Hello, gentlemen, thank you for standing by for Li Auto's Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Janet Zhang, Investor Relations Director of Li Auto. Please go ahead, Janet.

Thank you, Rachel. Good evening and good morning, everyone, welcome to Li Auto's third quarter 2021 earnings conference call. The Company's financial and operating results were published in the press releases earlier today and were posted on the Company's IR website and the Hong Kong Stock Exchange. On today's call we have our President, Mr. Kevin Yanan Shen; our CFO, Mr. Johnny Tie Li; to begin with prepared remarks, our Founder and CEO, Mr. Xiang Li; and our CTO, Mr. Kai Wang 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 US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the Company's actual results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included inside the filings of the Company with the US Securities and Exchange Commission and announcements published on the website of the Hong Kong Stock Exchange and the Company. The Company does not assume any obligation to update any forward-looking statement except as required under applicable law. Please also note that Li Auto's earnings press release and this conference call include discussions of unaudited GAAP financial information, as well as unaudited non-GAAP financial measures. Please refer to Li Auto's press release and announcements which contain a reconciliation of unaudited non-GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our President. Please go ahead, Kevin.

Thank you, Janet. Hello, everyone, and thank you for joining our call today. We are excited to be part of this once in a century transformation from ICE vehicles to smart electric vehicles. We are also pleased to see user acceptance of the NEVs reaching an inflection point. As reported by the China Passenger Car Association, the penetration rate of NEVs in retail sales rose significantly to 18.5% in October, from 5.8% in 2020. Looking out to 2022, we believe the extended range system with a large battery capacity will usher in a year of explosive EREV sales. Against this backdrop and on the heels of the successful 2021 Li ONE launch in May, we delivered strong results in the third quarter, achieving revenue growth of 209.7% year-over-year, underpinned by record breaking quarterly delivery of 25,116 units, an increase of 190% year-over-year. This growth once again highlights the underlying strength of our 2021 Li ONE and its compelling appeal to family users. Thanks to the dedicated efforts of our team and supply chain partners as well as continuous support from Li ONE users. Our October delivery was 7,649 units, increasing 107.2% year-over-year. Our order intake remains robust, hitting a new monthly record of over 14,500 units in October. The rapid development of the smart EV industry has magnified the effects of the industry-wide chip shortage, challenging each OEM's production and delivery schedule. While we are enjoying the strong user endorsement of our product, our delivery growth lagged our order growth due to the chip supply shortage, which has constrained our production. Despite the lingering impact of COVID-19 and extreme weather conditions in certain regions, we have resolved some of the chip supply problems by working diligently with our supply partners and also internal teams. We delivered 100,000 Li ONEs to…

Thank you, Kevin. Hello, everyone. I will now walk you through some of our financial results for the third quarter of 2021. Due to time constraints, I will address our financial highlights here and encourage you to refer to our earnings press release for further details. Total revenue in the third quarter of 2021 were RMB7.78 billion, or $1.21 billion, representing an increase of 209.7% from RMB2.51 billion in the third quarter of 2020 and an increase of 54.3% from RMB5.04 billion in the second quarter of this year. This included RMB7.39 billion or $1.15 billion from vehicle sales, which increased 199.7% year-over-year and 50.6% quarter-over-quarter. The increase in revenue from vehicle sales from the third quarter of 2020 and the second quarter of 2021 was mainly attributable to the increase of vehicle delivery in the third quarter of 2021. Revenues from other sales and services were RMB389.4 million or $60.4 million in the third quarter, representing an increase of 745.1% year over year and an increase of 187% quarter over quarter. The increase in revenue from other sales and services over the third quarter of 2020 and the second quarter of 2021 was mainly attributable to the sales of regulatory credits as well as increased sales of charging stalls, accessories and services in line with higher accumulated vehicle sales. Cost of sales in the third quarter of 2021 was RMB5.96 billion or $925.5 million, representing an increase of 196.1% year-over-year and an increase of 45.9% quarter over quarter. Gross profit in the third quarter of 2021 was RMB1.81 billion or $281.2 million, growing 264.8% compared with the third quarter of 2020 and 90.2% compared with the second quarter of this year. Vehicle margin in the third quarter was 21.1%, compared with 19.8% in the third quarter of 2020 and…

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator instructions] Your first question comes from the line of Fei Fang of Goldman Sachs. Please ask your question.

Great. Yes, thanks for the opportunity. Very impressive quarter. My first question is on your HPC BEV pipeline. Other than the 4C battery pack test that Changzhou have shared on the call, which is obviously very impressive, what else have you thought about in terms of the key features that differentiate your upcoming product from this competitive market? And also, can you refresh us the timeline for your next product launch? And the second question is about production hurdles. The management mentioned that, if I heard you correctly, in October, there was 14,500 units of intake in terms of the backlog expansion. So if you look at next year, when do you think the monthly production can ramp up towards that level? Thank you.

Fei Fang, can you also repeat your question in Chinese, please?

