Li Auto (LI) Q1 2023 Earnings Call Transcript

Li Auto (LI -3.79%)
Q1 2023 Earnings Call
May 10, 2023, 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 2023 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, investor relations director of Li Auto.

Please go ahead, Janet.

Janet Chang -- Director, Investor Relations

Thank you, operator. Good evening and good morning, everyone. Welcome to Li Auto's first quarter 2023 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 chairman and CEO, Mr. Xiang Li; and our CFO, Mr. Johnny Tie Li, to begin with prepared remarks. Our president, Mr.

Donghui Ma, and other senior executive management will join for the Q&A discussion. Before I 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 company filings with the U.S. Securities and Exchange Commission and the Hong Kong Stock Exchange. 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 disclosure documents on the IR section of our website, which contains a reconciliation of the unaudited non-GAAP measures to comparable GAAP measures. Our CEO will start with his remarks in Chinese. There will be translation after he's finished all his remarks.

With that, I will now turn the call over to our CEO, Mr. Xiang Li. Please go ahead.

Xiang Li -- Founder, Chairman, and Chief Executive Officer

[Foreign language] Hi, everyone, and welcome to today's earnings call. In the first quarter of 2023, China's NEV market continued to grow, but market competition intensified, triggering a wait-and-see sentiment among consumers. Nevertheless, we firmly believe that true winners will emerge from competition. In the first quarter, we achieved our best quarterly delivery results to date.

With continued user recognition of the L8 and L9, as well as strong order intake for L7 and its rapid production ramp-up, we delivered 52,584 vehicles this quarter, representing a year-on-year increase of 65.8%. This achievement placed us among the top three NEV brands priced over RMB 200,000 in China with a market share of approximately 11%, far surpassing any other emerging automakers and, once again, showcasing our ability to design and build blockbuster models. It also demonstrates the strength and collaborative efficacy of our supply chain, manufacturing, and sales and servicing network. We will continue to do our best to grow rapidly and strengthen our market leadership.

In April, our monthly deliveries hit a new high, reaching 25,681 units, with cumulative deliveries exceeding 335,000. Li L7, L8, and L9 all performed outstandingly in their respective market segments. According to the insurance registration data of CIRI Auto Technology Institute, L7 became the sales champion in the large SUV market in China after it started delivery in early March. In April, its first full month of delivery, L7 hit the 10,000 vehicle market, becoming our first fourth model to reach this milestone.

In the meantime, the L8 has maintained its sales leadership in the six-seater subsegment. And in the full size SUV market, the L9 has consistently topped the sales chart ever since its delivery started at the end of August last year. Driven by our strong deliveries in relentless pursuit of operating efficiency, our financial metrics improved across the board. In the first quarter, our total revenues reached RMB 18.79 billion, representing a year-on-year increase of 96.5%.

At the same time, we delivered positive operating profit and positive net profit. And our free cash flow reached a record high of RMB 6.7 billion. A healthy profitability in cash flow will fund our R&D in products, platforms, and systems, creating a solid foundation for long-term development. With the launch of L7 and L8 Air models in April, we further expanded our price range and user coverage.

We expect our user marketshare in the NEV market at over RMB 200,000 and above to expand further in the next quarter, with expected deliveries to be between 76,000 and 81,000 units. Physical product delivery is just the beginning. In order to continuously improve the experience of family users, we will enhance our products through OTAs. Since the beginning of this year, we have delivered two OTA updates for our L-series, OTA 4.3 and 4.4, updating more than 100 features in total.

New features include task master, which allows users to create customized combinations of functions of drive settings, navigation, applications, and more. We also rolled out LKA Plus, the first feature of its kind in China, which can autonomously overtake on highways and urban expressways when not in navigation mode. Additionally, we will officially launch OTA 3.3 for Li One in the middle of this year. For family users, safety is always the top priority.

Every model of Li Auto is developed to meet the most stringent safety standards and has undergone comprehensive safety tests. In April 2023, the China Insurance Automotive Safety Index, C-IASI, released its latest batch of evaluation results. The L8 received a G rating, the highest rating in occupant protection, pedestrian protection, and driver assistance systems. It also received a G rating in the 25% offset frontal impact tests on both the driver and passenger side.

