EHang Holdings Limited (NASDAQ:EH) Q1 2023 Earnings Call Transcript May 31, 2023

EHang Holdings Limited misses on earnings expectations. Reported EPS is $-0.17 EPS, expectations were $-0.13.

Operator: Good day, ladies and gentlemen. Thank you for standby. And welcome to the EHang First Quarter 2023 Earnings Conference Call. As a reminder, we are recording today’s call. Now, I will turn the call over to Anne Ji, EHang’s Senior Director of Investor Relations. Ms. Anne, please proceed.

Anne Ji: Hello, everyone. Thank you for joining us on today’s conference call to discuss the company’s financial results for the first quarter of 2023. The earnings release is available on the company’s IR website. Please note, the conference call is being recorded and the audio replay will be posted on the company’s IR website. On the call today, we have Mr. Huazhi Hu, our Founder, Chairman and Chief Executive Officer; Mr. Xin Fang, Chief Operating Officer; and Mr. Richard Liu, Chief Financial Officer. The management team will successfully give prepared remarks. Remarks delivered in Chinese will be followed by English translations. All translation is for convenience purpose only. In case of any discrepancy, the management’s statement in the original language will prevail.

A Q&A session will follow afterwards. Before we continue, please note that today’s discussion will contain forward-looking statements made pursuant to 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 expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company’s public filings with the SEC. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Also, please note that all numbers presented are in RMB and are for the first quarter of 2023, unless stated otherwise.

With that, let me now turn the call over to our CEO, Mr. Huazhi Hu. Please go ahead, Mr. Hu.

Huazhi Hu: This is the English translation of Mr. Hu’s remarks. Hello, everyone. Thank you all for joining our conference call today. Since the beginning of this year as the pandemic has eased, we have seen encouraging signs of recovery in the tourism industry. As a result, the demand for our AAVs from the clients in this sector has been growing. However, EHang 216-S is currently undergoing the process of obtaining airworthiness certification, and we are fulfilling customer orders with this determine. In Q1 2023, we delivered a total of 11 EHang 216 Series AAVs, resulting in the revenue of RMB22.2 million. This represents an increase of 42% compared with the previous quarter and an increase of 283% year-over-year. Along with the considerable surge in revenue, our gross margin remains strong, maintaining a high level of 64% in the first quarter.

Meanwhile, our operational performance has shown significant improvement. Both adjusted operating loss and adjusted net loss have significantly narrowed, representing an improvement of 44% compared with Q4 last year. Additionally, EHang’s cash position remains healthy and a strategic investment of US$10 million by Qingdao West Coast New Area was closed in the first quarter. So far, the EHang 216-S airworthiness classification has been at the last phase of demonstration and verification of compliance. And we have completed over 90% of the compliance tests. We entered into the final sprint in late April. Even so, our dedicated EHang team remains (ph) committed to providing a flawless performance report as soon as possible. I would like to extend my sincere gratitude to the CAAC for their unwavering support to EHang, their commitment throughout this process day and night, and they prompt approvals for the completions of each subject.

EHang is not only an industry pioneer, but also an advocate for low-altitude air mobility. Against the macro policy background of our comprehensive national transport network, we have seen that China has established a range of a favorable policies regarding the low-altitude economy since the beginning of this year. Per the report of the national low-altitude economy integration and innovation research center, 16 provincial governments has included specific provisions related to the low-altitude economy in their 2023 Government Work Reports. These government initiatives focused on the unmanned aviation industry within the 20 designated experimental zones across China, demonstrating vigorous policy support and creating an environment conducive to further exploration of the AAV market across China.

During this period, we are also relentlessly broadening our international collaborations and delivering products. We are glad to explore urban air mobility alongside our customers and partners from more countries. Next, I will hand over the call to our Chief Operating Officer, Mr. Xin Fang. Thank you.

Xin Fang: This is the English translation of Mr. Xin Fang’s remarks. Thank you, Mr. Hu, and hello everyone. During the first quarter, we continued to advance towards the final stage of airworthiness certification for the EHang 216-S. On the other hand, we further expanded new opportunities, both domestically and abroad, with our cutting edge AAV products, including signing up new customers and conducting flight demonstrations and tests. These endeavors are instrumental to pave the way for future commercial deliveries and operations once the certification process is successfully completed. Following the lifting up epidemic restricted policies, we were delighted to see a strong recovery in domestic tourism market. A noteworthy example is, according to the data from China’s Ministry of Culture and Tourism, a year-on-year increase of 31% in domestic tourism trips during the Labor Day holiday period in May, reaching a total of 274 million trips, representing 119% of the pre-epidemic level in the same period of 2019.

