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Li Auto Inc. (NASDAQ:LI)
Q3 2021 Earnings Call
Nov 29, 2021, 7:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Hello gentlemen, thank you for standing by for Li Auto's third 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 Li Auto. Please go ahead, Janet. 

Janet Zhang -- Director of Investor Relations

Thank you, Rachel. Good evening, and good morning, everyone. Welcome to Li Auto's third quarter 2021 earnings conference cll. The company's financial and operating results were published in the press release earlier today and were posted on the company's IR website and the Hong Kong Stock Exchange.

On today's call, we have our president, Mr. Kevin Yanan Shen; 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 includes 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 announcements, which contain a reconciliation of 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 -- Executive Director

Thank you, Janet. Hello, everyone, and thank you for joining our call today. We are excited to be part of this once-in-a-century transformation from ICE vehicles to smart electric vehicles. We are also pleased to see user acceptance of the EVs reaching an inflection point.

As reported by the China Passenger Car Association, the penetration rate of EVs in retail sales rose significantly to 18.5% in October from 5.8% in 2020. Looking out to 2022, we believe the extended range system with a large battery capacity will usher in a year of explosive EREV sales. Against this backdrop and on the heels of the successful 2021 Li ONE launch in May, we delivered strong results in the third quarter, achieving revenue growth of 209.7% year over year, underpinned by record-breaking quarterly delivery of 25,116 units, an increase of 190% year over year. This growth once again highlights the underlying strength of our 2021 Li ONE and its compelling appeal to family users.

Thanks to the dedicated efforts of our team and supply chain partners as well as continuous support from Li ONE users. Our October deliveries was 7,649 units increasing 107.2% year over year. Our order intake remains robust, hitting a new monthly record of over 14,500 units in October. The rapid development of the smart EV industry has magnified the effects of the industrywide chip shortage, challenging each OEM's production and delivery schedule.

While we are enjoying the strong user endorsement of our product. Our delivery growth lagged our order growth due to the chip supply shortage, which has constrained our production. Despite the lingering impact of COVID-19 and extreme weather conditions in certain regions, we have resolved some of the chip supply problems by working diligently with our supply partners and also internal teams. We delivered the 100,000 Li ONE to our family users in this month and expect our deliveries in November to exceed 10,000 vehicles.

In light of the ongoing industrywide semiconductor shortage, we expect the total delivery in the fourth quarter of 2021 to be between 30,000 to 32,000 vehicles. As the development of the smart electric vehicle industry accelerate, we think the challenge to the overall EV supply chain facing the industry will persist into the future. Going forward, we will continue to take actions and find multiple measures together with our supply chain partners to mitigate the risk. Turning to the profitability.

Our gross margin stood at 23.3% in the third quarter, up 3.5% year over year and 4.4% quarter over quarter. Our operating cash flow was RMB 2.17 billion or USD 336.7 million during the third quarter, reflecting our consistent and relentless focus on execution and cost management. During the third quarter, we made notable progress in the expansion of our direct sales and service network, which not only serves as our user touch point for efficient sales and marketing, but also an integral component of our closed-loop integrated online and offline platform that help us manage user feedback to continuously enhance our products and services. As of October 31, 2021, we had 162 retail stores, covering 86 cities and the 223 servicing center and the Li Auto authorized body and paint shops operating in 165 cities.

We will continue to expand our coverage of lower-tier cities while deepening our penetration in first and the second tier cities to reach our target of 200 retail stores by year end, covering more than 100 cities in China. This will increase our brand awareness and prepare us for surging user demand as we launch new models. In terms of product optimization, we upgraded the in-car invoice assistant Li Xiang Tong Xue and launched a new application store via an OTA update in early September. The new Li Xiang Tong Xue is smarter and able to carry out smoother and more natural conversations.

Li Xiang Tong Xue can also take separate commands from four different zooms in the car, providing full coverage in-car voice control and creating a more fun and entertaining experience for families. The new application store offers a streamlined interactive design, supporting an application ecosystem similar to that on smartphones, allowing users to upgrade their in-car application without the need of an OTA update. With these upgrades, our Li ONE continues to evolve and grow. Meanwhile, we plan to release our NOA upgrade to 2021 Li ONE users in December.

We are confident that 2021 Li ONE with NOA functions will provide family users with safe, enhanced, convenience and effective ADAS functions. Following the NOA upgrade through OTA, all 2021 Li ONE will be equipped with this feature. We are prepared to provide NOA to over 60,000 family users by year-end, gaining a dominant leadership in this regard in China. In terms of HPC BEV, we are making good progress developing our technologies to support high-power charging.

