Li Auto Inc. (NASDAQ:LI) Q3 2023 Earnings Call Transcript

Li Auto Inc. (NASDAQ:LI) Q3 2023 Earnings Call Transcript November 9, 2023

Li Auto Inc. misses on earnings expectations. Reported EPS is $1.34 EPS, expectations were $2.19.

Operator: Hello, ladies and gentlemen. Thank you for standing by for Li Auto’s Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. Today’s conference call is being recorded. I will now turn the call over to your host, Kobe Wang, the Head of Capital Markets of Li Auto. Please go ahead, Kobe.

Kobe Wang: Thank you, operator. Good evening, and good morning, everyone. Welcome to Li Auto’s Third 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 will have our Chairman and CEO, Mr. Xiang Li; our CFO, Mr. Johnny Tie Li, begin with prepared remarks. Our President, Mr. Donghui Ma and the Senior VP, Mr. James Liangjun 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 provision 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 different from the views expressed today. Further information regarding risks and uncertainties is included in certain company filings with the U.S. SEC and the Hong Kong Stock Exchange. The company doesn’t assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that Li Auto’s earnings price — release price and this conference call include a discussion of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to Li Auto’s disclosure, the comment on the IR section of our website, which contains a reconciliation of unaudited non-GAAP measures — 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: Hello, everyone, and welcome to today’s earnings conference call. In the third quarter of 2023, despite the intense competition in China’s NEV market, we maintained strong growth momentum propelled by our compelling product lineup and strong execution. Total deliveries for the quarter surpassed 105,000 vehicles, almost 4x the volume for the same period last year, setting another new quarterly delivery record. By the end of September, we have delivered our 500,000 Li Auto vehicles, becoming the fastest Chinese emerging new automaker to reach this benchmark. Moreover, in October, Li Auto achieved another new milestone with over 40,000 monthly deliveries. According to the insurance registration data of China Automotive Technology and Research Center, Li L9 maintained its position as the full-size SUV sales champion during the quarter, while L7 and L8 continue to occupy the first and second spot in the large SUV market, respectively.

We remain one of the top 3 NEV brands priced over RMB 200,000 in China while our market share continued to grow, reaching 15.4% in NEV brands priced over RMB 200,000 in China, compared with 10.9% in the first quarter and 13.7% in the second quarter. We believe that our L series’ robust growth momentum, together with deliveries of our upcoming BEV models next year, will enable us to accelerate the large-scale transition from traditional ICE vehicles in 2024. Turning over to our financial performance. Our rapid scale growth has driven continued cost reduction, resulting in steady improvements across multiple financial metrics. Total revenues for the third quarter were RMB 34.68 billion, up 271.2% year-over-year. Our net income and free cash flow increased to RMB 2.81 billion and RMB 13.22 billion, respectively, both heading new historical highs.

Notably, our cash position reached RMB 88.52 billion as of the end of the third quarter. Our healthy operations reaffirms our strong operational capabilities, underpinning our long-term firm commitment to R&D. Our market-leading charging capability for 5C BEV is just one great example of our achievements made through R&D investments. With respect to production, in October, our Changzhou manufacturing base completed its capacity expansion and is now well positioned for its production increase in Q4. In terms of supply chain management, we continue to break through the component supply chain bottleneck via the enhanced supply chain management strategies, improved processes and more efficient collaboration with our suppliers. We expect total deliveries in the fourth quarter to be between 125,000 to 128,000 units.

Now I would like to talk about Li MEGA. Li MEGA can gain up to 500 kilometers of driving range with a 12-minute charge and features an industry-leading silhouette. It is — its market reception has exceeded our expectations. Li MEGA’s extremely large interior space meets the travel needs of large Chinese families. At the same time, its unique body style and silhouette are intended to reach the perfect balance between interior space and energy consumption. It is the most aerodynamic MPV in the world with a drag coefficient of only 0.215. Based on our 800-volt BEV platform, MEGA is capable of 5C charging with a peak charging power exceeding 520 kilowatts, higher than any other passenger vehicle in production in the world. Li MEGA is targeted for launch in December 2023.