This trend is very beneficial to the commercial low-altitude tourism market that we are targeting. And this allows for potential customers to have a more capital and motivation to consider utilizing AAVs at various attractions for higher growth. Considering its huge market growth potential, low-altitude tourism has become the primary target market we plan to tap into after obtaining certification. Our business plan is also supported by the guidelines and policies introduced by multiple governments to foster the development of the low-altitude tourism and economy. For example, Xinjiang included the low-altitude economy in its Government Work Report in the first time this year, and made the Xinjiang special economic zone low-altitude industry promotion regulation a key legislative project committed to building the world’s first urban air mobility demonstration city and boosting the high-quality development of the low-altitude economy.

We have been actively seeking cooperation opportunities with local domestic governmental departments or upstream and downstream partners for exploring prospects in the development of urban air mobility and low-altitude tourism. In the first quarter, we delivered EHang 216-S AAVs to Guangxi, Anhui, Jishou, Guangdong in China and the Japan overseas. Among these deliveries, Fengshan’s Sanmenhai 4A scenic area, renowned karst landscape tourist attraction located in Guangxi, purchased a total of six EHang 216-S units from us, all of which were delivered within the first quarter. The customer plans to launch low-altitude tours locally, creating the first low-altitude flying camp in Guangxi. This initiative aims to offer a unique and innovative way for tourists to enjoy the breath-taking beauty of Fengshan from the sky, providing an exceptional experience of leisure and sightseeing.

In addition, we have officially signed a cooperation framework agreement with Xiyu Tourism Development Company, a leading Xinjiang tourism company listed on the Xinjiang Stock Exchange. This cooperation compromised our plans for us to establish a joint venture in developing low-altitude sightseeing businesses in Xinjiang’s major scenic spots, like the Tianshan Heavenly Lake. The cooperation is expected to operate at least 120 units of EHang 216-S or comparable passenger carrying AAVs within the next five years. We’ve seen an increasing number of cultural tourism customers who intend to actively integrate a high technology with traditional services to bring vitality into the industry’s development. Additionally, this March, we’re entered into a strategic partnership with Xi’an Aerospace Investment Science and Technology Development Holdings Group for urban air mobility and smart city development.

And in this partnership, we have received an indicative order for 20 units of EHang 216-S, that is anticipated to be finalized by 2025. To summarize, the tourism revival is propelling a positive trend in the domestic deliveries and potential orders. By seizing this momentum, we will continue to drive our commercial deliveries and operations after certification. Meanwhile, our travel operations in China are still ongoing. To date, we have developed 19 EHang 216-S trial operation spots in collaboration with our customers across 17 cities nationwide. Primarily for low-altitude tourism scenarios, our EHang 216-S have successfully completed around 8,800 safe trial flights. Internationally, Asia stands as our principal region of focus. Following our expansion and partnerships established across the East and Southeast Asia last year, this February, our EHang 216-S AAV completed its first passenger carrying autonomous flight demonstration within Japan, which has also marked its first passenger carrying flight in an open airspace outside China.

The demonstration reflects the safety and the reliability of our AAVs and a recognition from international regulatory authorities. As of April, EHang became a member of the Public-Private Committee for Advanced Air Mobility, established by the Japan’s Ministry of Economy, Trade and Industry and the Ministry of Land, Infrastructure, Transport and Tourism. This committee aims to engage in a collaborative effort with global government and corporate entities to advance the usage of aircraft within Japan, including at Expo 2025 Osaka, Kansai, Japan. EHang, as the only autonomous vehicle company among 56 committee members, is poised to leverage its pioneering AAV technology and a trial flight experience in six Japanese cities, to catalyze the growth and the revolution of advanced air mobility in the country.

Simultaneously, we’re actively seeking out on fostering partnerships in overseas markets like Europe, the Middle East and South America. As of the end of May, the EHang 216 Series AAV had conducted over 37,000 safe trial flights across 12 countries in Asia, Europe and Americas, which is among the highest flight record in the global eVTOL industry. We are willing to work with customers and partners from more countries to explore safe, intelligent and innovative UAM industry, so as to bring unique environmentally friendly and efficient ride experience to more passengers. I’d like to note that EHang will participate in the upcoming Paris Air Show this June, at its world renowned aviation and aerospace exhibition. We will showcase our advanced EHang 216-S AAV, and partake in a series of urban mobility themed events to share our value and experience.