We have completed the 4C battery pack test on vehicles and demonstrated that it can support a driving range of more than 400 kilometers with only 10 minutes charging. With the proceeds raised through our due primary listing, we will build upon our recent success and to deploy R&D capital to drive parallel development in EREVs and BEVs, and advancement in smart cockpit and ADAS technologies, aiming to introduce more product catering to family users' needs, and competing with both ICE vehicles and the electric vehicles. We also made headway in expanding our production capacity. In October, we officially commenced the construction of our manufacturing base in Beijing.

The manufacturing base is scheduled to be operational in 2023 and will serve as an important production base for our premium BEVs. Now I will turn this call over to our CFO, Mr. Tie Li to review our financial performance in the third quarter. 

Johnny Tie Li -- Chief Executive Officer

Thank you, Kevin. Hello, everyone. I will now walk you through some of our financial results for the third quarter of 2021. Due to time constraints, I will address the financial highlights here and encourage you to refer to our earnings press release for further details.

Total revenue in the third quarter of 2021 were RMB 7.78 billion or USD 1.21 billion, representing an increase of 209.7% from RMB 2.51 billion in the third quarter of 2020, an increase of 54.3% from RMB 5.04 billion in the second quarter of this year. This included RMB 7.39 billion or USD 1.15 billion from vehicle sales, which increased 199.7% year over year and 50.6% quarter over quarter. The increase in revenue from vehicle sales from the third quarter of 2020 and the second quarter of 2021 was mainly attributable to the increase of vehicle delivery in the third quarter of 2021. Revenues from other sales and services were RMB 389.4 million or USD 60.4 million in the third quarter, representing an increase of 745.1% year over year and an increase of 187% quarter over quarter.

The increase in revenue from other sales and services over the third quarter of 2020 and the second quarter of 2021 was mainly attributable to the sales of regulatory credits as well as increased sales of charging stalls, accessories, and services, in line with our higher accumulated vehicle sales. Cost of sales in the third quarter of 2021 was RMB 5.96 billion or RMB 925.5 million, representing an increase of 196.1% year over year and an increase of 45.9% quarter over quarter. Gross profit in the third quarter of 2021 was RMB 1.81 billion or USD 281.2 million, growing 264.8% comparing with the third quarter of 2020 and 90.2% compared with the second quarter of this year. Vehicle margin in the third quarter was 21.1% compared with 19.8% in the third quarter of 2020 and 18.7% in the second quarter of 2021.

The increase in vehicle margin was primarily driven by higher average selling price attributable to increasing deliveries of 2021 Li ONE in the third quarter of 2021. Gross margin in the third quarter was 23.3% compared with 19.8% in the third quarter of 2020 and 18.9% in the second quarter of this year, mainly driven by the increase in vehicle margin. Operating expenses in the third quarter were RMB 1.91 billion or USD 296.4 million, representing an increase of 182.2% year over year and an increase of 28.3% quarter over quarter. R&D expenses in the third quarter of 2021 were RMB 888.5 million or USD 137.9 million, representing an increase of 165.6% year over year and an increase of 36% quarter over quarter.

The increase in R&D expenses over the third quarter of 2020 and the second quarter of this year was primarily attributable to increased employee compensation as a result of growing research and development staff as well as increased costs associated with new product developments. SG&A expenses in the third quarter were RMB 1.02 billion or USD 158.5 million, representing an increase of 198.5 year over year and increase of 22.3% quarter over quarter. The increase in SG&A expenses over the third quarter of 2020 was primarily driven by increased marketing and promotion activities as well as increased employee compensation and rental expenses associated with the expansion of the company's distribution network. The increase in SG&A expenses over the second quarter of this year was primarily driven by the increased employee compensation and rental expenses, associated with the expansion of the company's distribution network.

Loss from operations in the third quarter of 2021 was RMB 97.8 million or USD 15.2 million, representing a decrease of 45.7% year over year and a decrease of 81.8% quarter over quarter. Net loss in the third quarter of 2021 was RMB 21.5 million or USD 3.3 million, representing a decrease of 79.9% year over year and a decrease of 90.9% quarter over quarter. And turning to our balance sheet and cash flow. Our bank cash and cash equivalents, restricted cash, term deposits, and short-term investments totaled RMB 48.83 billion or USD 7.58 billion as of September 30, 2021.

Operating cash flow in the third quarter of 2021 was RMB 2.17 billion or USD 336.7 million. Free cash flow was RMB 1.16 billion or USD 180.8 million in the third quarter. And now for our business outlook. For the fourth quarter of 2021, the company expects the deliveries to be between 30,000 and 32,000 vehicles, representing an increase of 107.4% to 121.2% from the fourth quarter of 2020.

