Li Auto Inc. (LI) Q1 2021 Earnings Call Transcript

Li Auto Inc. (LI 0.42%)
Q1 2021 Earnings Call
May 26, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, ladies and gentlemen, thank you for standing by for Li Auto's first-quarter 2021 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, director of investor relations of the company.

Please go ahead, Janet.

Janet Chang -- Director of Investor Relations

Thank you, Annie. Good evening, and good morning, everyone. Welcome to Li Auto's first-quarter 2021 earnings conference call. The company's financial and operating results were published in the press release earlier today and were posted on the company's IR website.

On today's call, we have our president, Mr. Kevin Yanan Shen; our CFO, Mr. Johnny Tie Li; and our CTO, Mr. Kai Wang, to begin with prepared remarks.

Our founder and CEO, Mr. Xiang Li, will join us 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 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 of the company with the U.S. Securities and Exchange Commission.

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 press release, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our president.

Please go ahead, Kevin.

Kevin Yanan Shen -- President

Thank you, Janet. Hello, everyone, and thank you for joining our call today. I will review the key highlights of the first quarter as well as our newly released 2021 Li ONE, which offers best-in-class PHEV, efficiency, comfort, and intelligence. In the first quarter, we delivered 12,579 Li ONE, up 334.4% year over year, which brought about total revenue of RMB 3.58 billion, 319.8% higher than the first quarter of 2020, and exceeding the top end of our revenue guidance by 11.2%.

In the first quarter, our Li ONE was the second best-selling new energy SUV in China. As our compelling product offering and superior user experience continue to delight customers and enhance brand awareness as well as the wavering support of our direct sales and servicing network underpins our growth. We were also the only domestic brand ranked in the top 10 best seller among all premium SUVs in the first quarter. In April, Li ONE remained the first among all new energy SUVs in China.

In the rankings, including ICE cars, BEV, EREV, and PHEV, Li ONE ranked second in the large SUV segment and fourth in the premium SUV segment. On the profitability side, our gross margins stayed robust at 17.3% amid our ongoing efforts to enhance investment in R&D as well as to expand our direct sales and servicing network. Our expanding -- operating expenses increased by 238.6% year over year and 27.5% quarter over quarter. Despite the deliberate increase on the expense side, we continued with the disciplined cash flow management strategy.

Our free cash flow remained positive at RMB 570.2 million. We also raised over US$840 million in net proceeds through our successful convertible senior notes offering in April, strengthening our capital base for future growth as we increased our R&D investment in leading technologies, prepared for new model launches, and gear up for a further increase in demand. We view our direct sales and servicing network as an integral component of our close-to-loop system that allows us to iteratively improve product features and add new functions for our users by accelerating the expansion of our direct sales and servicing network. We remain committed to proactively serving our users and anticipating future demand for our pipeline vehicles.

As of April 30, 2021, we have 73 retail stores covering 53 cities, 143 servicing centers, and the auto -- authorized body and paint shops operating in 105 cities. We are on track to reach our year-end target of 200 retail stores. We have also started reconfiguring our state-of-the-art Changzhou factory for a new model pipeline, especially the full-sized premium SUV based on the next generation EREV platform to be launched in 2022. As a user-driven automotive and technology enterprise, we deeply value the tremendous trust and support our users bestow on us during the 19th International Automotive Industry Exhibition in April.

A large team of Li ONE owners came to our exhibition to volunteer as brand ambassadors, sharing their experience with the vehicle, their passion for it, and their acknowledgment of the value that Li ONE brings to their family's everyday life. One of them, a Li ONE owner for 11 months, said that Li Auto is not only a car rep but also a spiritual partner. It is an integral part of our lives now. We are so grateful to see our mission and the vision being recognized and echoed by our users.

As of April 30, our cumulatively Li ONE deliveries have exceeded 50,000 units. We took only 17 months to reach this milestone from the first delivery of Li ONE in December 2019, creating the fastest record among all new energy vehicle companies. Our users have driven over 500 million kilometers with more than 65 million kilometers assisted by our data solution at the daily active rate of over 30%. In terms of self-safety, over 800 million early warnings were triggered, preventing more than 10,000 potential serious accidents.

