Li Auto Inc.

Hello ladies and gentlemen. Thank you for standing by for Lee Otto's third 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 Tseng, Investor Relations Director of Lee Otto. Please go ahead Janet.

Thank you operator. Good evening and good morning everyone. Welcome to Lee Otto's third quarter 2024 earnings conference call. The company's financial and operating results were published in a press release earlier today and will be 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 Chilli begin with prepared remarks. Our President Mr. Dong Hui Ma and Senior Vice President Mr. James Yang-Jin Zou will join for the Q&A discussion. Before we continue please be reminded that today's discussion will contain forward looking statements made under the safe harbor provisions of the U.S. Private Securities Detection 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 filing with the U.S. Securities and Exchange 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 Lee Otto's earnings press release and this conference call include discussions of unaudited U.S. GAAP financial information as well as unaudited non-GAAP financial matters. Please refer to Lee Otto's disclosure documents on the IR section of our website which contain of the unaudited 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. Xiang Wei. Please go ahead.

Hello everyone, I am Li Xiang. Welcome to today's call. In the third quarter, China's new South China Sea car traffic has reached 50.3 percent. The first time the new South China Sea car traffic has exceeded the fuel car. At the same time, the brand and the sales of the brand are becoming more and more obvious. Especially in the new energy car market with a price tag of over 200,000 yuan. In the third quarter, the market share of the top three brands has exceeded 50 percent. Among them, the ideal car traffic in the third quarter has reached 15.2 million. The same growth of 45.4 percent. The market share of the second quarter has increased from 14.4 percent to 17.3 percent in the third quarter. The high-level traffic and market share have further enhanced the ideal car. At the position of the Chinese brand sales champion of over 200,000 yuan. In addition, in the whole energy car market of over 200,000 yuan, the first time the ideal car traffic has exceeded the traditional European brand. The market share of the third quarter has increased from 14.4 to 17.3 percent. The Chinese brand is the champion. In the face of the increase in the number of car cars, the sales of the ideal L series is still strong. We continue to create gold. Through a high-quality OTA update every month, the function of the intelligent driving, intelligent storage and the entire car experience is constantly improving. The average sales of the L series in the third quarter reached 50,000 units. It is worth mentioning that the hard investment in the development of the ideal car has been able to drive efficiently, quickly and continuously. The sales of the car is constantly improving. This not only represents the recognition of the user's technical achievements of the ideal car, but also further optimizes our product structure. In the third quarter of 2024, the total income of the ideal car reached RMB 4.29 billion. The same amount has increased by 23.6 percent, which is a new height in history. We continue to optimize the product structure, expand the scale of efficiency and improve operating efficiency. The three-quarter profit rate has further increased to 21.5 percent. By adjusting the operating profit, it exceeded RMB 4.4 billion, reaching the highest level in history, and achieved the current flow of RMB 11 billion. In October, the total income of the ideal car exceeded 1 million units. In 58 months, it became the first Chinese company to achieve 1 million units. 1 million units is a milestone, and a new beginning. In the future, we will continue to develop and develop new technologies, maintain the innovative advantage, and work hard to create outstanding products and services. At the same time, we will continue to produce and deliver high-efficiency products, and strengthen our business leadership position. In the fourth quarter of this year, we expect the total amount of the ideal car to reach 16 to 17 million units. The total amount of the DaiDong 2024 year is about 50.2 million units to 51.2 million units. In terms of smart driving, since July, our new generation of smart driving plans, Duan Baoduan and Wei Waimu, have been quickly replaced by two to three official versions every week. In three months, the model training data scale has increased from 1 million klips to 4 million klips. The average traffic time of MPM has been about 2.5 times. With the strong data model and the full coverage of the scene, the deep understanding of the traffic environment, the new double system driving plan can greatly improve the user experience of driving. On October 23, we launched the OT 6.4 delivery to the MIGA and the ideal car series, and continued to fully deliver the new driving plan to more than 320,000 ABMAX users. Since July, after the nationwide delivery of the Wutu-MA, the technical center of ABMAX has been realized again in just three months. In addition, the OT 6.4 has also brought more dynamic ideal car classes for all car owners, the task-based 220 with large language model, the upgrade of charging experience, and the new and improved features in the smart space and intelligent transmission. The accumulated training journey leading the industry, we have established the core advantages of the continuous innovation of smart driving technology. Until October 30, the ideal car smart driving training journey has reached 2.6 billion kilometers, the ideal car user NLA journey has reached .3.9 billion kilometers, the accumulated use of smart car driving features exceeded 60 million times, the ideal car active safety accumulated to avoid the current size of the user 345 million times, including 516 extreme accidents. In the third quarter, we continue to upgrade sales and service networks. Until September, the ideal car is operating in 449 retail centers in 145 cities across the country, and 436 social maintenance centers and delivery centers in 221 cities. Among them, the number of central chains in the head of the car city and the high-quality industry has reached 165, and the number of three chains is 9 to 11, which has exceeded 3,000 in total. While supporting the current car sales improvement, we are also preparing for our new pure electric SUV. In the charging network construction, until now, the ideal car has been open to operate, 1,000 ideal supercharging stations, equipped with 4,888 superchargers, and are located in 175 cities in 31 provinces across the country. The ideal high-speed supercharging station has reached 582, which is the number one in the high-speed supercharging network construction scale industry. In addition, we continue to expand our cooperation with high-quality industry partners. On October 12, we will officially reach strategic cooperation with China's Shihua. Both sides will develop a deep cooperation in the construction of charging stations and the communication of the platform. The ideal supercharging station we have built has currently built more than 1,200 high-capacity and high-stability third-party ideal charging stations. In the pure electric field, we will maintain strategic structure. The efficiency and reliability of the pure electric car is always one of the core concerns of consumers. We will continue to accelerate the charging network layout, actively explore new technologies, and aim to build a charging network between high-speed and city industry next year, to prepare for our new charging and supercharging car, and continue to provide more users with reliable and reliable maintenance period. Finally, I would like to share with you the results we have achieved in terms of EMG. In September this year, with the work performance of the company management, product quality safety, and clean energy technology, the car will receive the highest level of 3A in the world in the second year of the MSCI ESD. We will continue to explore the low carbon technology and green operating management, and take responsibility for the travel of society. Next, please welcome our Zai Bao donkey, to give you a detailed introduction to our financial performance.

