Li Auto Inc. (LI) Q2 2021 Earnings Call Transcript

Li Auto Inc. (LI -2.49%)
Q2 2021 Earnings Call
Aug 30, 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 second-quarter 2021 earnings conference call. [Operator instructions] Today's conference call is being recorded. I will now turn the call over to your host, Janet Zhang, director of investor relations of the company. Please go ahead, Janet.

Janet Zhang -- Investor Relations

Thank you, Annie. Good evening, and good morning, everyone. Welcome to Li Auto's second-quarter 2021 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 president, Mr. Kevin Kevin Shen; and our CFO, Mr. Johnny Tie Li to begin with prepared remarks. Our founder and CEO, Mr.

Xiang Li; and our CTO, Mr. Kai Wang 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 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 and announcements published on the website of the Hong Kong Stock Exchange and the company.

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 and interim results announcement, which contain 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 Shen -- President

Thank you, Janet. Hello, everyone, and thank you for joining our call today. First of all, we are proud that our Class A ordinary shares started trading on the main board of the Hong Kong Stock Exchange on August 12, opening a new chapter for our company. We are honored and also humbled by the support we received from all investors.

With the Hong Kong dual primary listing, we significantly strengthened our equity base with over USD 1.5 billion of net proceeds raised. This will provide strong financial support for our R&D initiatives and the direct sales and servicing network expansion as well as enhanced protection for our shareholders. We will continue to take the responsibilities associated with being a publicly traded company seriously, work to build out our long-term vision and create value for our users, shareholders and our employees alike. Next, moving to the key highlights of our second-quarter results.

Our 2021 Li ONE has been an exceptional performer since its debut on May 25. Our 2021 Li ONE boost and enhanced the ADC range of 1,080 kilometers, optimized the mobility comfort and more intelligent cockpit. It has received rave reviews and strong user endorsement for its outstanding features and performance. Our second-quarter deliveries achieved 17,575 units, increasing 166% year over year.

Our July deliveries reached 8,589 hitting a new record. In July, Li ONE topped sales chart in the new energy SUV and large SUV categories. according to new car insurance registration data reported by China Automotive Technology and Research Center. It is a powerful testament to Li ONE's highly competitive product features, making us a leading domestic NEV manufacturer in China.

While these rankings and Li ONE's strong performance and popularity are exciting achievements, yesterday's home run do not win today's game. We will continue to be disciplined and dedicated, and we will strive to constantly surpass ourselves in products and services to earn the support, trust and loyalty from our users. Our record high deliveries would not have been possible without cooperation and assistance of our supply chain partners. They have been helping us navigate the ongoing semiconductor shortage.

Turning to the profitability. Our gross margin reached 18.9% this quarter, up 5.6 percentage points year over year and 1.6% quarter over quarter. Our operating cash flow was RMB 1.4 billion or USD 218 million during the second quarter, demonstrating our consistent high operating capability. In the second quarter, we aim to further broaden and deepen city coverage to address increasing demand from prospective users across China and prepare ourselves for our new model launches in 2022 and beyond.

Thus, we accelerated the expansion of our direct sales and servicing network. As of July 31, 2021, we had 109 retail stores covering 67 cities and 176 servicing centers, and Li Auto authorized body and paint shops operating in 134 cities. We are on track to reach our year-end target of 200 retail stores. We have expanded our footprint to lower tier cities in China.

In August, we opened a retail store in Lhasa, Tibet. This has taken our direct sales and servicing network geographical coverage of provinces, autonomous regions and centrally administered municipalities in Mainland China to 100%. The industrywide semiconductor shortage has affected our monthly deliveries in recent months, resulting in undelivered backlog as our new orders exceeded 10,000 in June. We tried our best to utilize our alternative solutions to enhance our flexibility and acquire industry sources.

Going forward, we'll continue to collaborate closely with our supply chain partners to mitigate the semiconductor shortage and minimize the impact on our production. Given the proven success of our Li ONE catering to the needs of families, we are working to diversify our product portfolio to appeal to an even broader family user base. We have three platforms under development. The X platform for our next-generation EREV with the first model to be released in 2022, and the Whale and the Shark platform for our BEV models to be launched in 2023.

The development of these new platforms are progressing smoothly, and we are confident to launch new vehicle model some time. In July, we also signed an MOU with a local company for collaboration in reconstruction and expansion project of an automobile manufacturing plant in Beijing. This will further expand our production capacity and support the increasing vehicle sales volume with future models. On August 27, 2021, we also signed an investment agreement with a wholly owned subsidiary of Xinchen China Power Holdings Limited to form a new company in Mianyang, Sichuan Province, China to develop and manufacture our next-generation range extension system.

