Maintain the target of selling 250,000 units in 2024 with a full-year gross profit margin of 5% (Leapmotor 2Q24 conference call minutes)

Below is the summary of Leapmotor's second quarter financial report conference call in 2024. For a detailed interpretation of the financial report, please visit " Leapmotor: Both revenue and gross profit fall short of expectations, can they turn the tide in overseas markets? 》

1. Review of Core Financial Information:

2. Detailed Content of the Financial Report Conference Call

2.1 Key Points from Management's Statements

1. Vehicle Models and Orders:

The LEAP3.0-equipped C11 and C01 models launched in March, along with the simultaneous release of C10 and C16, have boosted the sales of several other models. By the end of June, 24,100 units of C10 had been delivered; the first month of C16's launch saw cumulative orders exceeding 10,000.

In July, the company received over 28,000 orders, with monthly deliveries reaching 22,913 units. As of now, over 400,000 vehicles have been delivered cumulatively. It is expected that the sales volume in the third quarter will reach a new high, and efforts will continue in the second half of the year to achieve the overall sales target of 250,000 units.

2. Financial Situation:

The company's revenue in the first half of the year reached 8.85 billion RMB, a year-on-year increase of 52%. The gross profit in the first half was 100 million RMB, with the gross profit margin in the second quarter already improved to 2.8%. It is expected that the gross profit margin will perform better in the second half of the year, with the annual target set at 5%. The improvement in financial condition is attributed to economies of scale brought by sales growth, optimization of product structure, cost advantages from the company's insistence on end-to-end independent research and vertical integration strategy, as well as efficient and sustainable cost control efforts.

The company incurred a loss of 2.2 billion RMB in the first half of the year, which is almost the same as last year. Despite the increase in gross profit, the loss did not significantly decrease. This is because we have increased investment in research and development. Compared to the same period last year, the gross profit improvement is approximately 440 million RMB. In the past six months, research and development expenses reached 1.22 billion RMB, a 48% increase from the same period last year, with an absolute increase of about 400 million RMB, which basically offset the growth in gross profit last year and this year.

Leapmotor's research and development investment is mainly used for: the upcoming launch of seven new models, while end-to-end technology research and development is also accelerating. Therefore, we have increased investment in research and development, yet we still maintain a leading position and are one of the companies with the highest research and development efficiency output ratio in the industry.

3. Product Situation:

In the first half of 2024, we continued to accelerate the iteration of LEAP3.0, forming six core modules of the globalized whole vehicle architecture, including the new energy golden power CTC battery + oil-cooled electric drive + 8295 chip-enhanced intelligent cockpit + intelligent driving combining urban and highway applications. These modules were integrated into the 2024 models C11, C01, C10, and C16. In addition, we launched the C10 model in June, which is equipped with the latest 800-volt high-voltage platform, featuring four major advantages of high performance, high efficiency, high intelligence, and long life, providing users with an efficient and convenient charging experienceIn the future, we will continue to technologically iterate and upgrade our existing modern products, allowing users to continuously enjoy the latest R&D achievements.

In terms of intelligent cabins, we released the first model using the Qualcomm 8295 chip in 24. This model, with its excellent human-machine interaction and intelligent performance, has become a bridge connecting members and core vehicle functions, receiving wide acclaim from consumers. Our latest generation cabin is based on SOA software architecture, opening up more than 300 development capabilities, pioneering the introduction of linked custom scenarios, achieving a personalized driving experience for each user. We have also independently developed a 21-speaker sound algorithm that supports Dolby panoramic sound, delivering an industry-leading in-car audio experience. In addition, our cabin supports functions such as visible speech recognition in all scenarios and full-view wake-up. In July, we upgraded the existing cabin functions via OTA, implementing AI large models on the C10, providing capabilities such as a driving assistant, WenShengTu, and an encyclopedia assistant, becoming the first model in the same price range to support AI large models.

