Expected third-quarter automotive gross margin to rise to over 19% (Li Auto 2Q24 conference call minutes)
The following is the summary of the second quarter performance conference call of Li Auto in 2024. For financial report interpretation, please refer to " [Will Li Auto still have good days despite being "pressed to the ground" by Huawei?](file:///C:\Users\JOY\Downloads\被华为%20“按地上”%20 摩擦，理想还能有好日子吗？) "
I. Review of Core Financial Information:
II. Detailed Content of the Financial Report Conference Call
2.1. Key Points from Executive Statements:
① Sales Performance and Market Share
a. In the second quarter of 2024, Li Auto delivered over 108,000 vehicles, a year-on-year increase of 25.5%.
b. In the NEV market with a price of RMB 200,000 and above, Li Auto's market share increased from 13.6% in the first quarter to 14.4% in the second quarter, ranking first among domestic car brands.
c. By June 21, 2024, Li Auto's cumulative delivery volume exceeded 800,000 vehicles; in July 2024, the company set a record with a monthly delivery volume of 51,000 vehicles; on August 21, the cumulative delivery volume surpassed 900,000 vehicles, setting a new historical high for Chinese high-end car brands.
② Performance of Main Models
a. In the second quarter, Li Auto's L7 and L8 ranked first and second in the large NEV market with a price of RMB 300,000 and above.
b. Since the launch of Li Auto's L6 in April, production and deliveries have continued to grow. Since June, monthly delivery volumes have exceeded 20,000 units, ranking second.
③ Autonomous Driving and User Experience
a. Through frequent OTA updates, Li Auto continues to add new features and optimize user experience. In July, OTA versions 6.0 and 6.1 were released, bringing significant improvements in autonomous driving, intelligent space, and intelligent electric drive.
b. In terms of autonomous driving, in July, the company pushed unlimited city and road No-Map NOA to over 240,000 AD max users, which can be driven nationwide without relying on prior information. The company's No-Map NOA has received wide acclaim from users and driven order growth. Since the start of the experience in May, store NOA test drives have doubled; after the launch of OTA 6.0, daily active users of city NOA have nearly increased eightfold, and the average city NOA mileage per vehicle has nearly tripled.
c. As of now, Li Auto's intelligent driving user penetration rate has exceeded 99%, and the cumulative mileage of full-scenario NOA has exceeded 1.11 billion kilometers. User satisfaction with intelligent driving and ADmax orders continue to rise.
d. Li Auto's intelligent driving will continue to upgrade and iterate rapidly. At the intelligent driving sub-level release conference held on July 5, the company unveiled the industry's first dual-system intelligent driving solution based on end-to-end and VLM visual language models, and pushed it to a new scale of test users at the end of JulyEnd-to-end and VRM's visual language model not only give intelligent driving systems stronger gaming and logical thinking capabilities, but also fully demonstrate onemodel's rapid iteration capabilities. Currently, early bird testing is iterating at a speed of 14 versions per week, with an average user daily activity exceeding 70%.
e. The company's independently developed reconstruction and generative event model has been used for training and validation in intelligent driving. Based on this new dual-system architecture smart driving solution, information transmission and reasoning computation efficiency can be higher, model iteration speed faster, planning capability more impressive, and user experience more optimized.
④ Sales and Service Network Expansion
a. The company continues to upgrade and expand Li Auto's sales and service network. In the second quarter, by replacing northern mall stores with centers (i.e. 4S stores) and upgrading existing mall stores, the proportion of company center stores has increased to 31%, with a more than 13% increase in store booth numbers on a month-on-month basis.
b. As of July 31st, the company has established 487 retail stores in 146 cities and operates 411 service centers in 220 cities to meet the growing demand for product portfolios and vehicle ownership.
c. In terms of charging network, as of August 27th, the company has operated 733 supercharging stations covering 3,428 charging piles.
⑤ Company Outlook
a. The delivery volume guidance for the third quarter is between 145,000 and 155,000 vehicles, with an expected year-on-year growth of 38% to 47.5%.
b. Plans to launch a battery electric SUV in the first half of 2025 to serve a wider range of household users.
2.2. Analyst Q&A
Q: With the company actively investing in next-generation autonomous driving technology and massively expanding its team, how to evaluate the return on investment and efficiency of such large-scale investments? For investors, which indicators are more effective in evaluating the commercial progress of autonomous driving technology?
A: The investment output efficiency of Li Auto's smart driving is relatively high. In terms of measurement indicators, the company believes in being results-oriented, and it should be viewed from two aspects: first, whether users are willing to use it, such as a significant proportion of usage time and mileage. The second is whether users are willing to spend money to buy it.