The L9 also received a five-star rating with a weighted score of 91.3% in the C-NCAP assessment test. In the first quarter of 2023, We continue to enhance our commercial capabilities by upgrading and expanding our integrated online and offline direct sales and servicing network to support the expanding product offerings and provide better services to our users while spreading our brand vision and increasing brand awareness. With respect to our retail sales network, we continue to add physical stores while accelerating the upgrade and expansion of our existing stores to support multiple vehicles. Since L9's launch in late June last year, we have relocated and expanded close to 50 existing stores and opened over 50 new stores.

As of April 30, 2023, we had 302 retail stores in 123 cities, as well as 318 service centers and authorized body shops in 222 cities. As our business accelerates, sustainability has always been deeply ingrained in our products, services, and corporate governance. On April 21st, we released our 2022 ESG report, detailing our continued exploration and progress in ESG. We received an MSCI ESG AA rating for two consecutive years.

In the future, we will continue to improve our ESG governance; promote the harmonious development of our brand, the environment, and the society; and create value for our users, partners, employees, and other stakeholders. As we enter the next phase of the development, we will execute our autonomous driving and BEV roadmap unveiled on April 18th at Shanghai Auto Show. City NOA will mark the beginning of autonomous driving 3.0 for our company. Meanwhile, we will also enter a new chapter in terms of powertrain platforms and products with EREVs and HPC BEVs being developed in parallel.

In terms of autonomous driving, our highway feature has served over 280,000 families, accumulating over 140 million kilometers of highway NOA mileage. In this quarter, we'll bring the NOA feature to urban driving scenarios. We'll expand -- we'll release city NOA for beta testing on Li AD Auto Max 3.0 and target rollout of the feature in 100 cities across the country by the end of 2023. Moving forward, with the application of transformer models in autonomous driving, we believe we will be the biggest beneficiary since we have the largest data set in China.

With respect to EREVs and HPC BEVs, we will adhere to our parallel development strategy. For EREVs, we will focus on enhancing the efficiency of the range extenders, allowing users to drive on battery power on urban commutes and on range extender during long-distance travel, a much better experience than driving our EV vehicles. For HPC BEVs, we'll continue to improve our technology to offer a rapid charging experience comparable to fill up with gasoline vehicles so the users can make inter-city trips without range anxiety. By 2025, our portfolio will consist of seven models with -- will consist of one super model, flagship model, five EREVs and five HPC BEVs, 11 models in total, which will allow us to further expand our user base and expand to new markets.

This year we'll redouble our efforts in fast charging network deployment. Our four-seat fast chargers can reach peak power output of 480 kilowatts, adding 400 kilometers of driving range with a 10-minute charge. We plan to build 300 charging stations in highway service areas by the end of 2023, carving four major economic zones, including the Beijing-Tianjin-Hebei region, the Yangtze River Delta region, and the Great Bay Area, and the Chengdu Chongqing region. We expect to further expand to 3,000 charging stations by the end of 2025, covering 90% of highway mileage nationally and all major Tier 1, 2, 3 states.

In the future, we will continue to refine our operations, build organizational capabilities to support the scaling of our business, and maintain healthy sales growth. As we continue to strengthen our autonomous driving and smart cockpit capabilities, and simultaneously implement our EREV and HPC BEV dual product strategy, we're confident we will also continue to strengthen our market leadership in the NEV market, creating more and better choices for family users to create mobile homes and create happiness. With that, I'll turn it over to our CFO, Johnny, for a closer look at our financial performance.

Johnny Tie Li -- Chief Financial Officer

Thank you, Li Xiang. Hello, everyone. I will now review some of our 2023 first quarter financials. Due to time constraints, I will address financial highlights here and encourage you to refer to our earnings press release for further detail.

Total revenues in the first quarter of 2023 were RMB 18.79 billion, or $2.74 billion, increasing 96.5% year over year and 6.4% quarter over quarter. This included RMB 18.33 billion, or $2.67 billion, from vehicle sales, which was up 96.9% year over year and 6.1% quarter over quarter. The year-over-year increase was mainly due to the increase of vehicle delivery and the higher average selling price contributed by the Li L-series. The quarter-over-quarter increase was mainly due to the increase in vehicle delivery, partially offset by the lower average selling price due to different product mix between the two quarters.

Revenues from other sales and services were RMB 459.7 million, or $66.9 million, in the first quarter of 2023, growing 81.4% year over year and 20.5% quarter over quarter. The increase was mainly attributable to increase the sales of accessories and services in line with higher accumulated vehicle sales. Cost of sales in the first quarter was RMB 14.96 billion, or $2.18 billion, representing an increase of 102.2% year over year and an increase of 6.2% quarter over quarter. Our gross profit in the first quarter of 2023 was RMB 3.83 billion, or $557.7 million, growing 77% compared with the first quarter of last year and 7.4% versus the first quarter of 2022.