In the field of intelligent driving, the development of end-to-end technology has brought a deterministic outlook for urban intelligent driving. We are increasing investment and have already implemented end-to-end large model quality system development on the basis of achieving high-speed NAP and urban NAC intelligent driving functions. In the coming period, we will continue to increase manpower, computing power, and equipment investment. In 24, we established the Intelligent Technology Research Institute, planning to expand the existing team to about 500 people, focusing on developing proprietary algorithms and application technologies. At the end of July, we upgraded the existing L2 plus assisted driving functions via OTA, receiving widespread consumer praise. With further R&D progress, we will launch further functional optimizations in the second half of 2024, including the ability for point-to-point commuting on open roads and autonomous parking in parking lots. At the same time, we plan to launch CNAP, a city intelligent function based on end-to-end self-driving large models, by 2025, continuously providing customers with a comfortable and safe premium family experience.

Globalization:

In addition, at the Paris Motor Show in October, we will unveil the company's B platform's first global model, codenamed B10. This model is aimed at the largest segmented market, adopting leading-edge technology architecture, and is expected to become the company's next explosive model, further supporting the company's sales targets for next year.

Channels:

In terms of marketing, we will continue to deepen our efforts, always focusing on the user's car purchase and service experience, placing the car purchase experience at the core position, and continuously improving our marketing network. We will continue to promote the channel model of One Plus N, which includes 4S service functions, regional flagship stores supporting several N supermarkets and city showrooms. We will continue to focus on end customers, providing them with convenient and personalized car purchase and service experiences. As of the end of June, our company has more than 470 sales outlets, with over 320 service outlets covering 187 cities in China. In the second half of the year, we will accelerate channel layout, expand coverage to blank cities, accelerate the sinking of county-level cities, gradually increase Leapmotor centers, and strive to provide the best sales and service experience for end customers. In terms of sales, we will adopt a vertical management model for retail managers, aiming to enhance the refinement of store management through the fixed mentoring of retail managers

Marketing:

In terms of marketing, we have been applying full-chain digital marketing and service in the field. This system, with end users as the core, integrates online and offline service touchpoints, covering all user scenarios and achieving good results. In terms of globalization, we are actively expanding our global business, creating additional revenue growth points, and promoting the orderly landing of overseas business. In May, S Group and Leapmotor, our joint venture company Leapmotor International, completed the establishment of the company, the establishment of the core team, and the investment attraction plan.

Starting from September, we began selling and delivering the C10 and T03 models in Europe, both of which have obtained WVTA certification from the European Union. Currently, we have transported approximately 2,000 imported C10 and T03 models to Europe by sea and land. In the coming months, we will develop more vehicles. We plan to expand to about 200 sales outlets in Europe by the end of the year, gradually expanding to 500 outlets. In addition to Europe, we also need to enter the Asia-Pacific, Middle East, Africa, and South American markets. To promote sales in Europe and other markets, we plan to organize a four-day Leapmotor International media event at the end of September, inviting many top international media to experience and test drive the vehicles.

The cooperation between Leapmotor and Stellantis covers comprehensive global cooperation in channels, after-sales service, automotive finance, product and component empowerment, and more. Recently, we have collaborated with the Maserati team under Stellantis to jointly develop chassis to enhance our global competitiveness. In addition, we have made significant progress in ESG.

Our globalization strategy is based on the Chinese market, expanding overseas markets, and striving for breakthroughs in the supplier field.

[Q&A Interaction]

Q: Factors affecting gross margin in the second quarter? Outlook for gross margin in the third quarter?

A: In the second quarter, due to the launch of new vehicles and the clearance of 23 models, the gross margin increased month by month in May, June, and July, averaging 2.8%. In June, the gross margin exceeded 5%. Overall, the outlook is optimistic, aiming to achieve a target of 5% or higher for the full year.

Q: How to adjust the model mix of C16 and C10 in the shared production, as well as the subsequent delivery and ramp-up situation, and whether the expected sales volume stability of C16 has been adjusted based on the current order situation?

A: C10 and C16 are produced on the same line, with a production capacity of 30GPH for the entire factory. With two shifts working 20 hours a day, the production level can reach 600 vehicles, and the total delivery volume in a full production month can reach 16,000-18,000 units.

Since the release of C16, it has received 10,000 orders in the first month, significantly higher than C10 by 30-40%. We believe that C16 has great potential in August. In the first week of August, there was some impact due to equity (withdrawing the first month's preferential policies), but growth resumed quickly from the second week onwards. Looking at the order volume and production capacity planning, the combined sales target of around 18,000 units for both models can be achieved, matching the production capacity planning.

