Li Auto Inc. (NASDAQ:LI) Q1 2023 Earnings Call Transcript

Li Auto Inc. (NASDAQ:LI) Q1 2023 Earnings Call Transcript May 10, 2023

Operator: Hello, ladies and gentlemen. Thank you for standing by for Li Auto’s First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today’s conference call is being recorded. I will now turn the call over to your host Janet Chang, Investor Relations Director of Li Auto. Please go ahead, Janet.

Janet Chang: Thank you, operator. Good evening, and good morning, everyone. Welcome to Li Auto’s first quarter 2023 earnings conference call. The company’s financial and operating results were published in the press release earlier today and are posted on the company’s IR website. On today’s call, we have our Chairman and CEO, Mr. Xiang Li; and our CFO, Mr. Johnny Tie Li, to begin with prepared remarks. Our President, Mr. Donghui Ma and other senior executive management will join for the Q&A discussion. Before I continue, please be reminded that today’s discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties.

As such, the company’s actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in certain company filings with the U.S. Securities and Exchange Commission and the Hong Kong Stock Exchange. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that Li Auto’s earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to Li Auto’s disclosure documents on the IR section of our website, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures.

Our CEO will start the remarks in Chinese. There will be translation after he finish all his remarks. With that, I will now turn the call over to our CEO, Mr. Xiang Li. Please go ahead.

Xiang Li: [Foreign Language] Hi, everyone, and welcome to today’s earnings call. In the first quarter of 2023, China’s NEV market continued to grow, but market competition intensified, triggering a wait-and-see sentiment among consumers. Nevertheless, we firmly believe that true winners will emerge from competition. In the first quarter, we achieved our best quarterly delivery results to date. With continued user recognition of the L8 and L9, as well as strong order intake for L7 and its rapid production ramp-up, we delivered 52,584 vehicles this quarter, representing a year-on-year increase of 65.8%. This achievement placed us among the top three NEV brands priced over RMB200,000 in China with a market share of approximately 11%, far surpassing any other emerging automakers and once again showcasing our ability to design and build blockbuster models.

It also demonstrates the strength and the collaborative efficacy of our supply chain, manufacturing and sales and servicing network. We’ll continue to do our best to grow rapidly and strengthen our market leadership. In April, our monthly deliveries hit a new high, reaching 25,681 units with cumulative deliveries exceeding 335,000. The L7, L8, and L9 all performed outstandingly in their respective market segments. According to the insurance registration data of CIRI Auto Technology Institute, L7 became the sales champion in the large SUV market in China after it started delivery in early March. In April, its first full month of delivery, L7 hit the 10,000 vehicle mark, becoming our first fourth model to reach this milestone. In the meantime, the L8 has maintained its sales leadership in the six-seater subsegment and in the full-size SUV market, the L9 has consistently topped the sales chart ever since its delivery started at the end of August last year.

Driven by our strong deliveries and relentless pursuit of operating efficiency, our financial metrics improved across the board. In the first quarter, our total revenues reached RMB18.79 billion, representing a year-over-year increase of 96.5%. At the same time, we delivered positive operating profit and positive net profit, and our free cash flow reached a record high of RMB6.7 billion. A healthy profitability and cash flow will fund our R&D in products, platforms, and systems creating a solid foundation for long-term development. With the launch of L7 and all L8 Air models in April, we further expanded our price range and user coverage. We expect our market share in the NEV market at over RMB200,000 and above to expand further in the next quarter, with expected deliveries to be between 76,000 and 81,000 units.

Digital product delivery is just the beginning. In order to continuously improve the experience of family users, we will enhance our products through OTAs. Since the beginning of this year, we have delivered two OTA updates for our L series, OTA 4.3 and 4.4, updating more than 100 features in total. New features include Task Master, which allows users to create customized combinations of functions of seats, drive settings, navigation applications, and more. We also rolled out LKA+, the first feature of its kind in China, which can autonomously overtake on highways and urban expressways when not in navigation mode. Additionally, we will officially launch OTA 3.3 for LED1 in the middle of this year. For family users, safety is always the top priority.