The company also expects fourth quarter total revenues to between RMB 8.82 billion and RMB 7.41 billion or USD 1.37 billion and USD 1.46 billion, representing an increase of 112.7% to 126.9% from the fourth quarter of 2020. This business outlook reflects the company's current and preliminary view on its business situation and market condition, in particular, the ongoing industrywide semiconductor shortage, which are all subject to change. I will now turn the call over to the operator to start our Q&A session. Thank you.

Questions & Answers:


Operator

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator instructions] Your first question comes from the line of Fei Fang of Goldman Sachs. Please ask your question.

Fei Fang -- Goldman Sachs -- Analyst

Thanks for the opportunity. Very impressive quarter. My first question is on your HPC BEV pipeline. Other than the 4C battery pack test that Changzhou have shared on the call, which is obviously very impressive, what else have you thought about in terms of the key features that differentiate your upcoming product from this competitive market? Also, can you refresh us the timeline for your next product launch? The second question is about production hurdles.

The management mentioned that, if I heard you correctly, in October there was 14,500 units of intake in terms of the backlog expansion. So if you look at next year, when do you think the monthly production can ramp up toward that level? Thank you.

Operator

Fei Fang, can you also repeat your question in Chinese, please?

Fei Fang -- Goldman Sachs -- Analyst

Yes, of course. [Foreign language]

Kevin Yanan Shen -- President

Thank you, Fang Fei. This is Kevin. To your first question, for HPC, besides the 4C battery we made good progress. On the other hand, we also made a lot of progress on our high-voltage air-conditioning system, also the progress made on the high-power charging infrastructure.

So in terms of timing, we're still on track to launch our first HPC BEV product in the second half of 2023. And in terms of our production plan, actually, right now, our factory ramp-up already can support roughly 14,000 per month. Right now, our production is gated by the chip shortage. So, basically, next year we expect our production will ramp up to more than 15,000 right after the Chinese New Year, assuming the chip shortage to a certain extent will be resolved. 

Fei Fang -- Goldman Sachs -- Analyst

That's very helpful color. Thank you.

Kevin Yanan Shen -- President

Thank you.

Operator

Your next question comes from the line of Tim Hsiao from Morgan Stanley. Please ask your question.

Tim Hsiao -- Morgan Stanley -- Analyst

Hi, management team. Congratulations on a great result and thanks for taking my questions. I've got two questions, the first one about the margin, because to gross margin expansion any tracks much ahead of our previous target of high teens. So given the favorable volume scale in upcoming quarter, should we expect the upward trajectory of gross margin to persist into fourth quarter or early next year? And meanwhile, will Li Auto consider leveraging more aggressive promotion to further boost the scale on the back of that gross margin? [Foreign language]

Johnny Tie Li -- Chief Executive Officer

Hi, Tim. This is Johnny. I think the current gross margin is, as we guided before, it was mainly due to the higher average selling price of the new 2021 Li ONE, and also, the cost control effort of our internal team, supply chain team, despite the semiconductor shortage. On this year's cost margin, we still want to keep our previous guidance.

For the promotion, currently, the customer has about six to eight weeks of waiting time, so no need to do more promotion to let the customer wait too long, yes. So, currently, at least in the next two to three months, we won't do that.

Tim Hsiao -- Morgan Stanley -- Analyst

Got it. My second question, I basically want to follow up on the wait times, because as you mentioned, the wait times for a new Li ONE are as long as six to eight weeks. If the company fails to deliver the vehicle before Chinese New Year, should we worry or be concerned about the rising order cancellation rate early next year, or the new orders intake would fall substantially toward the end of this year, and any precaution the company can or will take to avoid such order volatility? [Foreign language]

Kevin Yanan Shen -- President

Tim, this is Kevin. First of all, we don't expect that we'll see any other cancellations due to the prolonged delivery lead time, because before we take the order from our customer, normally, we'll reach an agreement with them in terms of roughly when they can expect the delivery. So basically, when they give us the order, they already have the expectation set for the delivery. 

Tim Hsiao -- Morgan Stanley -- Analyst

Great. Thank you very much.

Operator

Your next question comes from the line of Bin Wang of Credit Suisse. Please ask your question.

Bin Wang -- Credit Suisse -- Analyst

Thank you. I've got two questions. Number one is about the 2022 guidance, volume guidance. The second question is about the battery cost outlook for next year, because [Inaudible] battery costs may be increased.

[Foreign language]

Johnny Tie Li -- Chief Executive Officer

I will take the first question. I think due to the current supply chain shortage, I think it is not the right time to give guidance for the next year. But you should believe, within the company, we have a very robust plan for the next year. Maybe Kevin could take the second question.

