The annual gross profit margin continues to be maintained at 5%-10% (Leapmotor 23 Q4 conference call minutes)
Leapmotor Fourth Quarter Meeting Minutes:
The following is the summary of Leapmotor's fourth quarter financial report conference call in 2023. For an interpretation of the financial report, please refer to " Gross Margin Continues to Rise, Can Leapmotor Lead the Way in Overseas Markets? 》
I. Review of Core Financial Information:
II. Detailed Content of the Financial Report Conference Call
2.1 Q&A Analyst Q&A
Q: What is the market situation in the new energy vehicle market in the price range of 100,000 to 200,000 RMB? How is the competition in the new energy vehicle market at this price range?
A: In the price range of 100,000 to 200,000 RMB, the competition in the new energy vehicle market is very intense. Leapmotor copes with this market by using technical innovation, full independent research and development, and internal manufacturing of core components. This allows us to provide users with more features at the same price, thus offering a better cost-effective experience.
We hope to effectively participate in the market competition through continuous efforts and differentiation strategies. Starting from September 2022, we have undergone multiple cost reduction cycles, with a cycle every six months. We aim to reduce the cost of each vehicle by 10,000 to 15,000 RMB per cycle, excluding the battery price. Because the battery is a cyclical material, its price fluctuates with raw materials. Our goal is to further reduce costs based on savings in battery costs.
In terms of market strategy, we have three components: business model, domestic market, and international market. In the domestic Chinese market, we are fearless because we compete comprehensively in the market, leveraging our product strategy and product advantages. We will continue to consolidate and optimize our position and capabilities in the market, sales, distribution, and service.
In the international market, we have the opportunity to launch models suitable for overseas markets, as the demand in overseas markets is very different from China. They prefer smaller models, focus more on control and handling, and have less demand for smart features compared to the Chinese market.
In the overseas market, we will leverage Stellantis' 10,000 distribution network and component distribution system to launch models suitable for overseas markets and quickly expand overseas markets. Leapmotor will also serve as a Tier 1 supplier, providing core components such as electric drive, electronic control, and electronic architecture to OEMs. Our partner, Stellantis Group, sells six to seven million cars annually and could also become a core component supplier for other OEMs. These are the three parts of the Leapmotor business model we aim to establishQ: The company has 20 billion RMB in cash and the operating cash flow has reached breakeven. What are the plans for capital expenditures, research and development, and shareholder returns?
A: In 2023, our operating cash flow will exceed 1 billion RMB. If sales reach the target in 2024, we will achieve monthly sales of 30,000 units by the fourth quarter of this year, compared to over 10,000 units per month in 2023.
Based on the payment terms of component suppliers, an increase in sales can generate 5 to 6 billion RMB in cash due to payment timing differences. Therefore, based on our payment terms with suppliers, we will have a positive cash flow of 5 billion. According to our plan, if losses are kept within 4 billion RMB, we will continue to generate 1 billion RMB in positive cash flow by 2024. In terms of funds, Leapmotor has very strong security.
The company's full-year gross margin target for 2024 will turn positive. With increased sales, gross profit will increase. Marketing expenses and positive profits will be invested in smart driving and new model development, more than in 2023. We are also cooperating with overseas markets, with over ten models in development. This investment will include hiring 200 more employees in smart driving, bringing the total to 500. There will be more recruitment in research and development, smart driving, as well as algorithm and leasing expenses, which will be another capital expenditure. Overall, we are quite confident that we can generate positive cash flow at least in this year.
Q: What preparations have been made for globalization, especially in terms of models and overseas factories? Is there the ability to establish factories overseas in a short period of time?
A: In terms of globalization preparations, we plan to obtain EU certification for T03 and C10 in the second quarter. Once certified, we will start recruiting distributors and building a network, with sales revenue expected in the third and fourth quarters. Our internationalization strategy is different from other Chinese peers, who usually adopt a trade or major distributor model, while we will operate overseas with distributor and dealer models, deeply involved in model promotion.
In overseas markets, consumer demands differ from the Chinese market. For example, in Europe, C10 is already the largest model, but overseas markets prefer A-class or A0-class models, which are smaller than Chinese models. Therefore, we are developing models more suitable for overseas markets and plan to launch a new sedan model next year. We hope to provide a complete model lineup for overseas markets in the next two to three years.