We account for over 50% market share in Q3. Li Auto delivered over 152,000 vehicles in Q3, of .4% year over year, and driving our segment market share to .3% in Q3, compared to .4% in Q2. Our historically high quarterly deliveries and market shares solidify our market leadership in the segment. In addition, our sales in China's overall RMB 200,000 and above PV market surpass multiple established European premium brands for the very first time, making us the top three brands among all brands, and number one across all Chinese brands in this segment. With a multitude of players entering the EREV market, Li Auto series sustained its strong sales performance, partly attributable to our ongoing innovation and high quality monthly OTA updates, encompassing improvements in autonomous driving, smart cockpit, and electric drive. In Q3, the average monthly sales of Li L series exceeded 50,000 units. It is worth noting that ABMAX take rate continues to grow, owing to our investments in R&D that have led to rapid iterations and breakthroughs in our vehicle's autonomous driving capabilities. The deployment not only reflects user recognition of our technologies, but also improves our overall product mix. In the third quarter, we continued to upgrade our sales and servicing networks. As of the end of September, we had 479 retail stores located in 145 cities, as well as 436 service centers at Li Auto authorized body and paint shops operating in 221 cities in China. Among these, 165 sales centers are located in major auto parts and premium commercial properties, with 9 to 11 display spots per store, driving our total display spots to over 3,000. This supports the sales growth of our existing models, while also prepares us for the launch of BEV SUE. On the supercharging network as of now, we have 1,000 supercharging stations with 4,888 charging stalls operating in 175 cities across 31 provinces nationwide. Notably, our network includes 582 Li Auto supercharging stations along highways, the largest network of its kind in China. In addition, we continue to strengthen our collaboration with premium partners in the industry. On October 12, we officially formed strategic cooperation with SinoPAC on charging station construction and platform interconnectivity. As of now, our Li selection supercharging network includes 1,200 high-power, highly stable third-party charging stations. We remain on track in terms of our BEV strategy. Charging efficiency and reliability remain top concerns for BEV customers. We will continue to accelerate the deployment of our charging network while actively exploring new technologies, aiming to establish an industry-leading charging network covering both highways and urban areas by next year. The initiative will prepare us for the launch of our BEV electric SUVs and ensure that we continue to provide convenient and reliable charging experience for a growing number of users. Moving on to autonomous driving. Since its release in July, our proprietary SolFAC -to-end and vision language model, autonomous driving solution, has been iterating at a rate of 2 to 3 versions per week. In just three months, the amount of training data per model went from 1 million video clips to 4 million, while the average mileage per intervention increased nearly 2.5 times. Our new System 1 System 2 autonomous driving solution significantly enhanced user experience with its robust model and deep comprehension of the traffic environment. On October 23rd, we began rolling out OTA 6.4 for the LeMega and BL series. The update includes our new autonomous driving solution, which is now fully deployed on over 320,000 LeMega 80 Max vehicles, only three months after we rolled out our nationwide Maplest NLA in July. The OTA 6.4 update also features a more lively VXM, Taskmaster 2.0 powered by large language models, and improved charging experience, among many other improvements. Our industry-leading amount of real-world training data is a key competitive advantage and powers rapid innovations in autonomous driving. As of October 30th, our total real-world training mileage has reached 2.6 billion kilometers, with NOA mileage hitting 1.39 billion kilometers, and automated parking has been activated 60 million times. Additionally, our active safety features have prevented 3.45 million potential accidents, including 516 severe accidents. In Q3 2024, our total revenues reached a record high of RMB 42.9 billion, up .6% -over-year. Our growth margin expanded to 21.5%, and non-GAAP income from operations hit an all-time high of RMB 4.4 billion, and operating cash flow reached RMB 11 billion. The solid financial performance is driven by our improving product mix, economies of scale, and operating efficiency. In October, we reached an important milestone of 1 million cumulative vehicle deliveries in just 58 months, the first among emerging new energy vehicle automotive brands in China. The milestone marked a new beginning. Looking forward, we will continue to innovate through R&D and develop outstanding products and services, while maintaining our production and delivery efficiency as an industry leader. In Q4 of this year, we expect vehicle deliveries to be between 160,000 to 170,000 units, with foliar deliveries falling between 502,000 and 512,000 units. Last but not least, I would like to share the highlights in our ESG performance. In September, we received MSCI's highest AAA BSG rating for the second consecutive year, a testament to our outstanding performance in corporate governance, product quality, and safety, and clean energy technology. We will continue to explore cutting-edge low-carbon technologies and implement green operational management practices, proactively fulfilling our social responsibilities. I will now turn it over to our CFO, Johnny, to walk you through our financial performance.