We firmly believe that smart EREVs will be a superior replacement to ICE vehicles and they increase the overall NEV penetration rate in the medium to long term. We continue to view it as one of our core strategic development directions. The cooperation will leverage the R&D and the production capabilities of both companies to provide high-quality products and further expand the market share of smart EREVs in the domestic market. With respect to international markets, we will keep our strategy to always make sense before taking actions as we want to be a winner, not just a mere participant in the global market.

To win market share overseas, a car company has to develop the right product to attract customer with tastes and requirements that are different from domestic customers. We have set up a team dedicated to the overseas market, and we are meticulously working on the plans to find a winning formula. As a corporate citizen, we are proud to have passionately engaged in social relief activities to help people in need. In July, in response to the flood in Henan Province, we organized the emergency relief with donations to support the affected people, including our users.

We also mobilized all traders we have access in the adjacent provinces to join the rescue efforts. In addition, we provide our users with services such as warranty extension for replacement parts, free replacement of flood damage charging posts and free vehicle inspections for our disaster stricken vehicles. We made our efforts to reassure them and help in any way possible for a smooth transition back to normalcy. Lastly, we achieved a AA MSCI ESG rating in April, making us a leader in ESG among 40 rated automotive companies.

Going forward, we will continue to undertake social responsibilities and view this as an integral part of our mission to build smart electric vehicles that make families happier. Now I will turn this call over to our CFO, Mr. Tie Li, to review our financial performance in the second quarter.

Tie Li -- Chief Financial Officer

Thank you, Kevin. Hello, everyone. I will now walk you through some of our financial results for the second quarter of 2021. Due to the time constraint, 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 2021 were RMB 5.04 billion or USD 780.4 million, representing an increase of 40.7% from RMB 3.58 billion in the first quarter of 2021.

This included RMB 4.9 billion or USD 759.4 million from vehicle sales, which increased 41.6% quarter over quarter. This increase in vehicle sales was mainly driven by the increase in delivery of the 2021 Li ONE since its release on May 25, 2021. Revenues from other sales and services were RMB 135.7 million or USD 21 million in the second quarter of 2021, representing an increase of 21.7% quarter over quarter. The increase in revenue from other sales and services over the first quarter was mainly due to the increased sales of charging stalls, accessories and services in line with higher accumulated vehicle sales.

Cost of sales in the second quarter was RMB 4.09 billion or USD 632.9 million, representing an increase of 38.2% quarter over quarter. Gross profit in the second quarter of 2021 was RMB 952.8 million or USD 147.6 million, growing 54.5% compared with the first quarter of 2021. Vehicle margin in the second quarter was 18.7% compared with 16.9% in the first quarter of 2021. The increase in vehicle margin from the first quarter was primarily driven by higher average selling price in the second quarter of 2021 due to our launch of 2021 Li ONE in late May.

Our gross margin in the second quarter of 2021 was 18.9% compared to 17.3% in the first quarter of 2021, which was mainly attributable to the increase of vehicle margins. Operating expenses in the second quarter of 2021 were RMB 1.49 billion or USD 230.6 million, representing an increase of 45.3% quarter over quarter. Research and development expenses in the second quarter of 2021 were RMB 653.4 million or USD 101.2 million, representing an increase of 27% quarter over quarter. Excluding share-based compensation expenses, non-GAAP research and development expenses were RMB 543.7 million or USD 84.2 million, increasing 36.6% quarter over quarter.

The increase in research and development expenses over the first quarter of 2021 was primarily attributable to the increased headcount and the increased research and development activities for the company's future vehicle models. Selling, general, and administrative expenses in the second quarter of 2021 were RMB 835.3 million or USD 129.4 million, representing an increase of 63.8% quarter over quarter. Excluding share-based compensation expenses, non-GAAP selling, general and administrative expenses were RMB 780.9 million or USD 129.9 million, increasing 73.6% quarter over quarter. The increase over the first quarter of 2021 was primarily driven by increased marketing and promotion activities as well as increased headcount and rental expenses with the expansion of the company's distribution network.

Loss from operations in the second quarter of 2021 was RMB 535.9 million or USD 83 million, representing an increase of 31.4% compared with the first quarter. Excluding share-based compensation expenses, the non-GAAP loss from operations was RMB 365.5 million or USD 56.6 million, representing an increase of 62.6% quarter over quarter. Net loss was RMB 235.5 million or USD 36.5 million in the second quarter of 2021, compared with RMB 360 million net loss in the first quarter of 2021. Non-GAAP net loss was RMB 65.1 million or USD 10.1 million in the second quarter of 2021, compared with RMB 177 million net loss in the first quarter of 2021.