Q: What is the level of R&D expenses for the whole year? What is the investment plan for end-to-end intelligent driving? How do you view the stimulating effect of the old-for-new policy on sales volume?

A: R&D expenses increased by 50% in the first half of the year. This is due to increased R&D investment in intelligent driving (personnel, computing power, operating expenses) and increased investment in R&D for seven new models to be released in the next two years. It is estimated that there will be another 50% growth in the second half of the year, with R&D expenses for the whole year expected to increase by 50% compared to last year.

The intelligent driving team was established four years ago with relatively low initial personnel and computing power investment. Starting from last year, efforts were intensified, with personnel increasing from 200 to 300 people, currently at 400 people, and expected to reach around 500 people by the end of the year. The research on intelligent driving algorithms has been separated to establish a research institute, increasing R&D efforts and investment. The algorithm research uses the entire architecture of BEV, with C10 adopting the BEV model. Efforts are being made to implement point-to-point commuting mode in the second half of the year, allowing users to use OTA. In the later stages, it will also move towards urban NOA and large-scale models, achieving end-to-end integration. It is hoped that Leapmotor can enter the forefront of R&D next year.

The old-for-new policy has brought a significant increase in incremental sales, such as T03, because of its lower selling price, with the old-for-new policy accounting for a considerable portion. This led to a breakthrough in July, resulting in a good increase in sales volume, reaching 28,000 units in July. It is expected that sales in August will exceed 30,000 units. As of mid-month, our orders have exceeded 15,000 units, maintaining optimism for future sales.

Q: With more consumers selling intelligent driving vehicles, does it have a promotional effect on gross profit? How to balance quantity and profit in the future?

A: This year, our sales target is basically still striving for the target of 250,000 units, hoping to achieve a gross profit margin of 5%-10% and a sales target of 250,000 units.

From the current perspective, there is still a high possibility and certainty. As for the balance between sales volume and profit, we believe that a balance must be achieved. Currently, the hottest trend is end-to-end, and in this area, the starting line for everyone is not too different.

Q: How is the ramp-up of local production capacity and readiness in Europe?

A: The T03 and C10 in Europe have passed EU certification and are ready for sale. European sales will begin in September at 200 stores, and in September, we will also conduct media test drives to officially start development in Europe.

Due to the unclear policies in the EU, we are adopting two models: 1) SKD model: assembling complete vehicles in Poland. Many details of this model are still to be confirmed, such as the required percentage of local production (possibly around 40%). 2) We believe that local manufacturing in Europe is a must, it's just a matter of speed. We are actively working on this, balancing our overall localization progress through cost structures.

Q: The average unit price in the second quarter is around 100,000 yuan, slightly lower than the 104,000 yuan in the first quarter. Is this mainly due to some promotional activities and the impact of clearing out the 2023 models in the second quarter? What is the trend of the average selling price in the second half of the year and the impact of exports on the average unit price?Outlook for next year?**

A: First of all, regarding pricing, we expect the third and fourth quarters to be slightly better than the second quarter. This is due to the addition of C16, which increases the high-value volume models. However, due to the national policy of replacing old with new as mentioned earlier, the sales of T03 may slightly increase. But we still hope to maintain a balance. Our several models including C11, C10, C16, and T03 (with relatively smaller sales of C01) have sales that are basically evenly distributed, each accounting for about 25% of total sales. If we price according to this target, the overall price may further increase from the current 100,000 to 110,000.

Unlike XPeng and Nio, we have eliminated the distribution fee of over 10,000 yuan for actual dealers and agents in our dealership model. Therefore, if we adopt a direct sales model, our prices will definitely reach 120,000 to 130,000. This is because our sales are already net, equivalent to removing the sales link of dealers.

For the overseas market, we are generally optimistic. Because we have comparative advantages in channel resources, services, parts distribution resources, as well as the entire system of financial insurance and other operations. Therefore, this is also why we were able to open over 200 stores in Europe in September and sell Leapmotor products in a short period of time. Of course, this also includes the impact of EU policies. If tariff policies increase, Leapmotor can quickly localize manufacturing in the local area to effectively avoid tariffs. These are all unique advantages of Leapmotor.