Thank you, Xiao. Hello, everyone. I will now walk you through some of our 2024 third 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 third quarter were RMB 42.9 billion or $6.1 billion. Up .6% -over-year and .3% -over-quarter. This included RMB 41.3 billion or $5.9 billion from vehicle sales. Up .9% -over-year and .3% -over-quarter. The -over-year and sequential increase was primarily attributable to the increase in vehicle delivery, partially offset by the lower average selling price mainly due to the different product mix. Cost of sales in the third quarter was RMB 33.6 billion or $4.8 billion. Up .5% -over-year and 32% -over-quarter. Cost profit in the third quarter was RMB 9.2 billion or $1.3 billion. Up .7% -over-year and .3% -over-quarter. Vehicle margin in the third quarter was 20.9%, relatively stable compared with .2% in the same period last year and improved from .7% in the last quarter. The sequential increase was mainly due to the cost reduction, partially offset by the lower average selling price mainly due to the different product mix. Gross margin in the third quarter was .5% versus 22% in the same period last year and .5% in the prior quarter. Operating expenses in the third quarter were RMB 5.8 billion or $825.4 million. Up .2% -over-year and .5% -over-quarter. R&D expenses in the third quarter were RMB 2.6 billion or RMB 368.6 billion. The cost reduction was primarily due to the decrease in the -over-year and the sequential decrease in the -over-year. The -over-year and sequential decrease was primarily due to the decrease in design and development costs for new products and technologies and decreased employee compensation. R&D expenses in the third quarter were RMB 3.4 billion or $478.7 million. Up .1% -over-year and .3% -over-quarter. The -over-year and sequential increase was primarily due to the increased employee compensation associated with the recognition of share face compensation expenses regarding the field performance based awards in the third quarter of this year. As the achievement of the related performance condition was deemed probable, income from operations in the third quarter was RMB 3.4 billion or $478.7 billion. The -over-year and sequential increase was primarily due to the decrease in the -over-year The -over-year and sequential decrease in the -over-year were RMB 4.8 billion or $489.2 million. Up .7% -over-year and .4% -over-quarter. Operating marketing in the third quarter was 8%. Able from .7% in the same period last year and .2% in the prior quarter. Next income in the third quarter was RMB 2.8 billion or $401.9 million. Up .3% -over-year and .2% -over-quarter. Diluted net earnings per ADS attributable to ordinary shareholders was RMB 2.66 or $0.38 in the third quarter. The -over-year and sequential increase was RMB 2.67 in the same period last year and RMB 1.05 in the prior quarter. And now turning to our energies and tax law. Our tax position remains strong as stood at RMB 106.5 billion or $15.2 billion as of September 30, 2024. Net cash provided by operating activities in the third quarter was RMB 11 billion or $1.6 billion. Worthed net cash provided by operating activities of RMB 14.5 billion in the same period last year. And net cash used in operating activities of RMB 429.4 billion in the prior quarter. Free cash flow was RMB 9.1 billion or $1.3 billion in the third quarter. Worthed RMB 13.2 billion in the same period last year and negative RMB 1.9 billion in the prior quarter. And now for our business outlook. For the fourth quarter of 2024, the company expects the deliveries to be between 160,000 and 170,000 vehicles. Representing a -over-year increase of .4% to 29%. The company also expects fourth quarter total revenues to be between RMB 43.2 billion and RMB 45.9 billion or $6.2 billion and $6.5 billion. Representing a -over-year increase of .5% to 10%. 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 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 Tsou with Morgan Stanley.

