Li Auto Inc. (NASDAQ:LI) Q2 2023 Earnings Call Transcript

Li Auto Inc. (NASDAQ:LI) Q2 2023 Earnings Call Transcript August 8, 2023

Li Auto Inc. beats earnings expectations. Reported EPS is $2.18, expectations were $0.88.

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

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

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

Xiang Li: [Foreign Language] [Interpreted] In the second quarter of 2023, we reached multiple milestones in deliveries. We delivered over 30,000 vehicles in June, taking our second quarter deliveries to 86,533 vehicles, tripling the volume from the same period of last year. We delivered more vehicles in the first half of this year than all of 2022. Furthermore, in early July, we delivered our 400,000th Li Auto vehicle, taking just 42 months to reach this important milestone since we commenced deliveries in December 2019, setting a record for Chinese emerging NEV OEMs. Going from 300,000 cumulative deliveries to 400,000 took less than four months. Finally, our July deliveries hit a new high of 34,134 units, bringing our total cumulative vehicle deliveries over 430,000.

With our strong product line of comprehensive improvements, organizational processes and operating capabilities, our three models continue to lead in their respective market segments, with cumulative deliveries exceeding 200,000 units since their successive launches starting in June last year. According to the insurance registration data of China Automotive Technology and Research Center, in this past quarter, Li L7 consistently topped China’s large SUV monthly sales chart. The L8 also remained customer’s favorite six seater SUV priced over RMB300,000. The L9 continued to dominate the full size SUV sales chart in China. Li Auto has the highest sales among domestic premium automotive brands in China, and we remain one of the top three NEV brands priced over RMB200,000 in China, with market share increasing from approximately 11% in the first quarter to about 14% in the second quarter.

Driven by our delivery growth and stronger operational capabilities, our financial performance continued to improve. In the second quarter, the company achieved record breaking results across revenue, net income and free cash flow. During the quarter, our revenue reached RMB28.65 billion, up to 128.1% year-over-year, while net income and free cash flow increased [from] (ph) RMB2.31 billion and RMB9.62 billion, respectively. We’re confident that our outstanding cash generation capability and ample cash reserve will support our unwavering commitment to invest in R&D, business expansion and building long-term competitive barriers. We expect our third quarter deliveries to be between 100,000 to 103,000 units. For the full year of 2023, we’re confident to beat the internal delivery target we set at the beginning of this year by 10% to 20%, with annual revenue exceeding RMB100 billion.

We aim to hit the 40,000 monthly delivery milestone by the end of this year. To achieve our delivery target, we will continue to foster coordination across production, supply chain and sales, while continuing to expand production capacity, enhance supply chain management processes and capabilities. We made rapid progress in autonomous driving this year. In June 2023, we started test drives for China’s first NOA and commute NOA, which do not rely on high-definition maps in [Wangjing] (ph), known as one of the most complicated traffic zones in Beijing. We also rolled out our city NOA to early bird users in Beijing and Shanghai. On the perception front, we use BEV models enhanced by innovative NPN features and TIN network to perceive complex road structures in real time and comprehend traffic rules.

While utilizing occupancy network to identify common obstacles, we also utilized imitation learning and control algorithms to make judgments more akin to human drivers. Test drivers and media have spoken highly of driving safety, efficiency and comfort demonstrated by Li Auto AD Max. In the second half of 2023, we will continue to release city NOA and commute NOA to more early bird users, bringing city level autonomous driving to more families. Meanwhile, users are increasingly accustomed to convenience and ease — the convenience and ease of highway NOA during their journey. As of today, we have provided highway NOA to over 380,000 families, covering more than 230 million kilometers. With respect to BEV models, we introduced our 800 volt high-power charging solution at our first-ever Family Tech Day in June 2023.