Every model of Li Auto is developed to meet the most stringent safety standards and has undergone comprehensive safety tests. In April 2023, the China Insurance Automotive Safety Index, CIASI, released its latest batch of evaluation results. The L8 received a G rating, the highest rating in occupant protection, pedestrian protection, and driver assistance systems. It also received a G rating and a 25% offset throttle impact test on both the driver and passenger side. The L9 also received a five-star rating with a weighted score of 91.3% in the CMCAP [ph] assessment test. In the first quarter of 2023, we continue to enhance our commercial capabilities by upgrading and expanding our integrated online and offline direct sales and servicing network to support the expanding product offerings and provide better services to our users while spreading our brand vision and increasing brand awareness.

With respect to our retail sales network, we continue to add physical stores while accelerating the upgrade and expansion of our existing stores to support multiple vehicles. Since L9’s launch in late June last year, we have relocated and expanded close to 50 existing stores and opened over 50 new stores. As of April 30, 2023, we have 302 retail stores in 103 cities as well as 318 service centers and authorized body shops in 222 cities. As our business accelerates, sustainability has always been deeply ingrained in our products, services and corporate governance. On April 21, we released our 2022 ESG report detailing our continued exploration and progress in ESG. We received an MSCI ESG AA rating for two consecutive years. In the future, we will continue to improve our ESG governance, promote the harmonious development of our brand, the environment, and the society, and create value for our users, partners, employees, and other stakeholders.

As we enter the next phase of the development, we will execute our autonomous driving and BEV roadmap unveiled on April 18 Shanghai Auto Show. City NOA will mark the beginning of autonomous driving 3.0 for our company. Meanwhile, we will also enter a new chapter in terms of powertrain platforms and products with EREVs and HVC BEVs being developed in parallel. In terms of autonomous driving, our highway NOA feature has served over 280,000 families, accumulating over 140 million kilometers of highway NOA mileage. In this quarter, we will bring the NOA feature to urban driving scenarios, we will release city NOA for beta testing on LI AD Auto Max 3.0, and target rollout of the feature in 100 cities across the country by the end of 2023. Moving forward, with the application of transformer models in autonomous driving, we believe we will be the biggest beneficiary since we have the largest data set in China.

With respect to EREVs and HVAC BEVs, we will adhere to our parallel development strategy. For EREVs, we will focus on enhancing the efficiency of the range extenders, allowing users to drive on battery power on urban commutes and on range extenders during long-distance travel, a much better experience than driving ICE vehicles. For HVAC BEVs, we’ll continue to improve our technology to offer a rapid charging experience comparable to settle on the gasoline vehicle so that users can make intercity trips without range anxiety. By 2025, our portfolio will consist of seven models with consist of a one super model, flagship model, five ERUVs and five HVAC BEVs, 11 models in total, which will allow us to further expand our user base and expand to new markets.

This year, we’ll redouble our efforts in fast charging network deployment. Our 4C fast chargers can reach peak power output of 480 kilowatts, adding 400 kilometers of driving range with a 10-minute charge. We plan to build 300 charging stations in highway service areas by the end of 2023, covering four major economic zones, including the Beijing, Tianjin, Hebei region, the Yangtze River Delta region, and the Great Bay Area, and the Chengdu Chongqing region. We expect to further expand to 3,000 charging stations by the end of 2025, covering 90% of highway mileage nationally and all major tier one, two, three states. In the future, we will continue to refine our operations, build organizational capabilities to support the scaling of our business and maintain healthy sales growth.

As we continue to strengthen our autonomous driving and smart cockpit capabilities, and simultaneously implement our ERE and HVAC BEV dual product strategy, we’re confident we will also continue to strengthen our market leadership in the MEV market, creating more and better choices for family users to create mobile homes and create happiness. With that, I’ll turn it over to our CFO, Johnny, for a closer look at our financial performance.

Tie Li: Thank you, Li. Hello, everyone. I will now review some of our 2023 first quarter financials. Due to time constraints, I will address financial highlights here and encourage you to refer to our earnings press release for further detail. Total revenues in the first quarter of 2023 were RMB18.79 billion or $2.74 billion, increasing 96.5% year-over-year and 6.4% quarter-over-quarter. This included RMB18.33 billion or $2.67 billion US dollars from vehicle sales, which was up 96.9% year-over-year and 6.1% quarter-over-quarter. The year-over-year increase was mainly due to the increase of vehicle delivery and the higher average selling price contributed by the Li L-series. The quarter-over-quarter increase was mainly due to the increase in vehicle delivery, partially offset by the lower average selling price due to different product mix between the two quarters.

