Delay the release of the all-electric SUV to the first half of next year (Minutes of Li Auto's 1Q24 conference call)

The following is a summary of Li Auto's first quarter financial report conference call in 2024. For an interpretation of the financial report, please refer to " Li Auto: Profit Collapse! The Moment of Testing Faith Has Arrived "

I. Review of Core Financial Information:

II. Detailed Content of the Financial Report Conference Call

2.1. Key Points from Executive Statements:

1. Business Overview:

① Challenges and Responses: Faced with internal and external challenges since the beginning of the year, the performance in this quarter did not meet the initial expectations. Swift actions were taken, including organizational restructuring and workflow optimization, to enhance operational efficiency and decision quality.

② Market Performance: The market for new energy vehicles priced above 200,000 RMB grew by 24.8% year-on-year in the first quarter. Li Auto's growth rate far exceeded the market, establishing itself as a leader in high-end new energy vehicle brands.

③ Technological Updates: The team focused on established strategies, including enhancing user experience, price competitiveness, and platform ecosystem.

• Launched AD Pro 3.0, providing improved autonomous driving features, including Highway NOA and Urban NOA.
• Li Auto AD MAX 3.0 initiated public testing of Urban NOA function, with plans for OTA deployment in the third quarter.

③ Charging Network: Currently operating 404 supercharging stations and 1770 charging piles, with plans to have over 10,000 charging stations in China by the end of the year.

④ Outlook for the Second Quarter:

• Expected vehicle delivery volume between 105,000 and 110,000, mainly driven by market demand and new product launches.
• Through operational pace adjustments and matrix organization upgrades, further enhance operational efficiency and user value, pursuing healthy development.

1. Financial Highlights:

① Revenue: Increased by 36.4% year-on-year, driven by higher vehicle delivery volume, but offset by lower average selling price due to changes in product mix and pricing strategies; decreased by 38.6% quarter-on-quarter, impacted by seasonal factors of the Chinese New Year holiday and reduced vehicle deliveries.

② Gross Margin: Vehicle gross margin & overall gross margin decreased by 3.4% and 2.9% respectively quarter-on-quarter, mainly due to changes in pricing strategies and warranty reserve adjustments.

③ Research and Development Expenses: Increased by 4.6% year-on-year, decreased by 12.7% quarter-on-quarter. The year-on-year increase was mainly due to higher employee compensation, increased costs related to growing product portfolio and technology driven by employee headcount growth. The quarter-on-quarter decrease was in line with the timing and progress of new vehicle projects.

④ Selling, General, and Administrative Expenses (SG&A): Increased by 81% year-on-year, influenced by higher employee compensation and expenses related to expanding sales and service networks; decreased by 8.9% quarter-on-quarter, due to reduced vehicle deliveries⑤ Second Quarter Performance Outlook:

a. Vehicle deliveries: Expected to be between 105,000 and 110,000 units, a year-on-year growth of 21.3% to 27.1%.

b. Total revenue: Expected to be between RMB 29.9 billion and 31.4 billion (approximately USD 4 billion to 4.1 billion), a year-on-year growth of 4.2% to 9.4%.

2.2 Q&A Analyst Q&A

Q: If faced with pressure to achieve targets, would you consider adjusting pricing strategies to increase sales volume? Or do you plan to sacrifice profit to abandon sales targets?

A: The L6 series has performed exceptionally well with its product advantages and pricing strategies, accumulating over 41,000 orders from April 18 to May 5. The L6 series orders continue to grow strongly. After implementing new pricing strategies for the Li Auto L7, L8, and L9, order volumes have also increased. Overall, sales momentum is steadily increasing, and we are optimistic about monthly sales growth.

Q: Regarding gross profit margin, we previously expected a full-year gross profit margin of 20%. If we maintain this guidance, what factors will help us achieve a 20% gross profit margin in the second half of the year after price reductions? Is it the economies of scale when sales reach 60,000 units, or are there other contributing factors?

A: Following the challenges in the first quarter, we believe that sales recovery is crucial at this stage. Saving resources is equally important for the company. The automotive industry benefits significantly from economies of scale, and the sales recovery will alleviate pressure on the gross profit margin. The growth in sales volume of the L6 and optimization of product mix will have a positive impact on the gross profit margin. We have taken multiple measures to control costs in response to market challenges. Since March, we have faced many difficulties, and we expect the second quarter to be the most challenging period for the company this year.

Q: Management mentioned intense competition in the Chinese market, with poor sales performance year-to-date. Although Li Auto has launched the 2024 L6 and made price adjustments, what strategies will the company adopt to further increase sales? Is sales being suppressed? Will the company consider upgrading product specifications or further reducing prices to increase sales of L6, L7, L8, L9, and pure electric vehicles in the second half of the year?

A: Regarding pricing strategy, feedback received after the April adjustment shows that the current prices are highly competitive in the market, with positive customer response evident from the continuous growth in orders since April. Therefore, we do not have plans to further reduce prices. As for the gross profit margin, we firmly believe that for a healthy company, sales and gross profit margin are the two most important operational indicators. As a 9-year-old automotive company, Li Auto has always measured itself against these.

Q: After updating Li Auto's sales targets for 2024 and 2025, what is the reasonable scale for employee size, sales network, marketing expenses, and R&D investment? When will the effects of cost savings be financially evident?

A: Given the new annual sales targets, the company quickly adjusted resource allocation in less than two months to align with this year's operational goals, with a particular focus on improving operational efficiency. These adjustments are expected to show initial effects starting from the second quarterQ: Regarding the new store expansion plan for the sales network. What was our original plan to add 400 new stores this year, and what is the new target under the new strategy? How does the ratio of stores in downtown areas to suburbs look like? What are the considerations for different city tiers?