While Li ONE's extensive powertrain and ADAS solution that are a standard configuration enable a more free and safe travel experience for our users. Its intelligent cockpit featuring a comprehensive entertainment system is another highlight of the vehicle. We pioneered the four-screen interactive in-car system that has been widely praised by our users for the smart space of mobility. It allows the users and each passenger to offer private usage and voice space interactive connections.

On average, users spend more than 40 minutes in our Li ONE every day while the car itself is parked. Our in-car karaoke function, which was first released before the Chinese New Year holiday, provided on-demand karaoke more than 30,000 times during the Chinese New Year holiday, and more than 18,000 times during the May Day holiday. Affirming our long-standing dream of creating extension homes that brings happiness to the entire family, Li ONE is a proven success catering to the needs of families in China and has effectively addressed the current challenge to BEVs in terms of energy replenishment. The success of Li ONE demonstrates our extraordinary productivity-defining capability, which lays a solid foundation for the development of our future models.

We will continue to develop new MEV models with best-in-class performance. In parallel, we are developing our next-generation extended REV platform and high 13.5% quarter over quarter. Vehicle marketing in the first quarter of 2021 was 15.9%, compared with 8.4% in the same quarter of 2020, and 17.1% first quarter of 2020. The increase in vehicle marketing over the first quarter of 2020 was primarily attributable to lower material cost and the lower unit manufacturing overhead cost derived from the increased production volume.

The slight decrease in vehicle margin from the first quarter of 2020 from the fourth quarter of 2020 was primarily due to the lower average selling price cost by promotion activities launched in the first quarter of 2021, partially offset by the decreased material costs. Our gross margin in the fourth quarter of 2021 was 17.3%, compared to 8% in the first quarter of 2020 and 17.5% in the fourth quarter of 2020, which was mainly attributable to the change of vehicle margin. Now, operating expenses in the first quarter of 2021 were RMB 1.02 billion or US$156.4 million, representing an increase of 238.6% year over year and the increase of 27.5% quarter over quarter. Research and development expenses in the first quarter of 2021 were RMB 5145 million or US$78.5 million, representing an increase of 171.2% in the first quarter of 2020 and an increase of 37.5% in the fourth quarter of 2020.

Excluding share-based compensation expenses, non-GAAP research and development expenses were RMB 397.9 million or US$50.7 million, representing an increase of 109.8% year over year and an increase of 7.8% quarter over quarter. The increase in research and development expenses over the first and fourth quarter of 2020 was primarily attributable to first, on increased share-based compensation expenses derived from incremental share options granted with higher fair value in January 2021, while no share-based compensation expenses were recognized for stock options with service conditions under performance conditions related to our IPO in the first quarter of 2020; second, the increase in R&D activities for the company's next vehicle models; and third, increased headcount. General and administrative expenses in the first quarter of 2021 were RMB 509.9 million or US$77.8 million, representing an increase of 352% in the first quarter of 2020 and an increase of 18.8% in the fourth quarter of 2020. Excluding share-based compensation expenses, non-GAAP selling, general, and administrative expenses were RMB 449.8 million or US$68.7million, representing an increase of 298.8% year over year and an increase of 5.4% quarter over quarter.

The increase in selling, general, and administrative expenses over the first and fourth quarter of 2020 was primarily driven by increased marketing and promotion activities, increased headcount, and rental expenses with the expansion of the company's sales network, and increased share-based compensation expenses. Losses from operations in the first quarter of 2021 was RMB 407.7 million or US$62.2 million, representing an increase of 74.1% in the first quarter of 2020 and an increase of 416.7% in the fourth quarter of 2020. Excluding share-based compensation expenses, our non-GAAP loss from operations was RMB 224.8 million or US$34.3 million, representing a decrease of 4% year over year and an increase of 215.2% quarter over quarter. Net loss was RMB 360 million or US$54.9 million in the first quarter of 2021, comparing with RMB 77.1 million net loss in the fourth quarter of 2020 and RMB 107.5 million net income in the fourth quarter of 2020.

Non-GAAP net loss was RMB 177 million or US$27 million in the first quarter of 2021, compared with RMB 253.4 million net loss in the first quarter of 2010 and RMB 115.4 million net income in the fourth quarter of 2020. Turning to our balance sheet and cash flow. Our cash and cash equivalents, restricted cash, time deposits, and short-term investments total -- totaled RMB 30.36 billion or US$4.63 billion as of March 31, 2021. Operating cash flow in the first quarter of 2021 was RMB 926.3 million or US$141.4.