Kevin Yanan Shen -- President

Of course, we all know that right now, we all see a big jump in terms of raw material costs for the batteries. But so far, within this year, we have no plan to increase the price with [Inaudible].

Johnny Tie Li -- Chief Executive Officer

Yes. Also, I think we are less impacted as we do EREV. They have one less battery pack.

Bin Wang -- Credit Suisse -- Analyst

Thank you. Great.

Johnny Tie Li -- Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Ming-Hsun Lee of BofA Securities. Please ask your question.

Ming-Hsun Lee -- Bank of America Merrill Lynch -- Analyst

Thank you, management. I have two questions. The first question is regarding the new functions of NOA to be upgraded in December. Could you elaborate more functions of this new service? Secondly, also, could you elaborate more on the credit sales in the third quarter and the potential contribution in the fourth quarter as well as 2022? Thank you.

[Foreign language]

Johnny Tie Li -- Chief Executive Officer

I will take the second question first. This is Johnny. I think we have already sold off all the EV credit beginning from last year's sales. So, basically, around RMB200 million, with all the EV credit over 70 for last year.

So we won't have a lot more revenue for the fourth quarter. For the first question, I will pass to Kai.

Kai Wang -- Chief Technology Officer

This is Kai speaking. So regarding your first question, so our NOA feature will be released in December, and so far, we have lots of testing, over a million kilometers. Since our 2021 Li ONE model has NOA feature by default, which makes our December OTA update the biggest NOA release in scale in China. So I think this is probably the biggest difference compared with our peers.

Thank you.

Ming-Hsun Lee -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

[Operator instructions] Your next question comes from the line of Paul Gong of UBS. Please ask your question.

Paul Gong -- UBS -- Analyst

Thanks for taking my questions. Basically, there are two questions. The first one is regarding your order pipeline. We have observed that in this rising competition environment, some peers have already accelerated new products launch or adding new models or more models into the pipeline.

How does Li Auto consider your action on this? [Foreign language]

Kevin Yanan Shen -- President

Paul, this is Kevin. In terms of our future product, actually, we will reveal our X01 to the market in the second quarter next year and start to deliver in the third quarter. More details of the X01 will be introduced at the launch event. Although we see a lot of new products launching to the market, we want to still keep to our own schedule.

Right now, for example, when our Li ONE delivered the volume reached the level of Highlanders, its residential value is also getting close to the Highlander level. This is the benefit of reaching scale by a single model. We will choose to sell big volumes with one model rather than very quickly launch a lot of models, but only sell small volumes. Our philosophy is slightly different than our peers. 

Paul Gong -- UBS -- Analyst

OK. My second question is regarding the ADAS going forward. It seems that now that the different ADAS systems by different car makers are getting a little bit similar to each other. Everyone would adopt LIDAR, everyone would use Nvidia chips with high calculation power.

What is the key differentiation in this competition in the ADAS function going forward, for the relatively longer time? [Foreign language]

Kai Wang -- Chief Technology Officer

This is Kai speaking. Regarding this ADAS related topic, we believe ADAS technology eventually I think user experience is the most important thing. But in order to achieve automated user experience, as in the previous quarter, we already explained, you need massive data to train your algorithm to make it more intelligent. As you know, Li Auto, we have the biggest, basically, customer base with NOA feature by default because we believe safety is very important to every single of our customers.

Therefore, by using the complete fleet, we can speed up our progress of our development to make the user experience reach much, let's say, faster speed than our competitors. Thank you.

Paul Gong -- UBS -- Analyst

OK. Thank you very much.

Operator

[Operator instructions] Your next question comes from the line of Chang Liu of CICC. Please ask your question.

Chang Liu -- CICC -- Analyst

Yes. Thank you for taking my question and congrats on the great result. My first question is regarding cost, because we see that the cost per vehicle rises to RMB 232,000 in the third quarter, which is RMB5000 more than the second quarter, and also it's the highest quarter since 2020. Could you share the reason with us, maybe how much is caused by the rising cost of 2021 model, and how much is caused by the rising price of material? [Foreign language]

Johnny Tie Li -- Chief Executive Officer

This is Johnny. I think, generally, we still target to achieve our desired gross margin on the Li ONE. As we mentioned before, it will be finally to achieve a 25% as we design the product. But currently, we are under pressure of the supply chain cost pressure, and it's a floor that we expected last year.

So it's a mix of our supply chain effort and also those measures from the semiconductor parts. Also, we have -- there's a lot of increase we have some benefit from the manufacturing side, so it's a net-net impact for each quarter.