A: Regarding the store expansion plan, we plan sales and service networks based on sales demand. While increasing the number of stores, we aim to enhance the quality of individual stores by adding more display vehicles and optimizing store space. This year, we have opened 43 new stores, with over half of them able to display 9 or more vehicles. At the same time, we have also closed some smaller stores. As of May 19th, the total number of stores has reached 488. We have achieved full coverage in first-tier cities, new first-tier cities, and second-tier cities, as well as 89% coverage in third-tier cities.

There are 215 showrooms nationwide to help us expand coverage to more cities, especially third and fourth-tier cities. With the adjustment of new sales targets, we are gradually changing our market penetration strategy to better meet current business needs.

Regarding the types of new stores, over the past year, we have gradually increased the proportion of automotive park stores. In the future, as the vehicle lineup expands and brand awareness increases, we will continue to increase this proportion.

Q: How do you differentiate autonomous driving algorithms from other algorithms, and what is the future development direction of autonomous driving technology?

A: In the field of autonomous driving, we have three main development paths: fully relying on high-definition maps, partial independence, and full independence. The fully independent solution is the most challenging because it does not rely on high-definition map coverage, update frequency, etc., and can be used as long as there is navigation.

We plan to launch a fully independent high-definition map solution to all users in the third quarter of this year. This fully independent solution represents true artificial intelligence in the field of autonomous driving, using data-driven models to simulate human behavior, replacing rule-based solutions, similar to Tesla's end-to-end large-scale data-driven model concept. While this concept is consensual, implementing it requires a large amount of data and computing power, which not all car companies have. Therefore, different companies will choose suitable solutions based on their own situation, capabilities, and resources. These different choices will result in different product features and user value.

Q: What are our plans for pure electric vehicle products later this year and next year?

A: Regarding our upcoming SUV product, we plan to launch it in the first half of next year, rather than later this year. This decision is based on two main reasons: first, in order to sell high-end SUVs, we believe we must have a sufficient number of brand charging stations, ideally reaching the level of Tesla's charging network in China, which will be the best time to launch new products. Secondly, the limited number of display spaces in stores restricts our sales capacity, which is crucial for selling multiple models and maintaining stable sales of each model above 10,000 units. To achieve this goal, we need to increase the number of display spaces nationwide by 500 to 600. The L8 model has been affected in recent months due to a 40% reduction in display spaces, but the situation is improving, and we are adding more display spaces for the L8In summary, sufficient charging stations and additional display spaces are key conditions for selling SUV products. We expect to meet these conditions in the first half of next year.

Q: Will an independent brand or sales channel be established for the pure electric vehicle product line?

A: We will continue to adopt a direct sales model in the domestic market and plan to showcase all products in retail stores and showrooms. We are discussing differentiated retail strategies and may introduce innovative pilot projects in the future, sharing more details in due course.

Q: Considering the company's ample cash reserves and recent performance, are there plans for stock repurchases?

A: Regarding stock repurchases, we currently do not have specific plans and will evaluate them regularly based on the company's mergers and acquisitions, capital markets, and other priorities.

Q: In the context of the weak wealth effect of the middle class, has there been any update to our positioning in the household user market? With the growth of the supply chain for electric vehicles priced above 200,000 RMB, will our growth in the second half of the year mainly come from the expansion of the household market or the competitiveness of competing products? Could the management provide an analysis on this?

A: The market of middle to high-end household users priced above 200,000 RMB is our firm market choice. This positioning will not change in the medium to long term. At the same time, we believe that in this market, we still have a long way to go and many more detailed user values waiting for us to explore and develop.

Q: Does the company have plans to consider expanding into overseas markets in advance? Considering the favorable competitive and pricing environment in overseas markets, as well as the shift of European and American car companies towards hybrid extended-range technology, is this a potential option worth considering?

A: Regarding the overseas market strategy, as our models are increasingly popular overseas, we are accelerating the construction of an after-sales service network to ensure excellent service experience for overseas users. We plan to launch our own after-sales service network in Central Asia and the Middle East this year, and select suitable dealers for market expansion outside Western Europe and North America. Considering the adjustment of this year's sales target, we will focus on the domestic market.

Q: Recently, there have been reports in the media about a certain degree of restructuring within the company. What is your restructuring strategy for the future? In which departments or areas will you invest more resources to promote development?

A: In the recent organizational restructuring, we established a new department - Quality Operations Department. This is aimed at enabling business units to focus on high-quality decision-making and improving operational efficiency, rather than just focusing on processes themselves. Generally, organizational changes take 12 to 24 months to show results. Therefore, we expect to evaluate the effects of this restructuring between 2025 and 2026.

Q: With the company accelerating the opening of NOA functions in urban areas, how does the management evaluate the relative importance of NOA to consumers of vehicles priced above 250,000 RMB, and whether this importance is increasing? Will the Tesla FSD V12 function launch in China affect consumer behavior? For those edge car companies lacking NOA functions, will they face greater survival challenges in the future?A: We firmly believe that NOA will bring a safer and more convenient driving experience to users of Li Auto. The NOA test version launched in May has received positive feedback from the first batch of beta users, with a usage rate of over 65%, demonstrating high user approval.

Regarding the opening of Tesla's FSD V12 functionality, we believe this marks a new stage in the competition of autonomous driving technology, where autonomous driving will become a major consideration for consumers when purchasing cars. The launch of FSD in China will further enhance consumer attention to autonomous driving features and experiences, which will have a positive impact on the standardization and technological advancement of the automotive industry, and is expected to promote domestic automakers' investment and performance improvement in autonomous driving research and development.

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