Free cash flow was RMB 570.2 million or US$87 million in the first quarter of 2021. And now, our business outlook for the second quarter of 2021. The company expects deliveries to be between 14,500 and 15,500 vehicles, representing an increase of 119.6six% to 134.7% from the second quarter of 2020. The company also expects second-quarter total revenues to be between RMB 3.99 billion and RMB 4.27 billion or between US$609.0 million and US$641.7 million, representing an increase of 104.6% to 119% from the second quarter of 2020.

I will now hand the call over to the operator for the Q&A session. Thank you.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question comes from the line of Tim Hsiao of Morgan Stanley. Your line is open. Please go ahead.

Tim Hsiao -- Morgan Stanley -- Analyst

Hi, management team. Thanks for taking my question. So, I've got two questions. The first question, could you please update your effective capacity at the moment with the output of new Li ONE models suffer from greater impact for the component bottleneck? For example, like chip and chip shortage, or in the battery time-outs, or any other key components.

And if that's the case, when do we expect the output of the new Li ONE? Could it get back to a more normal level? My second question is how's the gross margin of the new Li ONE compared to the previous version? With a 10,000 price hike, it'll be more than enough to offset the cost increase from the feature upgrade and raw material inflation and further again the second-quarter gross margin. [Foreign language]

Kevin Yanan Shen -- President

Thank you, Tim. This is Kevin. I will answer the first question. Of course, as we all know, we are -- the whole industry is suffering from the shortage of the semiconductor.

Right now, in terms of our capacity, our Changzhou factory, with two shifts already ready, we can do more than 500 per day. But of course, due to the ramp of the new Li ONE and also the -- some of the timing issue of the chips, we are -- the volume cannot achieve that high. We expect, starting from September, we expect our monthly production will be more than 10,000. And I will ask Johnny to answer the gross margin.

Johnny Tie Li -- Chief Financial Officer

Hi, Tim. For the gross margin, in the long run, it's -- the volume remained at the same level of the current Li ONE, with some additional hardware, as you may know, for the NOA parts and also some savings from traditional parts like the rear model. It's net-net. And for the second quarter, I think it will be a net of April, May with some promotion on the current new -- the current Li ONE and also with one-month new Li ONE with RMB 10,000 sales price [Inaudible].

So it will be a mix. 

Tim Hsiao -- Morgan Stanley -- Analyst

Got it. Thank you. Thanks for the answers.

Kevin Yanan Shen -- President

OK.

Operator

Thank you. Our next question is from the line of Fei Fang of Goldman Sachs. Your line is open. Please go ahead.

Fei Fang -- Goldman Sachs -- Analyst

Yes. Thanks, management, for the opportunity. I have two questions. First, about your store number.

So, you reported 52 stores by the end of 2020 and then you reported 73 stores by April, and then you guided 200 stores by year-end. So what that means is that you have added 21 stores in the first four months of the year, but you plan to add 130 stores in the next eight months. Is that the right way to look at it? And also, 130 stores in eight months is not something that we've seen before. So is there any execution risk with regard to that? Second is about pricing.

Now you've raised prices in the phase lift, which is always very different from some of your competitors or other EV manufacturers who have lowered prices over time. So does that mean that Li Auto plans to move further into the premium segment in the forward product cycles? Thanks. [Foreign language]

Kevin Yanan Shen -- President

OK. Thank you, Fang Fei. I will answer your question. So as of today, right now, we have 75 stores.

And in the first quarter, because of the impact of the spring festival and some areas have COVID-19 outbreaks, the pace of the opening new stores was a bit slow than our expectation. However, we have been making a very good progress in site selection. In fact, right now, we have another 50 stores in our pipeline actually under construction. So, therefore, the -- for the whole year, the 200 retail store targets remain unchanged.

Yeah, we are just a little bit behind the track. We think we'll catch up in the second half. And for the pricing strategy, the methodology we took is to price our product based on its value to the customer, yeah. And Li ONE is very, very competitive and delivered a lot of value.

And with more feature functions we added into the new Li ONE, we think just RMB 10,000 higher price is very fair, yeah. And the new Li ONE will be even more competitive than its predecessor.

Fei Fang -- Goldman Sachs -- Analyst

Yeah. Thanks for the comment.

Operator

Thank you. The next question is from the line of Ming-Hsun Lee of BofA Securities. Your line is open. Please go ahead. 