We warmly invite the global investors to join us for discussion during this event. Moving forward, we remain committed to the principle of conducting trial operation while going through the airworthiness certification process, thereby paving the way for a crucial pivot towards post-certification commercialization. As an industry first mover, we have harnessed our unique AAV leading technology and a first mover advantage to build a robust customer base and substantial trial operation experience. We remain optimistic about the discovering as well as creating values in a growing UAM market. Next, our Chief Financial Officer, Richard, will shed light on our financial status. Thank you.

Richard Liu: Thank you, Xin. Hello, everyone. Before I go into details, please note that all numbers presented are in RMB and are for the first quarter of 2023, unless stated otherwise. All percentage changes are on a quarter-over-quarter basis, unless otherwise specified. Detailed analysis are contained in our earnings press release, which is available on our IR website. I want to highlight some of the key points here. Following the listing of China’s zero-COVID policies, we have observed a robust resurgence in the tourism industry in China, attributable to the significant demands for travel. Together with favorable policies, these have been driving up demands and inquiries for our AAVs recently. This phenomena are in alignment with our current strategic business development focus on aerial tourism.

As such, we are confident in our future growth prospects and capabilities in growing our post-certification AAV order pipeline going forward. In Q1, total revenues were RMB22.2 million, up 41.6% from RMB15.7 million in Q4, primarily driven by the increase in the sales volume of EH216-Series AAV products. The deliveries of EH216-Series AAVs in Q1 were 11 units, an 83% increase from six units in Q4. Gross margin was 63.9% in Q1, a slight decrease of 2.2 percentage points from 66.1% in Q4. Despite this minor fluctuation, our gross margin maintains at a high level compared to those of other electrically-powered mobility products such as electric vehicles. This is a result that attest to our competitive strengths and the first mover advantages in the global UAM and eVTOL industry.

In Q1, our adjusted operating expenses, which are operating expenses excluding share-based compensation expenses, were RMB50.1 million compared with RMB773.2 million in Q4. The decrease was mainly attributed to the non-cash item of additional provisions for receivables in response to the COVID impact on customers in Q4 last year, while there were increased expenditures for aircraft conformity and compliant tests in the final phase of the EH216-S type certification this quarter. As a result, our adjusted operating loss in Q1 was RMB34.3 million, a significant improvement of 44.1% from RMB61.3 million in Q4. Adjusted net loss was RMB33.6 million, a 43.5% improvement from RMB59.4 million in Q4. Moving on to our balance sheet. We maintain a prudent approach in managing our cash position and assessing our liquidity.

As of the end of Q1, we had RMB217.6 million of cash, cash equivalents, restricted cash, restricted short-term deposits and short-term investments. This includes US$10 million strategic investment made by the Qingdao West Coast New Area in Q1, which provides additional liquidity support to bolster our operations and growth. That concludes our prepared remarks. Let’s now open the call to questions. Operator, please go ahead.

Q&A Session

Operator: Thank you. We will now take our first question. Please standby. This is from the line of Verena Jeng from Goldman Sachs. Please go ahead.

Verena Jeng: Thank you. Thank you management team for the presentation. Two questions from me. First is about the TC progress. We have completed over 90% of the progress. So, wondering if there is any timeline for the rest of 10% and are there any hurdles going forward. My second question is about the following quarter outlook. So, we delivered a strong sales volume and also the revenues in first quarter. So, just wondering if we see the strong momentum could continue in the following quarters. Thank you.

Xin Fang: This is the English translation of Mr. Fang’s answer to your first question. First, I’d like to highlight that we are currently in a final phase for obtaining our TC, with over 90% of the compliance test successfully completed. And this has been a considerable undertaking. Throughout this process, we worked closely with multiple professional trial sites and facilities in China that has extensive aviation experience and credit shows. We conducted (ph) of specific review meeting with the (ph) team and diligently performed numerous laboratory test, ground test and flight test, step by step according to our plans. And this test ranges from battery, environmental, (ph) and structural strengths to software communication and data link and ground control station.

And this enables us to verify the safety and air worthiness of our EHang 216-S aircraft from both the hardware and software perspective. And for the remaining roughly 10% test, we are in the final sprint, and expect to finish them as soon as possible in the near term. At this stage, we do not see any major obstacles, as we have already overcome the most difficulties. And our test work in this final phase is essentially a matter of time now. After we completed the test, we have submitted and we’ll continue to submit the test reports to the CAAC for their review and approval and issuing the certificate. Here, I want to express my gratitude for everyone’s attention, interest and patience during this process. And please stay tuned for our update.

