Still focusing on producing pure electric BEVs (ZEEKR 1Q24 conference call minutes)

The following is a summary of ZEEKR's first quarter financial report conference call in 2024. For an interpretation of the financial report, please refer to " "The Second Generation of Electric Vehicles" ZEEKR: Will it be a Dark Horse?" 》

I. Review of Core Financial Information:

II. Detailed Content of the Financial Report Conference Call

2.1. Key Points from Executive Statements:

1. Business Progress:

① Product Lineup:

• ZEEKR 001 2024 model: Launched at the end of February this year, with over 1,000 upgrades including an 800-volt electrical system, the most advanced computing platform, and LiDAR. Monthly deliveries in April and May both exceeded 10,000 units, maintaining the top spot in sales for models priced above 250,000 RMB.
• ZEEKR 009 Glory: Unveiled on April 19th and deliveries started on May 24th, it is the world's only luxury MPV equipped with LiDAR.
• ZEEKR Mix: Debuted at the Beijing Auto Show in April, positioned as a five-seater model for family travel, based on the SEA-M architecture.
• ZEEKR 007: Deliveries started in January this year, and three months later, an enhanced rear-wheel drive version was launched, becoming the fastest mass-produced electric vehicle priced below 500,000 RMB.
• Future Product Releases: In the second half of this year, ZEEKR will launch ZEEKR Mix and a new mid-sized pure electric SUV, expanding the product lineup to six models.

② Advancements in Intelligent Technology:

• Intelligent Driving: Advancing intelligent technology through self-research and collaboration, for example, the ZEEKR 001 2024 model is equipped with CCD electromagnetic shock absorption, bidirectional sliding, and other technologies. On May 15th, the OS 6.1 version of ZEEKR 007 debuted the automatic parking function for mechanical parking spaces.
• Intelligent Cockpit: ZEEKR 009 Glory achieved global mass production of the dual 8295 chip computing platform, providing independent computing power support for the front and rear cabins, with industry-leading cockpit system response speed, graphic video processing capabilities, and AI large model computing performance.

③ Charging Solutions:

• Ultra-Fast Charging Technology: ZEEKR is the carmaker with the most globally produced 800-volt models. In April this year, it launched the world's first 800kW V3 fast charging station, equipped with 8 V3 fast charging piles, each with a peak power of 800 kW.

• Charging Network: As of the end of May, ZEEKR has built 1,076 charging stations, including 487 ultra-fast charging stations, totaling 2,650 charging piles. The ZEEKR Car App integrates with third-party charging networks on its charging map, covering over 340 cities. It is expected that by the end of 2024, the number of charging stations will reach 1,000, and by 2026, the total number of charging piles will exceed 10,000④ Channel Service Capability:

• Retail Stores: As of the end of May, there are 392 retail stores globally, with 380 in China.

• Zeekr Homes: Currently, there are 64 Zeekr Homes, providing a one-stop experience.

• Zeekr Spaces: In the future, there will be a special focus on expanding Zeekr Spaces' coverage in third and fourth-tier cities.

⑤ Global Expansion: As of the end of May, ZEEKR has entered more than 20 countries and regions. ZEEKR 001 and ZEEKR X have started deliveries in Europe. In the third quarter, ZEEKR 009 and ZEEKR X with right-hand drive will be launched in Singapore and Hong Kong. By the end of the year, ZEEKR is expected to enter 6 to 8 luxury car markets in Europe, covering more than 50 countries and regions globally.

1. Financial Highlights:

① Revenue:

• Automotive Sales Revenue: Increased by 73% year-on-year, decreased by 22.8% quarter-on-quarter. The year-on-year increase was due to an increase in sales volume, while the quarter-on-quarter decrease was mainly caused by a decrease in average price due to seasonal factors and changes in product structure.
• Battery and Other Component Sales Revenue: Increased by 82% year-on-year, increased by 56.5% quarter-on-quarter. The growth was mainly attributed to an increase in sales volume of battery packs and electric drives, as well as growth in overseas battery components.
• R&D Services and Other Services Revenue: Decreased by 42.4% year-on-year, decreased by 85.9% quarter-on-quarter. The quarter-on-quarter decrease was mainly due to a decrease in sales of R&D services and licensed technology to related parties.