With optimized battery and thermal management systems, our BEVs can fully leverage the battery’s 5C charging rates, with peak charging power of over 500 kilowatts and 500 kilometers of driving range from a 12 minute charge. In conjunction with our own 5C charging network, our BEV can offer a very compatible energy replenishment experience to ICE vehicle. We’ll unveil our super flagship 5C BEV Li MEGA by the end of this year, and we’re confident that we’ll emerge as the new top seller among all vehicles priced over RMB500,000. Meanwhile, we’re actively deploying our 5C supercharging network. As announced, we have built and commenced operation of 37 Li Auto 5C supercharging stations. Going forward, we’ll accelerate the rollout aiming to establish over 300 5C supercharging stations by the end of this year and over 3,000 by the end of 2025 to offer our BEV users a fast and reliable charging experience.

We firmly believe our dual energy strategy is the best solution to replacing ICE vehicles at scale. The dual energy strategy composes of EREV technologies that center on high capacity batteries and highly efficient range extenders as well as a high voltage BEV technology that can truly address pain points in charging speed and charging on long trips. To support the rapid sales growth, we accelerated the expansion and upgrade of our internal — integrated online and offline direct sales and servicing network. While we continue to open online — retail stores in shopping malls, we have increased the proportion of our retail stores located in automotive retail parts to cater to different users’ purchasing habits and need, further improving user acquisition and sales conversion.

In the second quarter, we opened 32 new retail stores and upgraded 18 existing stores through allocation and expansion. As of July 31, 2023, we operated 337 retail stores in 128 cities, as well as 323 service centers and Li Auto authorized body and paint shops operating in 222 cities. Looking ahead, driven by our pursuit of continuous growth, we will relentlessly explore, train and learn to refine our two most critical products, namely our smart electric vehicles for family users and organizational processes to serve our internal talents and teams, better supporting our journey from [1 to 10] (ph). With that, I will turn it over to our CFO, Johnny, for a closer look at our financial performance.

Johnny Tie Li: Thank you, Li Xiang. Hello, everyone. I will now walk you through some of our 2023 second quarter financials. Due to time constraints, I will address financial highlights here and encourage you to refer to our earnings press release for further details. Total revenues in the second quarter of 2023 were RMB28.65 billion, or US$3.95 billion, increasing 228.1% year-over-year and 52.5% quarter-over-quarter. This included RMB27.97 billion, or US$3.86 billion, from vehicle sales, which was up 229.7% year-over-year and 22.6% quarter-over-quarter. The year-over-year increase was mainly due to the increased vehicle deliveries. The quarter-over-quarter increase was mainly due to the increase in vehicle deliveries, partially offset by the lower average selling price as a result of different product mix between the two quarters.

Revenues from other sales and services were RMB680.8 million, or US$93.9 million, in the second quarter of 2023, growing 173.4% year-over-year and 48.1% quarter-over-quarter. The increase was mainly due to the increase of sales of accessories and provision of services in line with higher accumulated vehicle sales, as well as increased sales of charging stores in line with higher vehicle deliveries. Cost of sales in the second quarter of this year was RMB22.42 billion, or US$3.09 billion, up 227.1% year-over-year and 49.9% quarter-over-quarter. Gross profit in the second quarter of this year was RMB6.24 billion, or US$859.9 million, growing 232% and 62.8% compared with the second quarter of 2022 and the first quarter of this year. Vehicle margin in the second quarter of 2023 was 21% compared with 21.2% in the second quarter of last year and 19.8% in the first quarter of 2023.

Excluding the impact of the Li ONE, the vehicle margin of the Li series — Li L series remained stable over the first quarter of 2023. Gross margin in the second quarter of 2023 was 21.8% compared with 21.5% in the second quarter of 2022 and 20.4% in the first quarter of 2023. Operating expenses in the second quarter of 2023 were RMB4.61 billion, or US$635.7 million, growing 61.4% year-over-year and 34.6% quarter-over-quarter. Research and development expenses in the second quarter of 2023 were RMB2.43 billion, or US$334.5 million, up 58.4% year-over-year and 31% quarter-over-quarter. The increase was primarily driven by increased employee compensation as a result of our growing number of staff, as well as increased expenses to support our product portfolio expansion and technology advancements.