In respect of your second question, the notable increase in our Q1 sales and revenues is primarily attributed to the rapid recovery of the domestic tourism market post pandemic. And additionally, driven by both core needs for attracting as well as the favorable policies for encouraging the low-altitude air tourism all over China. Our tourism customers have shown keen interest in utilizing our innovative AAVs in their tourism business. And they are actively tapping into this market because they believe our AAVs can drive up their growth and revive the traditional tourism industry. The customers Xinyang Xiyu Tourism and Guangxi Fengshan are good examples. And as such, we will see that the domestic tourism will maintain the throughout the following quarters.

And consequently, it is expected to have a growing order pipeline from the tourism customers. And in terms of the delivery pace, based on obtaining the TC, we expect a gradual increase in deliveries after TC. And the few units delivered before T C are mainly for the customers internal testing, training and , et cetera. And post the TC, we’ll gradually fulfill the current domestic auto pipeline more than (ph) per the requirements of our customers and put them into operation. Thank you.

Operator: Thank you. We’ll now move to the next question. Please standby. And this is from the line of (ph) from Tianfeng Securities. Please go ahead.

Unidentified Analyst: Hi, thank you management team for taking my questions. I have two questions as well. My first question is, there are many eVTOL use cases with great potentials in the emerging urban air mobility industry. Why do you choose the aerial tour as the initial target market to tap into? Could you please elaborate on your thinking behind that? And my second question is, what’s your cooperating — or cooperation mode with your tourist customers? Thank you so much.

Richard Liu: Hi. This is Richard. I will take your questions. Basically, we have found that the aerial tourism or aerial sightseeing is a use case which is very suitable as an initial target market for EH216-S AAV. First of all, it has immediate companies that are sufficiently sizable but not well served, by traditional solutions such as helicopters. According to an estimate published, some of you may have known, by the China Air Transport Association, the potential market size would amount to (ph), roughly US$8.5 billion. Secondly, air sightseeing is the type of experiential services and and experience are attractions. Thus the end customer or passengers are not very price sensitive. This will help with the economic viability of the services and provide more room for pricing.

Thirdly, compared to traditional helicopters, our EH216-S are inherently safer, have lower level of noise and no pilot costs and much lower acquisition and maintenance costs and are more eco-friendly and economical due to electrically powered. Further, it is easier and more efficient to offer the frequent multiple fly routes given the autonomous modes of the EH216-S AAV and the cluster management by our command and control system. With all these advantages, our EH216-S AAVs have been recognized by tourism operators as a new solution, not just to meet that existing needs, but we need small needs for aerial sightseeing uses. Policy-wise, the state council and the CAAC in China have been promoting the integrated development of general aviation and tourism aiming to establish aerial tourism networks in scenic spots, resorts, theme parks and other choice destinations.

And recently, as everybody can see, the tourism industry in China has been quickly recovering from the COVID impact after release of the restrictions. Further, given the similar point to point passenger transportation feature, that the aerial tourism or aerial sightseeing in this case also has essentially typical urban air mobility use case that is located in scenic areas. Thus, it can provide a very good foundation for us to accumulate operational experience for our strategic goal to offer urban air mobility service such as air commuting in cities in the near future. So these are some of our main thoughts behind this strategic approach. And we believe aerial tourism presents an excellent opportunity for our EH216-S AAVs as an initial market that has already been .

In respect of your second question, the cooperation mode or models with our present operator, customers or partners, we have been exploring different models. So far, they can be summarized in two basic scenarios. First of all, we can sell our EH216-S AAVs to the tourism operators and they can operate the AAVs themselves to offer aerial sightseeing services to their tourist passengers. We will provide a necessary support to them, such as training, initial setup, technical support, et cetera. In this case, we are essentially an AAV product provider and the related revenues would be mainly generated from product sales. Secondly, we can carry our EH216-S AAVs to cooperate with the tourism operator. They can open up their scenic areas to us and we will offer our AAVs to offer aerial sightseeing services to the tourist passengers.

In this case, we are essentially an AAV operational service provider and the related revenues would be mainly generated from operational services. In reality, there will be more different coverage models based on the special needs and conditions of different parties. So, this is my answer to your questions. Thank you.

Unidentified Analyst: Thank you so much.

Operator: Thank you. Seeing no more questions in the queue. Let me turn the call back to Ms. Anne for closing remarks.

Anne Ji: Thank you, operator. Thank you all for participating on today’s call. If you have any further questions, please contact our IR team by email or participate in our following investor events through the calendar information provided on our website. And we appreciate your interest and look forward to our next earnings call. Thank you.

Operator: Thank you all again. This concludes the call. You may now disconnect.