Showroom vehicles are scheduled for debut at our retail stores in January 2024, and deliveries will commence in February. We will share more details about Li MEGA during our product launch event this December. In the meantime, we have been making progress with our 5C supercharging network expansion. To date, we have built and started operating 130 supercharge stations along highways nationwide. We expect to establish 300 highway supercharging stations by the end of this year, covering 4 major economic zones, including the Beijing-Tianjin-Hebei Economic Belt; the Yangtze River Delta region; and the Greater Bay Area; and Sichuan-Chongqing Economic Belt. Going forward, we will further accelerate the rollout to increase nationwide highway coverage while also actively building urban supercharging stations, thereby greatly improving users’ energy replenishment experiences across all scenarios.

Moving on to autonomous driving. Our city NOA on our AD Max platform continue to progress smoothly. We expect to push the official version of AD Max 3.0 by the end of this year with full scenario NOA function. Meanwhile, the AD Pro 3.0’s official version will be released in the first half of next year. By then, part of AD Max’ algorithm capability will also be available on AD Pro. We’re confident that Li Auto will become a market-proven first-year player in the autonomous driving market in the first half of next year. Turning to the development of our direct sales and servicing network. As of October 31, 2023, we have 372 retail stores in 133 cities. Moving to the fourth quarter, we will continue to accelerate our network expansion, aiming to cover over 400 stores across 140 cities nationwide, further increasing Li Auto’s market share in China’s new energy automotive market.

Last but not least, I would like to share some details regarding our accomplishments in ESG. In September, our company was upgraded to the highest AAA rating by MSCI ESG Research, making Li Auto the first Chinese automaker ever to receive this ratings. The rating validates our steadfast efforts across corporate governance, product safety and quality, clean tech development and organization and talent among other areas. Moving forward, we’ll continue to uphold our value proposition of providing outstanding products and services that exceed our family users’ needs as we constantly push the limits of growth. With that, I will turn it over to our CFO, Johnny, for a closer look at our financial performance.

Tie Li: Thank you, Xiang. Hello, everyone. I will now walk you through some of our 2023 third quarter financials. Due to time constraints, I will address financial highlights and encourage you to refer to our earnings press release for further details. Our total revenues in the third quarter were RMB 34.68 billion or USD 4.75 billion, up 271.2% year-over-year and 21% quarter-over-quarter. This included revenue from vehicle sales, RMB 33.62 billion or USD 4.61 billion, up 271.6% year-over-year and 20.2% quarter-over-quarter, mainly driven by increased vehicle deliveries. Revenue from sales and services — revenue from other sales and services were RMB 1.06 billion or USD 145.7 million in the third quarter, growing 258.7% year-over-year and 56.2% quarter-over-quarter.

The increase was mainly due to the increased sales of accessories and provision of services, in line with our higher accumulated vehicle sales as well as the increased sales of charging stalls, in line with higher vehicle deliveries. Cost of sales in the third quarter was RMB 27.03 billion or USD 3.71 billion, up 231.3% year-over-year and 20.6% quarter-over-quarter. Gross profit in the third quarter was RMB 7.62 billion or USD 1.05 billion, growing 546.7% year-over-year and 22.6% quarter-over-quarter. Vehicle margin in the third quarter was 21.2%, compared with 12% in the same period last year and 21% in the prior quarter. Excluding the impact of inventory provision and losses on purchase commitments related to Li ONE in the third quarter of 2022, the vehicle margin remained stable over the third quarter of 2022.

Gross margin in the third quarter was 22%, compared with 12.7% in the same period last year and 21.8% in the last quarter. Operating expenses in the third quarter were RMB 5.31 billion or USD 727.1 million, growing 60.2% year-over-year and 15.1% quarter-over-quarter. R&D expenses in the third quarter were RMB 2.82 billion or USD 386.1 million, up 56.1% year-over-year and 16.1% quarter-over-quarter, 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. SG&A expenses in the third quarter were RMB 2.54 billion or USD 348.7 million, up 68.8% year-over-year and 10.2% quarter-over-quarter, primarily 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 servicing network expansion.