Now turning to our balance sheet and cash flow. Our cash and cash equivalents, restricted cash, time deposits and short-term investments totaled RMB 36.53 billion or USD 5.66 billion as of June 30, 2021. Operating cash flow in the second quarter of 2021 was RMB 1.41 billion or USD 218 million. Free cash flow was RMB 982.1 million or USD 152.1 million in the second quarter.

And now for our business outlook. For the third quarter of 2021, the company expects deliveries to be between 25,000 and 26,000 vehicles, representing an increase of approximately 188.7% to 200.2% from the third quarter of 2022. The company also expects the third quarter total revenue to be between RMB 6.98 billion and RMB 7.25 billion or USD 1.08 billion and USD 1.12 billion, representing an increase of 177.8% to 188.9% from the third quarter of 2022. This business outlook reflects the company's current and preliminary view on the business situation and market condition, in particular the ongoing industrywide semiconductor shortage due to the global COVID-19 pandemic, which are all subject to change.

I will now turn the call to the operator to facilitate our Q&A session. Thank you.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question is from the line of Fei Fang of Goldman Sachs. Your line is open. Please go ahead. 

Fei Fang -- Goldman Sachs -- Analyst

Great. Thanks for the opportunity. Congratulations on the results. Can management talk a little bit about competition and regulation.

So on competition, some of your incumbent peers have really speed up launching new products, Great Wall, Geely, BYD, for instance. The frequency of their launches have increased and the hit rate seems also increased. So just wondering if you have refreshed thoughts on their progress and also the potential for them to enter into the premium segment? So that's the question. Second is about regulation.

So what's your thoughts on regulatory risk around autonomous driving and assisted driving development? Do you think if there is any regulatory intention to slow down things a bit in order to perfect the safety and customer experience? [Foreign language]

Kevin Shen -- President

Fang Fei, this is Kevin. Thank you for the question. Yes. I think for the product development cycle, we have our own strategy and scheduled to launch new products.

So basically, we are accelerating our development, our next generation of EREV platform and also the HPC BEV platform. As we shared before, we will roll out our brand-new EREV models based on our next-generation EREV platform next year, and 2023 will have -- will be a big year for us. We'll have two new models on the X platform and another two HPC BEV model launch. And for the regulation, in fact, we have been closely communicating and engaging with the authorities.

I think the intention from the MIIT is to standardize the overall smart electric vehicle industry and the risk of the technology requirement for the ADAS solution. I think overall, this is a good thing. This will ensure the healthy development of this industry. And I think the impact to us is basically in the future, we need to be more cautious when we launch the product with ADAS solution.

I think it will take us more effort to fully develop a function before the launch into the market. But that was our original plan. So there is no change of our strategy. But overall, I think our focus on ADAS will not change.

Fei Fang -- Goldman Sachs -- Analyst

Very helpful color. Thank you, Kevin. 

Operator

Thank you. Our next question is from the line of Tim Hsiao of Morgan Stanley. Your line is open. Please go ahead. 

Tim Hsiao -- Morgan Stanley -- Analyst

Thanks for taking my question, and congratulations on the solid results. I have two questions. The first question, could the management team share some light on what components or type of chips are currently in short supply for Li Auto? Because you look at the numbers, I think Li Auto's production seems more resilient than peers. So how can we manage the supply disruption better than our peers? Is there any alternative sources Li Auto could secure the component and the support likely more than 12,000 monthly run rate into fourth quarter? So this is the first question about the supply.

And my second question, I think Johnny touched briefly on during the presentation, what's the progress in our new plant for capacity expansion in Beijing? Was the name plate capacity and when will the contribution from the new capacity start to kick in? [Foreign language]

Kevin Shen -- President

Thank you, Tim. This is Kevin. I will answer the first question about the shortage. Right now, the single big shortage we are facing is an industry common shortage due to the COVID-19 situation in Malaysia, especially from ST.

So this is an industry common shortage. And in the past several months, we have been fighting every day for the supply. I don't think we -- our situation is better than the other competitors, yes. But the outlook for the next quarter, if the COVID-19 situation will get better, we believe overall the industry supply will become more balanced.

But the COVID-19 situation is not predictable. So it's still a risk for us. Johnny, do you want to comment on that?

Tie Li -- Chief Financial Officer

For the bidding side, I think we will release more details when -- in the future. One thing we can make sure is it's on track to get ready for the BEV launch in 2023, Tim.

Tim Hsiao -- Morgan Stanley -- Analyst

Thank you. Great. Thanks for sharing.