Vehicle margin in the first quarter of this year was 19.8% compared with 22.4% in the first quarter of 2022 and 20% in the fourth quarter of 2022. The year-over-year decrease was mainly due to the different product mix between two quarters. Gross margin in the first quarter of 2023 was 20.4% compared with 22.6% the first quarter of last year and 20.2% in the fourth quarter of last year. Operating expenses in the first quarter of 2023 were RMB 3.42 billion, or $498.7 million, increasing 32.9% year over year and decreasing 7.4% quarter over quarter.

Research and development expenses in the first quarter of 2023 were RMB 1.85 billion or, $269.7 million, up 34.8% year over year and down 10.5% quarter over quarter. The year-over-year increase was primarily driven by increased expenses to support our expanding product portfolios, as well as increased employee compensation as a result of our growing number of staff. The quarter-over-quarter decrease was mainly in line with timing and progress of new vehicle programs. Selling, general, and administrative expenses in the first quarter of 2023 were RMB 1.65 billion, or $239.6 million, representing an increase of 36.8% year over year and an increase of 0.9% quarter over quarter.

The year-over-year increase was primarily driven by increased employee compensation as a result of our growing number of staff, as well as increased rental expenses associated with the expansion of our sales and servicing network. Income from operations in the first quarter was RMB 405.2, or $59.0 million, compared with RMB 413.1 million loss from operations in the first quarter of 2022 and RMB 133.6 million loss from operations in the fourth quarter of 2022. Net income in the first quarter of 2023 was RMB 933.8 million, or $136 million, compared with RMB 10.9 million net loss in the first quarter of 2022 and more than tripled the RMB 265.3 million net income in the fourth quarter of 2022. Turning to our balance sheet and cash flow, our balance of cash and cash equivalents with restricted cash, time deposits, and short-term investment was RMB 65 billion, or $9.46 billion, as of March 31, 2023.

Net cash provided by operating activities in the first quarter of 2023 was RMB 7.78 billion or $1.13 billion. Free cash flow was RMB 6.7 billion, or $975.9 million, in the first quarter of 2023. And now for our business outlook. For the second quarter of 2023 the company expects the delivery to be between 76,000 and 81,000 vehicles, representing an increase of 164.9% to 182.4% from the second quarter of 2022.

The company also expects the second quarter total revenue to be between RMB 24.22 billion and RMB 25.86 billion, or $3.53 billion and $3.77 billion, representing an increase of 177.4% to 196.1% from the second quarter of last year. This business outlook assumes supportive macroeconomic conditions, no significant disruptions in the supply chain, and reflects the company's current and preliminary view on its business situation and the market condition, which is subject to change. I will now turn the call over to the operator to start our Q&A session.

Questions & Answers:

Operator

[Operator instructions] The first question comes from Tim Hsiao from Morgan Stanley. Please go ahead.

Tim Hsiao -- Morgan Stanley -- Analyst

[Foreign language] So, my first question is about the gross profit margin. So, first quarter gross profit margin was adversely affected by the inferior product mix and the lower utilization rate. So, how should we think about the margin trajectory in the following quarters, given the interplay of multiple factors? So, on the bright side, the scale will rise in component costs, including the battery prices would fall. And on the flip side, we expect the rising mix of L7 and the air models might cause greater margin dilution.

So, any chance in the following quarter we could see the gross profit margin bounce back to like a previous peak level, more than 22%. So, that's my first question.

Johnny Tie Li -- Chief Financial Officer

Thank you, Tim. This is Johnny. Basically, we are confident of improving the gross margin starting from Q1. First, in the first quarter, the Li One sales impact 1.6% on the gross margin negative if we -- excluding that.

So, we will sold out all the Li Ones in the first quarter -- in the first half. And yeah, there will be some room on this on Li Ones, a negative impact. And with the ramp-up of our L7 series and also the L-series, there will be some room on that. But we still see there will be some other form cost up of stress.

So, we still keep our 20% full year guidance. Thank you.

Tim Hsiao -- Morgan Stanley -- Analyst

Got it. Thank you very much, Johnny. [Foreign language] So, my second question is about the city NOA. Li Auto plans to push through the city NOA to the small group of users for early testing.