Revenues from other sales and services were RMB459.7 million or $66.9 million in the first quarter of 2023, growing 81.4% year-over-year and 20.5% quarter-over-quarter. The increase was mainly attributable to increase the sales of accessories and services in line with higher accumulated vehicle sales. Cost of sales in the first quarter was RMB14.96 billion or $2.18 billion, representing an increase of 102.2% year-over-year and an increase of 6.2% quarter-over-quarter. Gross profit in the first quarter of 2023 was RMB3.83 billion or $557.7 million, growing 77% compared with the first quarter of last year and 7.4% versus the first quarter of 2022. Vehicle margin in the first quarter of this year was 19.8% compared with 22.4% in the first quarter of 2022 and 20% in the fourth quarter of 2022.

The year-over-year decrease was mainly due to the different product mix between two quarters. Gross margin in the first quarter of 2023 was 20.4% compared with 22.6% the first quarter of last year and 20.2% in the fourth quarter of last year. Operating expenses in the first quarter of 2023 were RMB3.42 billion or $498.7 million, increasing 32.9% year-over-year and decreasing 7.4% quarter-over-quarter. Research and development expenses in the first quarter of 2023 were RMB1.85 billion or $269.7 million, up 34.8% year-over-year and down 10.5% quarter-over-quarter. The year-over-year increase was primarily driven by increased expenses to support our expanding product portfolios as well as increased employee compensation as a result of our growing number of staff.

The quarter-over-quarter decrease was mainly in line with timing and progress of new vehicle programs. Selling, general and administrative expenses in the first quarter of 2023 were RMB1.65 billion or $239.6 million, representing an increase of 36.8% year-over-year and an increase of 0.9% quarter-over-quarter. The year-over-year increase was primarily driven by increased employee compensation as a result of our growing number of staff as well as increased rental expenses associated with the expansion of our sales and servicing network. Income from operations in the first quarter was RMB405.2 or $59.0 million, compared with RMB413.1 million loss from operations in the first quarter of 2022 and RMB133.6 million loss from operations in the fourth quarter of 2022.

Net income in the first quarter of 2023 was RMB933.8 million or $136 million, compared with RMB10.9 million net loss in the first quarter of 2022 and more than tripled the RMB265.3 million net income in the fourth quarter of 2022. Turning to our balance sheet and cash flow, our balance of cash and cash equivalents with restricted cash, time deposits, and short-term investment was RMB65 billion or $9.46 billion as of March 31, 2023. Net cash provided by operating activities in the first quarter of 2023 was RMB7.78 billion or $1.13 billion. Pre-cash flow was RMB6.7 billion or $975.9 million in the first quarter of and now for our business outlook. For the second quarter of 2023 the company expects the delivery to be between 76,000 and 81,000 vehicles representing an increase of 164.9% to 182.4% from the second quarter of 2022.

The company also expects the second quarter total revenue to be between RMB24.22 billion and RMB25.86 billion $3.53 billion and $3.77 billion representing an increase of 177.4% to 196.1% from the second quarter of last year. This business outlook assumes supportive macroeconomic conditions, no significant disruptions in the supply chain and reflects the company’s current and preliminary view on its business situation and the market condition, which is subject to change. I will now turn the call over to the operator to start our Q&A session.

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Q&A Session

Operator: [Operator instructions] The first question comes from Tim Hsiao – Morgan Stanley. Please go ahead.

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

Operator: Thank you. The next question comes from Paul Gong with UBS. Please go ahead.

Operator: Thank you. The next question comes from Ming Hsun Lee from Bank of America. Please go ahead.

Operator: The next question comes from Yuqian Ding with HSBC. Please go ahead.

Operator: Thank you. The next question comes from Yingbo Xu with CITIC Securities. Please go ahead.

Operator: Thank you. The next question comes from Xue Deng with CICC. Please go ahead.

Operator: Thank you. The next question comes from Jiong Shao with Barclays. Please go ahead.

Operator: As we are reaching the end of our conference now, I’d like to turn the call back over to the company for closing remarks. Ms. Janet Chang, please go ahead.

Janet Chang: Thank you all once again for joining us today. If you have any further questions, please feel free to contact Li Auto’s Investor Relations team. That’s all for today. Thank you and have a good day.