Ming-Hsun Lee -- BofA Securities -- Analyst

Hi, good evening. So I have two questions. The first question is regarding your new supplier of your processor, which is the Horizon. So you know that the Horizon should be able to give you a better exposure to [Inaudible].

Could you give us more details regarding your strategy to choose the Horizon for your [Inaudible] processor supplier? And in the longer term, will you continue to take Horizon, or you will also consider some other foreign brands? This is my first question. And the second question is actually regarding to the detailed roadmap of your autonomous driving. Currently, you already gave a very detailed explanation about your new NOA system to be launched by the end of this year. So could you give us some pipeline for 2022 or 2023? What kind of the new autonomous driving function do you provide in the next two years? [Foreign language]

Kevin Yanan Shen -- President

Thank you, Mr. Lee. Kai, do you want to take these two questions? Thank you. 

Kai Wang -- Chief Technology Officer

Yes. OK. Thank you. So basically, we have five criteria for SoC selection.

So basically, that can explain why we choose our Journey 3 from Horizon Robotics as our SoC supplier. So the first one is the performance. Of course, when we define the feature we want to achieve and the performance of the chipset must meet the requirement. And from that perspective, Journey 3 is enough for the target.

The target is Level 2-plus functions with, for example, NOA features. And then the second criteria is the openness and flexibility. So for example, our previous generation, we use Mobileye, so it's not very flexible for our own algorithm development. So from that perspective, both ORing and Journey 3, they are more open, and we can use our own algorithm there.

So the third criteria is about the support. We need a very solid support from our supplier so that we can keep our high-speed, let's say, development and also the phase of iteration. So Journey 3 is from Horizon Robotics. Their headquarter is also in Beijing.

So from that perspective, they can provide the best service or support locally. So the reaction of this interaction between economies is much more convenient. The fourth criteria is regarding the SOP timing. So the chipset today will evolve every year.

There will be new chipset available from the market. So from the timeline, we SOP our 2021 Li ONE, but Journey 3 is better. So the fifth, but not the least, criteria is the price. So the price of Journey 3 can offer capable performance.

At the same time, the price is affordable. So basically, overall, these five criteria eventually come out [Inaudible] idea that we use Journey 3 here. Regarding the roadmap of our autonomy, so we already mentioned in the previous description that we will, by now, just right away, launch our in-house algorithm to support Level 2 ADAS functions with our own perception, own prediction, planning, execution, and software. And then the fourth quarter, we will provide NOA because we need some time for the adaptation of the HD map covering more and more roads and areas in China.

So -- and then the next year, we already introduce the let's say the next-generation platform on basis of Orin. And that one, we will provide even much more processing power and then even richer [Inaudible] and support more futures hub. So hardware-wise, we can even up to a Level 4. For software-wise, of course, we need to step by step release more function of Li [Inaudible].

That's the plan in general. Thank you. 

Ming-Hsun Lee -- BofA Securities -- Analyst

Yeah, thank you. [Foreign language]

Operator

Thank you. Next question is from the line of Bin Wang of Credit Suisse. Please go ahead.

Bin Wang -- Credit Suisse -- Analyst

Thank you for taking my question. First, I'll go to the price about the top-selling software in the [Inaudible] payments. But you actually raised the price by RMB 10,000. Can I actually try to elaborate is that is RMB 10,000 matches the price for the software? Can I have this kind of explanation of light.

That's number one. And number two actually, I found one company call [Foreign language] actually [Inaudible] naturally I speak involved in your R&D at Level 3. The polls have been [Inaudible]. So basically, it's the same product as the Li ONE 2021 version.

Is this company one of your supplier? And actually, they don't have this full-stack in-house design. Actually, what's their role of [Foreign language] in this project? [Foreign language] 

Kevin Yanan Shen -- President

OK. Thank you, Wang Bin. I will take the first question. Actually, the RMB 10,000 is not specifically for NOA or for any new feature of the new Li ONE.

It's just the -- as just as I explained, this is overall our pricing strategy. And Mr. Li Xiang already stated that the safety standards, not the optional. Therefore, we make all the new ADAS solution a standard function without any charge to our customer.

The second question, I will ask Tie to comment. Tie?

Johnny Tie Li -- Chief Financial Officer

Yes. So regarding the role of [Foreign language]. It's our hardware Tier 1 provider. So the role of [Foreign language] is mainly about product validation and also of design coordination together with our team, and then the final production.