From the user's perspective, since Li Auto's NOA was launched in July, the acceptance of smart driving has been increasing. The daily activity and driving mileage of urban NOA have significantly increased, even several times over; from the market perspective, smart driving has also had a very good driving effect on sales volume. Potential users come to the store for test drives, the proportion of NOA has doubled, and the AD max orders for various models are increasing, especially for models above 300,000, where the AD max order ratio has reached close to 70%.
At the same time, end-to-end combined with VLM (visual language model) has set a threshold. Because starting from this generation is when artificial intelligence is truly used for smart driving, and artificial intelligence requires a large amount of data and computing power, it will allow companies with a high level of smart driving vehicle ownership and sufficient R&D investment to have increasingly greater advantages in autonomous driving, and will truly promote the increase in sales volume, which in turn will bring about an increase in ownership and R&D investment, creating a continuous positive snowball effect.
Q: Can the management comment on the ongoing competition between Li Auto and Huawei? In the second half of the year, as Li Auto and Huawei, among other brands, compete for a leading position in the family SUV market equipped with intelligent driving functions, how do you expect the competitive landscape to evolve?
A: Huawei is our main competitor in the market. We believe that in the long term, we will maintain a very healthy coexistence with Huawei. Our attitude has always been to continuously learn from Huawei, especially in terms of research and development systems, operations, and management methods. Having such a learning role model is crucial for us as a startup company.
Q: Regarding this year's profit margin guidance. Are you maintaining the full-year gross margin guidance of 20%? Especially in the third quarter, you mentioned that the proportion of AD MAX versions exceeded 70%. Will this affect the product mix? Is there an expectation for the gross margin in the third quarter—especially the vehicle gross margin—to rebound to 20%?
A: Last quarter, we expected the vehicle gross margin to be around 18%, and we ultimately achieved 18.7%, reflecting the overall performance of the company, as well as the product mix and delivery situation. For the third quarter, we expect the vehicle gross margin to slightly rebound, exceeding 19%, while the total gross margin will exceed 20% in the third quarter.
Q: You postponed the release of the all-electric model by nearly six months. Was this due to design changes? Especially in terms of intelligent functions design, are customers more inclined to choose a standard design different from MEGA's design? Do you have any comments on this?
A: Li MEGA validated our strength in the 800-volt high-voltage power system and related R&D capabilities, including power system efficiency, high-voltage platform, and the enhancement of end-to-end charging experience and capabilities. With our progress in the field of autonomous driving, we have also become a top player in the autonomous driving field. At the same time, our competitiveness in the intelligent cockpit and intelligent space field has always been strong. For our flagship SUV, we need to address two important issues. First is the overall design of the product, and second is to ensure that we have over 2,000 charging stations in place when we start delivering the product. Overall, we are confident in the competitiveness of our future all-electric SUV and aim to become a top brand in the high-end electric vehicle market within two years.
Q: Regarding the company's strategy to deal with competition in the second half of the year. Especially in the absence of new models being launched, how does the company expect to maintain or even increase sales volume?
A: Indeed, new models are a reason for driving sales growth, but in my opinion, efficient sales operations are equally key to driving sales, which is what we are currently focusing on. Looking ahead, we will continue to optimize store layouts while enhancing sales capabilities. This will bring more possibilities for sales growth and improve the efficiency of sales operations. In addition, our recent promotion of autonomous driving technology has also driven sales growth, especially in the sales of AD MAX models. Data shows that our market share in the electric vehicle market above RMB 200,000 increased from 13.6% in the first quarter of 2024 to 14.4% in the second quarter. Our goal is to further increase this market share to 16% in the last quarter of this year.
Q: Earlier this year, the management lowered the annual sales target to 560,000 units, but the capital expenditure forecast we provided in the first quarter remains high, at around RMB 15 billion. With the decrease in sales expectations, how should we view the pace of capacity expansion and the new capital expenditure forecast?
A: As mentioned earlier, we expect to achieve a 16% market share in the electric vehicle market with a price of over RMB 200,000, and we are optimistic about the healthy development of the passenger car market in the second half of the year. Therefore, the company is confident in delivering over 500,000 vehicles for the full year.
Regarding capital expenditure, our initial estimate at the beginning of the year was around USD 2 billion. Currently, we have adjusted this estimate to USD 1.1 billion to USD 1.2 billion. In terms of free cash flow, we have achieved positive free cash flow. With the optimization of capital expenditure and the improvement of operational efficiency, we are very confident that the company's free cash flow will remain positive starting from the third quarter.
Q: What are the company's plans for end-to-end autonomous driving in the future? The second question is about the development trend of Robotaxi, what is the company's view on this?
A: First, regarding the end-to-end VLM model, since the launch of the thousand-person early bird testing program in July, the iteration speed and performance of the model have exceeded our expectations. In less than a month, the model has undergone 9 iterations, with a new iteration every 3-4 days on average.