Income from operations in the third quarter was RMB 2.34 billion or USD 320.6 million, compared with RMB 2.13 billion loss from operations in the same period last year and growing 43.9% from RMB 1.63 billion income from operations in the last quarter. Net income in the third quarter was RMB 2.81 billion or USD 385.5 million, compared with RMB 1.65 billion net loss in the same period last year and increasing 21.8% from RMB 2.31 billion net income in the second quarter of this year. And now turning to our balance sheet and cash flow. Our cash position remains strong and stood at RMB 88.52 billion or USD 12.13 billion as of September 30, 2023. Net cash provided by operating activities in the third quarter was RMB 14.51 billion or USD 1.99 billion.

Free cash flow was RMB 13.22 billion or USD 1.81 billion in the third quarter. And now for our business outlook. For the fourth quarter of 2023, the company expects the deliveries to be between 125,000 and 128,000 vehicles, representing an increase of 169.9% to 176.3% from the fourth quarter of 2022. The company also expects fourth quarter total revenues to be between RMB 38.46 billion and RMB 39.38 billion, representing an increase of 117.9% to 123.1% from the fourth 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. This 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: [Operator Instructions]. Your first question comes from Tim Hsiao with MS.

Tim Hsiao: So my first question is about the margin. Despite third quarter margin beat, Li Auto has been scaling up the vehicle discount and benefits since the late quarter, and most of the promotions similarly continue in fourth quarter. As there are more competitive models coming to the market in the following months and the on the auto, would the company consider to respond with more aggressive promotions or spec upgrade to your current lineup? And would that affect Li Auto’s peak margin in fourth quarter and beyond? So in short, should we still consider 20% plus a reasonable and sustainable level for vehicle gross margin against such a tough competition backdrop? That’s my first question.

Tie Li: Thank you, Tim. This is Johnny. I think for every quarter and every year, we will take a full consideration between sales and volume growth and the gross margin when we plan our sales policy and promotion policy. And also every quarter, our sales policy we’ll also add our supply chain effort, which absolve some of the sales policy promotion. So I still want to emphasize from the company’s operations side, each quarter and every year, we want to keep our gross margin above 20%. We believe that will be a healthy margin to keep enough money on hand to invest on either R&D and also the service network expansion for the future. Thank you.

Tim Hsiao: So my second question is about autonomous driving. Li Auto is now attaching greater importance to the development of smart driving and planning to increase the overall investment. So could management team help us to quantify Li Auto’s investment plan in autonomous driving? Like how much you are going to spend in 2024 and ’25? And how many people are you claiming to hire? And in the meantime, what would be the best way for investors to track the progress? For example, when will Li Auto to activate the urban NOA function to whole public users across the cities? And will you keep offering such function for free after a more sizable investment this year? That’s my second question.

Donghui Ma: This is Mr. Ma Donghui. First of all, on a strategic level, the company has always been very focused on investments in autonomous driving. In the fall strategy summit of our company, we had a thorough discussion around autonomous driving and reached consensus to making smart autonomous driving leading in the market our core strategic goal. So the company will continue to increase our investments in autonomous driving. At this point, the R&D team for autonomous driving is around 900 people, and it’s expected to reach about 2,000 by the end of 2024 and over 2,500 by the end of ’25. As the scale and talent density of our R&D team grows, we will develop technology as well as product at the same time. On the one hand, we will continue to deploy our AD products across multiple vehicle lines, across multiple scenarios of deploying NOA in multiple scenarios.

On the other hand, we will continue to invest in AI algorithms of autonomous driving as well as other cutting-edge technology. In terms of investments, we will continue to increase the amount of investments in vehicles, in testing, computing power and personnel. Our ample cash reserve and cash flow will be a very strong support for our continued investments. In terms of progress, as Li mentioned earlier, we plan to deploy AD Max 3.0 software on all of our Max — our vehicles equipped with AD Max, providing full scenario NOA features using the same BEV architecture, and we will also be adding valet parking feature to our AD Max users. At the same time, in the first half of ’24, we will be releasing AD Pro 3.0 to our Pro users. Part of the AD Max algorithms will be deployed on AD Pro, and the capability of autonomous driving will also be significantly improved.

We’re confident to become one of the top-tier Tier 1 players in the market that is proven by the market. In terms of product lineup strategies, we will continue to make AD standard on all of our vehicles, which allows us to have the largest training fleet of autonomous driving vehicles in the country and also more training mileage, which will accelerate the deployment and iteration of our foundational model algorithms.