Operator

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

Ming-Hsun Lee -- Bank of America Securities -- Analyst

Thank you. [Foreign language] My first question is regarding the gross margin improvement trend, especially in the second quarter, your ASP is increasing, but also your cost of goods sold per car is also decreasing. So could you elaborate more? And also comment on the third quarter and fourth quarter trend? That's my first question. And second question, could you give us more details regarding your collaboration with Xinchen Power on the cooperation of EREV?

Kevin Shen -- President

Lee, thank you. This is Kevin. Very quickly, your first question besides the sales price increase of the new Li ONE from the cost perspective, primarily we had -- partially due to the BOM cost reduction from some of our suppliers, and also because of the sales volume increase, therefore, the amortization will reduce. So that's the -- that result in the gross margin increase.

I think for the third quarter and the fourth quarter, we'll continue to see the gross margin will gradually improve also. So we still see that overall, for this year, blended gross margin will be somewhere between 19% to 20%. The second, your second question is about our joint venture with Xinchen Holdings. Actually, Xinchen Holdings is a leading engine company in China, especially they have been a long-term partner with BMW.

So we have this joint venture, jointly R&D developer and manufacturer our next-generation EREV engine with Xinchen. And for this joint venture, we have 51% of the share.

Ming-Hsun Lee -- Bank of America Securities -- Analyst

Thank you. 

Kevin Shen -- President

Thank you.

Operator

Thank you. Our next question is from the line of Bin Wang of Credit Suisse. Your line is open. Please go ahead. 

Bin Wang -- Credit Suisse -- Analyst

Thank you. I've got two questions. No. 1, about long-term borrowing.

So we told that in the second quarter, our long-term borrowing actually go to RMB 5.6 billion. Given you have some of the cash on hand, can you explain why that perhaps we have a big jump in the end of June? That's number one question. No. 2 is about the volume guidance.

It actually used to be kind of our September number can go to 10,000. But if you see the third quarter guidance, it seems like if we maintain the 10,000 guidance for September, we mind that August should be a very low number. So how should we think about the third quarter guidance? And we also actually guided 1.6 million units by 2025, in prior to maybe next year, talk about 150,000 units. So during next year, 2022, the volume should be 150,000.

[Foreign language]

Tie Li -- Chief Financial Officer

First of all, the long-term borrowing because of the launches, we do a CB in April. So it's -- yes, it's the CB on the long-term borrowing.

Kevin Shen -- President

Yeah, yeah. This is Kevin. Thank you, Wang, Bin, for the question. I think when we give out the guidance for third quarter, we have already taken into consideration of the potential risk of the impact of the COVID-19 in Malaysia.

So therefore, we don't want to be too aggressive. So I think today is already 30th. So in the next two days, you will see our August numbers. And for the next year, I think your estimation is within the range of our plan.

We -- of course, we want to further increase the monthly delivery of Li ONE.

Operator

Our next question is from the line of Chang Liu of CICC. Please go ahead. Your line is open. 

Chang Liu -- CICC -- Analyst

[Foreign language] I'll translate my question. My first question is about our financial expenses. Could you give us some details on the acceleration of SG&A in the second quarter and any guidance on the full year R&D and SG&A expenses? And my second question is on our pure BEV models to be launched in 2023. Could you give us some update on the its development, especially some the key milestones, high-pressure charging systems? Thank you. 

Tie Li -- Chief Financial Officer

Yes. So for the SG&A, this is Johnny. And for the SG&A, as I just mentioned, it's more related to the network expansion and also the marketing and promotion activities in the second quarter. And we will also increase headcount and the rental expenses.

And in the second half of this year, we will continue to expand our retail stores toward our target 200. And for R&D, we still want to keep our -- the whole year guidance, which is around RMB 3 billion. For second question, Kevin.

Kevin Shen -- President

This is Kevin. For the HPC BEV models, we are on track in terms of our R&D process. To share some of the milestones, for example, we already have our 4C new battery sample ready. So that's a big milestone.

And also for our HPC super-fast charging port design, we have already finished the concept design, and we plan to have our first pilot charging station within this year.

Chang Liu -- CICC -- Analyst

Thank you.

Operator

Thank you. Our next question is from the line of Xinyu Fang of UBS. Please go ahead. 

Paul Gong -- UBS -- Analyst

Hi. I'm not sure if this is my line. This is Paul Gong with UBS. I have two questions.