The amount of data for model training has also increased from the initial 1 million clips to 2.3 million clips, and the model's capabilities are continuously improving. Many early bird testers have shared their excellent performance in end-to-end driving on social media. The rapid iteration of the model is inseparable from efficient automated testing capabilities. We have built a simulation testing system based on the world model, reconstructed and generated through user feedback and real-world scenario technologies, established an error and testing scenario library to ensure that the model undergoes the most comprehensive testing and training. This testing process can score the model on multiple dimensions such as safety and comfort. We believe that autonomous driving research and development has undergone a fundamental change, shifting from hardware iteration to model capability iteration, with the iteration speed highly dependent on high-quality large-scale data, powerful computing capabilities, and automated simulation testing programs. We plan to launch a large-scale testing program in September, covering approximately 10,000 users, to further advance the end-to-end VLM system.
Regarding Robotaxi, our view is that as we achieve Level 4 autonomous driving, the demand for Robotaxi may actually decrease. Of course, the development of this market still requires time for observation and evaluation.
Q: Recently, we have noticed that consumer sentiment in China is relatively weak, but car sales continue to grow. With the impact of government stimulus policies and the background of price increases for some German luxury brands, do you think the competitive environment in the high-end market has improved recently?
A: Our recent strong sales performance is mainly due to our significant competitive advantage in product strength, as well as our rapid response and adjustment capabilities to market changes. In addition to traditional sales channels, we have increased investment in online marketing resources in the second quarter, which has yielded significant results and driven significant sales growthIn addition, we are innovating the sales system to give more autonomy to regional levels. This system allows regions to flexibly formulate regional sales strategies within the profit target framework set by the company, greatly enhancing the sales potential of each region. Finally, since June 2024, the market penetration rate of new energy vehicles priced above 200,000 RMB has exceeded 50%, marking an important milestone. We believe that with further industry consolidation, Li Auto will become one of the major beneficiaries in this process.
Q: Regarding the preparation work for next year's BEV models, given the adjustment of the launch time by six months, will the company adopt more new and latest technologies? How is the company preparing for the scale of production capacity in the supply chain?
A: Our plan is to launch multiple 800-volt high-voltage electric vehicle models in 2025. In terms of research and development, everything is proceeding as planned. Currently, we have completed multiple rounds of small-scale trial production and are proceeding as planned in durability tests under high temperature and high humidity conditions. Progress in supply chain preparation is also smooth. The planned production capacity is sufficient to meet sales targets, manufacturing plants have been completed, and testing and installation of the four major production lines for stamping, welding, painting, and assembly are underway. We plan to independently develop key components for electric vehicle models and have conducted performance tests. In addition, the capacity construction of external suppliers and partners is progressing as planned. Overall, we are confident in delivering our high-end models next year as planned.
Q: In the previous quarter, management mentioned optimizing the product mix by reallocating the display of models within channels and increasing the exposure of high-end models such as L8. What is the effect of this measure compared to expectations? Can you also provide an update on the annual R&D expense guidance and indicate if there have been any changes?
A: Firstly, as we open more pop-up retail stores, the number of L8 displays is gradually increasing. We are also developing new online sales channels to ensure sufficient sales leads for L8. Therefore, since April, the sales performance of L8 has steadily improved, with current monthly deliveries restored to the range of 6,000 to 7,000 units.
Regarding R&D expenses, we expect the full-year GAAP R&D expenses to be below 12 billion RMB.
Q: The company made many improvements in the first half of 2024. Mr. Li Xiang mentioned increasing the proportion of central flagship stores. Could you please explain in detail the logic behind this change and our strategies for expanding the distribution network and entering lower-tier cities? Additionally, how should we prepare for the launch of long-range electric vehicle models next year?
Firstly, we adhere to a direct sales model with the goal of showcasing all models in our showrooms. Currently, our Water World retail stores have large display spaces capable of showcasing 9 to 11 vehicles, where we will display all models. Since the beginning of this year, we have made several adjustments to our sales channels. We are gradually replacing underperforming stores in shopping malls with large flagship stores located in major automotive parks. We will continue to focus on the best automotive parks in the top 150 cities and open large, high-quality stores there. As of the end of June 2024, the proportion of our stores in automotive parks has increased from 24% at the end of last year to 31%.We plan to further increase this ratio to close to 50% by the end of this year.
Regarding the launch of electric vehicle models next year, we will continue to increase the proportion of car park stores to better showcase our models. With the increase in the proportion of car park stores, the display capacity of each store has also improved. The number of display vehicles per store has increased from 4.6 vehicles at the end of last year to 5.1 vehicles by the end of June 2024, and we plan to increase this indicator to 6 vehicles per store by the end of this year. Our total number of display vehicles has increased from 2,642 vehicles at the end of last year to 2,919 vehicles by the end of June 2024, and we plan to further increase this number to over 3,600 vehicles by the end of this year.
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