C10 will become our flagship model in overseas markets, carrying the brand image and possibly being our highest-level model. T03 will be the main contributor to sales volume. As for the construction of overseas factories, we have not yet obtained formal certification, so we cannot disclose specific information publicly. However, our goal is to optimize costs overseas because to build a factory locally, there must be sufficient sales volume to spread the costsQ: Can you talk about the considerations for cooperating with Huawei or HarmonyOS?
A: Our cooperation with Huawei mainly focuses on applications, aiming to provide convenience and functionality upgrades for consumers. We have signed a digital cooperation agreement with Huawei, but this is at the application level, not related to the car itself. HarmonyOS from Huawei may occupy a certain market share in the future smartphone market, so we are cooperating with Huawei in advance. In the future, we will deploy Leapmotor applications on HarmonyOS-based smartphones, which is the content of our cooperation.
Q: Can you discuss the annual sales situation and give a rough estimate of sales in first-tier cities, lower-tier cities, and overseas markets? Considering price reductions and pricing rules, what is the outlook for gross profit margin trends in 2024?
A: For 2024, we are optimistic and hope to achieve a sales target of 250,000 to 300,000 units, mainly targeting the Chinese market. As for overseas markets, we plan to start deliveries at the end of the third quarter, so this is not included in the target I just mentioned. Based on the current sales structure in the Chinese market, New Energy Vehicles (NEVs) are mainly purchased by those willing to try new things, mainly in first and second-tier cities, with Leapmotor focusing on an average selling price (ASP) of 150,000 RMB. Therefore, more work needs to be done in lower-tier cities, especially for those who still have concerns about using Battery Electric Vehicles (BEVs), as they tend to prefer Extended Range Electric Vehicles (EREVs). Thus, EREVs are suitable for lower-tier cities. At the same time, we also need to compete for market share in first-tier cities to replace traditional Internal Combustion Engine (ICE) vehicles. In first-tier cities like Beijing, we need to focus on suburban markets, as users there may be more suitable for our products.
Overall, we are optimistic about the gross profit margin for 2024. In the fourth quarter of last year, our gross profit margin was close to 5% to 7%, at 6.7%. In the fourth quarter of 2023, 85% of the business was completed through a distribution model. If we fully transition to direct sales, the gross profit margin will reach 12% or 13%. In 2024, although we expect to face more competition and need to offer more incentives to customers, we have completed three rounds of cost reduction work. Therefore, we are confident in lowering costs through technology and providing customers with valuable products. At the same time, we expect to maintain a gross profit margin of 5% to 10% for the full year in 2024.
Q: You mentioned there will be three business models in the future, any new developments in this regard? Especially in the role of a first-tier supplier, can you talk about how being a first-tier supplier will develop? What gross profit margin do you expect to gain from the role of a first-tier supplier?
A: We have spent eight years testing through 300,000 vehicles, and our core components have been very well tested and verified, proving their applicability, marketability, and economic performance. For example, in 2023, our battery department sold many battery packs, collaborated with some OEMs, and our battery sales exceeded 100 million RMBThis is the starting point for electric drive. We have two SOPs (Standard Operating Procedures). In the automotive industry, it takes 1.5 to 2 years from SOP to delivery. So in 2024, we will receive more SOPs, but revenue will only be realized in 2025 and 2026.
We have high expectations for components. Of course, we need driving force, output, we have MDH (motors, drives, and hydraulic systems), we need efficiency, we need cost-effectiveness. All of these must be able to compete with other Tier 1 suppliers to win customers. There are other competitors in these areas, making it more difficult for us to become Tier 1 suppliers. But we have our own sales channels, we cooperate with different OEMs. Different OEMs have different needs and desires, so they have different cooperation interests. So we talked about Stellantis. They also have a considerable scale. Stellantis may become our customer. So we still have many opportunities.
For any product, whether it is a vehicle or a component, we always offer the best value for money compared to competitors, because products involve BOM (Bill of Materials), delivery, and quality. Especially for B2B, core competitiveness is necessary to win customer trust.
In the coming years, each component, each part, will be an independent listed company. For example, we have the capacity for lighting fixtures for 1 million vehicles, the capacity for 800,000 electric vehicles, and the capacity to provide battery packs for 600,000 vehicles. From cells to battery packs, from design to manufacturing, we have the capacity to provide battery packs for 600,000 vehicles. So there is a lot to look forward to in this regard in the future.