Selling, general and administrative expenses in the second quarter of 2023 were RMB2.31 billion, or US$318.5 million, up 74.3% year-over-year and 40.4% quarter-over-quarter. The increase was mainly driven by increased employee compensation as a result of our growing number of staff, as well as increased rental expenses associated with our sales and service network expansion. Income from operations in the second quarter of 2023 was RMB1.63 billion, or US$224.2 million, compared with RMB978.5 million loss from operations in the second quarter of last year and growing 301.3% from RMB405.2 million income from operations in the first quarter of this year. Net income in the second quarter of 2023 was RMB2.31 billion, or US$318.6 million, compared with RMB641 million net loss in the second quarter of last year and more than double the RMB933.8 million in the first quarter of 2023.

Turning to our balance sheet and cash flow. Our balance of cash and cash equivalents, restricted cash, time deposits and short-term investments totaled RMB73.77 billion, or US$10.17 billion, as of June 30, 2023. Net cash provided by operating activities in the second quarter of 2023 was RMB11.11 billion, or US$1.53 billion. Free cash flow was RMB9.62 billion, or US$1.33 billion, in the second quarter of 2023. And now for our business outlook. For the third quarter of 2023, the company expects the deliveries to be between 100,000 to 103,000 vehicles, representing an increase of 277% to 288.3% from the third quarter of 2022. The company also expects the third quarter total revenues to be between RMB32.33 billion and RMB33.3 billion, or US$4.46 billion and US$4.59 billion, representing an increase of 246% to 256.4% from the third quarter of last year.

This business outlook reflects the company’s current and preliminary view on its business situation and market condition, which is subject to change. That concludes our prepared remarks. I will now turn the call over to the operator to start our Q&A session. Thank you.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Tim Hsiao with Morgan Stanley. Please go ahead.

Tim Hsiao: [Foreign Language] So, my first question is about vehicle delivery, because Li Auto’s third quarter volume guidance of around 100,000 implies the vehicle supply constraint, [where it] (ph) persisted throughout the whole quarter. So, could you please elaborate a bit more about the key bottleneck to your production? Is that due to supply constraints of any specific components or anything else? And how confident are you in the company’s ability to remove the bottleneck and deliver like around 40,000 units per month in fourth quarter? And in meantime, should we be concerned about the similar challenge might relapse when launching the BEV models on the new platform and at the new [plant] (ph)? That’s my first question. Thank you.

Xiang Li: [Foreign Language] [Interpreted] First of all, I’ll take the question on production capacity. We currently operate two production lines in Changzhou for L8 and L9 and L7. The total capacity of running the two shifts is around 50,000 units per month. The current bottleneck is still with component supply, mostly because a very strong demand for this year which led us to increase our target compared to what we said at the beginning of the year. To cope with the additional demand, we actually have a production expansion plan made in Q2, but it’s taken some time for us to test the production lines and verify those. So, the new capacity will be released in due time. We are still confident that on an annual basis, we will be able to reach our delivery targets. In addition to prepare for our growth in ’24 and ’25, we have started early to make production and capacity plans to satisfy the needs for those two years.

Tim Hsiao: [Foreign Language] So, my second question is about organization restructure, because we noticed that over the past 12 months quite a lot of BEV industry peers have come through organization restructure or had management reshuffle. We recall that Li Auto also announced organization upgrade last December to prepare for its future growth. So, could you share with us the latest progress of the restructuring efforts? And should we expect any changes to the management team in the next six to 12 months in such upgrade? And in the meantime, operational and financial metrics, could we monitor more closely to quantify the improvement, for example, the lower cost, higher margin, or a faster model upgrade, in upcoming quarters? So, that’s my second question. Thank you.

Xiang Li: [Technical Difficulty]

Operator: Our next question comes from Bin Wang with Credit Suisse. Please go ahead.

Janet Chang: Operator, can you hear us? Sorry, we have some technical problems.

Operator: Yes, you’re coming through.