Hello, everyone. I'm Tim. Thank you for your questions. Congratulations on the company's strong performance. I have two questions. The first is about the future growth of the ideal L series, the future growth of the ideal L series. Because the target of the year is 50.2 to 51.2 million, which means that the L series 4G average sales can reach a level of 5.3 million. So if we look at the management of the ideal L series next year, we think there is still a lot of room for growth. If there is, then the growth space comes from the new model, such as L5, or the modern model of the new model, or the export or the deepening of the low-end model. So that's the deepening of the low-end model. Thanks for taking my questions. So my first question is about the potential, growth potential of EIEP. The four-year target of 502 to 512,000 units implies the average mobile sales of the L series. Could they exceed 53,000 in fourth quarter? So looking to next year, how much upside do you think the L series would still have? If there is ample upside, where would the opportunities be emerging from? Is it going to be new models like L5, faceless, export, or further penetration into the lower tier cities in China? So that's my first question.

Okay. Tim, this is James. I will take your first question. Overall, we hope our sales growth next year will be twice the growth rate of LB200,000 and higher anyway market. Thank you.

Okay. Thank you, Mr. Guan. My second question is about the price. In September, we released the internal version of the price of the L5 series. I would like to ask Mr. Guan when we will start to make the full-time sales. In addition, the next year, we will have the opportunity to upgrade the hardware and further downgrade to the new model of Pro. My second question is about the autonomous driving. In September, we also launched a better version of -to-point, -near-smart driving with just one click. So when will such function be officially deployed in full scale? And in addition, is there any chance that LiAuto will launch its CDNLA function on the new Pro version with hardware spec upgrade next year? Thank you.

I am Ma Donghui. I will answer this question. We have completed several large versions of the L5 series in the past 10 months. From the beginning of the Qingtu to the Wutu and the Dunedun. As you can see, everyone's recognition and expectation of LiAuto is getting higher and higher. Regarding the price of the vehicle, our plan is to fully promote it to all ADMAX users by the end of this year, before December. At the same time, we will also promote the ability to communicate throughout the country, etc. We will use the VYM model to implement the 10-bit etc. Whether it is from urban to high-speed NVA or from high-speed to urban NVA, they will not be able to give users a more smooth user experience by leaving the ETC shopping mall. In addition, is there a chance that urban NVA will be able to go down to the Pro version? Because urban NVA needs stronger perception and higher visibility. Now, urban NVA does not support the current version of Pro. Please pay attention to our new product launch conference. Thank you.

The traffic is increasing. In terms of parking space, our plan is to launch it to all ADMAX users by the end of December this year. Along with this launch, we will also be releasing the feature to pass all ETC pull stations automatically, which relies on our VLN model to recognize ETC pull stations so that our users can drive from highway to urban roads or to urban roads to highways through ETC pull stations without exiting NVA, which provides a more fluid user experience. In terms of whether our city NVA will be released on Pro models, and because city NVA relies on stronger perception and larger amount of computing power, the current city NVA features unfortunately won't be provided on our Pro models. As for specifics of future models and information, please stay tuned to our product launch events in the future. Thank you.

Your next question comes from Bin Wang with Deutsche Bank.

Thank you, leaders, for giving me this opportunity. My first question is about our spring model. I would like to ask if this model has been released in time, in the price range, and if we have forgotten to add the volume. Because there are media reports online that we want to launch the i6 in the middle of the year. I would like to know if this is correct. My first question is about the new upcoming QEV products. What's the timing for the first product and what's the pricing range that it will be, and what's your expectation for the monthly source volume? Because some of the local media reports actually will have i6 in the middle of the year. Do you confirm that? Thank you.

