Making autonomous driving the core objective (Summary of Ideal 3Q23 Conference Call)

Here is the detailed content of the Li Auto's 2023 Q3 earnings conference call. For the interpretation of the financial report, please refer to the article "Newcomer vs. Old Players: Can Li Auto Outperform Huawei?" at Longbridge.

1. Management Discussion

Market Share: Li Auto's L9 continues to be the best-selling full-size SUV, while L7 and L8 maintain their positions as the top two in the mid-size SUV segment. Li Auto ranks among the top 3 in the market for new energy vehicles priced above 200,000 RMB, with its market share increasing from 10.9% in Q1 to 13.7% in Q2 and further to 15.4% in Q3.

Production Capacity: The capacity upgrade of the Changzhou manufacturing base was completed in October, preparing for production ramp-up in the fourth quarter and continuously overcoming supply chain bottlenecks.

Guidance: Total deliveries in Q4 are expected to be between 125,000 and 128,000, with revenue ranging from 38.46 billion RMB to 39.38 billion RMB.

Mega: With a charging time of 12 minutes and a range of 500 kilometers, Mega has attracted attention beyond market expectations. Its spacious interior meets the travel needs of large families. With a drag coefficient of 0.15, the lowest among global MPVs, an 800V high-voltage platform, and a 5C charging rate, Mega has a peak charging power of over 520 kW, making it the fastest charging mass-produced passenger vehicle.

The Mega plan is scheduled to be released in December 2023, with the unveiling in January 2024 and customer deliveries starting in February.

Charging Stations: Li Auto continues to expand its 5C high-voltage charging network. As of now, it has built and operated 130 Ideal Super Charging Stations along national highways. By the end of this year, Li Auto plans to have over 300 high-speed super charging stations, covering four major economic regions: Beijing-Tianjin-Hebei, Yangtze River Delta, Greater Bay Area, and Sichuan-Chongqing. In addition to accelerating the deployment of high-speed charging stations, Li Auto is also actively building urban charging stations.

Intelligent Driving: The company plans to release the official version of AD Max 3.0 software by the end of this year, providing full-scenario NOA (Navigate on Autopilot). In the first half of next year, AD Pro, the full-scenario official software, will be launched. Some algorithm capabilities of AD Max will also be unleashed in AD Pro. Li Auto is confident that autonomous driving will become one of the first-tier technologies validated by the market next year.

Sales Network: As of October 31, 2023, Li Auto has 372 retail stores in 133 cities. In the fourth quarter, the company will continue to accelerate the expansion of its direct sales network, with the goal of opening more than 400 stores in over 140 cities nationwide, further increasing its market share.

Q&A

Q1. Regarding promotions and gross profit margin, will the promotion intensity in the ideal fourth quarter not significantly narrow down? Will the current single-car promotional discounts become the norm or increase further? What will be the impact on gross profit margin in the fourth quarter and next year? Will the gross profit margin still remain above 20%?

• When formulating sales and promotion policies each quarter, we fully consider the relationship between sales growth and gross profit margin.
• In each quarter and each year, we hope to maintain the gross profit margin above 20%, which will be a healthy profit margin that allows us to have sufficient funds for research and development and sales network expansion.

Q2. Ideal is clearly focusing on intelligent driving. Can you quantify Ideal's investment in autonomous driving? How much money will be invested in 2024/2025? What are the goals for team expansion? What is the timetable for the deployment of autonomous driving in a hundred cities? Will the original strategy of equipping the entire lineup be maintained after increasing investment?

• From a strategic perspective, the company has always been focused on investing in autonomous driving and considers leading in autonomous driving as a core strategic goal in the future.
• Currently, the autonomous driving team has about 900 people, and it is expected that the number of autonomous driving R&D personnel will reach around 2,000 by the end of 2024 and exceed 2,500 by the end of 2025.
• We will launch multi-scenario NOA, including city and highway NOA deployment, increase investment in intelligent driving algorithm research and development, vehicle testing, computing power, and personnel. We have sufficient cash flow to invest in intelligent driving.
• By the end of December, we will push the AD MAX3.0 version to all Max users, providing full-scenario NOA function and upgrading parking function using BEV large model. In the first half of 2024, we will also push AD3.0 to Pro users, pushing some Max algorithms to Pro. We are confident that in the first half of next year, it will become the first batch of market-validated models.
• We will always adhere to the standard configuration of intelligent driving, which can help Ideal have the largest intelligent driving fleet in the country and have more training mileage data, accelerating the iteration of large model algorithms.

Q3. How do you view the difference in demand between extended-range and pure electric vehicles in high-tier and low-tier cities? How will Ideal adjust its marketing strategy?

• In the SUV market with a price exceeding 300,000 RMB, we have achieved a market share of 50% in some developed cities, but our average market share in the entire market is less than 20%, which means we have a lot of room for future growth.
• We will continue to focus on first-tier, new-tier, new first-tier, and second-tier cities to increase our market share in first-tier cities. In the SUV market with a price of 300,000 RMB and above, the monthly sales volume of BEVs is about 55,000 units. If we consider the second-tier high-end brands included in BEVs and other brands, the monthly sales volume is about 90,000 units, which means we have room for growth in the next stage.
• **As of now, we have more than 300 retail stores nationwide, with over 100 retail stores already deployed in third and fourth-tier cities. Based on the current progress, we expect that the number of retail stores in third and fourth-tier cities will exceed 110 by the end of this year.