Yes, of course. [Foreign Language]

Thank you, Fang Fei. This is Kevin. To your first question, for HPC, besides the 4C battery, we made good progress. On the other hand, we also made a lot of progress on our high-voltage air-conditioning system, also the progress made on the high-power charging infrastructure. So in terms of timing, we're still on track to launch our first HPC BEV product in the second half of 2023. And in terms of our production plan, actually, right now, our factory already ramp-up can support roughly 14,000 per month. Right now, we are - our production is gated by the chip shortage. So, basically, next year, we expect our production will ramp up to more than 15,000 right after the Chinese New Year, assuming the chip shortage will be - to a certain extent will be resolved.

That's very helpful color. Thank you.

Thank you.

Your next question comes from the line of Tim Hsiao from Morgan Stanley. Please ask your question.

Hi, management team. Congratulations on a great result and thanks for taking my questions. I've got two questions, the first one about the margin, because to gross margin expansion any tracks much ahead of our previous target of high teens. So given the favorable volume scale in upcoming quarter, should we expect the upward trajectory of gross margin to persist into fourth quarter or early next year? And meanwhile, will Li Auto consider leveraging more aggressive promotion to further boost the scale on the back of that gross margin? [Foreign Language]

Hi, Tim, this is Johnny. I think the current gross margin is, as we guided before, it was mainly due to the higher average selling price of the new 2021 Li ONE, and also, the cost control effort of our internal team, supply chain team, despite the semiconductor shortage. And on this year's cost margin, we still want to keep our previous guidance. And for the promotion, currently, the customer has about six to eight weeks of waiting time, so no need to do more promotion to let the customer wait too long, yes. So, currently, at least in the next two to three months, we won't do that.

Got it. So my second question, I basically want to follow-up on the wait times, because as you mentioned, the wait times for a new Li ONE are as long as, like six to eight weeks. So if the Company fails to deliver the vehicle before Chinese New Year, should we worry or be concerned about the rising order cancellation rate early next year? Or the new orders intake would fall substantially towards the end of this year, and any precaution the Company can or will take to avoid such order volatility? [Foreign Language]

Tim, this is Kevin. First of all, we don't expect that we'll see any other cancellations due to the prolonged delivery lead time, because before we take the order from our customer, normally, we'll reach an agreement with them in terms of roughly when they can expect the delivery. So basically, when they give us the order, they already have the expectation set for the delivery.

Great. Thank you very much.

Your next question comes from the line of Bin Wang of Credit Suisse. Please ask your question.

Thank you. I've got two questions. Number one is about the 2022 guidance, volume guidance. And second question is about the battery cost outlook for next year, because [indiscernible] battery costs may be increased. [Foreign Language]

I will take the first question. I think due to the current supply chain shortage, I think it is not the right time to give guidance for the next year. But you should believe, within our – within the Company, we have a very robust plan for the next year. Maybe Kevin could take the second question.

Of course, we all know that right now, we all see a big jump in terms of the raw material costs for the batteries. But so far, within this year, we have no plan to increase the price with [indiscernible] now.

Yes. And also, I think we are less impacted as we do EREV. They have one less battery pack.

Thank you. Great.

Thank you.

Your next question comes from the line of Ming-Hsun Lee of BofA Securities. Please ask your question.

Thank you, management. I have two questions. The first question is regarding the new functions of NOA to be upgraded in December. Could you elaborate more functions of this new service? And secondly, also, could you elaborate more on the credit sales in the third quarter and the potential contribution in the fourth quarter as well as 2022? Thank you. [Foreign Language]

I will take the second question first, this is Johnny. I think we have already sold off all the EV credit beginning from last year's sales. So, basically, around RMB200 million, with all the EV credit over 70 for last year. So we won't have a lot more revenue for the fourth quarter. For the first question, I will pass to Kai.

This is Kai speaking. So regarding your first question, so our NOA feature will be released in December, and so far, we have lots of testing, over a million kilometers. Since our 2021 Li ONE model has NOA feature by default, which makes our December OTA update the biggest NOA release in scale in China. So I think this is probably the biggest difference compared with our peers. Thank you.

Thank you.

[Operator instructions] Your next question comes from the line of Paul Gong of UBS. Please ask your question.

Thanks for taking my questions. Basically, there are two questions. The first one is regarding your order pipeline. We have observed that in this rising competition environment, some peers have already accelerated new products launch or adding new models or more models into the pipeline. How does Li Auto consider your action on this? [Foreign Language]

Paul, this is Kevin. In terms of our future product, actually, we will reveal our X01 to the market in the second quarter next year and start to deliver in the third quarter. More details of the X01 will be introduced at the launch event. Although we see a lot of new products launching to the market, we want to still keep to our own schedule. Right now, for example, when our Li ONE delivered the volume reached the level of Highlanders, its [residential] value is also getting close to the Highlander level. This is the benefit of reaching scale by a single model. We will choose to sell big volumes with one model rather than very quickly launch a lot of models, but only sell small volumes. Our philosophy is slightly different than our peers.