Q: When it comes to being a Tier 1 supplier for electric vehicle manufacturers (EMs), customers may be concerned about relationships with competitors. So, as a company that serves as both an OEM and a Tier 1 supplier, what are your advantages? In the case of being both a component supplier and an OEM, are there any separate capital expenditure (CapEx) plans?
A: Our advantage lies in the fact that as an OEM, we understand customer needs very well, and our products have been validated through our own vehicles. Therefore, I believe this is a significant advantage. Ultimately, whether they are competitors or customers, whether they will purchase from us, it all comes down to competitive advantage. Just like Toyota, they have several suppliers, and they can choose which customers to serve. So, it actually depends on whether you have quality, delivery capability, and performance that exceeds expectations. This is crucial, this is essential. So for the future, I think as long as we continue to maintain this, each core component will become a very promising area, as we have gained many advantages through innovation. For example, our Cloverleaf electronic electrical architecture. The C10 is the first model in March, and we will start delivering products based on the Cloverleaf integrated architecture from April. Next month, both the C11 and C01 models will be based on the new architectureThis kind of speed is very rare.
Usually, if you look at other OEMs, this kind of speed is very rare. This is because of our internal R&D, a complete set of R&D. In the future, it's like smartphones, where all architectures and chips will be replaced every two years. Old models must keep up with this speed, otherwise you won't be able to sell your products. Just like smartphones, where chips are replaced every year, cars change to new chips every two years. If you can't keep up, you will fall behind.
Q: Regarding sales channels, there were 560 stores at the end of last year, are there any plans for new store openings this year and what arrangements are there for channel management?
A: Regarding Leapmotor's channel management, in 2023 we have added many channels, but mainly optimized existing channels. We are replacing some small dealers with larger, more capable dealers. Last year, we went through a channel optimization process and promoted the development of the OneplusN model. We hope to establish a regional center in specific areas, for example, in a city, we want to establish a standardized 4S store delivery service center, as well as neighborhood display centers and small screens.
This OneplusN model will help us get closer to users, we will have more city display centers and Sumaraki display centers as well as central centers, which will give users confidence that they will receive service and maintenance. Some investors have been asking, we hope investors will do geographical management. If there are model investors, they will establish their 1+N model by geographical region. This way investors will have their own region and will not conflict with us in terms of price competition. So this is the channel management strategy for 2023, mainly optimization.
By 2024, we hope to establish more regional centers. By the end of the year, we hope to establish over 200 central stores. So 2024 is still an optimization process, the number of stores will increase from 560 to over 300. We will not establish too many supermarkets or shopping mall stores, but will replace underperforming stores to improve performance. That's our plan.
As for cars, we will increase from 100 to 200 regional center stores. The C10 has been launched, and in the coming days we will achieve very good results. In March, we will deliver over 4,000 vehicles. This is a gradual increase in production capacity. The performance of the C10 is as expected, and at the upcoming Beijing Auto Show, we will launch the C16, a six-seater model that many users are looking forward to. We hope the C16 will start delivery from June. So the plan for 2024 is, because we launched the C10 and C16 before June, we will later launch a five-seater A-level SUV, planned for the end of 2024. So this year we will launch three new models. By 2025, we will launch at least four to five new models, with more new models in 2025Q: Will the company mainly focus on internal R&D or collaborate with partners to develop intelligent driving technology? In order to meet the demands of both the European and domestic markets, your company may need to introduce multiple models, each of which will require some time to increase production. How do you ensure meeting market demands, production, and delivery? Are there any plans or strategies regarding factories?
A: The company has always insisted on internal R&D in intelligent driving algorithms. Its team has made significant achievements in the C10 project after three years of effort, launching the first NVIDIA ORIN X chip equipped with an advanced intelligent driving solution. Compared with peers such as Nio, Li Auto, XPeng, and Huawei, its autonomous driving technology has been applied on some highways and urban expressways in Hangzhou and Shanghai. Currently, the company's autonomous driving technology performance is at a moderate level in autonomous R&D and algorithm fields, but after three to six months of optimization, its capabilities will gradually approach the industry-leading level. The company is focusing on cutting-edge technologies like Large Language Models (LLM) and expects to become one of the top players in the industry within the next year. By insisting on internal R&D to catch up with or even surpass the best technology, the company benefits from its team's deep background and foundation in AI vision.
