Li Auto Inc. (NASDAQ:LI) Q4 2023 Earnings Call Transcript February 26, 2024

Li Auto Inc. misses on earnings expectations. Reported EPS is $0.6 EPS, expectations were $2.06. Li Auto Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, ladies and gentlemen. Thank you for standing by for Li Auto's Fourth Quarter and Full-Year 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. Today's call is being recorded. I will now turn the call over to your host, Kobe Wang, the Head of Capital Markets of Li Auto. Please go ahead, Kobe.

Kobe Wang: Thank you, operator. Good evening, and good morning everyone. Welcome to the Li Auto's fourth quarter and full-year 2023 earnings conference call. The company's financial and operating results were published in a press release earlier today and were posted on the company's IR website. On today's call, we will have our Chairman and CEO, Mr. Xiang Li; and our CFO, Mr. Johnny Tie Li. To begin with prepared remarks, our present, Mr. Donghui Ma; and the Senior VP, Mr. James Liangjun Zou will join for the Q&A discussion. Before we continue, please be reminded that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

Forward-looking statements informed inherent risk and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in certain company filings with the U.S. SEC and the Hong Kong Stock Exchange. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that Li Auto's earnings press release and this conference call include discussion of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to Li Auto's disclosure document on our IR website which contains a reconciliation of unaudited non-GAAP measures to comparable GAAP measures.

Our CEO will start his remarks in Chinese. There will be English translation after he finished all his remarks. With that, I will now turn the call over to our CEO, Mr. Xiang Li. Please go ahead.

Xiang Li: [Foreign Language]. Welcome to today's earnings conference call. 2023 was a year of accelerated growth for Li Auto. We delivered a total of 376,000 vehicles for the entire year, exceeding our target setting at the beginning -- set at the beginning of 2023 and also making us the first emerging new energy automaker in China to exceed the 300,000 annual deliveries mark. Our total deliveries for the fourth quarter reached 131,805 vehicles, an increase of 184.6% year-over-year. In December, we reached another significant milestone of 50,000 monthly deliveries, setting a new record for Chinese premium car brands. According to China Automotive Technology and Research Centers insurance registration data in China's NEV market of RMB200,000 and higher, Li Auto's market share increased from 10.9% in Q1 2023 to 16.0% in Q4, making us a leading Chinese automotive brand by market share, the growth will continue in 2024.

I would like to take this opportunity to express our sincere gratitude to all of our family users, business partners and our team for your unwavering trust, support and tireless efforts. Moving on to our financial performance. Our scale expansion, effective cost control and increasing operating efficiency have continuously improved our financial performance. Q4 total revenues reached RMB41.73 billion and annual revenues surpassed RMB100 billion mark at RMB123.85 billion. Additionally, we achieved full-year profitability for the first time in 2023, recording a healthy net income of RMB11.81 billion. By the end of 2023, our cash position reached RMB103.67 billion. In 2024, the virtuous cycle of our business growth will solidify our long-term profitability, cash generation -- generating capabilities and capital base.

This trajectory will further deepen our R&D efforts across products, platforms and systems, ensuring consistent delivery of exceptional products and services to our users in the long run. 2024 will be an unprecedented year of new product launches for Li Auto, beginning in March with the launch of our high-tech flagship and family MPV, Li MEGA, developed on a pure BEV platform, Li MEGA integrates the latest technological advancements in 5C BEV technologies, smart space and autonomous driving. We also plan to begin mass delivery of 2024 model year Li L7, L8 and L9 models starting in March. You're all welcome to tune into our Li Auto 2024 Spring product launch event, this Friday, March 1, where we'll be unveiling more exciting vehicles about Li MEGA and our 2024 model year L Series.

Furthermore, we will introduce several new models over the course of the year, including Li L6, to broaden our product lineup even further. By the end of 2024, we will have eight models on the market, featuring four EREVs and four BEV forming a highly competitive product matrix and satisfying the diverse needs of our family users. New vehicle launches are only the starting point. Since the initial delivery of our L Series, we have released over 20 over-the-year updates, operating over 700 features. Notably, the official release of our OTA 5.0 upgrades in December last year, further enhance product competitiveness of our vehicles. Moving to autonomous driving. With the latest release of AD Max 3.0, full scenario NOA now covers all highways and city ring roads nationwide as well as urban roads across over 110 cities.

We anticipate to offer City NOA independent of AD Max in all of China by the end of the second quarter this year, and it will be delivered to all AD Max vehicles by NOA. As of today, our users have accumulated around 560 million kilometers on NOA during the 10-day Chinese New Year holiday from February 8th to 17th, over 220,000 users enjoy the convenience of NOA covering close to 50 million kilometers on NOA. In terms of our space, OTA 5.0 integrated Mind GPT into Lixiang Tongxue. Mind GPT is a full scenario multimodal large model with real-time connectivity. This development has significantly increased Lixiang Tongxue's understanding, generating, memorizing and reasoning capabilities. Since this release, there is a notable increase in user engagement and giving instructions and seeking text-based information and services through natural conversations.

During the 10-day Chinese New Year holiday, the percentage of such natural conversations among all effective communications reached 7.2%, twice the level before OTA 5.0. Amidst our remarkable sales growth in 2023, we accelerated the expansion of our direct sales network. In Q4 2023, we opened 106 new retail stores or over one store per day, creating the largest automobile direct sales network in China. As of January 31, 2024 we had 474 retail stores across 142 cities nationwide. In 2024, we aim to further expand our direct sales and service network, targeting 800 retail stores by year-end. While expanding our presence in first and second-tier cities, we also plan to broaden our coverage in third and fourth tier cities. Turning over to our supercharging network.