I am Li Jiang. As for the details of the product plan, we will share it with you in the right time through the official product launch event. Because it is very important to keep the work of this brand new product. Overall, we are very confident about the subsequent spring model. Just as the performance of our NVA series in the high-end QEV market is the same, we will work hard to make our QEV a -the-line QEV market first-class.

Our EV models have performed very strongly in the high-end NVA market. It is also our goal to make our best SUVs our tier-one players in the high-end market.

My question is about the share-based conversation for the CEO. We know that previously there were announcements that more than half a million units in the past 12 months can get ground up CEO style options. I know how much expense you're putting in the third quarter and how much you are going to be in the number four quarter this year. Thank you.

Hi, this is John. Regarding the CEO share-based conversation, as of September 30th, the company expects the fourth quarter delivery plus the delivery in the first three quarters will probably meet the CEO's performance required for the first batch of share-based conversation awards, which means the total delivery in the trailing 12 months first reached over $500,000. As a result, we recognize the share-based conversation expenses in the third quarter of RMB of $593 million. There will be additional RMB of $42 million in the fourth quarter. And every batch of the reward, which means the next 500,000 milestones, the expense will be the same as each batch. Thank you.

Your next question comes from Tina Howe with Goldman Sachs.

Thank you, Mr. Chairman. First of all, congratulations on your performance, especially on the overall profit. I have two questions. The first one is about the sales policy for the fourth quarter. The fourth quarter is a time where everyone's car is going to have a lot of sales policies. So I'd like to ask about your plan this year. And I see that the sales of the fourth quarter has increased by about 20,000 cars compared to the third quarter. But the growth of the fourth quarter and the third quarter last year was actually 26,000 to 27,000 cars. Considering that we actually have one more car this year, the overall sales of the sales is relatively conservative. I want to ask how you think about this. Is it possible that this year's sales policy will not be as much as last year? So my first question is regarding our sales policy strategy into the fourth quarter of the year. And then also in relation to that, our fourth quarter volume guidance seems to be quite conservative. Incremental volume in fourth quarter versus third quarter compared to last year. So I'm wondering how we're thinking about the volume and the sales policy.

Okay. Hi, Gina. This is James. I will take your first question. First of all, against the competition, sales of the L Series remain strong. Many due to the strengthening momentum of our brand recognition with over one million deliveries and the rapid breakthrough of our automobiles driving capabilities, we are very confident about our sales in the first quarter. The competition has been intense since the beginning of this year. Against such tough competition, our market share has been continuously increasing. In the third quarter, our market share in the renminbi 200,000 and above, any way market reached 17.3 percent, a record high year today. Meanwhile, since L6 launch, its monthly deliveries have exceeded 25,000 units, with community deliveries exceeding 139,000. The L6 is the best selling model among the new vehicles released this year. As to sales, we initiated a new round of change in the second half this year to give more operating autonomy to each region. The person in charge in each province will be responsible for overall operations, not just the sales as in the past. With operating autonomy, each province can run region-specific sales and marketing activities according to the local market conditions, further increasing brand awareness and market share. If we look at this region by region, the competition landscape varies for different provinces. We will formulate region-specific sales policies according to the local conditions. Thank you.

My second question is regarding our sales network expansion plan. What will be our target store number by end 2024 and also by end 2025? Thank you.

We expect our retail stores to reach about 500 at the end of this year. Our key channel adjustments we have been implementing this year is to gradually replace lower performing shopping mall stores in our network with sales centers in leading auto parks. As a result, the proportion of sales centers in auto parks will increase to over 40 percent at the end of this year from 24 percent at the end of 2023. Our total displaced stores in China is expected to reach over 3,600 at the end of 2024 from over 2,600 at the end of 2023. Meanwhile, we are expanding our coverage in the third tier cities and some key fourth and fifth tier cities in terms of sales and service networks. As to the store target next year, we will share that after the first quarter earnings release. Thank you.

Our next question comes from Jing Cheng with CICC.

So my first question, as Mr. Li Xiang has just mentioned, we have more and more new players to compete with us in the EREV sector. So if looking into our L series, it has already been released for nearly two years. So if there are some sectors that we can upgrade our products, what aspects do we think can be greatly improved?

The L series is a competitive market for both the L series and the EREV. The L series is still in its prime in the next two years. After the consumers buy the L series, we will continue to upgrade our products and improve our experience. We will continue to improve the value of our products. The biggest change is from AI. It includes AI-based intelligent driving and AI-based intelligent assistant. It will bring consumers a completely different experience today. It is the real beginning of the change. Finally, I would like to remind everyone of a small point. The most popular new car in the global market by far in 2024 is the L6. This is the result of the sales end of the -to-ten. From the release of the car to the six-month, the total sales of the L6 has exceeded 139,000 units. And the production capacity is clearly not enough to meet the needs of the order. The factory still needs to be expanded during the Spring Festival in 2025 to meet the needs of more consumers.