In terms of sales, we have maintained a target of 6,000-7,000 units for overseas sales this year. Next year, we will continue to strive to achieve a sales target of tens of thousands of units. Of course, there are some uncertainties. One reason is that due to geopolitical relations, the market trends for new energy vehicles in Europe and the United States may slow down. This is a major obstacle, including the mentioned tariffs, which may slow down the pace of our internationalization process. However, compared to other competitors, I believe we have greater advantages in localizing overseas, landing quickly, and selling rapidly.

Q: This year, we have seen aggressive pricing for independent brands, while joint venture brands have started to recover some rebates. From our perspective, how has market demand been since August this year? What will the future market competition landscape and demand situation be like? What improvements does the new channel model bring in terms of increasing customer satisfaction and brand reputation?

A: First of all, looking at the entire market, the penetration rate of new energy vehicles exceeded 50% in July. According to our predictions, if it exceeds 50%, the trend thereafter will be very rapid. If you are still buying fuel cars now, some may question your way of thinking because it is already outdated technology. In China, I believe that the overall market demand and the electrification process of new energy vehicles will further accelerate. We believe that every car manufacturer must seize the opportunity of the next three years. After these three years, there will hardly be any pure fuel cars, but more hybrid or pure electric vehicles. Therefore, these three years are very important for companies like LeapmotorZero Run's strategy is to increase gross profit margin year by year. We plan to convert last year's losses into an average gross profit margin of 5% or even higher this year. Next year, we will strive towards a 10% target. Ultimately, we believe Zero Run's gross profit margin should be around 15%. This is our overall profit strategy.

In terms of our market position, we have made good arrangements. First, our C series of cars, with C16 being the final model. From C11 to C01 and then to C10 and C16, we have launched four models, covering a price range of 150,000. In this segmented market, our sales have reached 30,000 units, and we believe we have captured a considerable market share. In the future, we will gradually increase the market share of each product. Even 20 years later, as long as Zero Run is still around, there will be four models: C11, C10, C16, and C01. Therefore, we must dominate this segmented market.

At the Paris Motor Show in October, we will launch our first model, the B10, an SUV belonging to the B series, similar to a traditional fuel car's B-class. Although it is a B-class car, we aim to sell it at an A-class car price and strive in that direction. Therefore, we are very optimistic about this B10. We have used the LEAP 3.5 electronic architecture and positioned it in the 100,000 to 150,000 level, which is the largest sales market. In June next year, we will launch the second model of the B series. We are very confident in its design. Our B01 is a sedan, sharing the same platform as the B10. By the end of the year, we will launch the B05, a hatchback, cross-style B-series model, one of the three models in our B series. The target sales volume for the B series is 40,000 units per month.

The flagship models for 2026 are the A series and D series, corresponding to price ranges of 60,000 to 80,000 and 250,000, respectively. These two series of models are sold through four platforms (ABCD) to achieve a sales combination of 3443, covering the entire market demand and meeting the needs of users in different price ranges.

Currently, our new energy vehicles rank at the 7th to 9th level as a group in the market. We strive to enter the top eight this year, including both overseas and domestic car companies. Next year, we aim to enter the top six, and the year after that, the top five, gradually achieving our goals by continuously increasing market share and gross profit margin. In three years, there will no longer be a distinction between new and old forces, and all models will be electrified. At that time, we must be among the top five in China. The top five in China represent the dominant position in the future global new energy vehicle market. This is our evaluation of the overall market competition landscape and Zero Run's strategy.

The third issue concerns channels. We believe that in the domestic market, we need to deepen our roots, while in overseas markets, we will work with partners to expand using Stellantis' global sales system as the main driver, combined with our Zero Run products. In the domestic market, we need to take root ourselves. Our main focus this year and next year is channel optimization, that is, refined operations. The goal is to reduce the main investment entities and manage investors in each city separately to avoid duplicate investments. We hope that each investor will only occupy a certain area in each city, rather than overlapping. Even in first-tier cities, we aim for no more than four dealers, minimizing unnecessary competitionAt the same time, we will optimize our network by adopting a "one plus N" model to increase more touchpoints and achieve low-cost operations. Additionally, we will establish a showroom, delivery, and service system centered around 4S stores to ensure that users can purchase and use our products with peace of mind.

Ultimately, our service quality depends on user satisfaction and cost investment. Therefore, we need refined management and further optimization in channel layout. For example, we can open city showrooms that not only sell cars but also provide delivery and maintenance services. Through this architecture, we can achieve the lowest-cost management layout and reach our goals.

