electric cars next year? I've got two questions. Number one is about the margin guidance for this year. Did you maintain a full year 20% gross margin guidance? Especially for the third quarter, basically, You mentioned that the ADMAX version proportionally increased to more than 70%. Is that going to be increasing the product list and then the third quarter gross margin, vehicle gross margin, back to 20%? That's the first question. The second question is about your COEV product. This is where you have been postponing the vehicle by almost half a year. Did you change the design, especially the interior design? Because some of the spec features show that the design has not changed yet. Most of the customers prefer to change the standard design to differentiate from the mega design. Can you provide any comment on that? Thank you.

Hello, Amit, and this is Johnny.

I'll take the first question. I think last quarter we said vehicle marketing is around 18%. Actually, finally, we delivered 18.7%, and this is an effort of... company, and also the product mix and the delivery, the final delivery. So, for the third quarter, we believe our vehicle marking will come back a little bit around, it will be over 19%, and the total cross-marking will be about 20% in the third quarter. Thank you.

In terms of pure electricity, IdealMega has proven that we have the technical strength in the three areas of 800V high-pressure pure electricity, including the efficiency of high-pressure platforms and the complete charging experience and capabilities. On the other hand, with the improvement of our branches, we have entered the top tier of the industry in terms of branches, and we have always maintained the performance of our warehouse. So as for pure electric SUVs, we need to solve two problems. One is the design of the product. The other is that when the pure electric product is delivered, it can provide more than 2,000 supercharging stations to users. So we are very confident in the competitiveness of pure electric SUVs. We hope that we can enter the first tier of high-end pure electric products in about two years.

LiMEGA has been a great validation of our capabilities in 800-volt high-voltage drivetrain and also our R&D capabilities in this area, including the drivetrain efficiency of our high-voltage platform and also the end-to-end charging experience and capabilities. And as we make improvements in autonomous driving, we have also become a Tier 1 player in autonomous driving and similarly our competitiveness in smart cockpit or smart space has also been very strong historically. So for our BAF SUVs, we really only need to solve two important problems. The first one is overall styling of the product. And the second one is to make sure that we have well over 200,000 charging stations by the time we start deliveries of our BAF product. So overall, we are pretty confident in the competitiveness of our BAF electric SUVs. And our plan or our goal is to have become a Tier 1 player in the premium bet market in two years' time.

Your next question comes from Tina Hao with Goldman Sachs.

Thank you for your time. I have two questions. The first question is that um um Thanks management for taking my question. First question is regarding our competition strategy into the second half of the year, so especially given that we don't have any new model launches for the second half, how are we expecting to maintain or even improve our sales volume? The second question is, since earlier this year, management has lowered overall volume guidance to a low end of 560,000 units for year 2024. However, we also gave a quite high CapEx guidance at around 15 billion RMB I think, in first quarter. So, given the lowered volume guidance, how should we think about the pace of capacity expansion as well as new CapEx guidance? Thank you.

Hi, Tina. This is James. I will take your first question. New models are only one of the reasons contributing to sales growth. From my point of view, efficient sales operations is another way to promote sales, and that's what we are doing now. Looking forward, we will continue to optimize the deployment of our stores while strengthening our capability to gain online need. This will open the door to higher possibilities of sales growth while enhancing the efficiency of sales operations. Our recent increase in the publicity of autonomous driving also facilitated sales growth, in particular the sales of ADMAX models. As the results show, our market share in the RMB 200,000 and higher NEV market increased to 14.4% in the second quarter of 2024 13.6% in the first quarter. We aim to grow our market share in this segment further to 16% in the last quarter this year.

I think, Tina, this is Johnny. I think with James, as Chuck mentioned, 16% market share on the and EV market above 200,000 RMB. And if we assume a healthy passenger vehicle market in the second half of this year, yeah, we are very confident our full-year delivery will finally over half million delivery vehicles. And for the type X, we have optimized our type X pace. And in the beginning of this year, we estimate the type X is about 2 billion US dollars. Currently, we estimate the type X will be 1.1 to 1.2 billion US dollars. For the free cash flow, for June and July, the free cash flow has been positive. And with the optimization of the TAPEX investment and also the improvement of the efficiency, we are very confident Free cash flow will come back to politics, starting from the subcontractors.

Your next question comes from Zhu Yingbo with SciTech Securities.