The competition in the automotive industry encompasses technology, products, supply chains, sales and service. It is a holistic competition. And RUV technology is only a pretty important one among all technologies, but it is definitely not the whole picture. For the LE-L series in the next few years, it is still considered, if you were to make an analogy to a human being, it is still in its youth stage. And after consumers buy our LE-Auto vehicles, we will continue to improve our features and experience through OTAs, which improves the value of products that they receive. So software, hardware and user experience and product, this integrated experience, LE-Auto is still the leader in the industry. And if we are looking at the next three to five years, I think the biggest variable is going to be artificial intelligence, which includes AI-powered autonomous driving and AI-powered smart assistant. It will create a completely different experience for our users. And that, I consider, is the beginning of real step change. And one thing I want to remind everyone of is since the beginning of 2024, the most popular and well-received automotive product in the entire world is LE-L6. And that is hard results that we have seen in our source. From launch to today, in a matter of only six months, the LE-L6 has delivered over 139,000 units. And demand is still over supply, which requires us to expand our production facilities during Spring Festival in 2025.

Okay, thank you. My second question is about the overseas market. So my second question is about the overseas market. Do we have a more aggressive strategy to go into the global market? Okay,

this is James. I will answer your question. Absolutely, the overseas market is very important to us. Our overseas strategy is different from other automakers. As of now, we have established the servicing networks in several countries and regions, such as Kazakhstan, in the Middle Asia. These servicing stores also helped us expand our market share in the overseas market. Regarding the choice of the overseas region, the Middle East and Central Asia will be our first target regions. Building on this, we will continuously explore and evaluate other markets with high growth potential to expand our global footprint. However, we are not considering entering Western Europe and North America for the time being. Thank you.

Your next question comes from Ming-Soon Lee with B of A.

Hello, everyone. Thank you for giving me the opportunity to ask questions. I have two questions. First, my first question is, a few days ago, the ideal car officially sent the full amount of adMACS users to the -to-end. I want to know what the biggest improvements have been made in terms of the current user experience and the -to-end NOV. In addition, this year, since the 13th quarter, has the adMACS version of sales been significantly improved? Let me translate the first question. So in October 2024, the auto officially OTA the -to-end latest adMACS functions. And how does the user experience improve and the feedback so far? And year to date, do you see a significant sales mix change for your adMACS version? Thank you.

Hello, I'm Ma Donghui. I'll answer this question. First of all, when the -to-end and the adMACS version were launched, we thought the concept of the whole frame would be a function and then a function. It would be a function like the city NOV and the high-speed NOV, and then become a real and then a control frame. This is also a transformation from regular algorithm to a real AI model. And then for the user, it actually brings a lot of value. I have two examples. First of all, the control journey, we call it MPI, will be longer. And then as the model parameters and training data increase, the MPI journey will increase significantly. And then the second example, the whole frame, we call it MPA, will also be greatly improved. And then compared to humans, we predict that the -to-end version will further increase the safety journey. And then it will achieve human safety. And then the other example, with the increase in large-scale capabilities, we will be able to automatically initiate the movement of AB, and then automatically initiate the transformation of AIS. And then the whole security will also be significantly improved. And then the major number of events will also be significantly reduced. And then about the impact of adMACS on the whole sales, it is actually very significant. Not only in the version of adMACS that is over 300,000, our sales actually improved to a certain level. In addition, the ratio of adMACS on the ideal L6 is also continuing to improve.

And that marks the change from rule-based algorithms to real AI model driven algorithms. And for users, the values are pretty significant. I'll give a few examples. First of all, MPI, or what we call Miles Per Intervention, have increased very steadily as we increase the amount of model parameters and training data. And the increase actually fits very perfectly into scaling law, which means companies with high quality training data will have a significant competitive advantage in the future, in this industry in the future. Second example I want to give is MPA, which is Miles Per Accident, have also been increasing steadily. My estimate is that with this current -to-end version, the MPA is going to be 35 times compared to human drivers. And lastly, as we increase the big model capability, our active safety features like AED and AES have also been improving very significantly. The number of severe accidents has dropped dramatically. And in terms of sales take rate, adMACS take rate has steadily increased, not only for cars priced over 300,000, but also for the L6. We have seen a very dramatic increase in adMACS take rate.