Meanwhile, Leapmotor's strategy is to adhere to refined management. We do not pressure dealers to stock up, but instead focus on their outbound volume. We are not concerned with how many cars they have sold, but rather focus on the number of orders each store receives daily, how to obtain orders, how to satisfy customers, and how to optimize the entire process from acquiring customer information to final delivery end-to-end. We have established the position of retail manager, where each retail manager plays the role of a former deputy general manager of the dealer group, responsible for managing ten stores and optimizing the entire store management system, including 5S management, customer invitations, test drives, and optimization and supervision training of the entire lifecycle customer management process. This way, we can fully utilize the enthusiasm of individual parts in the original dealer model and achieve the effectiveness of a fully direct management model.

By combining these two aspects, we can achieve our goals without requiring significant investment. If we were to go fully direct, the investment would be substantial, and if professional managers do not work hard, the stores would not be managed well. Therefore, we need to prevent a one-size-fits-all approach and the large investment of direct operations, while also continuing the refined management of direct operations to improve user satisfaction and transaction rates.

Therefore, I believe that through this year's overall efforts, our sales capabilities have been greatly enhanced. I believe that in the next two to three years, if we can continue to improve continuously, our sales model will become a benchmark for the industry to learn from and will bring higher efficiency. Thank you.

Q: How can the company leverage its product advantages in the European market?

A: The demands of European customers are different from those in the domestic market. Europe can be divided into two categories, with countries like Italy and Spain mainly preferring small cars, while Germany and Northern Europe have a relatively higher demand for large cars. There is a significant difference in vehicle types.

Therefore, since last year, we have formulated a comprehensive plan. We aim to focus mainly on our own B10 model based on the demands of the European market, which is equivalent to the B05 model, i.e., small models in the B series and A series. We will prioritize testing these models.

The second issue is that the electrification process in Europe is relatively slow, and the infrastructure is not yet sufficient. Therefore, we will mainly promote extended-range models in addition to pure electric vehicles. Many users have provided feedback that such models are quite popular in Europe. Hence, while we do not introduce extended-range versions of the B10 model domestically, we will launch more extended-range models overseas. This type of vehicle is very suitable for commuting and travel needs in Europe, especially for long-distance travel, where extended-range is a very good modeTherefore, we believe that in the future European market, extended-range vehicles are a transitional product, especially in the case where full electrification has not yet been achieved. At the same time, we also hope that our vehicles, especially the relatively mid-to-low-end products, can be used for long-distance transportation like luxury cars without having to consider shipping costs. However, due to the very high cost of shipping a car, it costs about 1400-1500 euros to ship from China to Europe, and with tariffs, even with profits, they would be almost entirely consumed. Therefore, ultimately, we need to localize the manufacturing of cars. We are actively planning to localize the manufacturing of new energy vehicles in Europe, utilizing existing factory resources for transformation to reduce costs. We need to achieve localized manufacturing as soon as possible to reduce all expenses and costs, increase gross profit margins, and enhance the competitiveness of our products. Therefore, achieving localized manufacturing in Europe is necessary and needs to be completed quickly.

In Europe, compact cars are not considered low-end just because they are small, but rather focus on maneuverability. Compact cars are not necessarily a cheap choice. Therefore, in the global market, we need to fully understand consumer needs and plan products accordingly to adapt to different market demands. Thank you.

Q: You mentioned earlier that you expect to become one of the top domestic autonomous driving teams by the end of next year. Has your attitude towards autonomous driving become more positive? Additionally, how much is our research and development investment in autonomous driving for this year and next year? In terms of overseas channels, how many sales channels do we expect to have for selling our vehicles by September? Any other marketing activities?

A: First of all, for our autonomous driving team, we started very early with intelligence. As early as 2011 or 2012, we began using deep learning technologies such as facial recognition and license plate recognition, gaining a deep understanding of this technology. We can see continuous progress in applying this technology in vehicles. For example, since 2014 when we started manufacturing cars, Musk has been saying that Tesla will soon achieve autonomous driving. However, until now, we believe that with the development of large models and new technologies such as BEV, autonomous driving has become a reliable assisted driving method. This assisted driving can reduce user fatigue and make driving easier. Therefore, starting from the first half of last year, we have invested more resources, including BEV and end-to-end technology. In this regard, we have invested more manpower, material resources, and computing power. From last year to the first half of this year, we have already implemented BEV on vehicles and will launch point-to-point driving mode by the end of the year. Next year, we are also very confident in achieving the implementation of end-to-end technology.