Okay. My second question is regarding the ADAS going forward. It seems that now that the different ADAS systems by different car makers are getting a little bit similar to each other. Everyone would adopt LIDAR, everyone would use Nvidia chips with high calculation power. What is the key differentiation in this competition in the ADAS function going forward, for the relatively longer time? [Foreign Language]

This is Kai speaking. Regarding this ADAS related topic, we believe ADAS technology eventually I think user experience is the most important thing. But in order to achieve automated user experience, as in the previous quarter, we already explained, you need massive data to train your algorithm to make it more intelligent. As you know, Li Auto, we have the biggest, basically, customer base with NOA feature by default because we believe safety is very important to every single of our customers. Therefore, by using the complete fleet, we can speed up our progress of our development to make the user experience reach much, let's say, faster speed than our competitors. Thank you.

Okay, thank you very much.

[Operator instructions] Your next question comes from the line of Chang Liu of CICC. Please ask your question.

Yes, thank you for taking my question, and congrats on the great result. My first question is regarding cost, because we see that the cost per vehicle rises to RMB232,000 in the third quarter, which is RMB5000 more than the second quarter, and also it's the highest quarter since 2020. Could you share the reason with us, maybe how much is caused by the rising cost of 2021 model, and how much is caused by the rising price of material? [Foreign Language]

This is Johnny. I think generally, we still target to achieve our desired gross margin on the Li ONE. As we mentioned before, it will be finally to achieve a 25% as we design the product. But currently, we are under pressure of the supply chain cost pressure, and it's a floor that we expected last year. So, it's a mix of our supply chain effort and also those measures from the semiconductor parts. Also, we have - there's a lot of increase we have some benefit from the manufacturing side, so it's a net-net impact for each quarter.

[Foreign Language]

This is Kevin. I will translate. Mr. Li Xiang just made some comments on the gross margin. Our philosophy is a healthy gross margin is very important for us, especially considering how we are a technology company. If we look at some of the previous generation technology companies, they have a very thin gross margin therefore they cannot invest enough money on the R&D. Most of their R&D money is spent on the product development, not enough in the technology development. So, our thinking is that we want to keep a very healthy gross margin so that not only we can invest in the product development but also, we will invest more and more on the technology development, 10% on the technology R&D.

Yes, thank you. My second question is regarding the expansion of sales network. As we see, we already have over 150 stores by the end of third quarter, which was close to our target, which is 200 stores by the end of this year. So, could you please update our plan of our sales network expansion for this year and also next year? [Foreign Language]

This is Kevin. Right now, we are on track to achieve 200 retail stores by the year end to cover around 150 within China. Next year, our initial plan is to at least double the number of retail stores.

Thank you.

Your next question comes from the line of Jeff Chung of Citi. Please ask your question.

[Foreign Language] So, my first question is in regards to the November order backlog. Would that be 100% higher than the actual potential November shipment, similar to the momentum in October? Secondly, is about the monthly production run rate. Can the chip supply support around 14,000 to 15,000 units per month in the first quarter next year? Thank you.

Thank you, Jeff. This is Kevin. First question, October delivery was impacted by both the Bosch ESP supply and also the millimeter radar supply. That's why you see that our order intake is around double the number of the final delivery. This month, actually the millimeter radar supply shortage has been solved. The only constraint we have is from Bosch, so therefore the order intake will not be 200% of the delivery. Your second question, actually, right now the headlight we have is in the first quarter of next year, we will still continue to be constrained by this Bosch ESP component. Right now, we are working with Bosch to try to solve as much as possible.

Thank you. [Foreign Language]

Thank you, Jeff.

[Operator instructions] Your next question comes from the line of Jia Lou of BOCI Research. Please ask your question.

Hello, management. This is [Lou Jia] from BOCI Research. I have two questions. One is about the SG&A ratio. Actually, we have seen that this year, SG&A ratio increased compared with last year, so just now, management mentioned that the target for R&D ratio is 10% but I want to know what about SG&A ratio spend level. [Foreign Language] My second question is about the capacity. We know that we are building the new plant in Beijing, so I want to know that what are our detailed capacity levels in 2023? We know that we have the Changzhou plant for EREV, so any expansion plans for Changzhou plant? [Foreign Language]

Thank you, Lou Jia, this is Kevin. First of all, for the SG&A the highlight I can give to you is that for the immediate next step, our plan is to control SG&A to a 10% level and for the longer term, we plan to - especially with the volume growth, we plan to further decrease this percentage. So, this year you see a slight increase on the SG&A is because on one hand, the promotion and also especially the aggressive sales network expansion increased our SG&A percentage. In terms of our capacity, by the end of 2023 our plan is to reach a standard capacity of annual capacity 500,000 and with double shift, actually we can do the total capacity near 700,000 units. That's our plan for 2023.

Thank you.

As we are reaching the end of our conference call, I'd like to turn the call back over to the Company for closing remarks. Ms. Janet Zhang, please go ahead.

Okay. Thank you everyone. That's all for today's call. Hope you have a good one.

This concludes today's conference call. Thank you for participating. You may now disconnect.