So I have two questions. The first question is about end-to-end autonomous driving. So what's our... wheel about our future plan in this area. And the second question is about rubber taxi, how we see this trend. Thank you.

I am Ma Tonghui. I will answer these two questions. In general, the speed and effect of the V1M model is more than expected. We started sending thousands of people to look for birds in July. And today, to one month. The model has been updated to nine versions. On average, it will be updated once every three to four days. In addition, the number of model training has increased from 1 million clips at the beginning to 2.3 million clips. The ability of the model has also increased significantly. Many short-term users have also shared the video on social media. They also showed this system on the city road. its excellent performance. At the same time, the speed of the model can not be separated from the efficiency and automatic ability to evaluate. Then we rely on the world model to create an anti-fake test system. In this system, we use the feedback of the user to use the scene reconstruction and generation technology to establish the body and the body, so that our model can be fully trained and evaluated. And this test system It can also give this model safety, quality, etc. So we think that the development of automatic driving has indeed undergone a fundamental change. From the past functional relay, it has turned into a model-capable relay. The speed of the relay depends on whether it has sufficient high-quality data and computing power, as well as an automated anti-theft test system. Then we will add the system of VLM. It is expected to carry out a larger scale in September. First of all, on end-to-end VLM models, the iterations rate and performance actually exceeded our operations. Since we began our early-bird testing program in July,

In less than a month, the model has gone through nine iterations, on average a new iteration every 34 days. The amount of data used for training has also increased from 1 million clips at the beginning to 2.3 million clips currently, and the model capability has also been increasing along the way. Many of our early bird testing users have posted many videos of their end-to-end driving on social media to showcase the great performance on city roads. The rapid iteration of the model won't be possible without highly efficient and automated testing capabilities, and we rely on world models to build a simulation testing system. In this system, using user feedback and using real-world scenario reconstruction and generative technologies, we have built a library of mistakes and testing scenarios for our models to make sure that our models are most fully tested and trained. This testing program can rate the models in terms of safety, comfort, and many other dimensions. And we believe that there has been a fundamental change in autonomous driving R&D. It has increased from feature iteration to model capability iteration, and the speed speed of iteration is highly dependent on whether we have high quality and large amounts of high quality data and large amounts of computing power. And also what I mentioned earlier, which is the automated simulation testing program. So our end-to-end system, we're planning for this system, we're planning to launch a greater scale or approximately 10,000 user scale testing program starting in September. And on your question regarding Robotexy, our view, interestingly, is that as we reach level four autonomous driving, the demand for ride-hailing and taxi will actually decrease. And obviously, the market will take more time for us to observe and to see how it develops in the future.

Your next question comes from Paul Gong with UBS.

Thank you for answering my question. I have two questions. The first question is about the trend and direction of the third quarter. We have recently seen that domestic consumption is weak. The environment of high-end cars is not particularly in demand. But the company's L series, We have seen recent weak consumption sentiment in China, but the auto sales series continue to grow in terms of the sales volume. In the environment of the government stimulus as well as certain pricing adjustment upwards by the German premium brand, have you seen the competitive environment in the high-end markets has sequentially improved recently?

Okay, Paul, this is James. I will take your question. I believe our recent global sales performance has been largely contributable to our least serious competitive advantage from these product strengths. And our adaptability and ability to make swift adjustments in responding to the market Apart from the traditional sales channels, in the second quarter, we ramped up our investment in online marketing resources such as Douyin and other online platforms, achieving significant results as it brought us substantial increase in sales leads. We are revolutionizing our sales system by giving more empowerment to regional level. This system allows each region to adopt regional sales strategy in a flexible approach on the condition of accomplishing profit targets given by the company. significantly enhances the sales potential to each region. Last but not least, since June 2024, the annual penetration rate in the RMB 200,000 and higher markets has reached over 50%. which is a significant milestone. After this, I think the premium EV industry will continue to consolidate, and I believe the auto will be one of the main beneficiaries during this process. Thank you.

Thank you. My second question is about some of the early preparation work for pure electric vehicles next year. It should be said that the time for this promotion will be from the second half of this year to the first half of next year. 我们有没有在一个新技术的采用方面有一些变化? 以及我们在产业链上面的产能准备的规划 大致上是一个什么样的量级? So my second question is regarding the preparation work for the BEV models next year. Given the half a year adjustment of the launching time, will you adopt more new technologies, the latest technologies, and how... How much of the scale have you been preparing for the supply chain in terms of the capacity?