So, what's the size of the user group at the initial stage, and when are you going to activate the function to all AD Max users? Separately, when the company think about the Li Auto's targeted customers, i.e. the family users, what's the value proposition of city NOA for high-level in terms of driving function? What does that mean to them? And how important is it when family users make the decision to buy the cars and to enhance their user experience? So, that's my second question. Thank you.

Xiang Li -- Founder, Chairman, and Chief Executive Officer

[Foreign language] Overall, we're making good progress in terms of city NOA, both on a system testing level, and as well as real road testing. Our plan is still to release early testing in June and the policy -- specific policy as to who do we release it to is still being created. But generally, our rule of thumb is we will try to cover more frequent users of highway and airway, which are users who have more willingness and ability to use NOA. They also have higher tolerance and level of understanding of the NOA feature.

By year end, we still plan to launch city NOA in 100 cities. And as to which specific cities we will cover first is mostly dependent on the number of our existing vehicles in those cities because as you know, our city NOA solution doesn't rely on high definition map, which means as long as we have navigation data for the city, as long as there's enough drivers driving our Max models, we will be able to accumulate enough data to allow users to use city NOA, especially when it comes to complex intersections. As long as we achieve good coverage on those scenarios, we will be able to accumulate more data and open up those cities and locations for our users. Speaking of family users, as we've always believed that they care a lot about safety and also comfort, especially when it comes to mimicking human drivers to be able to drive smoothly and give the entire family a good experience.

So, to make that happen, we're running shadow testing in our existing vehicles already to try to improve the behavior of our NOA features so that when they're launched, they can provide the best experience for our family users.

Tim Hsiao -- Morgan Stanley -- Analyst

[Foreign language] Thank you very much for the detailed sharing. Thank you.

Operator

Thank you. The next question comes from Bin Wang with Credit Suisse. Please go ahead.

Bin Wang -- Credit Suisse -- Analyst

[Foreign language] I actually got two questions all about the volume. If you see in last conference call, you mentioned you actually maybe try to do monthly, 30,000 units a month. What's your expectation? Which months will deliver, still your second quarter or in the future? The second thing about pure EV, in your media interview, it says that you have say that EV has been postponed to next year. Can you confirm that? If yes, what's the reason behind the postpone to next year? Thank you.

Xiang Li -- Founder, Chairman, and Chief Executive Officer

[Foreign language] So, first question, in Q2, we will gradually ramp up our delivery numbers. And our current goal is to reach the 33,000 monthly mark by June of this quarter. And talking about the BEV flagship, our plan is still to release it in Q4. And after which, we will be delivering the vehicles to retail stores for static viewing and test drives, which will follow a similar pace as you've observed with L9 and L8.

Bin Wang -- Credit Suisse -- Analyst

Thank you.

Operator

Thank you. The next question comes from Paul Gong with UBS. Please go ahead.

Paul Gong -- UBS -- Analyst

[Foreign language] So, my first question is regarding the expense. It seems that SG&A seems to be having either flattish quarter over quarter, or even slightly decline and below our budget, especially in terms of SG&A. Even with expanded network, it still seems to be well within control. So, can you please give an update of the full year and the spending guidance, as well as SG&A expense ratio? Thank you.

Johnny Tie Li -- Chief Financial Officer

Hi, Paul. This is Johnny. I will take over. For the R&D, we will still keep our full year guidance, which is over from RMB 10 billion to RMB 12 billion for the full year.

And for the SG&A as a percentage of revenue, we will improve starting from the first quarter of last year's ratio, yeah. This is our plan. Yeah. Thank you.

Paul Gong -- UBS -- Analyst

[Foreign language] So, my second question is regarding the competition. I think some other carmakers have launched similar size of the vehicle with also plugging hybrids system and with even lower price than the L8. Have we observed any impact in terms of the order intake? And how shall we think about the rising competition in the same segment? Thank you.

Xiang Li -- Founder, Chairman, and Chief Executive Officer

[Foreign language] Looking at our actual order intake, the orders for L8 is actually increasing very steadily. In fact, as we believe, as more players enter the market is actually good for our L8, which is the market leader, because many users read about these competitors and they start looking into this market segment,. And eventually, they come over to L8 and order our products. So, we don't -- generally don't think this to be a big threat.

And even when we look at the data for our L8 orders, this product you're talking about, this specific product isn't even among the top competitors. Our top competitors is still the Tesla Model Y.