And I also want to know about the capital spending in the next year. Lastly, I would like to ask more about the current charging station usage. Because our current adMACS has a relatively small storage capacity, I would like to ask if many charging stations are used by other brands. So in terms of our model, in terms of our charging station usage, it has not had any negative impact on our model. Let me translate the question. So what's our plan for the charging station by the end of next year? And what is your current breakdown for your own building, charging station and also the charging station run by third party? And right now, what is the utilization, especially since you have so many charging stations, but the VEV mega total population is still not high, does this mean that many other brands use your charging brand? So your charging station did not impact your gross margin.

Okay, this is James. I will take your question. So overall, we plan to establish the industry's largest OEM charging network and have an absolute lead. Before our new VEV models come to market, we expect to have more charging stations than Tesla in key cities for sales. By the time our new VEV model launches, we target to have more than 2,000 charging stations in operation, which will scale up to 4,000 by the end of 2025, next year. Our super charging station network now covers nine national highways, a total of over 54,000 kilometers with a coverage ratio of 63% of national highway trunk lines. By the end of 2025, we will build more than 1,200 super charging stations along highways, covering 90% of national highways. In addition to highway and urban coverage, we will also selectively cover medium and long-distance self-driving routes to meet the needs of our users for family travel. For instance, our Mount Everest super charging station will be commercialized in October this year, and we expect to achieve -to-end coverage to national highway 318 in April next year. And also, regarding the cooperative super charging station in the city, so far we have already built more than 500, and we are expecting by end of next year, we will also have this cooperative super charging station in the city, more than 3,000. Thank you.

Your next question comes from Yu-Kan Ding with HSBC.

Thank you, Mr. Manager. The first question is about consolidation for the pricing category above 200K. We discussed that at the beginning of the year, is the energy consolidation shaping in the way as management expected? How do we take the competition coming from the market? From the mass market brands, high-end models, and tech brands all to line up.

I am Li Xiang. I think that before we launched the SQV series, we have been talking about the market share of more than 200K, and the market share of NEV is increasing every quarter. The third quarter has reached 17.7%. I think that no matter what brand enters the market, everyone will face the same challenge. Can the products we provide in the price range provide the leading product value for the user? This is the core. We are confident that we will be able to build the product line and achieve more market share. Our long-term goal is to achieve more than 25% market share in the 200K NEV.

Today, even before we launched our pure electric SUVs, we have been increasing our market share very steadily every quarter, and it has reached .3% in Q3. For the longest time, no matter who enters the market, the fundamental challenge is the same for everyone. Can we offer products that provide the most value for our target users in their respective price range? That is the key to everything. Our long-term goal is still to, through our three BEV and REV products, together capture over 25% of market share in the NEV market, over 200K RMB. Thank you.

The second question is, in the medium-sized SUVs and MPVs that are used by families, we see the increase in the supply of new vehicles. Do we think that the boundaries of the family user may be partially reached? Are there any opportunities for the management to see the blue sea? The second question is on the segment and boundary. We notice there is more model supply among the mid- to large-size family utility SUVs and MPVs. Will the company management see the boundary limits for the current segment, or will family user markets be separated to a certain extent, which are the other segments that the company would identify as promising?

I think this is not enough to open up more markets. We should make the market better. On the other hand, from the perspective of power supply, many people say that it is difficult to sell a product with over 300,000 power. But the fact is that if you want to find a product with a power of L7, L8, L9, and a product with a product power, you can imagine that there is no market. So, we say that from the perspective of artificial intelligence or from the perspective of power supply outside the city, I think that this kind of mid- to large-size SUVs will have more market opportunities. We can't take this into account and sell

it. My view is that we have only started to scratch the surface in terms of family users' markets, especially if you take into account the power of AI, the changes that will be powered by AI in terms of autonomous driving and smart talk experience. There's going to be so much room for imagination for family users. So, in this regard, we're not in a rush for new markets. And the other opportunity is in pure electric or VEV markets. If you look at the market of VEV products over 300,000 R&D, there is no product that offers the equivalent or comparable product value to L7, L8, and L9. So, there's simply no good supply, and we believe that's another big opportunity for us. So, whether it's AI or VEV markets, we think there's a big opportunity in terms of large SUVs for family users. So, this is something we will continue to explore before we look at other potential markets or niche markets. And an analogy would be we actually have a golden bull in our hands, and we shouldn't be begging with a golden bull.

Your next question comes from Gao Fei-Ying with SciTech.