To date, we have over 340 supercharging networks in operation. Starting from the Chinese New Year holiday, throughout the entire holiday, we provided family users with free access to Li Auto's supercharging services. We delivered 57,000 free charging sections to Li Auto's users and over 120,000 sessions to all EV users, delivering over 2.81 million kilowatt hours of electricity. Facing the exceptionally high demand during the holiday season, our superchargers maintained an online rate of over 99.3% providing uninterrupted access to high-quality and efficient charging experience to all users. In 2024, we will continue to accelerate our supercharging network expansion across highways and cities nationwide, targeting 2,000 supercharging stations by year-end.

On the production front, Li Auto's Beijing Green Intelligent Manufacturing base went into production towards the end of 2023, ready for volume production of Li MEGA and subsequent BEV models. With volume production delivery of Li MEGA and 2024 model year, L7, L8 and L9, we expect our total vehicle deliveries for Q1 2024 to range between 100,000 units to 103,000 units with March delivery exceeding 50,000 units. In 2024, we'll continue to learn from the best enterprises, iterate ourselves and surpass expectations as we create mobile homes and create happiness. With that, we will turn it over to our CFO, Johnny for a closer look at our financial performance.

Johnny Tie Li: Thank you, Xiang Li. Hello, everyone. I will now walk you through some of our 2023 fourth quarter financials. Due to time constraints, I will address financial highlights here and encourage you to refer to our earnings press release for further details. Total revenues in the fourth quarter were RMB41.73 billion or $5.88 billion, up 136.4% year-over-year and 23% quarter-over-quarter. This included RMB40.38 billion or $5.69 billion from vehicle sales, up 133.8% year-over-year and 20.1% quarter-over-quarter. The year-over-year increase was mainly attributable to the increase in vehicle deliveries, partially offset by the lower average selling price due to different product mix between the two quarters. The quarter-over-quarter increase was mainly attributable to the increase in vehicle deliveries.

Cost of sales in the fourth quarter was RMB31.95 billion or $4.5 billion, up 126.8% year-over-year and 18.2% quarter-over-quarter. Gross profit in the fourth quarter was RMB9.79 billion or $1.38 billion, up 174.4% year-over-year and 28% quarter-over-quarter. Vehicle margin in the fourth quarter was 22.7% compared with 20% in the same period last year and 21.2% in the prior quarter. Excluding the impact of inventory provision related to true-up in the fourth quarter of last year and the true-up adjustments of warranty reserves in the fourth quarter of 2023 based on updated estimates of cost of further claims. The vehicle market remained relatively stable over the fourth quarter of 2022. The increase in vehicle margin over the third quarter of 2023 was mainly due to the aforementioned true-up adjustments of warranty reserves in the fourth quarter.

Gross margin in the fourth quarter was 23.5% compared with 20.2% in the same period of last year and 22% in the third quarter. Operating expenses in the fourth quarter were RMB6.75 billion or $950.8 million, up 82.4% year-over-year and 27.2% quarter-over-quarter. R&D expenses in the fourth quarter were RMB3.49 billion or $491.7 million, up 68.6% year-over-year and 23.9% quarter-over-quarter, primarily driven by increased expense to support our expanding product portfolios and technologies as well as increased employee compensation as a result of our growing number of staff. SG&A expenses in the fourth quarter were RMB3.27 billion or $460.5 million, up 100.6% year-over-year and 28.5% quarter-over-quarter, primarily driven by increased employee compensation as a result of our growing number of staff as well as increased rental expenses associated with the expansion of our sales and servicing network.

Income from operations in the fourth quarter was RMB3.04 billion or $427.7 million compared with RMB133.6 million loss from operations in the same period last year and up 29.8% quarter-over-quarter. Operating margin in the fourth quarter was 7.3% compared with negative 0.8% in the same period last year and 6.7% in the third quarter attributable to the increase of income from operations and the recognition of noncash tax benefit for the release of valuation allowance on certain deferred tax assets. Net income in the fourth quarter was RMB5.75 billion or $810.2 million, representing an increase of 2,068.2% year-over-year and increasing by 104.5% quarter-over-quarter. And diluted net earnings per ADS attributable to ordinary shareholders was RMB5.32 or $0.75 in the fourth quarter compared with RMB0.25 in the same period last year and RMB2.67 in the prior quarter.

Turning to our balance sheet and cash flow. Our cash position remains strong and stood at RMB103.67 billion or $14.6 billion as of December 31, 2023. Net cash provided by operating activities in the fourth quarter was RMB17.29 billion or $2.44 billion, up 251.1% year-over-year and 19.2% quarter-over-quarter. And free cash flow was RMB14.64 billion or $2.06 billion in the fourth quarter, up 349.4% year-over-year and 10.7% quarter-over-quarter. As of December 31, 2023, we had a total of 31,591 employees. For more information and details of our 2023 full-year financial results, please refer to our earnings press release. And now for our business outlook. For the first quarter of 2024, the company expects the delivery to be between 100,000 and 103,000 vehicles representing an increase of 90.2% to 95.9% from the first quarter of 2023.

The company also expects first quarter total revenues to be between RMB31.25 billion and RMB32.19 billion, or $4.4 billion and $4.53 billion, representing an increase of 66.3% to 71.3% from the first quarter of last year. This business outlook reflects the company's current and preliminary view on its business situation and market condition, which is subject to change. That concludes our prepared remarks. I will now turn the call over to the operator to start our Q&A session. Thank you.

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