Paul Gong -- UBS -- Analyst

[Foreign language] Thank you so much.

Operator

Thank you. The next question comes from Ming Hsun Lee from Bank of America. Please go ahead.

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

OK. Thank you. [Foreign language] So, my first question is regarding your business priority. At the current moment, is profitability and free cash flow more important for you, or market share is more important for you? And, also, how do you see the price competition in the second half this year, given the battery price already declined a lot? So, will you consider to slightly give a little bit of discount in order to maintain even higher market share?

Xiang Li -- Founder, Chairman, and Chief Executive Officer

[Foreign language] First of all, our top priority is going be market share. In Q2, our goal is to increase our market share in the EV market above RMB 200,000 in terms of MSRP from 11% to 13%. And we don't have any plans to offer discounts because as we made our long-term sales and product plans. We have already considered the price of our product as the most competitive, considering the size, the segment, and the price segment.

So, this is all taken into consideration, and we have confidence not to offer discount.

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

[Foreign language] So, my second question is regarding your battery EV plan. In April, you already disclosed your long-term goal. By 2025, you will have five BEV and five EV models and also five EREV models and one flagship model. So, how do you think about the long-term gross margin of your battery EV? And, also, what is your capex related to the BEV business?

Johnny Tie Li -- Chief Financial Officer

I will take that question. This is Johnny. And for this year's capex, in the last three years our capex is about RMB 10 billion. And rolling three are starting from this year based on our current estimate, including the HPC capex.

It's about RMB 18 billion. But it may expand if our early test on the HPC was 15. We may adjust our pricing plan on this. Thank you.

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

[Foreign language] 

Operator

The next question comes from Yuqian Ding with HSBC. Please go ahead.

Yuqian Ding -- HSBC -- Analyst

[Foreign language] Two questions on the product map. First, on the pure battery electric vehicle product strategy and profit outlook. As BEV might have quite different bond structure versus range extender for the coming EV models, big sized MPV, will there be range extender version versus pure battery electric version. So far, we noticed that during the competition, BYD and D9 have been selling well, but 90% -- 70% is range -- is PHEV.

And second, on the RMB 200K to RMB 300K pricing range, larger tank but more competition. How would Li Auto differentiate itself in winning midsize and compact size segment, which already have crowded model supply? Thank you.

Xiang Li -- Founder, Chairman, and Chief Executive Officer

[Foreign language] So, I'll answer this question from two angles. First of all, even though we haven't launched our HPC BEV products, in fact, we have invested in R&D and supply chain, especially developing in house parts very early on to prepare so that we can offer the best products at a price point very close to our EV product and deliver very similar gross margin as well. All business relying on our R&D efforts, as well as in-house parts, which is deployment in our supply chain. Without talking about specific models, whether it's BEVs or RUVs, our goal has always been to massively replace IC vehicles.

And in order to do that, the top priority is to tackle range of anxiety so that our users can drive freely between cities and away from their homes. So, our strategy for that product is to deploy charging stations, which can charge very, very rapidly in service areas and highways so that it can provide a very similar experience, even comparable to cars that are powered by trigonal chemical fuels. So, and at the same time, as I mentioned earlier, with our strategy in R&D and in-house development, we're able to offer all of this without incurring additional costs for the users so that they can buy these products at prices very similar to our EVs.

Operator

Thank you. The next question comes from Yingbo Xu with Citic Securities. Please go ahead.

Yingbo Xu -- Citic Group -- Analyst

[Foreign language] My question is how we plan our sales and service network in next two or three years to prepare for the large sales volume in future? Thank you.

Xiang Li -- Founder, Chairman, and Chief Executive Officer

[Foreign language] I'll answer this on three levels. First of all, as we build multiple vehicles in our product portfolio, we'll be upgrading stores, which can only house a one or two cars today, so that they can have a bigger part of our product offering. And, secondly, we will change the format in the cities, where we have a very high market share. We'll change the format of some of our stores to be a sales complex, which will offer better test driving experience, as well as drive higher conversion rates.

And, thirdly, in Tier 4 cities, we'll pretty much cover all -- we plan to pretty much cover all of the tier four cities, and the format will be very similar to what you see in auto complex offering a comprehensive store, offering services, as well as sales in the same complex. So, overall, as you look at our sales network, it will look very similar to what you see with Mercedes, BMW, and Audi, both in terms of scale and format.

Operator

Thank you. The next question comes from Jing Chang with CICC. Please go ahead.