The first one is regarding your split of the BEV versus EREV in terms of positioning. Starting from 2023, you will have both. How do you position the different segments and the size of each segment? And how should we think -- is this going to be the EREV is more focused on the larger vehicle or SUV, NPV, etc., and the BEV is more focused on the smaller vehicle next to sedans, etc. How should we think about positioning of the BEV versus EREV? My second question is regarding your R&D spend in split going forward? For second half of this year, from next year and going forward, how much portion is going to be spent on the BEV? How much on the EREV? And how much on the autonomous driving? Let me translate my questions quickly.

[Foreign language]

Kevin Shen -- President

Paul, yes. Let me take the first question. This is Kevin. So in the future, when we have a BEV and the EREV at the same time, actually, we are not differentiating these two based on size and -- based on size of car form factor.

So basically, all these two driving powertrain will based on this developed cars to cover the price band from RMB 200,000 to RMB 500,000, and they will -- each will have a different size of cars, design for family users. I think the key difference between these two are based on the customer's preference. If they are more concerned about the BEVs range anxiety and they don't have access to good charging infrastructure, they will choose -- we believe they will choose EREV, yes. If they have a good charging infrastructure, they will choose BEV.

So that's our viewpoint.

Tie Li -- Chief Financial Officer

For the R&D expenses, we still want to keep our original guidance from now on to 2023 to USD 1 billion. And yes, that will cover the vehicle, the coming models and also the autonomous driving and also some area we want to do in-house in the next two to three years and also some investment on the R&D side for the future intelligent driving side. Thank you, Paul. 

Paul Gong -- UBS -- Analyst

Thank you. 

Operator

Thank you. [Operator instructions] Our next question is from the line of Yingbo Xu of CITIC. Please go ahead. Your line is open.

Yingbo Xu -- CITIC Securities -- Analyst

[Foreign language] My first question is how -- what's our pricing strategy? Are we trying to maintain our high margin or maybe we have more flexibility in the pricing item? And the second question is considering a lot of newcomers in this sector, maybe 2023 is a period that a lot of newcomers joining in and they launch new model. And by the year 2025, maybe the market share is going to be concentrated again. So how we expect in next three or five years competition like technical product and also actuals. So could you give us some color?

Kevin Shen -- President

Yingbo, this is Kevin. Yes. First of all, about the pricing, from our point of view, for each of the products we design based on a price point. And unless we see the competitive issue, otherwise, we'll not alter the price point of this product.

I think to answer your question in another way, to gain more volume, definitely, we will launch products to cover wider price band. So as we mentioned that in the future, our product will cover between RMB 200,000 to RMB 500,000. That's not to say we are going to reduce the price of some of our products. We are going to design different product to cover different price points.

That's our philosophy. And also, by the way, the market size of between RMB 200,000 to RMB 500,000 is increasing. That's probably the only increasing segment in the -- yes, is a segment, the volume is increasing. And about the future competition, starting from 2023, I think we will stick to our three key choices.

So the first one is that we compete in the overall PV market. That's why we designed -- that's why we believe we have to solve the range anxiety issue. That's one of the core value we want to deliver to our customer. That's why you see we already have EREV solution, and we're going to have our next-generation EREV solution to completely solve the range anxiety issue for our customer.

And this is our midterm, long-term strategy. We'll continue to launch EREV products. On the other hand, we also see the opportunity to solve the range anxiety issue with the high-power charging solutions. So that's why we have this new Whale and Shark platform.

This is the first choice. The second choice is our target customer twice. We want to focus only on the family users. We see this as a growing demand segment.

And when we design our car, we want to design the car catering the needs of all the family members. The third thing is that we will continue to focus on the autonomous driving solution development and also the smart cabin solution development. So these three things are the fundamental building block of our product competitiveness. We don't think we'll -- we believe we'll stick to these three key things.

Yeah. 

Yingbo Xu -- CITIC Securities -- Analyst

Yeah. Very helpful. Thank you.

Operator

Thank you. And as we are reaching the end of our conference call, I'd like to turn the call back over to the company for closing remarks. Ms. Janet Zhang, please go ahead.

Janet Zhang -- Investor Relations

Thank you, Annie. Thank you once again for joining with us today. If you have any further questions, please feel free to contact Li Auto's investor relations team. Then that's all for today.

Thank you, and have a good one.

Duration: 54 minutes

Call participants:

Janet Zhang -- Investor Relations

Kevin Shen -- President

Tie Li -- Chief Financial Officer

Fei Fang -- Goldman Sachs -- Analyst

Tim Hsiao -- Morgan Stanley -- Analyst

Ming-Hsun Lee -- Bank of America Securities -- Analyst

Bin Wang -- Credit Suisse -- Analyst

Chang Liu -- CICC -- Analyst

Paul Gong -- UBS -- Analyst

Yingbo Xu -- CITIC Securities -- Analyst

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