The company sees globalization as a key to survival and emphasizes that internationalization is an important strategic goal. Through cooperation with Stellantis, the company can leverage Stellantis' logistics network, parts distribution system, global dealers, and manufacturing systems to accelerate its globalization process. To meet the demands of different markets, the company needs to focus on both the Chinese and overseas markets and develop diversified models. The company is planning more for its factories, with two production bases to meet all production needs. For example, the Jinhua factory will mainly produce the C series models, while smaller models will be produced at the Jinghang factory. The company aims to centralize manufacturing resources so that suppliers can establish facilities near the factories. This will help the company achieve better value for money and cost structure, improving production efficiency.
Q: What are the specific plans for overseas models? Are there any specific markets or countries planned to enter first? Can you discuss the latest progress of the joint venture?
A: Overseas models will have different naming conventions from China. For example, A0-level models in China will be B-level in overseas markets, and A-level in China will be C-level overseas. The company is planning multiple models and aims to launch them in the next two to three years. The first batch of models includes C10 and T03, where C10 will be named CPlus in overseas markets, positioned as a C-level model. Additionally, the company plans to launch A-level and B-level models. The company's SUVs and crossover models will cover multiple levels such as A-level, C-level, and C-plus to meet different market demands. The company plans to first launch new models in the European market but also hopes to simultaneously expand its globalization process to other regions, including South America, the Middle East, Africa, and the Asia-Pacific region. The company's goal is to achieve global deployment of personnel and products in the first quarter of 2024 and 2025 to drive its globalization effortsOn the overseas progress front, the company has completed the outbound direct investment (ODI) and related approval work, and will complete the registration of overseas companies next week. The international management team of the company has been fully established, including the CEO, marketing team, sales team, and service team, with all key positions filled, and efforts are being made towards the plan to be launched in the third quarter. Work in various aspects such as IT, finance, human resources, dealer network, brand building, and product development is proceeding as planned. The company is fully committed to building a ground dealer network and service network, which is a key step in achieving its overseas goals. The company plans to adopt a dealer model similar to traditional original equipment manufacturers, and this model is currently progressing as planned. It is expected that by September, the company will complete all preparations and begin laying out in the European market, followed by South America, the Middle East, and the Asia-Pacific market. All products have been developed with overseas versions, meaning the company's products will be suitable for global sales, further demonstrating the company's determination and capability to advance its globalization strategy.
Q: Regarding C16 SOP?
A: The company plans to start mass production of the C16 model in May, with expectations to deliver over 1,000 units starting in June, and achieve large-scale deliveries in July. Among the four models in this year's sales plan, the C series will be the main sales force. Although the T03 will contribute 20% of sales, it is expected that 80% of sales will come from the C series. The specific sales distribution of C11, C10, and C16 within the C series is difficult to predict accurately, but among past buyers of C11 and C10, some buyers may switch between the two, showing a certain overlap, while these models also have their own characteristics and differentiations. C11 is considered to have lasting appeal due to its classic design. For C01, the company delivered 25,000 units in 2023 and expects sales to increase to 40,000 to 50,000 units this year. The company hopes that each model can contribute to a more balanced sales volume, which is not only beneficial for capacity management but also meets financial arrangement needs. To avoid an overly imbalanced sales distribution, the company is committed to making the sales distribution of C11 and C16 more balanced, which will help with the company's financial arrangements.
Q: What are the plans for the price range of the models in the future? Any cooperation with Stellantis, and what is the price range?
A: The company's main price range is 100,000 to 200,000 RMB, which is the main price strategy for the next five to ten years. Although there may be some products with higher or lower prices, this price range will be the core. The pricing of the company's products is based on costs, aiming to reduce costs through innovation and set prices based on costs to provide the best features and cost-effectiveness at the same price or cost. The company has internal manufacturing capabilities, giving it a cost advantage. For each component, such as headlights, the company maintains a certain gross margin, which helps save costs and enhance competitiveness. The company plans to consolidate its cost advantage and focus resources within its core price range, which is 100,000 to 250,000 RMB, avoiding blindly pursuing the high-end market. Cooperation with Stellantis will focus on leveraging China's advantages in electric vehicles, including scale and core component manufacturing capabilitiesThe company plans to cooperate with Stellantis overseas, following the joint venture model used in the past when introducing foreign internal combustion engine models in China, to provide components overseas. At the same time, overseas partners as shareholders will also benefit. They can also obtain better prices.
Risk Disclosure and Disclaimer for this Article: Dolphin Research Disclaimer and General Disclosure