Jing Chang -- CICC -- Analyst

[Foreign language] We can see that our average second quarter vehicle guidance is around 78.5 thousand units, which means that by the end of the second quarter, the monthly sales volume will hit 30,000 units. And therefore, I want to ask whether the kind of new orders is May 1st, we have already seen a significant improvement and the part, the continuous improvement of deeper volume in May and June. In addition, I want to ask whether the current proportion of air version and also the proportion of sales volume in lower tier cities have already made greater incremental contribution than before? And what do you think for the further state of our three existing models after their sales volume has already reached 30,000 units, especially in the third and fourth quarter this year. Can you expect higher level? Thank you.

Xiang Li -- Founder, Chairman, and Chief Executive Officer

[Foreign language] Answering these questions in order. First of all, May have typically been a low season in terms of vehicle sales. But for us, we have seen a strong growth compared to April, both in terms of delivery numbers and order numbers. And as the air models hit our stores and we begin to offer test drives, we've also seen a greater share of air models in L8 and L7.

Together, L8 and L7 air contribute about 20% of incremental sales. And secondly, we divide the city by what we call new Tier 1s and Tier 2s. And we see the best performance in these so-called new Tier 1 cities because these are strong drivers in terms of buying SUVs that are priced over RMB 300,000, and they will continue to be strong drivers. In our next steps, we will expand into tier three and Tier 4 cities, and we believe they will be a growth engine for our next stage of development.

Operator

Thank you -- yes. Please go ahead.

Jing Chang -- CICC -- Analyst

[Foreign language] My second question, we can see a number of our staff has extended a lot, and most staff will open in the low cities. And this is a major -- one of the major driving [Inaudible] volume growth. And we also can see that we are constantly adjusting up distribution channels and organization methods. So, can you share some detailed cases, especially for what difficulties do we see in the large cities and how we adjust to make the improvement?

Xiang Li -- Founder, Chairman, and Chief Executive Officer

[Foreign language] I can't disclose too many details, but what I can share is that this quarter, we have started a comprehensive organizational upgrade on the commercial side. We have changed from a regional organization structure to a province-based organizational structure. So, in terms of both customer acquisition and conversion resources, we've changed from a centrally allocated model to a more regional, more frontline-directed allocation model so that the resources can be allocated more efficiently. Compared to Q4 last year, actually, our number of stores hasn't changed much.

But the sales per store and sales per person have both increased very dramatically. Also, the conversion rate from leads to order has also increased as to our strategy in Tier 3 and 4 cities. What I can share right now is that we will trust this new process and organizational structure and give the power to the frontline workers so that they can use their judgment and experience to decide what is the best strategy that best suits their city and region to achieve the best results.

Operator

Thank you. The next question comes from Jiong Shao with Barclays. Please go ahead.

Jiong Shao -- Barclays -- Analyst

[Foreign language]

Xiang Li -- Founder, Chairman, and Chief Executive Officer

[Foreign language] First of all, in the Chengdu factory, we currently operate two production lines. The first line manufacturer is L8 and L9, and we currently operate two shifts which gives us the capacity of about 20,000 to 25,000 per month. The second line makes L7 and L8 and currently operates on one shift, delivering 10,000 to 12,000 per month. And L8 is actually used to balance the load of the two lines so that they can operate at optimal efficiency.

And going forward, based on demand, we can easily improve our production output with the current factory in Chengdu. So, this year, this factory should be enough to support our sales targets. The Beijing factory is dedicated to our best product line, and it's designed to initially offer a 100,000 units production capacity annually. And as we deliver more vehicles in the future, we will strategically increase the output of these production capacities to meet our demand.

Operator

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

Janet Chang -- Director, Investor Relations

Thank you all once again for joining us today. If you have any further questions, please feel free to contact Li Auto's investor relations team. That's all for today. Thank you, and have a good day.

Duration: 0 minutes

Call participants:

Janet Chang -- Director, Investor Relations

Xiang Li -- Founder, Chairman, and Chief Executive Officer

Johnny Tie Li -- Chief Financial Officer

Tim Hsiao -- Morgan Stanley -- Analyst

Bin Wang -- Credit Suisse -- Analyst

Paul Gong -- UBS -- Analyst

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

Yuqian Ding -- HSBC -- Analyst

Yingbo Xu -- Citic Group -- Analyst

Jing Chang -- CICC -- Analyst

Jiong Shao -- Barclays -- Analyst

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