② Expenses:

• Total Expenses: Increased by 6.7% year-on-year, decreased by 13.39% quarter-on-quarter. The year-on-year increase was due to an increase in employee compensation and expenses related to expanding product portfolio and smart technology, while the quarter-on-quarter decrease reflected fluctuations in different design and development stages of new products and technologies.
• Selling, General, and Administrative Expenses (SG&A): Increased by 15.9% year-on-year, decreased by 11.6% quarter-on-quarter. The year-on-year increase was due to an increase in employee compensation, marketing and promotional activities in China and overseas, as well as increased leasing and related expenses due to offline channel expansion; the quarter-on-quarter decrease was mainly due to a reduction in marketing and promotional activities.

② Gross Margin:

• Gross Margin: 11.8% in the first quarter of 2024. The year-on-year increase was mainly due to an increase in automotive gross profit, while the quarter-on-quarter decrease was mainly due to the increased proportion of battery and other component sales revenue, which have a lower gross margin than automotive sales.
• Automotive Sales Gross Margin: 14% in the first quarter of 2024. The year-on-year increase was mainly due to procurement savings and cost reductions, while the quarter-on-quarter decrease was mainly due to new vehicle deliveries and changes in product structure.

2.2, Q&A Analyst Q&A

Q: Regarding the recent slowdown in order growth, how will the sales strategy for the second half of the year ensure the achievement of the target of an average of 23,000 vehicles per month in the second half of the year?

A: We launched ZEEKR 007 in December last year and started deliveries in January. On February 27, we released the all-new ZEEKR 001, starting deliveries in March. These two new models significantly boosted our order growth. Looking ahead, we plan to continue launching new models, including the recently announced ZEEKR 009 Glory on April 19, and a larger hybrid model unveiled at the Beijing Auto ShowWe will also launch economy cars and mid-size SUVs, with the latter becoming the main sales force in the second half of this year and next year.

At the same time, we are actively promoting international expansion, having signed dealers in regions such as Mexico, and planning to sign agreements with over 58 dealers in more than 58 countries and regions by the end of the year to help achieve this year's sales target. In addition, we are accelerating channel expansion from third-tier to fourth-tier cities to expand more market segments, further promoting future order growth.

Q: Regarding sales and administrative expenses (SG&A), how many stores do we plan to add in 2024? Secondly, considering the increasing investment in software development for R&D expenses, what level of R&D expenses do we believe should be maintained in the medium to long term to maintain our technological competitiveness in the industry?

A: By the end of 2023, we have established 342 customer touchpoints, including Zeekr Center, Zeekr Spaces, Zeekr Homes, and Delivery Center. By the end of this year, we plan to increase the number of stores to 520. We have covered all first-tier cities in China and will expand to third-tier and fourth-tier cities this year, while improving the efficiency of existing Zeekr Spaces. With the growth of our vehicle series and brand influence, we will obtain better locations in places like shopping malls and increase the number of large Zeekr Homes, which is this year's channel expansion strategy.

Last year, our R&D expenditure was about 8 billion RMB. This year, we will increase R&D expenditure, some of which will be used for software development, including advancements in ADAS and full-stack self-developed intelligent cockpits. Considering that we will launch a large number of new models in a short period of time, related expenses will also increase. Overall, this year's R&D expenditure is expected to be around 10 billion RMB. We are still carefully evaluating the specific amount and discussing how to use this fund more efficiently, especially in vehicle and software development.