Q4. Supply chain capacity bottleneck completely resolved, supply chain cost reduction target? Future two-year capacity and capital expenditure plan?

The supply chain bottleneck has been successfully resolved. For the new vehicle manufacturing and parts procurement next year, we have implemented long-term supply strategies.

In terms of cost reduction, the long-term stable and mutually beneficial relationship between the main manufacturers and suppliers has yielded positive results. In the short term, we have implemented project platformization, including procurement consolidation and cost accounting, to bring procurement costs back to a reasonable level. In the medium and long term, we will achieve cost reduction through product research and development and technological innovation.

Capacity: Currently, we have two manufacturing bases in Beijing and Changzhou. In Changzhou, we have three production lines dedicated to the production of extended-range models L9, L8, and L7, as well as the L6 production line that will be put into operation next year. In Beijing, we have a production line dedicated to the production of pure electric models, with capacity sufficient to meet sales and delivery demand for the next two years.

Q5. What is your view on the competition between extended-range vehicles and the BYD Tang brand? What is the impact on market share?

• Our models have maintained strong sales momentum, and the delivery volume of all our models (including L9, L8, and L7) has exceeded 100,000 units. Just like yesterday, our L7 surpassed 100,000 units in less than 10 months since its launch in March this year. At the same time, our sales revenue has achieved stable and continuous growth, and our market share in the new energy vehicle market with sales volume over 200,000 units has increased from 10.9% in the first quarter to 15.4% in the third quarter. In October, our market share has exceeded 17%.
• Currently, the penetration rate of new energy vehicles in the market has exceeded 35%. The aggregation effect of leading automobile companies in this field will become increasingly evident, and our accumulated user base and market share will support us in further increasing our shipment volume and market share.

Q6. How do you balance the mega technological advantages, especially when it comes to low coefficient of drag? How will the selling point of Mega's blind pre-orders be launched?

• The sense of security brought by charging, the sense of value brought by space, and the longing brought by the leading design,
• Breakthrough in charging, 12 minutes of charging can provide a range of 500 kilometers, and the construction of a large number of charging stations on highways,
• With the redesign of the entire high-voltage electrification structure, the product has a large spatial dimension, providing the best space experience for family users.
• Breakthrough in design, introducing the design and concept that people think can only be seen in concept cars into today's electric vehicle market.

Q7. How do you view homogenized competition, more and larger screens, and better human-machine interaction? Are charging space and design the core experiences for us in terms of differentiated competition? Do you have any more confidence to give to investors to have greater confidence in next year's pricing and profitability?

• Actually, what I just mentioned is quite comprehensive. For example, lower prices, better cost-effectiveness, more configurations, more screens, more functions. I think we are solid in these aspects, and we hope to achieve a breakthrough in a higher dimension in the three key value aspects for users.
• 5C charging, even when the battery is at 85% charge, it can still have a charging power of over 300 kW, even higher than the maximum charging rate of many other competitors, continuously innovating in product development.

Q8. What is the difference between charging stations in the city and on the highway? In terms of charging technology and user experience, how can you differentiate yourself from your competitors?

• In urban areas, whether it is public charging or home charging, consumers can make good use of charging facilities. For pure electric vehicles, the first thing to solve is the most critical pain point, focusing on meeting the need for rapid energy replenishment during long-distance driving on highways.
• With the launch and delivery of pure electric vehicles next year, the construction of urban charging stations will also be initiated. In terms of product experience, we will consider hardware and software as a whole product. For example, when an Ideal Car owner is looking for a charging station, they can check the status of the charging gun and charging station through the in-car infotainment system. We also provide services such as plug-and-play and password-free payment. For pure electric vehicles, the battery can be preheated remotely.

Q9. In the long run, how do you view the market dynamics of the Chinese EV industry? For other companies, how can they survive or operate well? What do you think is the most important?

• Focus on the nine areas of the three major categories. The first category is the consensus of the entire company, including culture, brand, consumer brand, and strategy. The second category is business operations, covering research and development, sales and service, supply chain, and manufacturing. Finally, there are back-office functions, including human resources and organization, IT and processes, and finance and operations. To become a company that can truly achieve billions of dollars in revenue, it is indeed necessary to perform well in all aspects. There can be no weaknesses, which is the core foundation for any company to achieve the scale of selling millions of units per year.

Q10. How long does it take for MEGA to be launched and put into production? How is the early profitability level of MEGA? Will it become a drag on the net profit margin in the first and second quarters of next year? Regarding the new product line for next year, especially for pure electric vehicle models, Will and Shark, the former platform may correspond to larger and more expensive models. Is there any more information about their product positioning and market launch or delivery time?

• On the one hand, we have experience in this area, and on the other hand, we work with supplier partners to sort out and formulate quality control and capacity ramp-up activities.
• In terms of personnel, we have also carried out recruitment and training of factory personnel in advance. MEGA will be officially launched in December, and at the beginning of the increase in production volume, we expect a slight impact on the net profit margin. As production rates stabilize, the profit margin will quickly recover to a very healthy level.