Xiang Li -- Founder and Chief Executive Officer

[Foreign language]

Kevin Yanan Shen -- President

This is Kevin. I will translate. Mr. Li Xiang just made some comments on the gross margin.

Our philosophy is a healthy gross margin is very important for us, especially considering how we are a technology company. If we look at some of the previous generation technology companies, they have a very thin gross margin therefore they cannot invest enough money on the R&D. Most of their R&D money is spent on the product development, not enough in the technology development. So our thinking is that we want to keep a very healthy gross margin so that not only we can invest in the product development, but also, we will invest more and more on the technology development, 10% on the technology R&D.

Chang Liu -- CICC -- Analyst

Yes. Thank you. My second question is regarding the expansion of sales network. As we see, we already have over 150 stores by the end of third quarter, which was close to our target, which is 200 stores by the end of this year.

So could you please update our plan of our sales network expansion for this year and also next year? [Foreign language]

Kevin Yanan Shen -- President

This is Kevin. Right now, we are on track to achieve 200 retail stores by the year end to cover around 150 within China. Next year, our initial plan is to at least double the number of retail stores.

Chang Liu -- CICC -- Analyst

Thank you.

Operator

Your next question comes from the line of Jeff Chung of Citi. Please ask your question.

Jeff Chung -- Citi -- Analyst

[Foreign language] So my first question is in regards to the November order backlog. Would that be 100% higher than the actual potential November shipment, similar to the momentum in October? Secondly, is about the monthly production run rate. Can the chip supply support around 14,000 to 15,000 units per month in the first quarter next year? Thank you.

Kevin Yanan Shen -- President

Thank you, Jeff. This is Kevin. First question, October delivery was impacted by both the Bosch ESP supply and also the millimeter radar supply. That's why you see that our order intake is around double the number of the final delivery.

This month, actually, the millimeter radar supply shortage has been solved. The only constraint we have is from Bosch, so therefore the order intake will not be 200% of the delivery. Your second question, actually, right now, the headlight we have is in the first quarter of next year, we will still continue to be constrained by this Bosch ESP component. Right now, we are working with Bosch to try to solve as much as possible. 

Jeff Chung -- Citi -- Analyst

Thank you. [Foreign language]

Kevin Yanan Shen -- President

Thank you, Jeff.

Operator

[Operator instructions] Your next question comes from the line of Jia Lou of BOCI Research. Please ask your question.

Jia Lou -- Bank of China International -- Analyst

Hello, management. This is Lou Jia from BOCI Research. I have two questions. One is about the SG&A ratio.

Actually, we have seen that this year SG&A ratio increased compared with last year, so just now, management mentioned that the target for R&D ratio is 10%, but I want to know what about SG&A ratio spend level. [Foreign language] My second question is about the capacity. We know that we are building the new plant in Beijing, so I want to know that what are our detailed capacity levels in 2023? We know that we have the Changzhou plant for EREV, so any expansion plans for Changzhou plant? [Foreign language]

Kevin Yanan Shen -- President

Thank you, Lou Jia. This is Kevin. First of all, for the SG&A, the highlight I can give to you is that for the immediate next step, our plan is to control SG&A to a 10% level and for the longer term, we plan to -- especially with the volume growth, we plan to further decrease this percentage. So this year, you see a slight increase on the SG&A, is because, on one hand, the promotion and also especially the aggressive sales network expansion increased our SG&A percentage.

In terms of our capacity, by the end of 2023 our plan is to reach a standard capacity of annual capacity 500,000. And with double shift, actually, we can do the total capacity near 700,000 units. That's our plan for 2023.  

Jia Lou -- Bank of China International -- Analyst

Thank you.

Operator

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 -- Director of Investor Relations

OK. Thank you everyone. That's all for today's call. Hope you have a good one.

Operator

[Operator signoff]

Duration: 53 minutes

Call participants:

Janet Zhang -- Director of Investor Relations

Kevin Shen -- Executive Director

Johnny Tie Li -- Chief Executive Officer

Fei Fang -- Goldman Sachs -- Analyst

Kevin Yanan Shen -- President

Tim Hsiao -- Morgan Stanley -- Analyst

Bin Wang -- Credit Suisse -- Analyst

Ming-Hsun Lee -- Bank of America Merrill Lynch -- Analyst

Kai Wang -- Chief Technology Officer

Paul Gong -- UBS -- Analyst

Chang Liu -- CICC -- Analyst

Xiang Li -- Founder and Chief Executive Officer

Jeff Chung -- Citi -- Analyst

Jia Lou -- Bank of China International -- Analyst

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