Then, according to the standard and test verification plan, we completed the test and performance test related to high-temperature construction and treatment. Then, in terms of the production capacity preparation of this production chain, the overall progress is normal. The production capacity planning of the pure electric vehicle can meet one of the needs of sales. The factory where we produce the whole car has been completed, and the production line of the four major industries is currently under installation and adjustment. Our plan is still to launch multiple 800-volt high-voltage pure electric vehicles next year, 2025.

In terms of R&D, everything is on track. So far, we have completed multiple rounds of low-volume trial production of prototype vehicles. And according to our testing and including, for example, high temperature, high humidity, durability testing schedule, everything is going according to plan. And in terms of supply chain readiness, everything is also on track. The planned production capacity is sufficient to meet the sales targets, and the factories for manufacturing these vehicles have completed construction, and the four major lines of stamping, welding, painting, and assembly are also under testing and installation. have key components developed in-house on our BEV electric vehicles. And these have also been going through performance testing. External suppliers and our partners have also been developing and building out their production capacity on track. Everything is going according to plan. So overall, we're very confident to deliver our BEV models next year according to plan.

Your next question comes from Yukeng Ding with HSBC.

各位管理層好,我有兩個問題。 第一條是上一屆我們有討論說會調整L8的這個展位安排, 就是要提高那個高價格帶的這個產品, 那渠道的這個調整是否有效? So I got two questions. The first is last season management talked about reallocate the model display in the channel to maximize the product mix and bring more exposure to the high-end model like L8. How does that go versus the expectation? The second question is about there's been quite some restructuring and adjustment in the first half. Could you refresh the full year R&D expense guidance and highlight a change, if any? Thank you.

Okay, this is James. I will take your first question. As we opened more stores in auto parks, the number of display spots for L8 has gradually recovered. We also developed new online sales channels, including Douyin, to ensure sufficient sales leads for L8. So now L8 sales has been steadily improving since April. Currently, its monthly delivery has recovered to the range of 6,000 to 7,000 units.

This is Johnny. For R&D, we expect the full year gap R&D will be below

Okay.

Your next question comes from Jing Chong with CICC.

Thank you for your question. I have two questions. The first one is about the new network. After looking back at the first half of the year, we have made a lot of changes and adjustments. Mr. Li mentioned that we need to increase the percentage of central power plants. Can you share the logic behind the change in the number of power plants? As for the expansion of the channel, including the idea of entering a low-end city, So my first question is about still the distribution network. After the review of the first half of 2024, we have made a lot of improvements. So just as Mr. Li mentioned about we increased the proportion of the central stores. So can you share more about the detail behind the above changes about the logic and our on the distribution network extension and also entering into the lower tier cities? And also what we should do more to prepare for the launch of EV models next year.

Okay, , this is James. I will take your question. So first of all, we are speaking to our direct sales model, and we are aiming to display all models in our showrooms. And that's what we are doing now. Our retail stores in auto parks have larger floor spaces and have the capacity to display 9 to 11 vehicles. And we will display all of our models in these stores. So since the start of this year, we have been making many adjustments towards our sales channels. We are gradually replacing low-performing stores in the shopping malls with retail stores in leading auto parks. We will continue to focus on the best auto parks in the top 150 cities and open stores large, high-quality stores there. In terms of our achievements so far, the proportion of our stores in auto parks has increased from 24 percent last year, end of last year, to 31 percent at end of June 2024. We plan to further increase the proportion to close to 50 percent by end of this year. And regarding your question that next year for the BEV when we launch our BEV models, so we will continue to increase the proportion of the car park stores next year. So to facilitate our display sports. The showroom capacity per store also improved alongside the increased proportion of stores The number of showroom vehicles per store has increased from 4.6 units at the end of last year to 5.1 units at the end of June 2024, and we plan to further increase this metric to cover six units per store by the end of this year. Our total number of showroom display sports has increased from 2,000 642 at the end of last year to 2,919 at the end of June 2024. We plan to further increase this number to over 3,600 by end of this year. 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. Yuen and Zeng, please go ahead.

Thank you once again for joining us today. If you have further questions, please feel free to contact Leonardo's investor relations team through the contact information provided on our IR website. This concludes this conference call. You may now disconnect your line. Thank you.