So as we already mentioned, actually, for our ADAS team, we have run about 300 people right now covering both hardware and software design. So software-wise, we already explained. It's full-stack in-house software development, including the low-level software like OS and also the middleware and all application software and closed-loop H to cloud environment completely, for software parts. Actually, we also designed the hardware part to ensure that we have the complete transparency of the design so that we can react if there are something wrong with our design during the lifecycle of the product.

So we are also responsible for the complete hardware design simulation and design validation. So including those electronics and in case. Now, the role of [Foreign language], they will participate with the hardware design because from an efficiency point of view, we will like to leverage the outsource resources to ensure we keep that in a very high level. So overall, they will do the coordination, the product validation, and then the production, which we -- on purpose, we don't want to touch because that will lower the efficient -- overall efficiency and also that's the part actually Tier 1 could have a better efficiency compared with OEM.

Thank you. 

Bin Wang -- Credit Suisse -- Analyst

OK. Thank you so much.

Operator

Thank you. Next question is from the line of Paul Gong of UBS. Your line is open. Please go ahead.

Paul Gong -- UBS -- Analyst

Yeah. Hi. Thanks for taking my question. Two questions.

The first one is you have to reach for the mobile IQ4 to of this Journey 3 and going straight to NVIDIA Orin next year. How do you see the data format of all these three systems? Can you freely use the data connected in the previous system and to use now and for the develop for the future ADAS function or use it seamless transition? The second question is regarding your BEV plan for 2023. You mentioned the Whale and the Shark platform. How do to think after seeing the Shanghai Auto Show with so many new BEV models, will this change target of your timeline, your roadmap, would you affected to the process or debates in view of the rising competition in the market? Thank you.

[Foreign language] 

Johnny Tie Li -- Chief Financial Officer

OK, clearly, I take the first question. So regarding different platforms. So actually, that's the reason why we would like to do the in-house design. So when you have controlled algorithm development.

You know, there are course of algorithms. Basically, we utilize the same mechanism behind. So when we're developing something, and then you can really based on different hardware maker kind of record software, then we can support different containers basically. That's our idea behind.

And from compatibility point of view, there are really lots of common area you can reuse. And also, on top of that, so you can see the current development, we do have the H part and also the cloud part. The cloud part, we utilize mass computing power for train. So both Journey 3 platform and Orin platform, we have the same NVIDIA solution behind or train.

So you can see right away, there are already a bunch of common stocks you can share. So then, we don't have any problem. Of course, if you support more, then you need let's say more effort for adaptation between platforms. So we will lower that, of course, then there's smart selection as we've mentioned.

That's the reason why we have a very strict criteria for SMC selection. Thank you.

Kevin Yanan Shen -- President

Yeah. Paul, this is Kevin. Let me take the -- your second question. Of course, we all see a lot of a new car models launched in Shanghai Auto Show.

However, as we reiterate too many times that we think they are a charging solution is the key competitive advantage we need to gain to compete in the BEV arena. Therefore, we'll stay on our track to develop our Shark and Whale platforms with ultra-fast charging capability. We think that's the key to winning the future competition. Yeah.

So, therefore, we will not alter our trend. Yeah, we'll stay very focused. Of course, with the more resources, we are, of course, want to accelerate the R&D process for sure. But right now, the outlook is still in 2023.

Yeah. 

Paul Gong -- UBS -- Analyst

Thank you very much. Yeah.

Operator

Thank you. As you were reaching the end of our conference call, I'd like to turn the call back over to the company for closing remarks. Ms. Janet Chang, please go ahead. 

Janet Chang -- Director of Investor Relations

Thank you once again for joining with us today. If you have further questions, please feel free to contact Li Auto's investor relations teams. Then that's all for today. Thank you and have a good one.

Duration: 45 minutes

Call participants:

Janet Chang -- Director of Investor Relations

Kevin Yanan Shen -- President

Tim Hsiao -- Morgan Stanley -- Analyst

Johnny Tie Li -- Chief Financial Officer

Fei Fang -- Goldman Sachs -- Analyst

Ming-Hsun Lee -- BofA Securities -- Analyst

Kai Wang -- Chief Technology Officer

Bin Wang -- Credit Suisse -- Analyst

Paul Gong -- UBS -- Analyst

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