Q: The demand for plug-in hybrid vehicles is strong this year. Are there any plans to introduce plug-in hybrid models in the future to expand the customer base? If there are such plans, how will the market positioning of plug-in hybrid models be defined, differentiated from other brands within the group and existing competitors in the market to meet the needs of different consumers?

A: Currently, we are focusing on high-end battery electric vehicles (BEV), as we believe there is a huge untapped market and customer demand in this area. Observing competitors such as the BMW series or Audi A4, which have considerable monthly sales, we believe there is still potential for brands like ours to explore these markets. Although Geely Group has different variants of power systems and technologies internally, providing a variety of driving options, we are currently focusing on BEVs to establish a leading position in this field, and then consider the possibility of other power systems.

Q: Regarding the mid-size SUV to be launched at the end of the year, can you share the sales volume, monthly sales, and profit expectations for this new SUV? In the fiercely competitive SUV market, what are the main advantages and differentiating features of our first SUV compared to existing models 001 and 007, especially compared to Tesla Model Y and other new models from independent brands?**

A: In the overall market competition, our 001 and 007 cars have taken the lead in their respective segmented markets. The 007, launched in December last year, targeting the mid-size SUV market, especially in the high-end price range, has demonstrated our ability to define products and attract customers. We have clear advantages in hardware and features, such as vehicle safety, handling, range, and AEB technology, which have been recognized by the market. In terms of software, we have made significant investments in intelligent cockpits and ADAS, using a full-stack self-developed solution to gradually enhance the intelligent experience and strengthen customer confidence. We believe that the new SUV to be launched in the second half of the year will leverage the advantages of the SEA-M architecture, combined with the latest intelligent cockpit system and ADAS, to become a key differentiating factor for our products. As for competitors, their product lines are not entirely in the same price range as ours, and some brands do not have new SUVs in the second half of the year. Furthermore, while other competitors may have product updates, they may not meet the needs of Chinese customers. We believe that we are in a favorable position for the Chinese market and specific products.

In the second half of this year, we plan to launch two new models: one is a high-end mid-to-large SUV, expected to be nearly 5 meters in length, which is expected to drive sales and gross margin growth; the other is an innovative and disruptive model that will redefine the appearance of future family cars. ZEEKR brand is committed to technological innovation and new product creation to enhance core competitiveness. These are the outlines of the new models we plan to launch this year.

Q: The market is eagerly awaiting the EU's latest tariff rates. Considering your company's plans to further expand into the European market, what is the priority goal of the business? Is it to ensure profitability in the target market, or to prioritize market share growth?

A: First of all, we do not comment on government policies and are waiting for the decision of the European Commission, and will adjust our strategy accordingly. We are committed to complying with all laws and regulations in operating regions. While we are ambitious about expanding into the European market, key markets are still Latin America, Southeast Asia, and the Middle East. Significant sales growth in Europe will take time to achieve. The products we offer, such as the 001, are designed to meet the needs of European customers, different from the SUVs and sedans that are popular in the Chinese market. Our product strategy takes into account the market characteristics of different regions, for example, compact multi-purpose vehicles are suitable for the Spanish and Italian markets.

In addition, our business model, combined with Geely Group's global manufacturing layout, provides flexibility and localization options, which is an advantage in competition. We implement 100% local manufacturing, fully utilizing Geely Group's manufacturing capabilities globally, including facilities in China, Southeast Asia, Western Europe, and the United States. This flexibility is unique in the Chinese electric vehicle industry.

Q: Do you have any latest updates and guidance on sales and marketing expenses, R&D expenses, and capital expenditures?

A: Our guidance for sales and marketing expenses (SG&A) is approximately RMB 10 billion, a figure driven by the company itself. I can confirm that our SG&A as a percentage of sales revenue will be better than most competitorsAs for capital expenditures (capex), due to our adoption of a light asset model and not having our own vehicle manufacturing facilities, capital expenditures are relatively controllable. Last year, our spending on capex was about 1.9 billion RMB, and this year it is expected to be maintained at a similar or slightly higher level.

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