Regarding the question of how much investment, I think our current investment is the most cost-effective. Because many areas have already been explored by others, including from mapping to non-mapping, open cities, and so on, there are things we don't need to do again because others have already done them. Now everyone is moving towards end-to-end large models, so we don't need to do some basic work again. This way, we can avoid detours, save time and investment. Therefore, in terms of investment, Leapmotor has always insisted on the minimum investment to achieve the best research results. This is also the principle that Leapmotor has always adhered to. We will decide when the most reasonable and suitable time to invest is based on time, rather than blindly pursuing early or late. Because we know that only in this way can we ultimately achieve results, Leapmotor never does things just to attract attentionWe all believe in being pragmatic, only investing when necessary to achieve the highest return on investment. For computing power, we have also adopted the most cost-effective approach, as there is currently an excess of computing power nationwide. Many governments and organizations have purchased a large amount of computing power, but we only need to lease it, without the need to purchase. Many people may promote buying, but leasing is the most cost-effective choice. We can lease computing power to obtain computational capabilities with minimal R&D investment.

Our intelligent driving data management platform is independently developed, achieving minimal input and maximum output through efficiency improvements and optimizations. In terms of intelligent driving, our main investment is in computing power servers, totaling only a few billion, with the rest obtained through leasing. Additionally, we plan to open 200 channel outlets in September to sell Leapmotor products. In the market aspect, apart from intelligent driving, we will also participate in the Paris Motor Show in October, one of the largest auto shows in Europe and a great opportunity for overseas promotion.

Q: How much revenue was generated in the first half of the year from the export of Tier 1 components? What are the full-year outlook and profit outlook for this year?

A: In terms of component exports, we achieved good results in the first half of this year, including electric drive, where we also added two fixed points. These fixed points need to generate sales, which will be reflected in 2025-2026. Because from fixed points to sales, it takes a long time for cars. In terms of batteries, we had tens of millions in sales revenue in the first half of the year, including energy storage and some electric utility vehicles. The sales revenue generated is approximately close to sixty to seventy million, and we will definitely have more sales in the second half of the year. Regarding Stellantis, we are implementing projects related to car lights and electric drives. We may release some announcements and news in this regard.

Q: Which vehicle models will the chassis we cooperate with Stellantis be suitable for?

A: The overall chassis tuning of the C10 model and other subsequent models will involve the participation of Stellantis' team, with a chassis team working together to help us fine-tune.

Q: At the end of this year, a SUV model will be launched. Can you provide some guidance on the price, sales volume, and specific launch time of this 5-seater SUV?

A: We will unveil this product for the first time at the Paris Motor Show in October this year. It adopts the Leap 3.5 electronic architecture, with a price range between 100,000 to 150,000. We are looking forward to it and hope it becomes a popular product. It will debut in the domestic market at the Guangzhou Auto Show and is expected to be delivered in Q2 next year.

Q: How many personnel are involved in international business? What are the specific role allocations? Are there any additional localized designs to meet the characteristics of the European market demand?

A: Our entire Leapmotor international overseas business adopts a light asset model, aiming to leverage each other's strengths and avoid redundant construction. Therefore, our management team is relatively small, with a target of fewer than 50 people, mainly responsible for product, demand, and market management. For each country's cities, we will utilize their existing networks and sales teams, incorporating Leapmotor as part of their brand, increasing from 14 brands to 15 brands. At the same time, we will also pay a portion of management fees to themThis way, we can quickly land in multiple countries while reducing operating costs. This is our framework. Therefore, we are a small and efficient team this year.

In terms of functional allocation, our overseas sales focus on Stellantis, with Leapmotor as a supplement, to reduce operating costs. For overseas models, there are some issues such as different charging powers, for example, 3000 watts and 6000 watts, as well as differences in slopes, etc. We need to develop different strategies based on these differences. Whether it is the Australian market or the European market, some personalized elements are needed. Since our market demand team is led by them, our understanding of demand may be faster than other companies. This will enable us to integrate into the overseas market more quickly. Thank you