Thank you, Mr. Zhang, for answering my question. I have two questions here. The first is about the progress of the autonomous driving industry. Can you introduce the progress of the autonomous driving industry and the pace of future planning? If we look at the future, from the perspective of the VT, will the technology of autonomous driving be slow? If we talk about the method, will it lead to a decrease in the technical differences between each company? Next, I will translate. My first question is about self-driving. So, could you give us some instructions about progress and plans in the field of self-driving? And I'm wondering that will the speed of self-driving iterations slow down in the long term? And will it potentially lead to a narrowing difference between companies' technology? Thank you.

In terms of the human-machine interaction, it also needs to be product and technical innovation. Currently, we have started to implement the user interface. After that, it will be sent to all users in the future. In the long term, we have also launched the self-driving prediction of the S-level. On the current technical route, we will study the more powerful car-type, VIA model, and cloud-type world models. We will strengthen the learning system. In addition, we will continue to invest in intelligent driving infrastructure, and maintain the leading in training computing and intelligent training and programming. We don't think the gap will be small in terms of the ability of various companies to control driving. Because in the long term, the demand for self-driving is very high for car-type computing, cloud-type computing, and training data. And the capacity of large-scale computing requirements will be higher and higher. On the contrary, we think the gap will be bigger and bigger.

Our current direction is to iterate on supervised autonomous driving, and provide -to-parking autonomous driving experience and completely seamless user experience. In the meantime, we are innovating in terms of human-vehicle interaction when it comes to supervised autonomous driving. We are currently running through some internal tests, and we will be releasing these to all of our users in the near term. Looking at the long term, we have already launched primary research on L4 autonomous driving. It builds on top of our current -to-end VLM model. We are looking into reinforced learning systems that combine VLE models on the car side and a world model on the cloud side. In the meantime, we will continue to invest in infrastructure to sustain our leadership in computing power as well as autonomous driving mileage. Finally, in terms of autonomous driving capability and the gap between different players, I don't think it will narrow, but in fact, I think it will widen over time. The reasons for that is because, first of all, the requirement for car side and cloud side computing power, a requirement for training data and resource investment, continue to be very large and has trend to increase. There is also a higher requirement on the algorithm capabilities for autonomous driving. Overall, I think the gap will widen.

My second question is about the future cost reduction. As we know that with our increasing sales, so how do we look for future cost reduction, including procurement, technology, depreciation and other aspects? Thanks.

I will answer this question. Regarding the cost reduction and efficiency, we will look for opportunities from the -to-end and the whole chain. This includes the technical improvement you mentioned earlier, and also includes the procurement volume, reducing the waste of quality, and increasing the productivity utilization rate of our partners. Even more efficient logistics and delivery methods require very detailed operation. Let's expand a little bit. First of all, we think technical innovation is very important for cost reduction. For example, the integration of the whole system including the drive, and the integration of the central control unit. Not only can it improve productivity, but also can reduce the cost of our competition. In terms of the engineering side, we have established a joint innovative platform, which allows our partners to enter more early, and together find better design and supply plans, and find opportunities to increase costs. In terms of cooperation with our partners, we always advocate the idea of dual use. This is beneficial to the long-term development of the industry. In addition, we use platformization, the platformization of the parts, and then build parts and products. In terms of cooperation, we focus more on the volume, and then increase productivity utilization rate, and then bring an opportunity to optimize the cost. At the same time, we are also using digitalization and digitization, and using our own factories and partner services to reduce the cost of the manufacturing process, and then increase the cost of manufacturing equipment to optimize the cost.

First, overall, we will look at the full value chain -to-end to find opportunities to increase efficiency and lower cost, which includes technology innovation, economy scale, procurement, and reducing quality-related waste. It also includes working with our partners to increase their capacity utilization, more efficient logistics. All these require very detailed and very skillful operations. To give an example in terms of technology innovation, it is key to driving lower costs over the long term. For example, with our REV system and our electric drive system, if we could integrate them and integrate the central control unit, it will not only make our products more competitive, but also make our costs more competitive. On the supplier end, we are building a joint innovation platform with the supplier, so that our suppliers can get involved much earlier. We can work together to find better solutions in terms of designs and processes to find opportunities for lowering cost. Also in working with suppliers, our value has always been a win-win philosophy, because only this is beneficial to the long-term development of the industry. On the other hand, we will design our parts so that they share the same platform, and we enlarge the volume of each product, which we call hit product. In terms of supplier strategy, our strategy has been to concentrate the volume on a smaller number of suppliers, increase their capacity utilization, and drive costs down over the long term. And lastly, we will continue to leverage digitization, smart technologies on our factories, as well as to empower our partners to reduce waste in the manufacturing process, increase online rate of the equipment to drive down costs over the long term. 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 Zhang, please go ahead.

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